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<SEC-DOCUMENT>0000912057-01-007757.txt : 20010320
<SEC-HEADER>0000912057-01-007757.hdr.sgml : 20010320
ACCESSION NUMBER: 0000912057-01-007757
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 24
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010319
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: WADDELL & REED FINANCIAL INC
CENTRAL INDEX KEY: 0001052100
STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211]
IRS NUMBER: 510261715
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-13913
FILM NUMBER: 1571927
BUSINESS ADDRESS:
STREET 1: 6300 LAMAR AVE
STREET 2: P O BOX 29217
CITY: OVERLAND PARK
STATE: KS
ZIP: 66202-4200
BUSINESS PHONE: 9132362000
MAIL ADDRESS:
STREET 1: P O BOX 29217
STREET 2: 6300 LAMAR AVE
CITY: OVERLAND PARK
STATE: KS
ZIP: 66202-4200
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>a2041359z10-k.txt
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
Commission file number 001-13913
WADDELL & REED FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 51-0261715
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
6300 Lamar Avenue
Overland Park, Kansas 66202
913-236-2000
(Address, including zip code, and telephone number of Registrant's principal
executive offices)
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Class A Common Stock, $.01 par value New York Stock Exchange
Class B Common Stock, $.01 par value New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
registrant (excludes officers, directors and stockholders holding 5% or greater
of the registrant's common stock): $2,014,071,078 at March 6, 2001.
Shares outstanding of each of the registrant's classes of common stock as of
March 6, 2001:
Class A Common Stock, $.01 par value: 43,461,511
Class B Common Stock, $.01 par value: 36,139,617
DOCUMENTS INCORPORATED BY REFERENCE
In Part III of this Form 10-K, the definitive proxy statement for 2001
annual meeting of stockholders to be held April 25, 2001.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Index of Exhibits (Pages 60 through 62)
Total Number of Pages Included Are 62
<PAGE>
WADDELL & REED FINANCIAL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
<TABLE>
<CAPTION>
PAGE
PART I --------
<S> <C> <C>
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 15
Item 6. Selected Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Risk Factors............................................................. 29
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 32
Item 8. Financial Statements and Supplementary Data................. 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 33
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 33
Item 11. Executive Compensation...................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 33
Item 13. Certain Relationships and Related Transactions.............. 33
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 33
SIGNATURES............................................................... 34
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................... 36
INDEX TO EXHIBITS........................................................ 60
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
BACKGROUND
Waddell & Reed Financial, Inc. (hereinafter referred to as the "Company,"
"we," "our" or "us") is a Delaware holding company that conducts its business
through its subsidiaries. One subsidiary, Waddell & Reed, Inc. ("W&R"), is a
registered broker-dealer and registered investment advisor that acts primarily
as the nationwide distributor and underwriter for the shares of our mutual funds
and the distributor of insurance products issued primarily by United Investors
Life Insurance Company ("UILIC") and by Nationwide Financial Services, Inc.
("Nationwide"). Another subsidiary, Waddell & Reed Investment Management Company
("WRIMCO"), is a registered investment advisor that provides investment
management and advisory services to our mutual funds and to institutions and
other private clients. Waddell & Reed Services Company ("WRSCO") provides
transfer agency and accounting services to the mutual funds and their
shareholders. On August 9, 1999, we completed the acquisition of Austin,
Calvert & Flavin, Inc. ("ACF"), a privately-held investment management firm
based in San Antonio, Texas. ACF was founded in 1981 and manages investments for
trusts, high net worth families and individuals, and pension plans of
corporations, hospitals, schools, labor unions, endowments and foundations. On
March 31, 2000, we completed the acquisition of The Legend Group ("Legend"), a
privately-held mutual fund distribution and retirement planning company based in
Palm Beach Gardens, Florida. Through its network of over 300 financial advisors,
Legend serves employees of school districts and other not-for-profit
organizations. Waddell & Reed Financial, Inc., W&R, WRIMCO, WRSCO, ACF and
Legend are hereafter collectively referred to as the "Company," "we, "us" or
"our," unless the context requires otherwise.
OVERVIEW
We were founded in 1937 and are one of the oldest mutual fund complexes in
the United States, having introduced the Waddell & Reed Advisors Funds
(formerly, the United Group of Mutual Funds) in 1940. On June 30, 2000, we
renamed two of our mutual fund families. The United Funds family was renamed the
Waddell & Reed Advisors Funds (the "Advisors Funds") and the Waddell & Reed Fund
family was renamed the W&R Funds (the "W&R Funds"). The Advisors Funds are
available for sale primarily through our proprietary sales force. The W&R Funds
are available for sale through both our proprietary sales force and through
selected third-party distribution channels. On October 16, 2000, the
Target/United Funds family was renamed the W&R Target Funds (the "Target
Funds"). We sell our investment products primarily to middle income Americans
through a virtually exclusive sales force and select third party channels. As of
December 31, 2000, we had $36.7 billion of assets under management, of which
$31.8 billion were mutual fund assets and $4.9 billion were separately managed
accounts. We have over 648,000 mutual fund customers having an average
investment of $43,000 and over 68,000 variable account customers having an
average investment of $54,000.
We are the exclusive underwriter and distributor of 43 mutual fund
portfolios (the "Funds"), including 20 comprising the Advisors Funds, 12
comprising the W&R Funds and 11 comprising the Target Funds. As part of our
financial planning services, we also distribute to our customers variable
annuities and life insurance products, underwritten by UILIC and Nationwide. On
October 23, 2000, we announced an agreement with Nationwide to provide a broad
span of private label insurance and retirement products for use by our
proprietary sales force.
Our traditional market has generally been professionals and working families
with annual incomes between $40,000 and $100,000 who are saving for retirement.
We believe that demographic trends and shifts in attitudes toward retirement
savings will continue to support increased consumer demand for our products and
services. According to U.S. Census Bureau projections, the number of Americans
between the ages of 45 and 64 will grow from 53.7 million in 1998 to
76.2 million in 2008, making this "pre-retirement" age group the fastest growing
segment of the U.S. population.
3
<PAGE>
We distribute the Funds and other financial products through a financial
advisor sales force that represents us on a virtually exclusive basis. On
December 31, 2000, our sales force consisted of 2,865 financial advisors,
including 220 district managers and 70 district supervisors. Eight regional vice
presidents and 148 division and associate managers operating from 219 division
and district sales offices located throughout the United States manage the sales
force. In addition, we have 182 individual advisor offices. For the year ended
December 31, 2000, our financial advisor sales force sold over $2.8 billion of
mutual fund and variable products. We believe, based on industry data, that our
financial advisor sales force is currently one of the largest sales forces in
the United States selling primarily mutual funds. As of December 31, 2000, 36%
of our financial advisors have been with us for more than 5 years and 24% for
more than 10 years. Our financial advisors are located primarily in smaller
metropolitan areas and rural communities.
On March 31, 2000, we acquired Legend, a privately-held mutual fund
distribution and retirement planning company. Legend provides asset allocation
advisory services and custodial services primarily for employees of school
districts and other not-for-profit organizations nationwide. Legend has over
90,000 clients having an average investment of $31,000 per account. Assets under
advisement at December 31, 2000 were $2.8 billion, of which $1.1 billion were in
accounts for which Legend provides custodial and asset allocation services. As
of December 31, 2000, Legend had 309 registered financial advisors in 22 Legend
offices located primarily in the eastern part of the United States. In 2000,
Legend advisors sold $38.1 million of our mutual fund products.
The financial advisor industry is fragmented, consisting primarily of
relatively small companies generally employing fewer than 100 investment
professionals. Our sales force competes primarily with small broker-dealers and
independent financial advisors. Our marketing efforts are currently focused on
customers residing in smaller metropolitan areas and rural communities. We focus
on underserved and retirement markets. We conduct investment seminars throughout
the United States to reach a large number of potential clients. We also provide
financial plans for clients offering one-on-one consultations emphasizing
long-term relationships through continuing service, rather than a one-time sale.
We believe that we are well-positioned to benefit from a developing industry
trend toward "assisted sales" (sales of mutual fund products through a sales
person) driven by the array of options now available to investors and the need
for financial planning advice that has resulted from the increase in the average
household's financial assets over the past decade.
Our investment philosophy and financial planning approach emphasizes
long-term investments. Our portfolio managers seek consistent long-term
performance and downside protection in turbulent markets. As a result, we have
developed a loyal customer base with clients maintaining their accounts for
approximately 14 years on average as compared to 4 years for the mutual fund
industry, according to the Investment Company Institute. This loyalty is
evidenced by a relatively low retail fund redemption rate for the five years
ended December 31, 2000 of 7.6% for the non-money market Funds, which is less
than one-half of the industry average of 20.3% and a relatively high dividend
reinvestment rate of 87.4% for those Funds for the same period, which has
consistently been higher than the industry average. Approximately 51% of our
mutual fund assets under management are in retirement accounts and an additional
$3.7 billion are in variable annuities as of December 31, 2000.
We believe we are relatively unique in the mutual fund industry in large
part due to our proprietary sales force. Not only do the members of our sales
force gain loyal customers, but they also create profit as they bring in assets
for us to manage. By contrast, we believe that the vast majority of companies in
the industry bear a significant cost to acquire assets to manage, due to the
expense of either heavy advertising or the use of third-party distributors. In
our opinion, other industry members are further challenged by the short period
of time allowed them to recoup their asset-acquisition cost from investment
management fees before losing the assets to redemptions. We not only do not have
to recoup the asset acquisition cost since we make a distribution profit, but we
are able to earn investment management fees on those assets for a much longer
period of time than others in the industry.
4
<PAGE>
We have a seasoned team of portfolio managers and an internal equity and
fixed income investment research staff that have substantial resources available
to them, including hundreds of on and off-site meetings annually with management
of the companies in which they invest. In addition, we utilize research provided
by brokerage firms and independent outside consultants. Generally, portfolio
managers have had extensive experience as investment research analysts prior to
acquiring money management assignments. The predominant style of our mutual
funds is growth equity. As of December 31, 2000, approximately 87% of our mutual
fund assets under management were invested in equity funds with the remainder in
fixed income and money market funds. This investment strategy generally
emphasizes investments at attractive valuations in companies that the portfolio
managers believe can produce above average growth in earnings.
OPERATIONS
Revenues from operations for the last three years were:
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from:
Investment management..................................... $253,774 178,612 137,823
Underwriting and distribution............................. 202,879 126,318 106,615
Shareholder service....................................... 53,436 41,525 33,808
-------- ------- -------
Revenues excluding investment and other income............ 510,089 346,455 278,246
Investment income and other revenue....................... 10,613 10,202 9,043
-------- ------- -------
Total revenues............................................ $520,702 356,657 287,289
======== ======= =======
</TABLE>
SALES MANAGEMENT
Since our initial public offering in March of 1998, we have undertaken
initiatives to increase the retention and productivity of our proprietary sales
force. Notably, the Bridge Income Program, which provides new advisors with a
fixed source of income while they are building their client base, has played an
important role in advisor retention. In 2000, 72% of advisors on the Bridge
Income Program were still with us after one year, compared with 32% of advisors
who did not participate in the program. In 2000, we retained 56% of our
financial advisors after one year and 27% after three years. These retention
statistics compare favorably to the pre-IPO 1997 retention rate of 41% for
advisors after one year and 14% after three years.
In addition to the Bridge Income Program, a number of other initiatives were
undertaken. We have significantly enhanced the financial plans offered to
clients by their financial advisors. These improved comprehensive plans have
resulted in higher average initial investments, more frequent repeat investments
and a higher close ratio. Since the IPO, we have penetrated 25 new geographic
markets by adding new division offices each year in areas where we did not
previously have a presence. We have also added new district offices and invested
in existing offices by upgrading and expanding the facilities. In many cases,
the additional space has been used by adding assistants to support the financial
advisor sales force. Additional initiatives, such as the Career Development
Conference and the New Manager Training Program, have also contributed to the
increased productivity of our financial advisors.
In 2000, our advisor sales productivity was $1.08 million per advisor
compared to $738 thousand per advisor in 1997, representing a 14% compound
annual growth rate. In the last few years, our efforts to improve sales
productivity and advisor retention have also resulted in our sales force being
more fully-committed. We consider advisors to be fully-committed to their
careers when their investment product sales exceed $1 million per year. At the
end of 2000, we had 1,159 fully-committed advisors who are responsible for a
very significant portion of our sales. The number of fully-committed advisors
has grown
5
<PAGE>
from 662 at the end of 1997, representing a 21% compound annual growth rate. In
order to emphasize the importance of recruiting and developing a sales force, we
utilize a manager compensation system that ties compensation of division
managers to the development of new financial advisors and to division sales,
rather than personal sales.
We provide training and motivational programs for our sales force. Sales
training specialists provide training programs for new recruits as well as
advanced training for experienced financial advisors. Programs for new recruits
focus on prospecting techniques, product knowledge, and sales skills. Field
office classes provide guidance in identifying target markets, practical
exercises to learn interviewing skills and data collection, instruction in basic
financial planning software and help in matching products with various client
investment objectives. Sales presentation skills are taught and practiced in a
classroom environment, as well as on joint sales calls with field sales
management. The programs for experienced advisors focus on skills related to
dealing with larger investment sums (such as IRA rollovers) and include training
in the use of asset allocation and estate planning software. In addition, we
offer new financial advisors the opportunity to participate in a week-long
training program at the home office covering such subjects as product features,
financial planning and the use of illustrative software packages.
In 1998, we launched our first national advertising campaign in select
markets throughout the country that focused on the important aspects of our
business and was intended to increase our name recognition in those markets.
This campaign continued throughout 1999 and 2000.
In 2000, we launched an advisor website. The development of our secure
intranet site, Advisors eSource, enhanced communication between our advisors and
the home office. The site provides for the timely communication of information
and offers information and other resources to help our advisors build and manage
their sales more effectively.
MARKETING--EXPANSION INTO ALTERNATIVE CHANNELS
In late 1999, we decided to leverage our strong investment performance and
back-office infrastructure by expanding our distribution efforts to include
third party channels in order to accelerate sales growth and complement our
proprietary sales force distribution. We began by creating a new position of
Chief Marketing Officer, whose responsibility is to provide leadership for our
proprietary marketing efforts and to lead our entry into non-proprietary
channels. Our third-party efforts focus principally on seeking sub-advisory
relationships and distributing funds from the W&R Funds family through channels
that do not compete directly with our financial advisors, including:
- 401(k) Platforms using multiple managers;
- institutional fund supermarkets serving fee-based financial advisors; and
- broker/dealer fee-based programs, including wrap programs.
During 2000, we created a third party sales team, became a member of
National Securities Clearing Corporation to facilitate selling into third party
environments, expanded our operating and client service infrastructure and began
negotiating selling agreements with select parties. A number of these agreements
are now in effect and the opportunity for additional agreements is substantial.
We also were appointed as a sub-advisor on two Nationwide equity products
and, separately, began offering select W&R funds available for sale through
their "Best of America Retirement Resource" program.
FUNDS AND ASSET MANAGEMENT
We serve as underwriter for, and investment advisor to, the Advisors Funds,
the W&R Funds, and the Target Funds and distribute variable annuity and variable
life insurance products related to the Target
6
<PAGE>
Funds. We also serve as a registered investment advisor that provides investment
management and advisory services to institutional clients and other separately
managed accounts.
We offer the Funds' shareholders a broad range of investment products
designed to attract and retain clients with varying investment objectives. The
predominant style of our mutual funds is growth equity. This investment strategy
emphasizes investments at attractive valuations in companies that the portfolio
managers believe can produce above average growth in earnings. According to an
annual Barron's/Lipper fund-family survey which ranks investment performance of
mutual fund complexes, overall our complex ranked in the top 27th percentile for
2000, while in the category of US Stock Funds (as defined by Barron's/Lipper) we
ranked in the top 8th percentile for the same period. Overall, for the five-year
and ten-year periods ended December 31, 2000, we also ranked in the top 8th
percentile.
For the twelve months ended December 31, 2000, our Funds had the following
characteristics:
- 87% of assets under management invested in equity funds, 10% invested in
fixed income funds and 3% invested in money market funds.
- 50% of our equity funds ranked in the top quartile of funds with similar
objectives, as ranked by Lipper, Inc.
- 36% of our equity funds ranked in the top 10% of funds with similar
objectives, as ranked by Lipper, Inc.
- 91% of our equity assets that are rated by Morningstar have four or five
stars. This ranks us second out of the top 25 fund complexes.
- 86% of our long-term assets (excluding money market assets) that are rated
by Morningstar have four or five stars, which ranks us second if compared
to the top 25 fund complexes in the country.
Our largest mutual fund, the Advisors Core Investment Fund (formerly, the
United Income Fund), is focused on large capitalization in core equity and had
the following fees and net asset values:
- management fees of $50.0 million (10% of total Company revenues) and a net
asset value of $8.5 billion for or as of the year ended December 31, 2000.
- management fees of $44.4 million (12% of total Company revenues) and a net
asset value of $8.4 billion for or as of the year ended December 31, 1999.
- management fees of $39.8 million (14% of total Company revenues) and a net
asset value of $7.8 billion for or as of the year ended December 31, 1998.
Our base of assets under management consists of a broad range of domestic
and international stock, bond, and money market mutual funds that meet the
varied needs and objectives of our individual and institutional investors. We
periodically introduce new mutual funds designed to complement and expand our
investment product offerings, to respond to competitive developments in the
financial marketplace, and to meet the changing needs of clients. As part of
broadening fund distribution, we added the following funds during 2000:
- Advisors Value Fund (December 15, 2000)
- Advisors Municipal Money Market Fund (December 15, 2000)
- Advisors Tax-Managed Equity Fund (March 31, 2000)
- W&R Large Cap Growth Fund (June 30, 2000)
- W&R Mid Cap Growth Fund (June 30, 2000)
- W&R Money Market Fund (June 30, 2000)
7
<PAGE>
- W&R Tax-Managed Equity Fund (June 30, 2000)
Several of our funds had name changes in 2000. Effective June 30, 2000, we
renamed the W&R Growth Fund the "W&R Small Cap Growth Fund." Effective
September 18, 2000, we renamed the Waddell & Reed Advisors High Income Fund II
the "Waddell & Reed Advisors Global Bond Fund" and changed the strategy of the
fund as well. On October 16, 2000, the Target Income Fund was renamed the
"Target Core Equity Fund," the W&R Total Return fund was renamed the "W&R Core
Equity Fund" and the Advisors Income Fund was renamed the "Advisors Core
Investment Fund."
In addition to performing investment management services for the Funds, we
act as an investment advisor for institutional and other private investors. We
receive a fee that is generally based on a percentage of assets under management
for our services as an investment advisor. Assets under management for
institutional and separate accounts totaled $4.9 billion at December 31, 2000.
Investment management fees from institutional and separate accounts were
approximately $28.7 million, or approximately 11%, of total investment
management fees for the year ended December 31, 2000.
Ending and average assets under management for the last three years were:
<TABLE>
<CAPTION>
2000 1999 1998
------------------- ------------------- -------------------
ENDING AVERAGE ENDING AVERAGE ENDING AVERAGE
-------- -------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Advisors Funds
Equity.......................................... $22,524 24,008 22,626 18,123 16,713 15,320
Fixed-income.................................... 2,815 2,925 3,190 3,464 3,637 3,652
Money market.................................... 1,045 827 812 693 644 572
------- ------ ------ ------ ------ ------
26,384 27,760 26,628 22,280 20,994 19,544
W&R Funds
Equity.......................................... 1,590 1,776 1,785 1,261 1,050 906
Fixed-income.................................... 65 69 82 88 85 74
Money market.................................... 11 3 -- -- -- --
------- ------ ------ ------ ------ ------
1,666 1,848 1,867 1,349 1,135 980
Target Funds
Equity.......................................... 3,465 3,456 3,113 2,415 2,127 1,859
Fixed-income.................................... 225 227 237 243 245 235
Money market.................................... 52 55 64 58 54 45
------- ------ ------ ------ ------ ------
3,742 3,738 3,414 2,716 2,426 2,139
Total Mutual Funds
Equity.......................................... 27,579 29,240 27,524 21,799 19,890 18,085
Fixed-income.................................... 3,105 3,221 3,509 3,795 3,967 3,961
Money market.................................... 1,108 885 876 751 698 617
------- ------ ------ ------ ------ ------
31,792 33,346 31,909 26,345 24,555 22,663
Institutional and Separate Accounts............... 4,933 5,642 5,393 3,953 3,189 2,947
------- ------ ------ ------ ------ ------
Total Assets Under Management..................... $36,725 38,988 37,302 30,298 27,744 25,610
======= ====== ====== ====== ====== ======
</TABLE>
8
<PAGE>
INVESTMENT MANAGEMENT AGREEMENTS
We provide investment advisory and management services pursuant to an
investment management agreement with each Fund. While the specific terms of the
agreements vary, the basic terms are similar. The agreements provide that we
render overall management services to each of the Funds, subject to the
oversight of each Fund's board of directors and in accordance with each Fund's
fundamental investment objectives and policies. The agreements permit us to
enter into separate agreements for shareholder services or accounting services
with the respective Funds.
Each Fund's board of directors, including a majority of the directors who
are not "interested persons" of the Fund or the Company within the meaning of
the Investment Company Act of 1940, as amended, (the "ICA") and its shareholders
must have approved the investment management agreement between the respective
Fund and the Company. These agreements may continue in effect from year to year
if specifically approved at least annually by (i) the Fund's board of directors,
including a majority of the directors who are not parties to the agreements or
"interested persons" of any such party, or (ii) the vote of a majority of the
shareholders of the Fund and the vote of a majority of the Fund's directors who
are not parties to the agreement or "interested persons" of any such party, each
vote being cast in person at a meeting called for such purpose. Each agreement
automatically terminates in the event of its "assignment" as defined in the ICA
or the Investment Advisers Act of 1940, as amended, (the "Advisers Act") and may
be terminated without penalty by the Fund by giving us 60 days' written notice,
if the termination has been approved by a majority of the Fund's directors or
shareholders. We may terminate an investment management agreement without
penalty on 120 days' written notice.
SERVICE AGREEMENTS
We provide various services to the Funds and their shareholders pursuant to
a shareholder servicing agreement with each Fund (except the Target Funds) and
an accounting service agreement with each Fund. Pursuant to the shareholder
servicing agreements, we perform shareholder servicing functions for which the
Funds pay us a monthly fee, including:
- the maintenance of shareholder accounts;
- the issuance, transfer, and redemption of shares, distribution of
dividends and payment of redemptions;
- furnishing information related to the Fund; and
- handling shareholder inquiries.
Pursuant to the accounting service agreements, we provide the Funds with
bookkeeping and accounting services and assistance for which the Funds pay us a
monthly fee, including:
- maintenance of the Fund's records;
- pricing of the Fund's shares; and
- preparation of the prospectuses for existing shareholders, proxy
statements, and certain shareholder reports.
A Fund's shareholder servicing agreement and accounting service agreement
may be adopted or amended with the approval of the Fund's directors who are not
interested persons. Each of the shareholder servicing agreements and accounting
service agreements have annually renewable terms of one year expiring on
October 1st of each year.
9
<PAGE>
UNDERWRITING AND DISTRIBUTION
We distribute the Funds pursuant to an underwriting agreement with each Fund
(except the Target Funds). Under each underwriting agreement, we offer and sell
the Fund's shares on a continual basis and pay the costs of sales literature and
printing of prospectuses, which are then either partially or fully reimbursed by
the Fund.
When a client purchases Class A shares, which are referred to as "front-end
load," we charge a sales charge of between zero to 5.75% of the amount invested.
The sales charge for the Class A shares typically declines as the net asset
value of the account increases. In addition, investors may combine their
purchases of these shares to qualify for the reduced sales charge. Class A
shares (except for the money market funds) may also be charged a maximum of
0.25% of the average daily net assets of these shares under a 12b-1 distribution
and service plan as compensation (for the W&R Funds) or reimbursement (for the
Advisors Funds) for expenses in connection with distributing these shares,
providing service to Class A shareholders and/or maintaining Class A shareholder
accounts.
When a client purchases Class B shares, which we refer to as
"deferred-load," we do not charge an initial sales charge, but we do charge them
on-going 12b-1 fees as well as a contingent deferred sales charge for six years.
For both the Advisors and W&R Funds, Class B shares are charged a maximum of
0.75% of the average daily net assets of these shares under a 12b-1 distribution
and service plan as compensation in connection with distributing shares of this
class. Class B shares are also charged a maximum of 0.25% of the average daily
net assets of these shares as compensation for expenses in connection with
providing service to Class B shareholders and/or maintaining Class B shareholder
accounts. Generally, clients are charged a contingent deferred sales charge upon
early redemption of shares of up to 5% of the net asset value of the redeemed
shares in the first year declining to zero for shares held for more than six
years. Class B shares convert to Class A shares by the end of the eighth year.
When a client purchases Class C shares, which we refer to as "level-load,"
we do not charge an initial sales charge, but we do charge them on-going 12b-1
fees as well as a contingent deferred sales charge for one year. For both the
Advisors and W&R Funds, Class C shares are charged a maximum of 0.75% of the
average daily net assets of these shares under a 12b-1 distribution and service
plan as compensation in connection with distributing shares of this class.
Class C shares are also charged a maximum of 0.25% of the average daily net
assets of these shares as compensation for expenses in connection with providing
service to Class C shareholders and/or maintaining Class C shareholder accounts.
Investors who redeem their Class C shares in the first year are generally
charged a contingent deferred sales charge of 1%. Class C shares do not convert
to shares of any other class.
Class Y shares, which we refer to as "institutional shares," are designed
for institutional investors or others investing through certain intermediaries.
Investors in Class Y shares do not pay a sales charge. W&R Funds Class Y shares
are charged a maximum of 0.25% of the average daily net assets of these shares
for 12b-1 distribution and service fees as compensation. The Advisors Funds
Class Y shares do not pay a 12b-1 distribution and service fee.
Each distribution and service plan is subject to annual approval by each
Fund's board of directors, including a majority of the independent directors,
cast in person at a meeting called for the purpose of voting on such approval.
Each Fund may terminate the distribution and service plan at any time without
penalty.
We distribute variable products relating to the Target Funds pursuant to an
underwriting agreement between us and certain insurance companies, namely
Nationwide and UILIC. Commissions, marketing allowances and other compensation
are paid to us as stipulated by these underwriting agreements. Under each
agreement, we offer and sell the Target Funds on a continual basis. A
significant portion of the commissions we receive are paid to our financial
advisors and sales managers. Under a Rule 12b-1 service plan, the Target Funds
may charge a maximum of 0.25% of the average daily net assets as compensation
10
<PAGE>
for expenses in connection with providing service to shareholders and
maintaining shareholder accounts of the Target Funds. The service plan is
subject to annual approval by the Target Funds' board of directors, including a
majority of the independent directors, cast in person at a meeting called for
the purpose of voting on such approval. The service plan may be terminated at
any time without penalty by the Funds.
Besides distributing variable products, we distribute a number of other
insurance products including individual and group term life, whole life,
accident and health, Medicare supplement, and disability insurance. Commissions
and compensation paid to us by UILIC for distributing variable and insurance
products underwritten by them comprised 14%, 13% and 12% of our total revenues
for each of the years ended 2000, 1999 and 1998, respectively.
On February 28, 2001, UILIC terminated the Principal Underwriting Agreement
by and between UILIC and the Company, effective April 30, 2001. As a result,
beginning May 1, 2001, Nationwide will become the primary provider of variable
products for distribution by our proprietary sales force. Management believes
that the profitability on the two insurer's variables products lines are
equivalent. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for more information.
INVESTMENT PRODUCT SALES
Investment product sales of proprietary products (excluding Legend and sales
at net asset value) are summarized as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Front End Load Sales (Class A)................... $1,590.3 1,329.0 1,266.8
Back End Load Sales (Class B).................... 367.5 355.8 252.3
Level Load Sales (Class C)....................... 233.5 51.3 --
Variable Products (Target)....................... 656.1 413.7 308.4
-------- ------- -------
Total Retail................................... $2,847.4 2,149.8 1,827.5
Institutional.................................... 1,077.1 1,096.0 491.4
-------- ------- -------
Total Sales.................................... $3,924.5 3,245.8 2,318.9
======== ======= =======
</TABLE>
Legend, acquired on March 31, 2000, earns revenue from commissions earned on
sales of investment products and services provided for asset allocation advisory
services and custodial services for certain investment accounts. Assets under
advisement at December 31, 2000 were $2.8 billion, of which $1.1 billion were in
accounts for which Legend provides custodial and asset allocation services.
Since its acquisition on March 31, Legend's advisors have sold $38.1 million of
our mutual fund products.
11
<PAGE>
FUNDS SUMMARY
The following table sets forth, for each management style, the net assets
under management as of December 31, 2000, the name of the Funds and the year in
which each Fund was first offered to the public.
<TABLE>
<CAPTION>
NET ASSETS AT
DECEMBER 31, 2000 YEAR OF
MANAGEMENT STYLE (IN MILLIONS) FUND INCEPTION
---------------- ----------------- ------------------------------------------ ----------------
<S> <C> <C> <C>
Large Capitalization Growth $ 1,258 Advisors Retirement Shares Fund 1972
2,587 Advisors Accumulative Fund 1940
3,317 Advisors Science and Technology Fund 1950
2,615 Advisors Vanguard Fund 1969
80 Advisors Tax-Managed Equity 2000
33 W&R Large Cap Growth 2000
188 W&R Science and Technology 1997
9 W&R Tax Managed Equity 2000
1,256 Target Growth 1987
295 Target Science and Technology 1997
-------
$11,638
Mid Capitalization Growth $ 1,641 Advisors New Concepts 1983
17 W&R Mid Cap Growth 2000
-------
$ 1,658
Small Capitalization Growth $ 404 Advisors Small Cap 1999
580 W&R Small Cap Growth 1992
345 Target Small Cap 1994
-------
$ 1,329
Large Capitalization Core Equity $ 8,518 Advisors Core Investment 1940
541 W&R Core Equity 1992
1,084 Target Core Equity 1991
-------
$10,143
Large Capitalization Value $ 11 Advisors Value Fund 2000
International Equity $ 1,399 Advisors International Growth 1970
161 W&R International Growth 1992
266 Target International 1994
-------
$ 1,826
Balanced and Asset Allocation $ 572 Advisors Continental Income 1970
122 Advisors Asset Strategy 1995
62 W&R Asset Strategy 1995
158 Target Balanced 1994
59 Target Asset Strategy 1995
-------
$ 973
Tax Exempt Bonds $ 758 Advisors Municipal Bond 1976
413 Advisors Municipal High Income 1986
27 W&R Municipal Bond 1992
-------
$ 1,198
High Yield Bonds $ 708 Advisors High Income 1979
19 W&R High Income 1997
102 Target High Income 1987
-------
$ 829
Taxable Investment Grade Bonds $ 531 Advisors Bond 1964
131 Advisors Government Securities 1982
274 Advisors Global Bond 1986
19 W&R Limited-Term Bond 1992
7 Target Limited-Term Bond 1994
117 Target Bond 1987
-------
$ 1,079
Money Markets $ 1,035 Advisors Cash Management 1979
10 Advisors Municipal Money Market 2000
11 W&R Money Market 2000
52 Target Money Market 1987
-------
$ 1,108
-------
TOTAL $31,792
=======
</TABLE>
12
<PAGE>
REGULATION
Virtually all aspects of our business are subject to various federal and
state laws and regulations. These laws and regulations are primarily intended to
protect investment advisory clients and shareholders of registered investment
companies. Under such laws and regulations, agencies that regulate investment
advisors and broker-dealers like us have broad administrative powers, including
the power to limit, restrict, or prohibit an advisor or broker-dealer from
carrying on its business in the event that it fails to comply with such laws and
regulations. In such event, the possible sanctions that may be imposed include
the suspension of individual employees, limitations on engaging in certain lines
of business for specified periods of time, revocation of investment advisor and
other registrations, censures and fines.
Our business is subject to regulation at both the federal and state level by
the Securities and Exchange Commission (the "SEC") and other regulatory bodies.
Certain of our subsidiaries are registered with the SEC under the Advisers Act
and the Funds are registered with the SEC under the ICA and various filings are
made with states under applicable state laws. The Advisers Act imposes numerous
obligations on registered investment advisors including fiduciary duties,
recordkeeping requirements, operational requirements and disclosure obligations.
The SEC is authorized to institute proceedings and impose sanctions for
violations of the Advisers Act, ranging from censure to termination of an
investment adviser's registration. The failure of one of our registered
subsidiaries to comply with SEC requirements could have a material adverse
effect on us. Two of our subsidiaries, W&R and Legend, are also registered as
broker-dealers with the SEC and are subject to regulation by NASD
Regulation, Inc. ("NASDR") and various states. Another of our subsidiaries,
WRSCO, is registered under the Securities Exchange Act of 1934, as amended, as a
transfer agent.
We derive a large portion of our revenues from investment management
agreements. Under the Advisers Act, our investment management agreements
terminate automatically if assigned without the client's consent. Under the ICA,
advisory agreements with registered investment companies such as the Funds
terminate automatically upon assignment. The term "assignment" is broadly
defined and includes direct assignments as well as assignments that may be
deemed to occur, under certain circumstances, upon the transfer, directly or
indirectly, of a controlling interest in the Company.
W&R is also a member of the Securities Investor Protection Corporation. In
its capacity as a broker-dealer, W&R is required to maintain certain minimum net
capital and cash reserves for the benefit of its customers, which may limit its
ability to pay dividends. W&R's net capital, as defined by NASD regulations, has
consistently met or exceeded all minimum requirements. Various regulations cover
certain investment strategies that may be used by the Funds for hedging
purposes. To the extent that the Funds purchase futures contracts, the Funds are
subject to the commodities and futures regulations of the Commodity Futures
Trading Commission. Under the SEC rules and regulations promulgated pursuant to
the Federal securities laws, we are subject to periodic examination by the SEC.
We are also subject to periodic examination by NASDR. Our most recent
examination by the SEC was in February 1999. Our most recent examination by
NASDR was in November 1999. Legend, acquired on March 31, 2000, was examined by
the NASDR in January 2000 and by the SEC in January 1999. ACF, acquired in
August 1999, was examined by the SEC in March 2000. To date, no material issues
resulting from those examinations have been raised.
COMPETITION
We are subject to substantial competition in all aspects of our business. We
compete with hundreds of other mutual fund management, distribution and service
companies that distribute their fund shares through a variety of methods,
including affiliated and unaffiliated sales forces, broker-dealers, and direct
sales to the public of shares offered at a low or no sales charge. Many larger
mutual fund complexes have developed relationships with brokerage houses with
large distribution networks, which may enable these fund complexes to reach
broader client bases. We compete with firms offering similar services and
13
<PAGE>
products to those of ours, such as American Express Financial Advisors Inc. and
Edward Jones & Co. In addition, we compete with brokerage and investment banking
firms, insurance companies, banks and other financial institutions and
businesses offering other financial products in all aspects of their businesses.
Although no single company or group of companies dominates the mutual fund
management and services industry, many are larger than us, have greater
resources and offer a wider array of financial services and products.
Competition is based on the methods of distribution of fund shares, the ability
to develop investment products for certain segments of the market, the ability
to meet the changing needs of investors, the ability to achieve superior
investment management performance, the type and quality of shareholder services
and the success of sales promotion efforts. We believe that competition in the
mutual fund industry will increase as a result of increased flexibility afforded
to banks and other financial institutions to sponsor mutual funds and distribute
mutual fund shares, and as a result of consolidation and acquisition activity
within the industry. In addition, barriers to entry into the investment
management business are relatively few, and thus we anticipate that we will face
a growing number of competitors. Many of our competitors in the mutual fund
industry are larger, better known, have penetrated more markets and have more
resources than those of the Company.
The distribution of mutual fund products has undergone significant
developments in recent years, which has increased the competitive environment in
which we operate. These developments include growth in the number of mutual
funds, introduction of service fees payable to broker-dealers that provide
continual service to clients in connection with their mutual fund investments
and development of complex distribution systems with multiple classes of shares.
Our financial advisors compete primarily with small broker-dealers and
independent financial advisors. The market for financial advice and planning is
extremely fragmented, consisting primarily of relatively small companies with
fewer than 100 investment professionals. Competition is based on sales
techniques, personal relationships and skills, the quality of financial planning
products and services, the quality of the financial and insurance products
offered, and the quality of service. Competition in this area is intense and
some of the competitors of our financial advisors are larger, better known, and
have more resources.
EMPLOYEES
At December 31, 2000, we had 1,341 full-time employees. Of our full-time
employees, 600 were home office employees, 156 were division managers, associate
managers or regional vice presidents, 171 were field office support personnel,
124 were employees of acquired subsidiaries and 290 were district managers and
district supervisors who are also counted as financial advisors.
Our proprietary sales force is comprised of 2,865 financial advisors who are
independent contractors, and includes 290 district managers and district
supervisors who are employees. Legend also had 309 retirement advisors
considered to be independent contractors at December 31, 2000. The combined
total of financial advisors and retirement advisors was 3,174.
ITEM 2. PROPERTIES
Through our subsidiary, W&R, we lease buildings that are used in the normal
course of business. W&R occupies a 116,000 square foot office building at 6300
Lamar Avenue, Overland Park, Kansas and a 113,000 square foot office building at
6301 Glenwood Avenue, Overland Park, Kansas, which we utilize as our corporate
headquarters. On March 7, 2001, we completed the sale of our two home office
buildings to Mesirow Realty Sale-Leaseback ("Mesirow"). We also entered into an
agreement with Mesirow to lease the buildings back for a period of fifteen
years. The net proceeds from this sale were $28.2 million and resulted in a
realized gain of approximately $1.8 million, which will be deferred and
amortized over the term of the operating lease. Additional leased space is
occupied in the immediate area for headquarters operations. W&R also leases
division and district office space, totaling 584,583 square feet, for its
proprietary sales force in various cities and towns in the United States.
14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Certain of our subsidiaries are involved from time to time in various legal
proceedings and claims incident to the normal conduct of their businesses. On
the basis of information presently available and advice received from counsel,
it is the opinion of management that such legal proceedings and claims,
individually and in the aggregate, are not likely to have a material adverse
effect on our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the 2000 fiscal year to
a vote of the security holders, through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our Class A and Class B common stock are traded on the New York Stock
Exchange (the "NYSE") under the symbols "WDR" and "WDR.B" respectively. The
closing prices on March 6, 2001 were $31.49 for Class A common stock and $31.10
for Class B common stock.
On February 23, 2000, we declared a three-for-two stock split on our
Class A and Class B common stock payable on April 7, 2000 to stockholders of
record as of March 17, 2000. All per-share and share outstanding data in the
consolidated financial statements and related notes have been restated to
reflect the stock split for all periods presented.
On May 31, 2000, Standard & Poor's added Waddell & Reed Financial, Inc. to
its S&P MidCap 400 Index of mid-range capitalization U.S. Stocks. Within the
index, we are included in the Financial economic sector and the Investment
Banking/Brokerage industry group.
On January 25, 2001, we announced that our Board of Directors had approved
the combination of our two classes of common stock by converting shares of our
Class B common stock into shares of Class A common stock on a one-for-one basis.
The combination will result from the merger of a wholly owned subsidiary into
the Company that will be subject to the approval of a majority of the voting
power of the Class A and Class B common stock, voting together as a single
class, and a majority of the Class B common stock, voting as a separate class.
The transaction will be submitted to stockholders at the upcoming annual meeting
on April 25, 2001. We believe that the elimination of the dual classes of common
stock will better align the voting rights of all stockholders with their
ownership interests. We also believe that the combination will increase the
overall liquidity of our common stock and eliminate the complexity, and
resulting market confusion, of having two publicly traded classes of common
stock.
15
<PAGE>
The table sets forth, for the periods indicated, the reported high and low
close sale prices of our Class A and Class B common stock, as reported on the
NYSE, as well as the cash dividends paid for these time periods:
CLASS A
MARKET PRICE
<TABLE>
<CAPTION>
2000 1999
------------------------------- -------------------------------
DIVIDENDS DIVIDENDS
PER PER
QUARTER HIGH LOW SHARE HIGH LOW SHARE
- ------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1.................... $28.21 $16.63 $.0884 $15.92 $12.54 $.0884
2.................... 34.81 23.38 .0884 18.29 13.25 .0884
3.................... 40.00 29.63 .0884 18.63 14.79 .0884
4.................... 38.88 29.94 .0884 18.13 13.63 .0884
</TABLE>
Year-end closing prices of the Class A common stock for 2000 and 1999,
respectively were: $37.63 and $18.08.
CLASS B
MARKET PRICE
<TABLE>
<CAPTION>
2000 1999
------------------------------- -------------------------------
DIVIDENDS DIVIDENDS
PER PER
QUARTER HIGH LOW SHARE HIGH LOW SHARE
- ------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1.................... $26.00 $15.38 $.0884 $15.67 $12.38 $.0884
2.................... 31.75 21.38 .0884 18.00 13.25 .0884
3.................... 38.13 26.63 .0884 18.21 14.25 .0884
4.................... 37.50 28.94 .0884 16.75 13.33 .0884
</TABLE>
Year-end closing prices of the Class B common stock for 2000 and 1999,
respectively were: $37.50 and $16.75.
STOCKHOLDERS
According to the records of our transfer agent, we had 3,908 holders of
record of Class A common stock as of March 6, 2001, compared to 4,029 on
March 13, 2000 and 4,117 holders of record of Class B common stock as of
March 6, 2001, compared to 4,430 on March 13, 2000. We believe that a
substantially larger number of beneficial owners hold such shares in depository
or nominee form.
DIVIDENDS
We intend, from time to time, to pay cash dividends on our common stock as
our Board of Directors deems appropriate, after consideration of our operating
results, financial condition, cash requirements, compliance with covenants in
our revolving credit facility and such other factors as the Board of Directors
deems relevant. We anticipate that quarterly dividends will continue at a level
comparable to past quarterly dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial data at
the dates and for the periods indicated. Selected financial data should be read
in conjunction with, and is qualified in its entirety by,
16
<PAGE>
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Consolidated Financial Statements and the Notes thereto
appearing elsewhere in this report.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------ ------------ ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE DATA AND NUMBER OF FINANCIAL ADVISORS)
<S> <C> <C> <C> <C> <C>
Revenues from:
Investment management................ $ 253,774 178,612 137,823 117,784 101,466
Underwriting and distribution........ 202,879 126,318 106,615 89,427 85,837
Shareholder service.................. 53,436 41,525 33,808 30,763 28,378
---------- --------- --------- --------- ---------
Revenues excluding investment and
other income....................... 510,089 346,455 278,246 237,974 215,681
Total revenues....................... 520,702 356,657 287,289 241,772 220,976
Net income............................. 139,005 81,767 83,735 70,292 66,700
per common share--basic.............. 1.67 0.91 0.85 0.71 0.67
per common share--diluted............ 1.60 0.89 0.84 0.71 0.67
Net income excluding
special items (1).................... 139,005 96,382 88,060 74,696 64,174
per common share--basic (1)(2)..... 1.67 1.08 0.89 0.75 0.65
per common share--diluted (1)(2)... 1.60 1.05 0.89 0.75 0.65
Dividends per common share............. $ 0.35 $ 0.35 $ 0.35 -- --
Advisor and productivity data
(excluding Legend):
Investment product sales--retail..... $2,847,447 2,149,842 1,827,526 1,518,257 1,505,100
Number of financial advisors (end of
period)............................ 2,865 2,611 2,370 2,160 2,010
Average number of financial
advisors........................... 2,632 2,432 2,175 2,072 2,072
Investment product sales per
advisor............................ $ 1,081 884 840 733 726
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Assets under management........................ $36,725 $37,302 $27,744 $23,417 $19,070
Balance sheet data:
Goodwill..................................... 180.2 113.0 95.9 98.8 101.7
Total assets (3)............................. 422.2 335.1 327.2 447.0 429.3
Short-term debt.............................. -- 125.3 40.1 -- --
Long-term debt............................... 175.3 -- -- -- --
Total liabilities (4)........................ 280.6 208.7 120.0 676.9 196.7
</TABLE>
- ------------------------
(1) Excludes a pre-tax write-off in 1999 of $19.0 million relating to
restructuring mutual fund products and a pre-tax loss of $4.6 million from
the sale of real estate properties, for a combined effect of $14.6 million
(net of tax). Excludes impact of interest relating to notes with Torchmark
Corporation ("Torchmark") for 1998, 1997 and 1996 that were prepaid with
proceeds from the initial public offering. Excludes special charges in 1997
relating to discontinuation of internal systems and information systems
outsourcing.
(2) The number of shares used to compute earnings per share for 1997 and
previous years was the number of shares outstanding at the initial public
offering.
(3) Includes amounts due from Torchmark of $192.7 and $184.5 million for 1997
and 1996, respectively.
(4) Includes amounts due to Torchmark of $611.6 and $126.6 million for 1997 and
1996, respectively.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS ITEM INCLUDES STATEMENTS THAT ARE "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING
STATEMENTS REGARDING OUR EXPECTATIONS, HOPES, BELIEFS, INTENTIONS OR STRATEGIES
REGARDING THE FUTURE. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS
INCLUDED IN THIS FORM 10-K REGARDING OUR FINANCIAL POSITION, BUSINESS STRATEGY
AND OTHER PLANS AND OBJECTIVES FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING
STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K ARE BASED
ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE ASSUME NO OBLIGATION
TO UPDATE SUCH FORWARD-LOOKING STATEMENTS. ALTHOUGH WE BELIEVE THAT THE
ASSUMPTIONS AND EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, WE CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE
BEEN CORRECT OR THAT WE WILL TAKE ANY ACTIONS THAT MAY PRESENTLY BE PLANNED.
CERTAIN IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM OUR EXPECTATIONS ARE DISCLOSED IN THE "RISK FACTORS" SECTION OF THIS
FORM 10-K, WHICH INCLUDE, WITHOUT LIMITATION, THE ADVERSE EFFECT FROM A DECLINE
IN SECURITIES MARKETS OR IF OUR PRODUCTS' PERFORMANCE DECLINES, FAILURE TO RENEW
INVESTMENT MANAGEMENT AGREEMENTS, ADVERSE RESULTS OF LITIGATION, COMPETITION,
CHANGES IN GOVERNMENT REGULATION, AVAILABILITY AND TERMS OF CAPITAL AND
ACQUISITION STRATEGY. ALL SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO US OR PERSONS ACTING ON OUR BEHALF ARE EXPRESSLY QUALIFIED IN
THEIR ENTIRETY BY SUCH FACTORS.
The following should be read in conjunction with the "Selected Financial
Data" and our Consolidated Financial Statements and Notes thereto appearing
elsewhere in this report.
RESULTS OF OPERATIONS
OVERVIEW
We derive our revenues primarily from providing investment management,
distribution and administrative services to the Funds and managed institutional
and separate accounts. Investment management fees, our most substantial source
of revenue, are based on the amount of assets under management and are affected
by sales levels, financial market conditions, redemptions and the composition of
assets. Underwriting and distribution revenues consist of sales charges and
commissions derived from sales of investment and insurance products,
distribution fees, as well as advisory services of Legend. The products sold
have various sales charge structures and the revenues received from sales of
products vary based on the type and amount sold. Rule 12b-1 distribution fees
earned for distributing certain mutual fund shares are based upon a percentage
of assets and fluctuate based on sales, redemptions, and financial market
conditions. Service fees include transfer agency fees, custodian fees for
retirement plan accounts and portfolio accounting fees.
On August 9, 1999, we acquired ACF, a privately-held investment management
firm based in San Antonio, Texas. ACF manages investments for trusts, high net
worth families and individuals, and pension plans of corporations, hospitals,
schools, labor unions, endowments and foundations.
In October 1999, we commenced restructuring our Advisors Funds and the W&R
Funds. On October 4, 1999, the Advisors Funds began offering Class B shares
("back-end sales charge shares") and Class C shares ("level sales charge
shares"). These were in addition to the already offered Class A shares
("front-end sales charge shares") and Class Y shares ("institutional shares").
Concurrently, the W&R Funds closed new sales of Class B shares due to their
non-industry standard structure and began offering Class C shares in addition to
the already offered Class Y shares. The discontinued W&R Funds' Class B shares
were converted to W&R Fund Class C shares in March 2000 and a new W&R Fund
Class B share was opened to investors in July 2000. As a result of the
discontinuation of the W&R Funds Class B shares in 1999, no contingent deferred
sales charges were collected on converted share redemptions. We expect that this
restructuring of shares will enhance competitiveness and strategic distribution
alternatives.
18
<PAGE>
On February 23, 2000, we declared a three-for-two stock split on our
Class A and Class B common stock payable on April 7, 2000 to stockholders of
record as of March 17, 2000. All per-share and share outstanding data in the
consolidated financial statements and related notes have been restated to
reflect the stock split for all periods presented.
On March 31, 2000, we acquired Legend, a privately-held mutual fund
distribution and retirement planning company based in Palm Beach Gardens,
Florida. Through its network of 309 financial advisors, Legend serves employees
of school districts and other not-for-profit organizations nationwide.
In July 2000, we renamed our two retail mutual fund families. The United
Funds family was renamed the Waddell & Reed Advisors Funds which are available
for sale primarily through Waddell & Reed's proprietary sales force.
Concurrently, the Waddell & Reed Fund family was renamed the W&R Funds which are
available for sale through both Waddell & Reed's proprietary sales force and
selected third party distribution channels. At the same time the fund families
were renamed, we added Class A and Class B shares to the W&R Funds, which had
existing Class C and Class Y shares.
On October 23, 2000, we executed an agreement with Nationwide Financial
Services, Inc. ("Nationwide") to provide a broad span of private label insurance
and retirement products for use by W&R's financial advisors. The selection of
Nationwide to provide insurance and retirement products increases the breadth
and competitiveness of such products available to our financial advisors.
Nationwide has developed two variable annuities, a flexible premium variable
universal life product, a survivorship life product and a qualified group
retirement plan for distribution by our investment advisors.
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<PAGE>
SUMMARY OF OPERATING RESULTS
For the years ended December 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
------------------- ------------------- -------------------
% OF % OF % OF
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Investment management fees.............. $253,774 48.7% 178,612 50.1 137,823 48.0
Underwriting and distribution fees...... 202,879 39.0 126,318 35.4 106,615 37.1
Shareholder service fees................ 53,436 10.3 41,525 11.6 33,808 11.8
-------- ----- ------- ----- ------- -----
Revenues excluding investment
and other income...................... 510,089 98.0 346,455 97.1 278,246 96.9
Investment and other income............. 10,613 2.0 10,202 2.9 9,043 3.1
-------- ----- ------- ----- ------- -----
Total revenues.......................... 520,702 100.0 356,657 100.0 287,289 100.0
OPERATING EXPENSES:
Underwriting and distribution........... 183,222 35.1 124,938 35.1 99,575 34.6
Compensation and related costs.......... 57,331 11.0 44,944 12.6 31,512 11.0
General and administrative.............. 28,498 5.5 19,245 5.4 8,551 3.0
Amortization of goodwill................ 5,502 1.1 3,224 0.9 2,903 1.0
Depreciation............................ 3,613 0.7 2,162 0.6 1,892 0.7
-------- ----- ------- ----- ------- -----
Total operating expenses (1)............ 278,166 53.4 194,513 54.6 144,433 50.3
OTHER ITEMS:
Interest expense........................ 14,590 2.8 6,546 1.8 704 0.2
-------- ----- ------- ----- ------- -----
Total expenses.......................... 292,756 56.2 201,059 56.4 145,137 50.5
-------- ----- ------- ----- ------- -----
Income before affiliated items
and income taxes (1).................. $227,946 43.8% 155,598 43.6 142,152 49.5
-------- ----- ------- ----- ------- -----
</TABLE>
- ------------------------
(1) Excludes a $19.0 million pre-tax charge for write off of deferred selling
costs and a $4.6 million pre-tax loss on sale of real estate in 1999.
TOTAL REVENUES
2000 OVER 1999
Revenues excluding investment and other income increased by $163.6 million,
or 47%, to $510.1 million in 2000 compared to 1999. Total revenues, which
include investment and other income, were $520.7 million in 2000, a 46% increase
from 1999. Income before income taxes and 1999 special charges increased by 46%
to $227.9 million in 2000 compared to 1999. Income before income taxes and 1999
special charges as a percentage of total revenues was 43.8% in 2000 and 43.6% in
1999. Legend, acquired in March 2000, contributed $36.6 million to 2000
revenues. ACF, acquired in August 1999, contributed $10.8 million to 2000
revenues and $3.7 million to 1999 revenues.
1999 OVER 1998
Revenues excluding investment and other income increased by $68.2 million,
or 25%, to $346.5 million in 1999 compared to 1998. Total revenues, which
include investment and other income, were $356.7 million in 1999, a 24% increase
from 1998. Income before affiliated items, income taxes and special charges
increased by 9% to $155.6 million in 1999 compared to 1998. Income before
affiliated items, income taxes and special charges as a percentage of revenue
was 43.6% in 1999 and 49.5% in 1998.
20
<PAGE>
INVESTMENT MANAGEMENT FEE REVENUE
INVESTMENT MANAGEMENT FEE REVENUES ARE EARNED FOR PROVIDING INVESTMENT
ADVISORY SERVICES TO THE FUNDS AND OTHER SEPARATELY-MANAGED ACCOUNTS.
2000 OVER 1999
The increase in management fee revenues came from both mutual fund and
separately managed account business. Revenue from mutual fund management fees
comprised 89% of total management fee revenue. In 2000, mutual fund revenue
increased $60.3 million, or 37%, to $225.0 million. Average mutual fund assets
under management increased 27% to $33.3 billion. Effective July 1, 1999,
management fee arrangements were restructured, increasing the overall mutual
fund management fee rates by approximately 8 basis points. In 2000, management
fee revenue from mutual funds increased at a greater rate than that of mutual
fund average assets due to a full year of benefit from the restructured rates.
The average management fee rate for mutual funds improved from 62.5 basis points
in 1999 to 67.5 basis points in 2000, representing approximately $16.7 million
in management fee revenues.
Management fee revenues from institutional and separately-managed account
business accounted for 11% of total management fee revenue. Revenue from these
accounts increased by $14.8 million, or 107%, to $28.7 million in 2000. Average
institutional and separate account assets under management increased 43% to
$5.6 billion. The average management fee rate for institutional and separately
managed accounts increased from 30.6 basis points to 44.6 basis points. This
increase was partially attributable to the acquisition of ACF in August of 1999,
as well as new accounts added with higher fee rates. Certain managed accounts
lost during the year had significantly lower rates than those currently in
effect. Managed assets of ACF contributed $6.8 million, or 46%, to the increase
in revenues from institutional and separately managed accounts. Certain separate
accounts allow for additional fees contingent upon certain relative performance
measurements being met. These performance fees were $2.8 million in 2000 and
$1.2 million in 1999.
1999 OVER 1998
Investment management fee revenue in 1999 was $178.6 million, a 30% increase
over 1998. Average assets under management were $30.3 billion for 1999, an
increase of 18% compared with 1998. The increase in management fee revenues was
due to several factors. First, the restructuring of the Fund's management fee
arrangements that became effective July 1, 1999 added approximately
$11.2 million to management fee revenue. Secondly, the acquisition of ACF in
August of 1999 contributed approximately $3.6 million. Finally, strong market
performance and relative performance resulted in a greater composition of
average assets in equity funds, especially growth, small cap, and technology
funds, which have higher management fee rates.
UNDERWRITING AND DISTRIBUTION FEE REVENUE
UNDERWRITING AND DISTRIBUTION FEE REVENUES ARE COMPRISED OF COMMISSIONS
CHARGED ON SALES OF FRONT-LOAD MUTUAL FUNDS, VARIABLE PRODUCTS AND INSURANCE
PRODUCTS; RULE 12B-1 ASSET-BASED DISTRIBUTION FEES AND CONTINGENT DEFERRED SALES
CHARGES FROM BACK-END AND LEVEL LOAD FUNDS; AND FEES FROM ASSET ALLOCATION AND
OTHER DISTRIBUTION SERVICES.
2000 OVER 1999
Underwriting and distribution fee revenue increased by 61% in 2000 to
$202.9 million. Legend, acquired March 31, 2000, contributed $31.4 million to
the current year's underwriting and distribution fee revenues. Excluding
Legend's contribution, the increase was $45.1 million, or 36%. Certain
investment product sales, namely Class A share mutual funds with front-end load
charges and variable annuity products, generate commissions based on sales
volume. These commissions increased by $27.4 million, or
21
<PAGE>
30% in 2000 over 1999. Sales of these products increased by 28%. Over 90% of
variable product sales are variable annuity products. Variable annuity product
sales were especially strong in 2000, growing 57%, while Class A share sales
grew 20%. Agency commissions paid by the underwriting insurance companies have
higher commission rates than that of Class A share mutual funds causing revenues
to increase at a higher rate than sales. The average commission rate for
variable insurance products in 2000 was 7.67%, compared with the average
commission rate for front-end mutual funds of 4.44%. In addition, an enhanced
variable annuity compensation agreement with UILIC effective January 1, 2000
added $7.3 million of asset-based fees to revenues in 2000. Revenues from
deferred load investment products (Class B and Class C shares) are primarily
derived from a 0.75% 12b-1 distribution fee on these assets, and to a lesser
extent from contingent deferred sales charges on early redemption of shares.
These revenues increased by $5.5 million, or 49%, as average assets in these
share classes increased by $779.9 million. The remaining increase in revenue
came from higher revenues from insurance products, other mutual funds and fees
from financial plans.
1999 OVER 1998
Underwriting and distribution fee revenue in 1999 increased by 18% to
$126.3 million. This increase is primarily attributable to increases in sales
volume of front-load investment products. Commission revenues from front-load
investment products, primarily the Advisors Funds Class A shares and variable
annuity products, accounted for 75%, or $14.7 million of this $19.7 million
increase in 1999 over 1998. Distribution revenues from back-end and level-load
share classes increased by $2.5 million or 28% to $11.3 million due to growth in
the asset value of these classes, partially offset by lower contingent deferred
sales charges. Commission revenues from insurance product sales were up by
$2.5 million to $19.1 million for 1999 due to increased sales of variable
universal life insurance.
SHAREHOLDER SERVICE FEE REVENUE
SHAREHOLDER SERVICE FEE REVENUES INCLUDE TRANSFER AGENCY FEES, CUSTODIAN
FEES FROM RETIREMENT PLAN ACCOUNTS AND PORTFOLIO ACCOUNTING FEES.
2000 OVER 1999
In 2000, shareholder service fee revenues increased by $11.9 million, or
29%, to $53.4 million. Excluding Legend's custodial service fee revenue
contribution of $5.1 million, shareholder service fees increased by 16% due
primarily to a 15% increase in the average number of accounts serviced.
Shareholder service fee revenue, excluding Legend's custodial contribution,
comprised 82% of transfer agency revenue and 13% of custodial fee revenue,
representing 95% of total service revenue. Transfer agency and retirement plan
custodial fees are primarily based on annual charges per account and fluctuate
based on the number of accounts serviced. The average number of shareholder
accounts was 1.88 million in 2000 compared with 1.64 million in 1999.
1999 OVER 1998
The transfer agency and custodian fee revenue, which comprised 95% of the
service fee revenues in 1999, are primarily based on annual charges per account
and fluctuate based on the number of accounts serviced. In 1999, shareholder
service fees increased by 23% to $41.5 million due primarily to a 12% increase
in the average number of accounts. In addition, a fee increase in the fourth
quarter of 1998, coinciding with the outsourcing of the data processing
component of transfer agency activities, caused the increase in revenues to
exceed the increase in number of accounts serviced. This fee increase
contributed $4.8 million to the growth in revenue in 1999.
22
<PAGE>
UNDERWRITING AND DISTRIBUTION EXPENSE
UNDERWRITING AND DISTRIBUTION EXPENSE INCLUDES COSTS ASSOCIATED WITH THE
MARKETING, PROMOTION, AND DISTRIBUTION OF OUR PRODUCTS. THE PRIMARY COSTS ARE
COMMISSIONS AND OTHER COMPENSATION PAID TO FINANCIAL ADVISORS, SALES MANAGEMENT
AND OTHER MARKETING PERSONNEL, PLUS OVERHEAD EXPENSES RELATING TO FIELD OFFICES,
SALES PROGRAMS AND ADVERTISING.
2000 OVER 1999
Underwriting and distribution expenses for 2000 were $183.2 million, an
increase of $58.3 million or 47% compared with 1999. Legend's operations
contributed $25.2 million to underwriting and distribution expenses. Excluding
Legend's contribution, the increase was 27%. Over 70% of underwriting and
distribution expenses are direct expenses relating to sales volume such as
commissions, advisor incentive compensation, and commission overrides paid to
field management. These costs increased $23.7 million, or 26%, as sales volume
increased 21%. Other indirect costs for sales offices, compensation to marketing
support personnel, advertising and sales program costs do not fluctuate directly
with sales volume or sales revenues. These costs increased by $6.3 million, or
18%, in 2000 compared with 1999. The major items included in indirect costs
include sales program financing costs of $8.6 million, group health and accident
insurance of $3.4 million, field office compensation of $5.8 million, and
facilities costs for field offices of $11.6 million. Our distribution margin,
excluding Legend, was 7.8% compared with 1.1% for the same period in 1999.
Margin improvement was attributable to enhanced compensation agreements on
certain products and also to the fact that growth in sales exceeded that of
fixed costs such as sales support, which do not fluctuate with sales volume.
1999 OVER 1998
Underwriting and distribution expenses for 1999 were $124.9 million, an
increase of $25.4 million or 25% compared with 1998. The largest contributor to
the increase in distribution expenses was commission expense, and other sales
force compensation related to sales volume. Other factors included higher
production and asset retention incentive compensation of $6.0 million, higher
net costs relating to field offices, marketing and national advertising of
$5.5 million and increased sales program costs of $2.7 million. We began
restructuring our mutual fund products in the fourth quarter of 1999. Due to
their non-industry standard structure, the W&R Funds' Class B shares were closed
for new sales and converted into Class C shares, which have an industry standard
structure. Concurrently, the Advisors Funds began offering Class B shares and
Class C shares. Upon conversion of the W&R Funds' Class B shares, no contingent
deferred sales charges were collected for any converted share redemptions. The
deferred selling costs of $19.0 million related to the W&R Funds' Class B share
conversion were written off on November 30, 1999 concurrent with the necessary
approvals for share conversion. It was estimated that underwriting and
distribution expenses would be reduced by approximately $3.0 million per year as
a result of the restructuring and related write-off, primarily through foregone
amortization of deferred selling costs.
COMPENSATION AND RELATED COSTS
2000 OVER 1999
Compensation and related costs for 2000 were $57.3 million, an increase of
$12.4 million, or 28%, compared to 1999. ACF contributed $3.9 million in 2000
and $1.2 million from the time of acquisition in August 1999 through
December 31, 1999. Legend, acquired March 31, 2000, contributed $1.3 million to
these costs in 2000. Excluding these acquisitions, compensation increased 19%,
or $8.4 million, from $43.7 million to $52.1 million. Salaries and incentive
compensation account for over 80% of total compensation. Remaining costs
included payroll taxes, group life and health insurance, and pension and savings
plan costs. Salaries and incentive bonus compensation increased 21% and 22%,
respectively, due
23
<PAGE>
primarily to the increase in personnel and annual raises. Other compensation
costs increased at a much lower rate of 11% due to lower expenses for group
health and accident insurance as well as certain pension costs.
1999 OVER 1998
Compensation and related costs for 1999 were $44.9 million, an increase of
$13.4 million, or 43%, compared to 1998. The growth in our operations added 25%
to the average employee headcount. Additional performance based compensation
accounted for $3.8 million of the increase in compensation costs due primarily
to investment performance compensation paid to portfolio managers and, to a
lesser extent, to the inclusion of middle management in incentive compensation
plans. Higher pension and health insurance costs were additional factors for the
increase in compensation costs. Pension and related costs were $0.8 million
higher due to personnel additions and a higher rate of compensation increase.
Higher health insurance costs contributed $1.1 million to the increase as
reserves were increased to reflect higher claims exposure.
GENERAL AND ADMINISTRATIVE EXPENSE
2000 OVER 1999
General and administrative expenses, which reflect operating costs other
than those related to compensation and to distribution efforts, increased by
$9.3 million, or 48%, to $28.5 million for 2000. ACF contributed $1.0 million in
2000 and $0.5 million from the time of acquisition in August 1999 through
December 31, 1999. Legend, acquired March 31, 2000, contributed $3.2 million to
these costs in 2000. Excluding these costs from recently acquired companies,
general and administrative expenses increased by $5.6 million, or 29%, a result
of investments made to facilitate growth, notably in computer systems and
services and costs associated with implementing new funds and share classes.
Also contributing to the increase were higher rental and facilities costs from
expanding operations.
1999 OVER 1998
General and administrative expenses were up by $10.7 million, or 125%, to
$19.2 million for 1999. Approximately $5.4 million of this increase was
attributable to the implementation of a new transfer agency system in the fourth
quarter of 1998. Higher shareholder service fee revenues coinciding with this
implementation offset most of the increased costs. The growth of our operations
added to higher administrative costs, including the acquisition of ACF, new
consulting arrangements, proxy and shareholder meeting costs, and additional
facilities rental to accommodate growth.
INVESTMENT AND OTHER INCOME
2000 OVER 1999
Investment and other income increased by $0.4 million from $10.2 million in
1999 to $10.6 million in 2000. In 2000, investment and other income included
$2.5 million of realized gains from the sale of investment securities sold to
partially fund the Legend acquisition. In 1999, $1.0 million was attributable to
net rental income from real estate properties which were sold in December of
1999. Excluding these items, interest income declined by $1.1 million, or 12%,
to $8.1 million due to lower amounts invested in interest-bearing corporate and
municipal bonds. Average invested cash and marketable securities were
$136.7 million in 2000 compared with $142.1 million in 1999.
1999 OVER 1998
Investment and other income increased by $1.2 million to $10.2 million in
1999. Average invested cash and marketable securities were $142.1 million in
1999 compared with $144.8 million in 1998. Substantially
24
<PAGE>
all of the increase in investment and other income was attributable to higher
net rental income from investment in real estate properties. These properties
were sold on December 28, 1999 for net proceeds of $16.5 million. Pretax income
realized from rental operations of these properties in 1999 was $1.0 million.
DEPRECIATION
2000 OVER 1999
Depreciation of property and equipment increased by $1.5 million, or 67%, in
2000 to $3.6 million. The acquisitions of ACF on August 9, 1999 and Legend on
March 31, 2000 accounted for $320 thousand of the increase. The remaining
difference was primarily the result of additions to furniture and equipment in
field offices and information systems in our home office. Our new building,
which was completed and placed into service in September 2000, was another
contributing factor to the increase in depreciation expense.
1999 OVER 1998
Depreciation of property and equipment increased by $270 thousand, or 14% in
1999 to $2.2 million primarily due to furniture and equipment relating to
opening additional field offices and upgrading and enhancing existing offices.
INTEREST EXPENSE
2000 OVER 1999
We entered into a $200.0 million credit facility arrangement in October of
1998. This facility is renewable annually in October, was renewed in
October 1999 and was increased to $220.0 million in March 2000. The facility is
expandable to $330.0 million, whereby syndicates could, at their option upon our
request, increase the loans by $110.0 million. The credit facility was used to
fund share repurchases and facilitate the acquisitions of Legend and ACF.
Beginning in the third quarter of 2000, we also implemented a money market loan
program. The money market loan program, which is similar to commercial paper,
was utilized to repay amounts borrowed under the credit facility. In
October 2000, all amounts borrowed on the credit facility were repaid. On
August 15, 2000, we filed a $400.0 million universal shelf registration whereby
proceeds received could be used for general corporate purposes, including
repaying short-term debt outstanding. On January 18, 2001, we issued
$200.0 million in principal amount of 7.5% senior notes due 2006 resulting in
net proceeds of approximately $197.6 million which was used to repay short-term
debt outstanding and for general corporate purposes. As a result, for purposes
of these financial statements, $175.3 million of short-term debt outstanding at
December 31, 2000 was reclassified as long-term. During the year, the average
balance on the combined short-term debt was $195.8 million for 2000 and
$106.1 million for 1999. The average interest rate applied, excluding other
costs, was 7.01% for 2000 and 5.73% for 1999.
1999 OVER 1998
The credit facility discussed above was used in 1999 to fund share
repurchases during the year and acquire ACF in August of 1999. The average
interest rate applied to this facility, excluding facility costs, was 5.73% in
1999. The average amount outstanding on this facility was $106.1 million. In
1999, interest expense and related facility costs were $6.5 million, compared to
$704 thousand for 1998. At the end of 1999, we had an outstanding balance of
$125.3 million under this credit facility, compared to $40.1 million at the end
of 1998.
25
<PAGE>
LOSS ON THE SALE OF REAL ESTATE
On December 28, 1999, we completed the sale of all multi-tenant properties
to unrelated third parties. Proceeds from the sale were $16.5 million resulting
in a $4.6 million pretax loss.
WRITE-OFF OF DEFERRED SELLING COSTS
We began restructuring our mutual fund products in the fourth quarter of
1999. Due to their non-industry-standard structure, the W&R Funds' Class B
shares were closed for new sales and were converted into Class C shares in
March 2000, which have an industry standard structure. Concurrently, the
Advisors Funds began offering Class B shares and Class C shares. Upon conversion
of the W&R Class B shares, no contingent deferred sales charges were collected
for any converted share redemptions. The deferred selling costs related to the
W&R Funds' Class B shares in the amount of $19.0 million (pre-tax) were written
off on November 30, 1999 concurrent with the necessary approvals for share
conversion. By offering additional classes of mutual fund shares and closing
funds with non-industry standard structures, our mutual funds are more
consistent with that of the industry, provide our clients with more choices and
greater value, and accommodate additional changes for strategic distribution
flexibility.
AFFILIATED INTEREST INCOME AND EXPENSE
Prior to its initial public offering in March of 1998, we had various notes
payable and notes receivable with Torchmark and certain subsidiaries of
Torchmark. The affiliated interest income and expense as reported for 1998
pertain to these notes and were prepaid with proceeds from the offering.
INCOME TAXES
Our effective income tax rate was 39.0%, 38.1%, and 38.2%, in 2000, 1999,
and 1998, respectively.
FINANCIAL CONDITION
At December 31, 2000, our total assets were $422.2 million, up
$87.1 million from December 31, 1999. In 2000, we repurchased 5.1 million shares
of our common stock at a total cost of $108.4 million compared to 8.7 million
shares of our common stock at a total cost of $132.2 million during 1999. Cash
flows from operations, the credit facility, and the money market loan program
were utilized to fund these share repurchases. At December 31, 2000, our
outstanding debt, including principal and accrued interest was $175.3 million
compared to $125.3 million on December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities increased by $60.5 million to
$173.9 million for 2000 due to higher net income from operations, excluding
non-cash items, as well as the timing of cash received and cash paid on assets
and liabilities. Net cash used in investing activities in 2000 was
$59.8 million, compared to $4.0 million net cash provided in 1999. Proceeds from
the sale and maturity of investment securities exceeded purchases of investment
securities by $30.9 million in 2000. At December 31, 2000, we had
$125.7 million in cash and marketable investment securities, of which
$21.9 million was restricted for the benefit of customers in compliance with
securities industry regulations. Cash and marketable securities at December 31,
1999 were $148.0 million, of which $17.1 million was restricted. Other investing
activities in 2000 used $30.4 million for the additions of property and
equipment, and $60.3 million for the acquisition of subsidiaries. In 2000, we
used $107.0 million in net financing activities, compared with $86.6 million in
1999. In 2000, we repurchased 3.3 million shares of Class A and 1.8 million
shares of Class B common stock, the combined cost of which was $108.4 million,
and paid $29.5 million in cash dividends. Net borrowings of $50.0 million on the
credit facility were utilized in 2000 to finance share repurchases and the
acquisition of Legend. The $220.0 million, 364-day revolving credit facility,
expandable to $330.0 million at the syndicates' option upon our request, had no
balance outstanding at December 31, 2000.
26
<PAGE>
Management believes its available cash, marketable securities, and expected
cash flow from operations will be sufficient to fund dividends, operations,
advance sales commissions, obligations, and other reasonably foreseeable cash
needs. We may also continue to repurchase shares of our common stock from time
to time, as management deems appropriate. The share repurchases could be
financed by our available cash and investments and/or the use of our revolving
credit facility or utilization of the money market loan program.
SUBSEQUENT EVENTS
On January 18, 2001, we completed an offering of $200.0 million in principal
amount of 7.5% senior notes due 2006 resulting in net proceeds of approximately
$197.6 million (net of discounts, commissions and estimated expenses.) The notes
represent senior unsecured obligations and are rated "Baa2" by Moody's and "BBB"
by Standard & Poor's. The notes pay interest semi-annually on January 18 and
July 18 at a rate of 7.5% per annum. Proceeds from the notes will be used to
repay short-term debt and for general corporate purposes. Total debt outstanding
as of December 31, 2000 was $175.3 million.
On March 2, 2001, we repurchased 4.0 million shares of our Class B common
stock at an aggregate cost, including commissions, of $122.0 million. These
shares were repurchased at $30.50 per share.
On March 7, 2001, we completed the sale of our two home office buildings to
Mesirow Realty Sale-Leaseback ("Mesirow"). We also entered into an agreement
with Mesirow to lease the buildings back for a period of fifteen years. The net
proceeds from this sale were $28.2 million and resulted in a realized gain of
approximately $1.8 million, which will be deferred and amortized over the term
of the operating lease.
UNITED INVESTORS LIFE INSURANCE COMPANY LITIGATION
Currently, we are in litigation with UILIC, one of our insurance providers,
and other related parties over terms of a compensation agreement signed in
July 1999 by UILIC and Waddell & Reed, Inc. The compensation is paid by UILIC to
us on variable annuities underwritten by UILIC and distributed by us. The
agreement provides for us to be paid annual compensation of 0.25% on all
variable annuity policies' assets under management issued after January 1, 2000,
and annual compensation of 0.20% on variable annuity policies' assets under
management issued before that date. This agreement added $7.3 million of
asset-based fees to revenues in 2000. Payments are continuing but the validity
and duration of that agreement has been challenged by UILIC in a complaint filed
in May 2000, in the Circuit Court of Jefferson County, Alabama in which we have
subsequently named Torchmark as a third party defendant in a tortious
interference claim. UILIC has taken the position that regardless of the validity
of the compensation agreement, the compensation payable pursuant to this
agreement terminates on April 30, 2001. Management believes that the Company
will prevail on the merits of the litigation and that compensation pursuant to
the July 1999 compensation agreement will continue, pursuant to the terms of the
agreement, as long as the variable annuity policies' assets are in place and the
variable annuity policies in question are in force. Moreover, we do not foresee
any additional risk to existing variable policy assets and anticipate continued
growth in sales of variable annuity products.
As previously reported, a number of Torchmark affiliates terminated us as
investment adviser for certain insurance company general account assets and
pension plan assets totaling $768.0 million with an average management fee of 25
basis points. These accounts paid approximately $1.9 million in annual
investment management fees. The only other Torchmark-affiliated assets for which
we serve as investment adviser are approximately $37.9 million of mutual funds
in 401(k) plans of Torchmark affiliates.
TERMINATION OF AGREEMENTS BY UNITED INVESTORS LIFE INSURANCE COMPANY
On February 28, 2001, UILIC terminated the Principal Underwriting Agreement
by and between UILIC and the Company, effective April 30, 2001. This agreement
provided for the sale of variable
27
<PAGE>
products underwritten by UILIC by our financial advisors. As a result, beginning
May 1, 2001, Nationwide will become the primary provider of variable products
for distribution by our financial advisors. Management believes that the
profitability of the two insurers' variable product lines is equivalent and does
not anticipate any material adverse effects from the termination of the
Principal Underwriting Agreement.
In addition, on February 28, 2001, UILIC terminated the General Agent
Contract by and between UILIC and the Company, effective December 31, 2001. This
agreement provides for the sale of non-variable life insurance products
underwritten by UILIC and distributed by our financial advisors. We are
currently in the process of negotiating with several insurance carriers for the
sale of their products by our financial advisors to complement the other
non-UILIC life products currently available for distribution by our financial
advisors. In addition, the Company has recently entered into an agreement with
BISYS to provide our financial advisors with access to an extensive array of
traditional life and disability insurance products for sale to our clients. As a
result, management does not anticipate any material adverse effects from the
termination of the UILIC General Agent Contract.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133 "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS 133"). This statement, which is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000,
establishes accounting and reporting standards for derivative financial
instruments and for hedging activities. It requires companies to recognize all
derivatives as either assets or liabilities, with the instruments measured at
fair value. The accounting for changes in fair value of a derivative depends on
the intended use of the derivative and the resulting designation. This statement
was amended in June 2000 with Statement of Financial Accounting Standards
No. 138, "ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING
ACTIVITIES" ("SFAS 138"). The FASB encourages early adoption of SFAS 133;
however, the provisions of the standard should not be retroactively applied to
financial statements of periods prior to adoption. The adoption of SFAS 133, as
amended, is not expected to have a material impact on us.
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS"
("SAB101"), which among other guidance, clarifies certain conditions to be met
in order to recognize revenue. SAB 101 summarizes some of the SEC
interpretations of generally accepted accounting principles relating to revenue
recognition. In June 2000, the SEC issued Staff Accounting Bulletin No. 101B
which delayed the implementation of SAB 101 until the fourth quarter of fiscal
years beginning after December 15, 1999 and the provisions are to be
retroactively applied to the entire year. The implementation of SAB 101 did not
have a material effect on our financial statements.
In March 2000, the FASB issued Interpretation No. 44, "ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION--AN INTERPRETATION OF APB
OPINION NO. 25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No.
25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB 25") for certain issues. It
does not address any issues related to the application of the fair value method
set forth in Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" ("SFAS 123"). Among other issues, FIN 44 clarifies the definition
of "employee" for purposes of applying APB 25, the criteria for determining
whether a plan qualifies as a non-compensatory plan, the accounting effects of
modifications to the terms of a previously fixed stock option or award and the
accounting for an exchange of stock compensation awards in a business
combination. For those issues that affect us, FIN 44 was effective July 1, 2000.
We do not expect that the application of FIN 44 will have a material impact on
the financial statements.
SEASONABILITY AND INFLATION
We do not believe our operations are subject to significant seasonal
fluctuations. We do not believe that inflation has had a significant impact on
operations.
28
<PAGE>
RISK FACTORS
THERE MAY BE ADVERSE EFFECTS ON OUR REVENUES, EARNINGS AND PROSPECTS IF THE
SECURITIES MARKETS DECLINE. Our results of operations are affected by certain
economic factors, including the level of the securities markets. We have
benefited from the favorable performance of the securities markets in recent
years that has attracted a substantial increase in the investments in the
securities markets. A decline in the securities markets, failure of the
securities markets to sustain their recent levels of growth or short-term
volatility in the securities markets could result in investors withdrawing from
the markets or decreasing their rate of investment, either of which could
adversely affect our revenues, earnings and growth prospects. Because our
revenues are, to a large extent, investment management fees based on the value
of assets under management, a decline in the value of these assets would
adversely affect our revenues. Our growth is dependent to a significant degree
upon our ability to attract and retain mutual fund assets, and in an adverse
economic environment, this may prove difficult. Our growth rate has varied from
year to year and there can be no assurance that the average growth rates
sustained in the recent past will continue. The combination of adverse markets
effecting sales and investment management fees could compound on each other and
materially effect earnings. Adverse conditions in the U.S. domestic stock market
are particularly material to us due to high concentration of assets under
management in that market.
THERE MAY BE ADVERSE EFFECTS ON OUR REVENUES AND EARNINGS IF OUR FUNDS'
PERFORMANCE DECLINES. Success in the investment management and mutual fund
businesses is dependent on the investment performance of client accounts. Good
relative performance stimulates sales of the Funds' shares and tends to keep
redemptions low. Sales of the Funds' shares in turn generate higher management
fees and distribution revenues. Good relative performance also attracts private
institutional accounts. Conversely, poor relative performance results in
decreased sales, increased redemptions of the Funds' shares and the loss of
private institutional accounts, resulting in decreases in revenues. Failure of
our Funds to perform well could, therefore, have a material adverse effect on
our revenues and earnings.
THERE MAY BE AN ADVERSE EFFECT ON OUR BUSINESS IF OUR INVESTORS REMOVE THE
ASSETS WE MANAGE ON SHORT NOTICE. A majority of our revenues are derived from
investment management agreements with our Funds that are terminable on 60 days'
notice. Each investment management agreement must be approved and renewed
annually by the disinterested members of each Fund's board or its shareholders.
Some of these investment management agreements may be terminated or not renewed,
and new agreements may be unavailable. In addition, mutual fund investors may
redeem their investments in the Funds at any time without any prior notice.
Investors can terminate their relationship with us, reduce the aggregate amount
of assets under management or shift their funds to other types of accounts with
different rate structures for any number of reasons, including investment
performance, changes in prevailing interest rates and financial market
performance. The decrease in revenues that could result from any such event
could have a material adverse effect on our business.
WE FACE INCREASED COMPETITION IN HIRING AND RETAINING KEY PERSONNEL AND
FINANCIAL ADVISORS. Our continued success depends to a substantial degree on
our ability to attract and retain qualified personnel to conduct our fund
management and investment advisory business. The market for qualified fund
managers, investment analysts, and financial advisors is extremely competitive
and has grown more so in recent periods because of the growth in the industry.
We are dependent on our sales force and select third party distributors to sell
our mutual funds and other investment products. Our growth prospects will be
directly affected by the quality and quantity of financial advisors we are able
to successfully recruit and retain. There can be no assurances that we will be
successful in our efforts to recruit and retain the required personnel.
WE FACE STRONG COMPETITION FROM NUMEROUS AND SOMETIMES LARGER COMPANIES. We
compete with stock brokerage and investment banking firms, insurance companies,
banks, online and Internet investment sites and other financial institutions.
Many of these companies not only offer mutual fund investments and services but
also offer other financial products and services. Many of our competitors have
more products
29
<PAGE>
and product lines, services, and may also have substantially greater assets
under management. Many larger mutual fund complexes have developed relationships
with brokerage houses with large distribution networks, which may enable these
fund complexes to reach broader client bases. In recent years, there has been a
trend of consolidation in the mutual fund industry resulting in stronger
competitors with greater financial resources than us. There has also been a
trend toward online Internet financial services. If existing customers stop
investing with us and instead invest with our competitors, or if potential
customers decide to invest with our competitors, it would cause our market
share, revenues and income to decline.
POTENTIAL MISUSE OF FUNDS AND INFORMATION IN THE POSSESSION OF OUR ADVISORS
COULD RESULT IN LIABILITY TO OUR CLIENTS. Our financial advisors handle a
significant amount of funds and financial and personal information for our
clients. Although we have implemented a system of controls to minimize the risk
of fraudulent taking or misuse of funds and information, there can be no
assurance that our controls will be adequate or that taking or misuse by our
employees can be prevented. We could have liability in the event of a taking or
misuse by our employees and we could also be subject to regulatory sanctions.
Although we believe that we have adequately insured against these risks, there
can be no assurance that our insurance will be maintained or that it will be
adequate to meet any future liability.
THERE ARE NO ASSURANCES THAT WE WILL PAY FUTURE DIVIDENDS. Our Board of
Directors currently intends to continue to declare quarterly dividends on both
our Class A and Class B common stock. The declaration and payment of dividends
is subject to the discretion of our Board. Any determination as to the payment
of dividends, as well as the level of such dividends, will depend on, among
other things, general economic and business conditions, our strategic plans, our
financial results and condition and contractual, legal, and regulatory
restrictions on the payment of dividends by us or our subsidiaries. We are a
holding company and, as such, our ability to pay dividends is subject to the
ability of our subsidiaries to provide us with cash. There can be no assurance
that the current quarterly dividend level will be maintained or that we will pay
any dividends in any future period.
REGULATORY RISK IS SUBSTANTIAL IN OUR BUSINESS. Our investment management
business is heavily regulated. Noncompliance with applicable laws or regulations
could result in sanctions being levied against us, including fines and censures,
suspension or expulsion from a certain jurisdiction or market or the revocation
of licenses. Noncompliance with applicable laws or regulations would adversely
affect our reputation, prospects, revenues and earnings. In addition, changes in
current laws or regulations or in governmental policies could adversely affect
our operations, revenues and earnings.
PROVISIONS OF OUR ORGANIZATIONAL DOCUMENTS COULD DETER TAKEOVER
ATTEMPTS. Under our Certificate of Incorporation, our Board of Directors has
the authority, without action by our stockholders, to fix certain terms and
issue shares of our Preferred Stock, par value $1.00 per share. Actions of our
Board of Directors pursuant to this authority may have the effect of delaying,
deterring, or preventing a change in control of the Company. Other provisions in
our Certificate of Incorporation and in our Bylaws impose procedural and other
requirements that could be deemed to have anti-takeover effects, including
replacing incumbent directors. In addition, our Board of Directors is divided
into three classes, each of which is to serve for a staggered three-year term
after the initial classification and election and incumbent directors may not be
removed without cause, all of which may make it more difficult for a third party
to gain control of our Board. In addition, as a Delaware corporation we are
subject to section 203 of the Delaware General Corporation Law. With certain
exceptions, section 203 imposes restrictions on mergers and other business
combinations between us and any holder of 15% or more of our voting stock.
OUR STOCKHOLDERS RIGHTS PLAN COULD DETER TAKEOVER ATTEMPTS. In 1999 we
adopted a stockholders rights plan pursuant to which rights attached to each
share of our then outstanding Class A and Class B common stock. Generally, the
rights are exercisable only if a person or group acquires 15% or more of the
voting power as represented by our Class A and Class B common stock. Under
certain conditions, the rights entitle the holders to receive shares of our
Class A common stock having a value equal to two times the exercise price of the
right. Our stockholders rights plan could impede the completion of a merger,
tender
30
<PAGE>
offer or other takeover attempt even though some or a majority of our
stockholders might believe that a merger, tender offer or takeover is in their
best interests and even if such transactions could result in our stockholders
receiving a premium for their shares of our stock over the then current market
price of our stock.
THE TERMS OF OUR CREDIT FACILITY IMPOSE RESTRICTIONS ON OUR OPERATIONS.
THERE ARE NO ASSURANCES WE WILL BE ABLE TO RAISE ADDITIONAL CAPITAL. We have
entered into a loan agreement for a $220 million, 364-day revolving line of
credit facility with various lenders. The facility is expandable to
$330.0 million, whereby the banks could, at their option upon our request,
increase the loans by $110.0 million. At December 31, 2000, there was no balance
outstanding under this line of credit. In August 2000, we also began utilizing a
money market loan program, which functions similarly to commercial paper. At
December 31, 2000, the outstanding balance was $160.0 million. The terms and
conditions of the revolving credit facility and the money market loan program
impose restrictions that affect, among other things, our ability to incur debt,
make capital expenditures, merge, sell assets, make distributions or create or
incur liens. Availability of our credit facility is also subject to certain
financial covenants. Our ability to comply with the covenants can be affected by
events beyond our control and there can be no assurance that we will achieve
operating results that comply with the provisions of the credit agreement. A
breach of any of these covenants could result in a default under our credit
facility. In the event of a default, the banks could elect to declare the
outstanding principal amount of our credit facility, all interest thereon and
all other amounts payable under our credit facility to be immediately due and
payable.
Our ability to satisfy our debt obligations will depend upon our future
operating performance, which will be affected by prevailing economic, financial
and business conditions and other factors, some of which are beyond our control.
We anticipate that borrowings from our existing revolving credit facility, the
refinancing of our revolving credit facility, and/or cash provided by operating
activities, will provide sufficient funds to finance anticipated development
plans, meet our operating expenses and service our debt requirements as they
become due. However, in the event that we require additional capital, there can
be no assurance that we will be able to raise such capital when needed or on
satisfactory terms, if at all. Also, there can be no assurance that we will be
able to refinance our current credit facility upon its maturity or on favorable
terms. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations Liquidity and Capital Resources."
THERE ARE NO ASSURANCES THAT THE COMBINATION OF OUR TWO CLASSES OF COMMON
STOCK WILL BE APPROVED OR THAT THE EXPECTED EFFECTS WILL OCCUR. Our
stockholders will consider and vote on a proposal to merge the Company and a
wholly-owned subsidiary that will effect the combination of our two classes of
common stock into a single class of stock. If the merger is approved, we
anticipate that (1) the combination of our two classes of common stock will have
no effect on our business or operations, as currently conducted or afterwards;
(2) neither we nor the stockholders will recognize taxable gain or loss upon the
conversion of the Class B stock and the aggregate tax basis in, and the holding
period of, the newly issued shares of Class A common stock will be the same as
the shares of Class B common stock exchanged; (3) the merger will not have any
material impact on our stock option plans, other benefit plans or our rights
agreement, except for technical amendments to the agreement to eliminate any
references to the Class B common stock; (4) there will not be any effect on
earnings per share or book value per share; (5) the analysis and valuation of a
single class of stock will be facilitated; and (6) it will enhance interest in
our stock and increase liquidity and trading efficiency. However, we cannot
guarantee or insure that the merger will be approved or, if approved, that any
of the anticipated effects, including an increase in liquidity and trading
efficiency of the single class of common stock, will occur.
SYSTEMS FAILURE MAY DISRUPT OUR BUSINESS. Our business is highly dependent
on communications and information systems, including our mutual fund transfer
agency system maintained by a third-party service provider. We are highly
dependent on our ability to process a large number of transactions on a daily
basis and also on the proper functioning of computer systems of third parties.
We rely heavily on financial,
31
<PAGE>
accounting and other data processing systems. If any of these do not function
properly, we could suffer financial loss, business disruption, liability to
clients, regulatory intervention or damage to our reputation. If our systems are
unable to accommodate an increasing volume of transactions, our ability to
expand could be affected. Although we have back-up systems in place, we cannot
insure that any systems failure or interruption, whether caused by a fire, other
natural disaster, power or telecommunications failure, act of war or otherwise
will not occur, or that back-up procedures and capabilities in the event of any
failure or interruption will be adequate.
WE MAY HAVE DIFFICULTY EXECUTING OUR ACQUISITION STRATEGY. We have adopted
a strategy to selectively pursue acquisitions and alliances that will add new
products or alternative distribution systems. There can be no assurance that we
will find suitable acquisition candidates at acceptable prices, have sufficient
capital resources to realize our acquisition strategy or be successful in
entering into definitive agreements for desired acquisitions. In addition, we
have limited experience in finding, acquiring and integrating other companies
and we may not be successful in the integration of acquired companies. An
acquisition may not prove to add new products or distribution systems or
otherwise be advantageous to us.
THE RESTRUCTURING OF OUR MUTUAL FUND PRODUCTS TO ENHANCE OUR COMPETITIVENESS
AND DISTRIBUTION CHANNELS MAY NOT BE SUCCESSFUL. In October 1999, we commenced
restructuring our mutual fund products by offering additional classes of mutual
fund shares and closing non-industry standard classes in an effort to enhance
our competitiveness and strategic distribution alternatives and favorably impact
our distribution margin. We anticipate that the product restructuring will
result in our product line (1) being more consistent with the industry,
(2) providing our clients with more choices and greater value, and
(3) accommodating additional changes for strategic distribution flexibility.
There can be no assurances that the restructuring of our mutual fund products
will enhance our competitiveness and distribution channels or that it will
favorably impact our distribution margin.
OUR HOLDING COMPANY STRUCTURE RESULTS IN STRUCTURAL SUBORDINATION AND MAY
AFFECT OUR ABILITY TO MAKE PAYMENTS ON OUR SENIOR UNSECURED NOTES. On
January 18, 2001, we completed a universal shelf offering of $200.0 million
principal amount of 7.5% senior notes due 2006. The notes represent senior
unsecured obligations exclusively of Waddell & Reed Financial, Inc. We are a
holding company and, accordingly, substantially all of our operations are
conducted through our subsidiaries. As a result, our cash flow and our ability
to service our debt, including the notes, is dependent upon the earnings of our
subsidiaries. In addition, we are dependent on the distribution of earnings,
loans or other payments by our subsidiaries to us. Our subsidiaries are separate
and distinct legal entities. Our subsidiaries have no obligation to pay any
amounts due on the notes or provide us with funds for our payment obligations,
whether by dividends, distributions, loans or other payments. In addition, any
payment of dividends, distributions, loans or advances to by our subsidiaries
could be subject to statutory or contractual restrictions. Payments to us by our
subsidiaries will also be contingent upon our subsidiaries' earnings and
business considerations. Our right to receive any assets of any of our
subsidiaries upon their liquidation or reorganization, and therefore the right
of the holders of the notes to participate in those assets, would be effectively
subordinated to the claims of that subsidiary's creditors, including trade
creditors. In addition, even if we were a creditor of any of our subsidiaries,
our rights as a creditor would subordinate to any security interest in the
assets of our subsidiaries and any indebtedness of our subsidiaries senior to
that held by us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates. Our cash
equivalents and short-term investments and our outstanding short-term debt bear
variable interest rates. We have not used derivative instruments to offset the
exposure to changes in interest rates. Changes in interest rates are not
expected to have a material impact on our results of operations.
32
<PAGE>
As noted in Item 7, our revenues and net income are based in part on the
value of the investment portfolios managed. Accordingly, financial market
declines will negatively impact our assets under management and, in turn, its
revenues and profitability.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements referred to in
the Index on page 36 setting forth our consolidated financial statements,
together with the report of KPMG LLP dated January 24, 2001 on page 37.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disagreements with accountants on any matter of accounting principles or
practices or financial statement disclosure have been reported on a Form 8-K
within the twenty-four months prior to the date of the most recent financial
statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item 10 is incorporated herein by reference to
our definitive proxy statement for our 2001 Annual Meeting of Stockholders to be
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 is incorporated herein by reference to
our definitive proxy statement for our 2001 Annual Meeting of Stockholders to be
filed pursuant to Regulation 14A under the Exchange Act.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item 12 is incorporated herein by reference to
our definitive proxy statement for our 2001 Annual Meeting of Stockholders to be
filed pursuant to Regulation 14A under the Exchange Act.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item 13 is incorporated herein by reference to
our definitive proxy statement for our 2001 Annual Meeting of Stockholders to be
filed pursuant to Regulation 14A under the Exchange Act.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a)(1) Financial Statements. Reference is made to the Index to
Consolidated Financial Statements on page 36 for a list of
all financial statements filed as part of this Report.
(a)(2) Financial Statement Schedules. None.
(b) Reports on Form 8-K. We filed no reports on Form 8-K during
the fourth quarter of 2000.
(c) Exhibits. Reference is made to the Index to Exhibits on page
60 for a list of all exhibits filed as part of this Report.
</TABLE>
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Overland Park, State of Kansas, on March 19, 2001.
<TABLE>
<S> <C> <C>
WADDELL & REED FINANCIAL, INC.
By:
/s/ KEITH A. TUCKER
------------------------------------------
Keith A. Tucker
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ KEITH A. TUCKER Chairman of the Board,
------------------------------------------- Chief Executive Officer March 19, 2001
Keith A. Tucker and Director (Principal
Executive Officer)
/s/ HENRY J. HERRMANN President, Chief
------------------------------------------- Investment Officer and March 19, 2001
Henry J. Herrmann Director
/s/ ROBERT L. HECHLER* Executive Vice President
------------------------------------------- and Director March 19, 2001
Robert L. Hechler
/s/ JOHN E. SUNDEEN, JR. Senior Vice President,
------------------------------------------- Chief Financial Officer March 19, 2001
John E. Sundeen, Jr. and Treasurer (Principal
Financial Officer)
/s/ D. TYLER TOWERY Vice President and
------------------------------------------- Controller (Principal March 19, 2001
D. Tyler Towery Accounting Officer)
/s/ JERRY W. WALTON*
------------------------------------------- Director March 19, 2001
Jerry W. Walton*
/s/ RONALD C. REIMER*
------------------------------------------- Director March 19, 2001
Ronald C. Reimer*
/s/ WILLIAM L. ROGERS*
------------------------------------------- Director March 19, 2001
William L. Rogers*
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ JAMES M. RAINES*
------------------------------------------- Director March 19, 2001
James M. Raines*
/s/ DANIEL C. SCHULTE Vice President, General
------------------------------------------- Counsel and Secretary March 19, 2001
Daniel C. Schulte
</TABLE>
*By: ATTORNEY-IN-FACT
35
<PAGE>
WADDELL & REED FINANCIAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Waddell & Reed Financial, Inc.:
Independent Auditors' Report................................ 37
Consolidated Balance Sheets at December 31, 2000 and
December 31, 1999......................................... 38
Consolidated Statements of Income for each of the years in
the three-year period ended December 31, 2000............. 40
Consolidated Statements of Stockholders' Equity for each of
the years in the three-year period ended December 31,
2000...................................................... 41
Consolidated Statements of Comprehensive Income for each of
the years in the three-year period ended December 31,
2000...................................................... 42
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2000.......... 43
Notes to Consolidated Financial Statements.................. 44
</TABLE>
36
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Waddell & Reed Financial, Inc.:
We have audited the accompanying consolidated balance sheets of Waddell &
Reed Financial, Inc. and subsidiaries, as of December 31, 2000 and 1999 and the
related consolidated statements of income, stockholders' equity, comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Waddell &
Reed Financial, Inc. and subsidiaries as of December 31, 2000 and 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Kansas City, Missouri
January 24, 2001
37
<PAGE>
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS
<TABLE>
<CAPTION>
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash and cash equivalents................................. $ 68,082 60,977
Investment securities, available-for-sale................. 57,639 87,045
Receivables:
Funds and separate accounts............................. 13,963 12,528
Customers and other..................................... 21,477 14,610
Deferred income taxes....................................... 45 37
Prepaid expenses and other current assets................... 4,868 7,111
-------- -------
Total current assets.................................... 166,074 182,308
-------- -------
Property and equipment, net................................. 55,453 27,633
Deferred sales commissions, net............................. 10,108 1,851
Goodwill (net of accumulated amortization of $31,995 and
$26,493).................................................. 180,173 112,994
Deferred income taxes....................................... 1,026 5,665
Other assets................................................ 9,352 4,622
-------- -------
Total assets............................................ $422,186 335,073
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
2000 1999
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Liabilities:
Accounts payable.......................................... $ 41,558 34,002
Accrued sales force compensation.......................... 18,741 14,578
Accrued other compensation................................ 11,774 10,998
Short-term notes payable.................................. -- 125,307
Income taxes payable...................................... 126 8,284
Accrued purchase price liability for acquired
subsidiaries............................................ 13,110 --
Other current liabilities................................. 8,429 5,458
--------- --------
Total current liabilities............................... 93,738 198,627
--------- --------
Long-term debt............................................ 175,320 --
Accrued pensions and post-retirement costs................ 11,295 10,103
Other..................................................... 223 --
--------- --------
Total liabilities....................................... 280,576 208,730
--------- --------
Stockholders' equity:
Common stock (See table below)............................ 997 997
Additional paid-in capital................................ 251,990 238,434
Retained earnings......................................... 206,589 97,129
Deferred compensation..................................... (10,950) (11,246)
Treasury stock (See table below).......................... (305,008) (198,360)
Accumulated other comprehensive income.................... (2,008) (611)
--------- --------
Total stockholders' equity.............................. 141,610 126,343
--------- --------
Total liabilities and stockholders' equity.................. $ 422,186 335,073
========= ========
</TABLE>
<TABLE>
<CAPTION>
2000 1999
COMMON STOCK ------------------------- -------------------------
($0.01 PAR VALUE) CLASS A CLASS B CLASS A CLASS B
----------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Authorized................ 150,000,000 100,000,000 150,000,000 100,000,000
Issued.................... 48,213,261 51,487,500 48,213,261 51,487,500
Outstanding............... 43,270,902 40,139,617 44,478,318 41,971,870
Treasury stock............ 4,942,359 11,347,883 3,734,943 9,515,630
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Investment management fees.............................. $253,774 178,612 137,823
Underwriting and distribution fees...................... 202,879 126,318 106,615
Shareholder service fees................................ 53,436 41,525 33,808
Investment and other income............................. 10,613 10,202 9,043
-------- ------- -------
Total revenues........................................ 520,702 356,657 287,289
-------- ------- -------
Expenses:
Underwriting and distribution........................... 183,222 124,938 99,575
Compensation and related costs.......................... 57,331 44,944 31,512
General and administrative.............................. 28,498 19,245 8,551
Depreciation............................................ 3,613 2,162 1,892
Amortization of goodwill................................ 5,502 3,224 2,903
Interest expense........................................ 14,590 6,546 704
Loss on sale of real estate............................. -- 4,592 --
Write-off of deferred selling costs..................... -- 18,981 --
-------- ------- -------
Total expenses........................................ 292,756 224,632 145,137
-------- ------- -------
Income before affiliated items and provision for
income taxes........................................ 227,946 132,025 142,152
Affiliated items:
Interest income......................................... -- -- 1,950
Interest expense........................................ -- -- (8,604)
-------- ------- -------
Income before provision for income taxes................ 227,946 132,025 135,498
Provision for income taxes................................ 88,941 50,258 51,763
-------- ------- -------
Net income.............................................. $139,005 81,767 83,735
======== ======= =======
Net income per share:
Basic................................................... $ 1.67 0.91 0.85
======== ======= =======
Diluted................................................. $ 1.60 0.89 0.84
======== ======= =======
Weighted average shares outstanding--basic................ 83,362 89,456 98,681
--diluted................. 86,895 91,548 99,269
Dividends declared per common share....................... $ 0.35 0.35 0.35
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
WADDELL & REED FINANCIAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
<TABLE>
<CAPTION>
DIVIDENDS IN
EXCESS OF
RETAINED
EARNINGS
AND
COMMON STOCK ADDITIONAL ADDITIONAL
------------------- PAID-IN RETAINED PAID-IN DEFERRED TREASURY
SHARES AMOUNT CAPITAL EARNINGS CAPITAL COMPENSATION STOCK
-------- -------- ---------- -------- ------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997........................ 63,450 $635 (212) -- (230,658) -- --
Net income.................... -- -- -- 73,712 10,023 -- --
Issuance of restricted shares
and other................... 446 4 5,259 -- -- (12,494) --
IPO proceeds.................. 35,805 358 295,021 -- 220,635 -- --
Dividends paid................ -- -- -- (26,387) -- -- --
Other distributions........... -- -- (54,129) -- -- -- --
Treasury stock repurchases.... -- -- -- -- -- -- (74,833)
Unrealized loss on investment
securities.................. -- -- -- -- -- -- --
------ ---- ------- ------- -------- ------- --------
Balance at December 31,
1998........................ 99,701 997 245,939 47,325 -- (12,494) (74,833)
Net income.................... -- -- -- 81,767 -- -- --
Recognition of deferred
compensation................ -- -- -- -- -- 1,370 --
Issuance of restricted shares
and other................... -- -- 6 -- -- (122) 116
Dividends paid................ -- -- -- (31,963) -- -- --
Exercise of stock options..... -- -- (15,964) -- -- -- 8,537
Tax benefit from exercise of
options..................... -- -- 8,453 -- -- -- --
Treasury stock repurchases.... -- -- -- -- -- -- (132,180)
Unrealized loss on investment
securities.................. -- -- -- -- -- -- --
------ ---- ------- ------- -------- ------- --------
Balance at December 31,
1999........................ 99,701 997 238,434 97,129 -- (11,246) (198,360)
Net income.................... -- -- -- 139,005 -- -- --
Recognition of deferred
compensation................ -- -- -- -- -- 1,625 --
Issuance of restricted shares
and other................... -- -- -- -- -- (1,329) --
Dividends paid................ -- -- -- (29,545) -- -- --
Exercise of stock options..... -- -- (19,499) -- -- -- 1,771
Tax benefit from exercise of
options..................... -- -- 33,055 -- -- -- --
Treasury stock repurchases.... -- -- -- -- -- -- (108,419)
Unrealized loss on investment
securities.................. -- -- -- -- -- -- --
------ ---- ------- ------- -------- ------- --------
Balance at December 31,
2000........................ 99,701 $997 251,990 206,589 -- (10,950) (305,008)
====== ==== ======= ======= ======== ======= ========
<CAPTION>
ACCUMULATED TOTAL
OTHER STOCKHOLDER'S
COMPREHENSIVE EQUITY
INCOME (DEFICIT)
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Balance at December 31,
1997........................ 344 (229,891)
Net income.................... -- 83,735
Issuance of restricted shares
and other................... -- (7,231)
IPO proceeds.................. -- 516,014
Dividends paid................ -- (26,387)
Other distributions........... -- (54,129)
Treasury stock repurchases.... -- (74,833)
Unrealized loss on investment
securities.................. (142) (142)
------ --------
Balance at December 31,
1998........................ 202 207,136
Net income.................... -- 81,767
Recognition of deferred
compensation................ -- 1,370
Issuance of restricted shares
and other................... -- --
Dividends paid................ -- (31,963)
Exercise of stock options..... -- (7,427)
Tax benefit from exercise of
options..................... -- 8,453
Treasury stock repurchases.... -- (132,180)
Unrealized loss on investment
securities.................. (813) (813)
------ --------
Balance at December 31,
1999........................ (611) 126,343
Net income.................... -- 139,005
Recognition of deferred
compensation................ -- 1,625
Issuance of restricted shares
and other................... -- (1,329)
Dividends paid................ -- (29,545)
Exercise of stock options..... -- (17,728)
Tax benefit from exercise of
options..................... -- 33,055
Treasury stock repurchases.... -- (108,419)
Unrealized loss on investment
securities.................. (1,397) (1,397)
------ --------
Balance at December 31,
2000........................ (2,008) 141,610
====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income.................................................. $139,005 81,767 83,735
Other comprehensive income:
Net unrealized appreciation (depreciation) of investments
during the period, net of income taxes of $428, $(387) and
$(150).................................................... 664 (616) (249)
Reclassification adjustment for amounts included in net
income, net of income taxes of $(1,290), $(124) and $64... (2,061) (197) 107
-------- ------ ------
Comprehensive income........................................ $137,608 80,954 83,593
======== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 139,005 81,767 83,735
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 9,268 5,386 4,795
(Gain) loss on sale of investments...................... (2,111) (375) 171
Recognition of deferred compensation.................... 1,625 1,370 1,333
Loss on sale and retirement of fixed assets............. 22 67 75
Write-off of deferred selling cost...................... -- 18,981 --
Loss on sale of real estate............................. -- 4,592 --
Capital gains and dividends reinvested.................. (1,394) (471) (399)
Deferred income taxes................................... 5,559 (4,089) (1,988)
Changes in assets and liabilities net of acquisition:
Receivables from funds and separate accounts.......... (1,435) (6,788) (1,709)
Other receivables..................................... 373 15,719 (15,254)
Due to/from affiliates--operating..................... -- -- 4,509
Other assets.......................................... (10,291) (12,928) (3,661)
Accounts payable...................................... 7,520 5,457 5,375
Other liabilities..................................... 25,794 4,699 10,237
--------- -------- --------
Net cash provided by operating activities................... 173,935 113,387 87,219
--------- -------- --------
Cash flows from investing activities:
Additions to investment securities...................... (15,609) (13,001) (110,652)
Proceeds from sales of investment securities............ 45,307 635 24,020
Proceeds from maturity of investment securities......... 1,185 27,995 2,424
Additions to property and equipment..................... (30,402) (9,096) (7,602)
Investment in real estate............................... -- 551 (5,913)
Proceeds from sale of real estate....................... -- 16,452 --
Acquisition of subsidiaries, (net of cash acquired)..... (60,290) (19,557) --
Other................................................... -- -- 7
--------- -------- --------
Net cash provided by (used in) investing activities......... (59,809) 3,979 (97,716)
--------- -------- --------
Cash flows from financing activities:
Proceeds from IPO....................................... -- -- 516,014
Net borrowings.......................................... 50,000 85,000 40,000
Cash dividends.......................................... (29,545) (31,963) (26,387)
Change in due to/from affiliates--nonoperating.......... -- -- (479,373)
Purchase of treasury stock.............................. (108,419) (132,180) (74,833)
Exercise of stock options............................... 8,327 869 --
Other stock transactions................................ (27,384) (8,295) (8,564)
--------- -------- --------
Net cash used in financing activities....................... (107,021) (86,569) (33,143)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 7,105 30,797 (43,640)
Cash and cash equivalents at beginning of year.............. 60,977 30,180 73,820
--------- -------- --------
Cash and cash equivalents at end of year.................... $ 68,082 60,977 30,180
========= ======== ========
Cash paid for:
Income taxes.............................................. $ 55,346 50,551 48,830
Interest.................................................. 14,013 5,932 628
</TABLE>
See accompanying notes to consolidated financial statements
43
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Waddell & Reed Financial, Inc. and subsidiaries (hereinafter referred to as
the "Company," "we," "our" and "us") derive their revenues primarily from
investment management, investment product underwriting and distribution, and
shareholder services administration provided to the Waddell & Reed Advisors
Funds (the "Advisors Funds"), the W&R Funds ("W&R Funds"), the W&R Target Funds
("Target Funds") (collectively, the "Funds"), and institutional and separate
accounts. The Funds and the institutional and separate accounts operate under
various rules and regulations set forth by the Securities and Exchange
Commission (the "SEC"). Services to the Funds are provided under contracts that
set forth the fees to be charged for these services. The majority of these
contracts are subject to annual review and approval by each Fund's board of
directors and shareholders. Our revenues are largely dependent on the total
value and composition of assets under management, which include mainly domestic
equity securities, but also include debt securities and international equities.
Accordingly, fluctuations in financial markets and composition of assets under
management impact revenues and results of operations. For 2000, management fees
from the Advisors Core Investment Fund were $50.0 million or 10% of total
Company revenues. The Advisors Core Investment Fund had a net asset value of
$8.5 billion at December 31, 2000 and was our largest fund.
Prior to December 1997, we were known as United Investors Management
Company. In the first quarter of 1998, our insurance operations, United
Investors Life Insurance Company, were distributed to Torchmark Corporation and
a subsidiary of Torchmark Corporation (together, "Torchmark"). We were wholly
owned by Torchmark until March 4, 1998, when we completed the initial public
offering of our Class A common stock (the "Offering"), realizing net proceeds of
approximately $516 million. Approximately $481 million of the proceeds were used
to prepay notes payable to Torchmark. After giving effect to the Offering and
prior to November 6, 1998, Torchmark controlled in excess of 60% of the
outstanding Class A and Class B common stock, and in excess of 80% of the voting
power of our outstanding Class A and Class B common stock. On November 6, 1998,
Torchmark distributed its remaining ownership interest in us by means of a
tax-free spin-off to the stockholders of Torchmark of all our common stock held
by Torchmark.
BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America and include the accounts of the Company and our subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Amounts in the accompanying financial statements and notes are
rounded to the nearest thousand. Certain amounts in the prior year's financial
statements have been reclassified to conform to the 2000 presentation.
STOCK SPLIT
On February 23, 2000, we declared a three-for-two stock split effected in
the form of a dividend on our Class A and Class B common stock payable April 7,
2000 to stockholders of record as of March 17, 2000. Accordingly, all per share
and share outstanding data in the consolidated financial statements and related
notes have been restated to reflect the stock split for all periods presented.
44
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
Accounting principles generally accepted in the United States of America
require us to estimate certain amounts. We have made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with these principles. Actual results could differ from
those estimates.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value for cash, short-term investments, debt, receivables and payables
approximates carrying value. Fair values for investment securities are based on
quoted market prices, where available. Otherwise, fair values are based on
quoted market prices of comparable instruments.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and short-term investments.
We consider all highly liquid debt instruments with original maturities of
90 days or less to be cash equivalents.
INVESTMENT SECURITIES AND INVESTMENTS IN AFFILIATED MUTUAL FUNDS
All investments in debt securities and mutual funds are classified as
available-for-sale or trading. As a result, these investments are recorded at
fair value. For available-for-sale securities, unrealized holding gains and
losses, net of related tax effects, are excluded from earnings until realized
and are reported as a separate component of comprehensive income. For trading
securities, unrealized holding gains and losses, net of related tax effects, are
included in earnings. Realized gains and losses are computed using the specific
identification method for investment securities other than mutual funds. For
mutual funds, realized gains and losses are computed using the average cost
method.
COMPREHENSIVE INCOME
Comprehensive income consists of net income and unrealized gains (losses) on
available-for-sale securities and is presented in a separate statement of
comprehensive income.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets.
SOFTWARE DEVELOPED FOR INTERNAL USE
Certain internal and external costs incurred in connection with developing
or obtaining software for internal use are capitalized in accordance with the
American Institute of Certified Public Accountants' Statement of Position
No. 98-1, "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED
FOR INTERNAL USE." These capitalized costs are included in Property and
Equipment, net on the Consolidated Balance Sheets and are amortized when the
software project is complete, over the estimated useful life of the software
that was put into production.
45
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, arose in connection with our acquisition by Torchmark, our
August 1999 acquisition of Austin Calvert & Flavin, Inc. ("ACF") and our
March 2000 acquisition of The Legend Group ("Legend"). Amortization related to
our acquisition by Torchmark is on a straight-line basis over 40 years.
Amortization related to our acquisition of ACF and Legend is on a straight-line
basis over 25 years. We assess the recoverability of goodwill by determining
whether the unamortized balance can be recovered through undiscounted future
operating cash flows over its remaining life. Impairment, if any, is measured by
the excess of the unamortized balance over discounted future operating cash
flows.
DEFERRED SALES COMMISSIONS
We defer certain costs, principally sales commissions and related
compensation, which are paid to financial advisors in connection with the sale
of certain shares of mutual funds. In October 1999, we commenced the
restructuring of our mutual fund products at which time the (non-industry
standard) W&R Funds Class B shares were closed for new sales. As a result of the
discontinuation of these shares, we wrote off the balance of related deferred
selling costs in the amount of $18,981,000 pre-tax in the fourth quarter of
1999. These discontinued W&R Funds' Class B shares were converted to W&R Funds
Class C shares in March 2000. Upon conversion of the W&R Funds Class B shares,
no contingent deferred sales charges were collected for any converted share
redemptions. The deferred selling costs associated with the discontinued W&R
Funds Class B shares were being amortized over the life of the shareholder
investments not to exceed ten years. A new (industry standard) W&R Fund Class B
share was opened to investors in July 2000. The deferred costs associated with
the sale of these new Class B shares are amortized on a straight-line basis over
the life of the shareholders' investments not to exceed six years.
Also in October 1999, the Advisors Funds began selling Class B and Class C
shares and the W&R Funds began selling Class C shares. The deferred costs
associated with the sale of Class B shares are amortized on a straight-line
basis over the life of the shareholders' investments not to exceed six years.
The deferred costs associated with the sale of Class C shares are amortized on a
straight-line basis not to exceed twelve months. We recover such costs through
12b-1 distribution fees, which are paid by the Advisors Funds and the W&R Funds
Class B and C shares along with contingent deferred sales charges paid by
shareholders who redeem their shares prior to completion of the required holding
periods.
REVENUE RECOGNITION
Investment advisory and administrative service fees are recognized when
earned. Commission revenues and expenses (and related receivables and payables)
resulting from securities transactions are recorded on the date on which the
order to buy or sell securities is executed.
ADVERTISING AND PROMOTION
We expense all advertising and promotion costs as incurred.
46
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
The weighted average number of shares used to compute basic earnings per
share was 83,362,000, 89,456,000, and 98,681,000 for the years ended 2000, 1999
and 1998 respectively. The weighted average number of shares used in computing
diluted earnings per share, which reflects the potential additional effect of
stock option and restricted stock award exercises into common stock was
86,895,000, 91,548,000, and 99,269,000 for years 2000, 1999 and 1998,
respectively.
Earnings per share were computed as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS
<S> <C> <C> <C>
Net income........................................ $139,005 81,767 83,735
Weighted average shares outstanding--basic........ 83,362 89,456 98,681
Incremental shares from assumed conversions....... 3,533 2,092 588
Weighted average shares outstanding--diluted...... 86,895 91,548 99,269
Earnings per share:
Basic........................................... $ 1.67 0.91 0.85
Diluted......................................... $ 1.60 0.89 0.84
</TABLE>
STOCK-BASED COMPENSATION
As allowed under the provisions of Statement of Financial Accounting
Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("FAS 123"), we
have elected to apply Accounting Principles Board Opinion No. 25, "ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES," ("APB 25") and related interpretations in
accounting for our stock-based plans. In most cases, no compensation costs have
been recognized with respect to stock options granted.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 2000 and 1999 include reserves of
$21,898,000 and $17,114,000, respectively, for the benefit of customers in
compliance with securities industry regulations. Substantially all such reserves
are in excess of federal deposit insurance limits.
47
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
3. INVESTMENT SECURITIES, AVAILABLE-FOR-SALE
Investments at December 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED
2000 COST GAINS LOSSES FAIR VALUE
- ---- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
United States government-backed
mortgage securities................ $ 1,748 31 (30) 1,749
Municipal bonds...................... 22,326 92 (2,187) 20,231
Corporate bonds...................... 14,194 51 (538) 13,707
Affiliated mutual funds.............. 22,585 335 (1,075) 21,845
Other................................ 107 -- -- 107
------- --- ------ ------
$60,960 509 (3,830) 57,639
======= === ====== ======
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED
1999 COST GAINS LOSSES FAIR VALUE
- ---- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
United States government-backed
mortgage securities................ $ 2,136 2 (3) 2,135
Municipal bonds...................... 39,225 7 (1,959) 37,273
Corporate bonds...................... 36,478 -- (822) 35,656
Affiliated mutual funds.............. 10,202 1,842 (63) 11,981
------- ----- ------ ------
$88,041 1,851 (2,847) 87,045
======= ===== ====== ======
</TABLE>
Municipal and corporate bonds held as of December 31, 2000 mature as
follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Within one year........................................... $ -- --
After one year but within five years...................... 20,056 20,180
After five years but within ten years..................... -- --
After ten years........................................... 16,464 13,758
------- ------
$36,520 33,938
======= ======
</TABLE>
Investment securities with fair value of $45,307,000, $635,000, and
$24,020,000 were sold in 2000, 1999 and 1998, respectively. These sales resulted
in realized gains of $2,111,000 and $6,000 in 2000 and 1999, respectively, and
realized losses in 1998 of $171,000.
4. ACQUISITION OF SUBSIDIARIES
On March 31, 2000, we acquired Legend in a business combination accounted
for as a purchase. Legend was a privately-held mutual fund distribution and
retirement planning company based in Palm Beach Gardens, FL. Legend serves
employees of school districts and other not-for-profit organizations nationwide
and uses strategic asset allocation services using proprietary systems. The
results of operations
48
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
4. ACQUISITION OF SUBSIDIARIES (CONTINUED)
of Legend are included on the accompanying financial statements since the date
of acquisition. The total cost of the acquisition, including expenses, was
$65,403,000, which exceeded the fair value of the net assets of Legend by
$63,571,000. The excess is being amortized on a straight-line basis over
25 years. The acquisition agreement provides for additional purchase price
payments contingent upon the achievement by Legend of specified earnings levels
for 2000, 2001 and 2002. These contingent payments could aggregate as much as
$14.0 million. For the year 2000, the specified earnings level was met;
accordingly, a $4.0 million contingent payment was accrued and added to
goodwill.
A summary of the net assets acquired is as follows (in thousands):
<TABLE>
<S> <C>
Assets acquired
Cash...................................................... $ 1,113
Accounts Receivable....................................... 7,156
Goodwill (including contingent payments).................. 63,571
Other assets.............................................. 1,949
-------
Total..................................................... 73,789
Liabilities assumed......................................... 8,386
-------
Total purchase price........................................ $65,403
=======
</TABLE>
The table below presents supplemental pro forma information for 2000 and
1999 as if the Legend and ACF acquisitions were made on January 1, 1999 at the
same purchase price, based on estimates and assumptions considered appropriate:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenues................................................. $532,592 399,817
Net Income............................................... $138,915 81,297
Net Income per common share
Basic.................................................. $ 1.66 0.91
Diluted................................................ $ 1.60 0.89
</TABLE>
ACF, acquired August 9, 1999, is also subject to additional purchase price
payments contingent upon the achievement of specified earnings levels. In 2000,
ACF met these levels and the full amount of the contingent payment was accrued
and added to goodwill at December 31, 2000 in the amount of $9.1 million. No
further contingent payments will be made related to this acquisition.
5. LOSS ON SALE OF REAL ESTATE
During 1998, we were participating in a limited partnership with TMK Income
Properties, LP ("TIP"). We contributed land and four income producing
multi-tenant commercial buildings adjacent to our headquarters in Overland Park,
Kansas in exchange for a limited partnership interest in TIP in 1997. This
transaction was classified as Investment in Real Estate in our consolidated
balance sheets. In late 1998, we ceased participation in TIP. In exchange for
our limited partnership interest, we received the
49
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
5. LOSS ON SALE OF REAL ESTATE (CONTINUED)
property we had originally contributed to TIP. We also reimbursed TIP $5,913,000
for improvements made to that property while it was in the partnership.
Effective December 28, 1999, we sold this investment in multi-tenant real estate
properties to unrelated third parties. Net proceeds from the sale were
$16,452,000, which resulted in a $4,592,000 pre-tax loss.
Net rental income was $0 and $1,026,000 for the years ended 2000 and 1999,
respectively. Real estate partnership income was $465,000 for the year ended
December 31, 1998.
6. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 2000 and 1999 is as
follows:
<TABLE>
<CAPTION>
ESTIMATED
2000 1999 USEFUL LIVES
-------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Land............................................ $ 5,516 5,260 --
Buildings and tenant improvements............... 22,501 10,605 40 years
Furniture and fixtures.......................... 19,287 10,688 5-10 years
Equipment and machinery......................... 10,793 5,642 5-20 years
Data processing equipment....................... 13,981 9,252 3-5 years
------- ------
Property and equipment, at cost................. 72,078 41,447
Less accumulated depreciation................... 16,625 13,814
------- ------
Property and equipment, net..................... $55,453 27,633
======= ======
</TABLE>
7. DEBT
In October 2000, we renewed our $220.0 million revolving credit facility,
expandable to $330.0 million, with a syndicate of eight banks, whereby
syndicates could, at their option upon our request, increase the loans by
$110.0 million. The credit facility is a 364-day revolving facility with an
interest rate of LIBOR plus 0.425% plus an additional 0.10% fee when utilization
of the facility exceeds 25% and 0.20% fee when utilization exceeds 50%. The
facility provides an additional source of capital to finance share repurchases,
acquisitions and other general corporate needs. Beginning in the third quarter
of 2000, we also implemented a money market loan program. The money market loan
program, which is similar to commercial paper, was utilized to repay amounts
borrowed under the credit facility. In October 2000, all amounts borrowed on the
credit facility were repaid. The credit agreement stipulates two financial
condition covenants. The consolidated leverage ratio cannot exceed 3.0 to 1.0
for four consecutive quarters. The consolidated leverage ratio is defined as
consolidated total debt to consolidated earnings before interest costs, income
taxes, depreciation and amortization ("EBITDA"). The consolidated interest
coverage ratio cannot be less than 4.0 to 1.0 for four consecutive quarters.
Consolidated interest coverage ratio is defined as consolidated EBITDA to
consolidated interest expense. We were in compliance with these covenants at
December 31, 2000.
During the year, the average balance on the combined short-term debt was
$195.8 million for 2000 and $106.1 million for 1999. As discussed below, the
short-term debt outstanding at December 31, 2000
50
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
7. DEBT (CONTINUED)
was reclassified as long-term. The average interest rate applied, excluding
other costs, was 7.01% for 2000 and 5.73% for 1999.
On August 15, 2000, we filed a $400.0 million shelf registration whereby
proceeds received could be used for general corporate purposes, including
repaying short-term debt outstanding. On January 18, 2001, we issued
$200.0 million in principal amount of 7.5% senior notes due 2006 resulting in
net proceeds of approximately $197.6 million (net of discounts, commissions and
estimated expenses) to repay short-term debt outstanding and for general
corporate purposes. As a result, for purposes of these financial statements,
$175.3 million of short-term debt outstanding at December 31, 2000 was
reclassified as long-term. The notes represent senior unsecured obligations and
are rated "Baa2" by Moody's and "BBB" by Standard & Poor's. Interest is payable
semi-annually on January 18 and July 18 at a rate of 7.5% per annum. These notes
are not redeemable prior to maturity.
8. TRANSACTIONS WITH RELATED PARTIES
Until the Offering in March of 1998, we were 100% owned by Torchmark. In
November of 1998, Torchmark disposed of its remaining interest in us through a
tax-free distribution to its shareholders. We serve as investment advisor to
Torchmark and its affiliates and receive advisory fees for this service.
Advisory fees, which are based on assets under management, amounted to
$1,063,000, $1,413,000, and $2,401,000 for the years ended December 31, 2000,
1999 and 1998, respectively. In the third quarter, we were terminated by a
number of Torchmark affiliates as investment advisor for certain insurance
company general account assets and pension plan assets totaling $768.0 million
with an average management fee of 25 basis points. The only other Torchmark
affiliated assets for which we serve as investment advisor are approximately
$37.9 million of mutual funds in 401(k) plans of Torchmark affiliates.
We are in litigation with one of our insurance providers, United Investors
Life Insurance Company ("UILIC"), and other related parties over terms of a
compensation agreement signed in July 1999 by UILIC and Waddell & Reed, Inc. The
compensation is paid by UILIC to us on variable products underwritten by UILIC
and distributed by us. The agreement provides for us to be paid annual
compensation of 0.25% on all variable annuity policies' assets under management
issued after January 1, 2000 and annual compensation of 0.20% on variable
annuity policies' assets under management issued before that date. This
agreement added $7.3 million of asset based fees to revenue for 2000. Payments
are continuing but the validity and duration of that agreement has been
challenged by UILIC in a complaint filed in May 2000, in the Circuit Court of
Jefferson County, Alabama in which we have subsequently named Torchmark as a
third party defendant in a tortious interference claim. We are confident that
the court will uphold the agreement as a contract and that we will prevail on
the merits of the case. Moreover, we do not foresee any additional risk to
existing variable policy assets and anticipate continued growth in sales of
variable annuity products.
We earn commissions from UILIC, a Torchmark subsidiary, for marketing life
insurance products and variable annuities. For the years ended December 31,
2000, 1999 and 1998, the commissions amounted to $63,164,000, $46,379,000, and
$36,724,000, respectively. In addition, an enhanced variable annuity
compensation agreement with UILIC effective January 1, 2000 added $7.3 million
of asset-based fees to revenues in 2000. Please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for more information.
51
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
9. INVESTMENT INCOME
The components of investment and other income are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest and amortization of (premium) discount..... $ 7,276 8,119 8,081
Dividends........................................... 492 498 423
Realized gains (losses), net........................ 2,111 375 (171)
Other............................................... 734 1,210 710
------- ------ -----
Total investment and other income................... $10,613 10,202 9,043
======= ====== =====
</TABLE>
In 2000, investment and other income included $2.5 million of realized gains
from the sale of investment securities sold to partially fund the Legend
acquisition. In 1999, $1.0 million was attributable to net rental income from
real estate properties which were sold in December of 1999. Average invested
cash and marketable securities were $136.7 million in 2000 compared with
$142.1 million in 1999.
10. INCOME TAXES
The components of total income tax expense are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Currently payable:
Federal.......................................... $71,698 46,608 46,845
State............................................ 11,750 7,044 6,934
------- ------ ------
83,448 53,652 53,779
Deferred taxes..................................... 5,493 (3,394) (2,016)
------- ------ ------
Income tax expense from operations................. 88,941 50,258 51,763
======= ====== ======
</TABLE>
52
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
10. INCOME TAXES (CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of deferred tax liabilities and deferred tax assets at December 31,
2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax liabilities:
Deferred selling costs............................ $(3,847) (703) (5,732)
Fixed assets...................................... (588) (328) --
Other............................................. -- -- (125)
------- ------ ------
Total gross deferred liabilities.................... (4,435) (1,031) (5,857)
------- ------ ------
Deferred tax assets:
Benefit plans..................................... 4,546 4,203 3,824
Accrued expenses.................................. 822 1,966 2,151
Fixed assets...................................... -- -- 983
Other............................................. 138 564 --
------- ------ ------
Total gross deferred assets......................... 5,506 6,733 6,958
------- ------ ------
Net deferred tax asset (liability).................. $ 1,071 5,702 1,101
------- ------ ------
</TABLE>
A valuation allowance for deferred tax assets was not necessary at
December 31, 2000, 1999 and 1998. The following table reconciles the statutory
federal income tax rate with our effective income tax rate:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax rate....................... 35.0% 35.0 35.0
State income taxes, net of federal tax benefits......... 3.5 3.3 3.3
Other items............................................. 0.5 (0.2) (0.1)
---- ---- ----
Effective income tax rate............................... 39.0% 38.1 38.2
==== ==== ====
</TABLE>
11. PENSION PLAN AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
We participate in a noncontributory retirement plan that covers
substantially all employees and certain vested former employees of Torchmark.
Benefits payable under the plan are based on employees' years of service and
compensation during the final ten years of employment. This plan invests in
equity securities of large capitalization companies, investment grade corporate
and government bonds, and cash
53
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
11. PENSION PLAN AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
and cash equivalents. We also sponsor an unfunded defined benefit postretirement
medical plan that covers substantially all employees. The plan is contributory
with retiree contributions adjusted annually.
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year................... $33,828 31,254 1,269 1,151
Service cost.............................................. 2,737 2,328 94 76
Interest cost............................................. 2,963 2,387 104 90
Actuarial (gain) loss..................................... 3,512 (847) 882 28
Benefits and expenses paid................................ (2,834) (1,294) (222) (147)
Retiree contributions..................................... -- -- 66 71
------- ------ ------ ------
Benefit obligation at end of year......................... $40,206 33,828 2,193 1,269
======= ====== ====== ======
Change in plan assets:
Fair value of plan assets at beginning of year............ $37,087 28,066 -- --
Actual return on plan assets.............................. 3,315 6,859 -- --
Company contribution...................................... 1,900 3,456 156 76
Benefits paid............................................. (2,834) (1,294) (222) (147)
Retiree contributions..................................... -- -- 66 71
------- ------ ------ ------
Fair value of plan assets at end of year.................. $39,468 37,087 -- --
======= ====== ====== ======
Funded status of plan....................................... $ (738) 3,260 (2,193) (1,269)
Unrecognized actuarial (gain) loss.......................... (4,295) (8,036) 1,113 90
Unrecognized prior service cost............................. 584 628 (286) (160)
Unrecognized net transition obligation...................... 93 98 -- --
------- ------ ------ ------
Accrued benefit cost........................................ $(4,356) (4,050) (1,366) (1,339)
======= ====== ====== ======
Weighted average assumptions as of December 31:
Discount rate............................................. 7.75% 6.75 8.00 7.75
Expected return on plan assets............................ 9.25% 9.25 N/A N/A
Rate of compensation increase............................. 4.50% 3.75 N/A N/A
Components of net periodic benefit cost:
Service cost.............................................. $ 2,737 2,328 94 76
Interest cost............................................. 2,963 2,387 104 90
Expected return on plan assets............................ (3,448) (2,607) -- --
Actuarial (gain) loss amortization........................ (95) -- -- --
Prior service cost amortization........................... 44 44 (15) (15)
Transition obligation amortization........................ 5 5 -- --
------- ------ ------ ------
Net periodic benefit cost................................. $ 2,206 2,157 183 151
======= ====== ====== ======
</TABLE>
For measurement purposes, the health care cost trend rate was 7.0% and 7.5%
in 2000 and 1999, respectively. The effect of a 1% annual increase in assumed
cost trend rates would increase the December 31, 2000 accumulated postretirement
benefit obligation by approximately $434,000, and the
54
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
11. PENSION PLAN AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year ended December 31, 2000 by
approximately $94,000. The effect of a 1% annual decrease in assumed cost trend
rates would decrease the December 31, 2000 accumulated postretirement benefit
obligation by approximately $379,000, and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for the
year ended December 31, 2000 by approximately $80,000.
12. SAVINGS AND INVESTMENT PLANS
We have a savings and investment plan covering substantially all employees.
Until December 31, 1998, this plan provided for a matching Company contribution
of 50% of the employee's investment in mutual fund shares and/or our Class A or
Class B common stock, not to exceed 3% of the employee's salary. Our
contributions to the savings and investment plan for the year ended
December 31, 1998 was $858,000. On January 1, 1999, this plan was amended to add
a 401(k) salary deferral option. The amended plan provides for a 100% Company
match on the first 3% of income and 50% on the next 2% of income, not to exceed
4% of the employee's eligible salary. Our contributions to the 401(k) plan for
the years ended December 31, 2000 and 1999 were $2,196,000 and $1,413,000,
respectively.
13. STOCK COMPENSATION PLANS
We have a fixed employee Stock Incentive Plan ("Option Plan"), as part of
our overall compensation program to attract and retain personnel and encourage a
greater personal financial investment in the Company. The exercise price of each
option is equal to the market price of the stock on the date of grant. The
maximum term of the options is ten years and two days and generally vests
one-third in each of the three years starting two years after grant date. The
number of options authorized for grant under this plan is 30,000,000.
We also have an Executive Deferred Compensation Stock Option Plan and a
Non-employee Director Stock Option Plan to promote the long-term growth of the
Company. The number of options authorized for grant under these plans is
3,750,000 and 1,200,000, respectively. The exercise price of each option is
equal to the market price of the stock on the date of grant. The maximum term of
these options is ten years and two days and generally vests 10% each year,
starting one year after the grant date.
In October 1995, the FASB issued Statement No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION" ("SFAS No. 123"), which was effective beginning
January 1, 1996. SFAS No. 123 defines the "fair value method" of accounting for
employee stock options. It also allows accounting for such options under the
"intrinsic value method" in accordance with Accounting Principles Board Opinion
No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB No. 25") and related
interpretations, which is the method we use. If a company elects to use the
intrinsic value method, pro forma disclosures of earnings and earnings per share
are required as if the fair value method of accounting was applied.
55
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
13. STOCK COMPENSATION PLANS (CONTINUED)
Pursuant to SFAS No. 123, the fair value of each option has been estimated
using a Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Dividend yield..................................... 1.10% 2.10% 2.34%
Risk-free interest rate............................ 5.43% 5.97% 5.20%
Expected volatility................................ 35.80% 28.60% 29.70%
Expected life (in years)........................... 4.71 4.71 4.71
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the vesting period of the options. Pro forma
effects on net income and earnings per share follow:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net income
As reported..................................... $139,005 81,767 83,735
Pro forma....................................... $133,435 77,141 79,744
Basic earnings per share
As reported..................................... $1.67 $0.91 $0.85
Pro forma....................................... $1.60 $0.86 $0.81
Diluted earnings per share
As reported..................................... $1.60 $0.89 $0.84
Pro forma....................................... $1.54 $0.84 $0.81
</TABLE>
After the spin-off from Torchmark, holders of Torchmark stock options
granted prior to 1998 were given a choice to retain their Torchmark options or
convert their options into Waddell & Reed Financial, Inc. options ("Conversion
Options"). Our employees and directors who held Torchmark options could elect to
convert their Torchmark options into Conversion Options. A total of 5,541,215
Conversion Options were converted from Torchmark options. The Conversion Options
retained the same terms as the previous Torchmark options except that the
exercise price and the number of shares were adjusted so that the aggregate
intrinsic value of the options remained the same.
Our option plan includes a Stock Option Restoration Program ("SORP") that
allows, on a specific date set by the Company, an optionholder to pay the
exercise price on vested options by surrendering common stock of the Company
that the optionholder has owned at least six months. A reduced number of options
are then granted to the optionholder at the current market price. The SORP,
which facilitates ownership of the Company's common stock by management and key
employees, results in a net issuance of shares of common stock and fewer stock
options outstanding. The Company receives a current income tax benefit for
exercises of stock options.
56
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
13. STOCK COMPENSATION PLANS (CONTINUED)
Prior to 1998, there were no stock options outstanding. A summary of stock
option activity and related information for the years ended December 31, 1998,
1999 and 2000 follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year........ 14,506,774 $14.65 12,112,890 12.43 -- --
Granted............................... 3,821,966 31.70 3,295,655 16.63 6,583,675 $15.07
Exercised............................. (621,201) 13.41 (116,220) 7.47 -- --
Granted in restoration................ 2,241,614 34.19 1,887,603 16.76 -- --
Exercised in restoration.............. (3,725,838) 13.57 (2,599,228) 8.69 -- --
Expired............................... (253,800) 15.51 (73,926) 14.84 (12,000) 15.33
Converted............................. -- -- -- -- 5,541,215 9.31
---------- ------ ---------- ------ ---------- ------
Outstanding, end of year.............. 15,969,515 $21.76 14,506,774 $14.65 12,112,890 $12.43
========== ====== ========== ====== ========== ======
Exercisable, end of year.............. 2,530,619 $14.57 2,853,326 $11.09 4,436,739 $ 9.61
========== ====== ========== ====== ========== ======
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 2000, 1999 and 1998 were $10.36, $4.45 and $3.83, respectively.
Following is a summary of options outstanding at December 31, 2000:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------ ----------------------------
WEIGHTED AVERAGE
REMAINING
EXERCISE PRICE CONTRACTUAL LIFE WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE NUMBER (IN YEARS) EXERCISE PRICE NUMBER EXERCISE PRICE
- --------------------- ---------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$5.44-$8.04 313,214 4.8 $ 7.39 296,598 $ 7.43
8.28-9.23 369,070 7.0 8.29 5,434 9.23
12.51-17.71 9,363,576 8.2 15.67 2,178,587 15.35
19.46-25.44 98,750 9.3 22.48 50,000 23.63
32.50-34.19 5,824,905 9.9 33.15 -- --
- --------------------- ---------- --- ------ --------- ------
$5.44-$34.19 15,969,515 8.7 21.76 2,530,619 $14.57
===================== ========== === ====== ========= ======
</TABLE>
Options granted prior to 1998 represented options on Torchmark common stock
granted by Torchmark prior to our March 4, 1998 initial public offering. These
options were converted to options on the Company's common stock on November 6,
1998, concurrent with Torchmark's distribution of our stock to its shareholders
(spin-off).
In March 1998, we affected promissory notes with a select group of 266
financial advisors and sales managers to facilitate the acquisition of our stock
at the IPO. The current balance of these promissory notes is $8.4 million, which
is reflected as unearned compensation in stockholders' equity. They were issued
for amounts ranging from $11,500 to $57,500, bear interest at 5.59% and mature
in March 2003. We have agreed to forgive these notes if certain conditions are
met, including, but not limited to, the
57
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
13. STOCK COMPENSATION PLANS (CONTINUED)
achievement of Company-stipulated annual productivity requirements for years
through 2002 and continued association with the Company's sales efforts through
March 2003.
14. UNIFORM CAPITAL RULE REQUIREMENTS
Waddell & Reed, Inc. ("W&R"), one of our subsidiaries, is a registered
broker-dealer and a member of NASD Regulation, Inc. ("NASDR") and is therefore
subject to a requirement of the NASD's Uniform Net Capital Rule, requiring the
maintenance of certain minimal capital levels. At December 31, 2000, W&R had net
capital, as defined by the Uniform Capital Rule, of $23,202,000, which is
$18,388,000 in excess of the required net capital.
15. COMMITMENTS AND CONTINGENCIES
RENTAL EXPENSE AND LEASE COMMITMENTS
We rent certain sales and other office space under long-term operating
leases. Rent expense was $9,473,000, $7,074,000, and $4,937,000, for the years
ended, December 31, 2000, 1999 and 1998, respectively. Future minimum rental
commitments under noncancelable operating leases are for the years ended
December 31 are as follows (in thousands):
<TABLE>
<S> <C>
2001........................................................ $ 7,481
2002........................................................ 3,004
2003........................................................ 2,140
2004........................................................ 1,392
2005........................................................ 677
Thereafter.................................................. 1,998
-------
$16,692
=======
</TABLE>
New leases are expected to be executed as existing leases expire. Thus,
future minimum lease commitments are not expected to be less than those in 2000.
CONTINGENCIES
From time to time, we are a party to various claims arising in the ordinary
course of business. In the opinion of management, after consultation with legal
counsel, it is unlikely that any adverse determination in one or more pending
claims would have a material adverse effect on our financial position or results
of operations.
58
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
18. SELECTED QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER FIRST SECOND THIRD FOURTH
- ------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
2000
Revenues............................................. $124,742 133,775 129,926 132,259
Operating revenues................................... 120,580 131,796 128,057 129,656
Net income........................................... 36,126 33,710 34,531 34,639
Earnings per share:
Basic.............................................. $ 0.43 0.41 0.42 0.42
Diluted............................................ 0.41 0.39 0.40 0.40
1999
Revenues............................................. $ 80,473 85,705 90,269 100,210
Operating revenues................................... 77,550 83,157 88,179 97,569
Net income........................................... 21,983 22,789 24,680 12,315
Earnings per share:
Basic.............................................. $ 0.24 0.25 0.28 0.14
Diluted............................................ 0.23 0.24 0.27 0.14
</TABLE>
- ------------------------
Note: Quarterly per share amounts will not necessarily add up to annual amounts
due to rounding.
59
<PAGE>
WADDELL & REED FINANCIAL, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
- --------------------- -------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of February 14, 2001,
by and between Waddell & Reed Financial, Inc. and WDR
Sub, Inc.
2.2 Purchase Agreement, dated as of February 28, 2000, by and
among Waddell & Reed Financial, Inc., Freemark Investment
Management, Inc., Legend Financial Corporation, Advisory
Services Corporation, The Legend Group, Inc., Philip C.
Restino, Restino Family Trust, 01/02/94 Trust FBO John J.
Restino, 01/02/94 Trust FBO Robert R. Restino, Mark J.
Spinello, Glenn T. Ferris and David L. Phillips. Filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K,
dated April 14, 2000 and incorporated herein by reference.
3.1 Amended and Restated Certificate of Incorporation of the
Company. Filed as Exhibit 3.1 to the Company's Form S-1
Registration Statement Number 333-43687 (the "Registration
Statement") and incorporated herein by reference.
3.2 Amended and Restated Bylaws of the Company.
4.1 Specimen of Class A Common Stock Certificate. Filed as
Exhibit 4.1 to the Company's Registration Statement and
incorporated herein by reference.
4.2 Specimen of Class B Common Stock Certificate. Filed as
Exhibit 4.1 to the Company's Form 8-A Registration
Statement, Accession Number 0000930661-98-002062, dated
October 1, 1998 and incorporated herein by reference.
4.3 Rights Agreement, dated as of April 28, 1999, by and between
Waddell & Reed Financial, Inc. and First Chicago Trust
Company of New York, which includes the Certificate of
Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock of the Company, as filed on
May 13, 1999 with the Secretary of State of Delaware, as
Exhibit A and the form of Rights Certificate as Exhibit B.
Filed as Exhibit 4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 and
incorporated herein by reference.
4.4 First Amendment to Rights Agreement, dated as of
February 14, 2001, by and between Waddell & Reed
Financial, Inc. and First Chicago Trust Company of New
York.
4.5 Indenture, dated as of January 18, 2001, by and between
Waddell & Reed Financial, Inc. and Chase Manhattan Trust
Company, National Association. Filed as Exhibit 4.1(a) to
the Company's Current Report on Form 8-K dated February 5,
2001 and incorporated herein by reference.
4.6 First Supplemental Indenture, dated as of January 18, 2001
by and between Waddell & Reed Financial, Inc. and Chase
Manhattan Trust Company, National Association, including
the form of the 7.50% notes due January 2006 as Exhibit A.
Filed as Exhibits 4.1(b) and 4.2 to the Company's Current
Report on Form 8-K dated February 5, 2001 and incorporated
herein by reference.
10.1 Public Offering and Separation Agreement, dated as of
March 3, 1998, by and between the Company and Torchmark
Corporation. Filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 and incorporated herein by reference.
10.2 Tax Disaffiliation Agreement, dated as of March 3, 1998, by
and between Waddell & Reed Financial, Inc. and Torchmark
Corporation. Filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 and incorporated herein by reference.
10.3 General Agent Contract, dated as of January 1, 1985, by and
between United Investors Life Insurance Company and W & R
Insurance Agency, Inc. Filed as Exhibit 10.4 to the
Company's Registration Statement and incorporated herein by
reference.
</TABLE>
60
<PAGE>
WADDELL & REED FINANCIAL, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
- --------------------- -------------------
<S> <C>
10.4 Second Amendment of General Agent Contract, dated as of
December 21, 1998, by and between United Investors Life
Insurance Company and W & R Insurance Agency, Inc. Filed as
Exhibit 10.6 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated
herein by reference.
10.5 General Agent Contract, dated as of October 20, 2000, by and
among Nationwide Life Insurance Company, Nationwide Life
and Annuity Insurance Company and Waddell & Reed, Inc. and
its affiliated insurance companies.
10.6 Fund Participation Agreement, dated as of December 1, 2000,
by and among Nationwide Life Insurance Company and/or
Nationwide Life and Annuity Insurance Company, Waddell &
Reed Services Company and Waddell & Reed, Inc.
10.7 Principal Underwriting Agreement, dated as of May 1, 1990,
by and between United Investors Life Insurance Company and
Waddell & Reed, Inc. Filed as Exhibit 10.18 to the
Company's Registration Statement and incorporated herein by
reference.
10.8 Second Amendment of Principal Underwriting Agreement, dated
as of December 31, 1998, by and between United Investors
Life Insurance Company and Waddell & Reed, Inc. Filed as
Exhibit 10.15 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated
herein by reference.
10.9 Letter Agreement Amending Principal Underwriting Agreement,
dated as of July 8, 1999, by and between the United
Investors Life Insurance Company and Waddell & Reed, Inc.,
effective January 1, 2000.
10.10 The Waddell & Reed Financial, Inc. 1998 Stock Incentive
Plan, As Amended and Restated. Filed as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000 and incorporated herein by reference.
10.11 The Waddell & Reed Financial, Inc. 1998 Non-Employee
Director Stock Option Plan. Filed as Exhibit 10.9 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 and incorporated herein by reference.
10.12 First Amendment to 1998 Non-Employee Director Stock Option
Plan. Filed as Exhibit 10.23 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference.
10.13 The Waddell & Reed Financial, Inc. 1998 Executive Deferred
Compensation Stock Option Plan, as Amended and Restated.
Filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000 and
incorporated herein by reference.
10.14 Credit Agreement, dated as of October 13, 2000 by and among
Waddell & Reed Financial, Inc., Lenders and The Chase
Manhattan Bank.
10.15 Fixed Rate Promissory Note for Multiple Loans dated as of
August 15, 2000, by and between Waddell & Reed
Financial, Inc. and the Chase Manhattan Bank.
10.16 The Waddell & Reed Financial, Inc. Supplemental Executive
Retirement Plan. Filed as Exhibit 10.27 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1998 and incorporated herein by reference.
10.17 The Waddell & Reed Financial, Inc. Management Incentive Plan
of 1999. Filed as Exhibit 10.29 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998
and incorporated herein by reference.
10.18 Form of Accounting Services Agreement by and between each of
the Funds and Waddell & Reed Services Company.
10.19 Form of Investment Management Agreement by and between each
of the Advisors Funds and Waddell & Reed Investment
Management Company.
</TABLE>
61
<PAGE>
WADDELL & REED FINANCIAL, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
- --------------------- -------------------
<S> <C>
10.20 Investment Management Agreement by and between the W&R Funds
and Waddell & Reed Investment Management Company.
10.21 Investment Management Agreement by and between the Target
Funds and Waddell & Reed Investment Management Company.
10.22 Form of Shareholder Servicing Agreement by and between each
of the Funds and Waddell & Reed Services Company.
10.23 Form of Underwriting Agreement by and between each of the
Advisors Funds and Waddell & Reed, Inc. Filed as
Exhibit 10.35 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated
herein by reference.
10.24 Form of Underwriting Agreement by and between each of the
W&R Funds and Waddell & Reed, Inc. Filed as Exhibit 10.36
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 and incorporated herein by
reference.
10.25 Form of Distribution and Service Plan for Class A Shares by
and between each of the Advisors Funds and Waddell &
Reed, Inc.
10.26 Distribution and Service Plan for Class A Shares, adopted
May 17, 2000 by and between W&R Funds, Inc. and Waddell &
Reed, Inc.
10.27 Form of Distribution and Service Plan for Class B Shares by
and between each of the Advisors and W&R Funds and
Waddell & Reed, Inc.
10.28 Form of Distribution and Service Plan for Class C Shares by
and between each of the Advisors and W&R Funds and
Waddell & Reed, Inc.
10.29 Distribution and Service Plan for Class Y Shares, adopted
December 27, 1995 by and between W&R Funds, Inc. and
Waddell & Reed, Inc.
10.30 Service Plan, adopted August 21, 1998 by and between W&R
Target Funds, Inc. and Waddell & Reed, Inc.
11 Statement regarding computation of per share earnings.
21 Subsidiaries of the Company.
23 Consent of KPMG LLP.
24 Powers of Attorney.
</TABLE>
62
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-2.1
<SEQUENCE>2
<FILENAME>a2041359zex-2_1.txt
<DESCRIPTION>AGREEMENT AND PLAN OF MERGER
<TEXT>
<PAGE>
Exhibit 2.1
AGREEMENT AND PLAN OF MERGER
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of February 14, 2001 (the
"Agreement"), by and between Waddell and Reed Financial, Inc., a Delaware
corporation (the "Company"), and WDR Sub, Inc., a Delaware corporation
wholly-owned by the Company ("Sub").
WITNESSETH:
WHEREAS, the Board of Directors of the Company has determined that it is in
the best interests of the Company and its stockholders for the Company to enter
into this Agreement and to effect the merger of Sub with and into the Company,
with the Company as the surviving corporation (the "Merger"), pursuant to the
terms and conditions set out in this Agreement, and to recommend and submit this
Agreement for approval by the Company's stockholders;
WHEREAS, the Board of Directors of Sub has unanimously approved this
Agreement and deems the execution of this Agreement and the consummation of the
Merger to be in the best interests of its stockholder;
WHEREAS, as of the date of this Agreement, the authorized and outstanding
capital stock of the Company is as follows: (1) 250,000,000 shares of common
stock, par value $.01 per share (the "Company Common Stock), consisting of
150,000,000 shares designated Class A Common Stock (the "Class A Common Stock"),
of which 43,383,361 shares are issued and outstanding, and 100,000,000 shares
designated Class B Common Stock (the "Class B Common Stock"), of which
40,139,617 shares are issued and outstanding; and (2) 5,000,000 shares of
preferred stock, par value $1.00 per share, of which 750,000 shares are
designated Series A Junior Participating Preferred Stock, none of which are
issued or outstanding.
WHEREAS, the authorized and outstanding capital stock of Sub consists of 100
shares of common stock, par value $.01 per share (the "Sub Common Stock"), all
of which are issued and outstanding and owned by the Company;
WHEREAS, the Company and Sub are entering into this Agreement to set forth
the terms and conditions of the Merger.
NOW, THEREFORE, in consideration of the mutual promises herein contained and
intending to be legally bound, the parties hereto agree as follows:
1. MERGER
1.1 THE MERGER. At the Effective Time (as defined in Section 1.3 below),
Sub shall be merged with and into the Company under the terms of this Agreement
and in accordance with the provisions of the Delaware General Corporation Law
("Delaware Law"), and the separate existence of Sub shall cease and the Company
shall continue as the surviving corporation (the "Surviving Corporation").
1.2 EFFECTS OF THE MERGER.
a. GENERALLY. The Merger shall have the effects as provided by
Delaware Law and other applicable law.
b. CERTIFICATE OF INCORPORATION AND BYLAWS. The certificate of
incorporation of the Company as in effect immediately prior to the Effective
Time shall be the certificate of incorporation of the Surviving Corporation,
except that the certificate of incorporation shall, as a result of the
Merger, be amended and restated as set forth in the form amended and
restated certificate of incorporation attached to this Agreement as
EXHIBIT A (the "Charter"). The bylaws of the Company as in effect
immediately prior to the Effective Time shall be the bylaws of the Surviving
Corporation, except that the bylaws shall, as a result of the Merger, be
amended and restated as set forth in the form amended and restated bylaws
attached to this Agreement as EXHIBIT B (the "Bylaws").
<PAGE>
c. BOARD OF DIRECTORS; OFFICERS. At the Effective Time, the Board of
Directors of the Surviving Corporation shall be identical to the Board of
Directors of the Company and the officers of the Surviving Corporation shall
be identical to the officers of the Company, in each case until their
respective successors have been duly elected or appointed and qualified and
subject to the Charter and Bylaws.
1.3. EFFECTIVE TIME. As soon as practicable following the satisfaction or
waiver of the conditions set forth in Article 3 of this Agreement, the parties
shall file with the Secretary of State of the State of Delaware a certificate of
merger (the "Certificate of Merger") executed in accordance with the relevant
provisions of Delaware Law. The Merger shall become effective at such time as
the Certificate of Merger is duly filed with the Secretary of State of the State
of Delaware, or at such other time as is permissible in accordance with Delaware
Law and as the Company and Sub shall agree and as specified in the Certificate
of Merger (the time the Merger becomes effective being the "Effective Time").
2. CONVERSION OF STOCK; TERMINATION OF CONVERTIBLE SECURITIES
2.1 CONVERSION OF CLASS A COMMON STOCK. At the Effective Time, each share
of issued Class A Common Stock, along with the right (a "Right") attached to
such share pursuant to that certain Rights Agreement, dated as of April 28,
1999, between the Company and First Chicago Trust Company of New York, a New
York trust company (the "Rights Agent"), as amended by that certain First
Amendment to Rights Agreement, dated as of February 14, 2001, between the
Company and the Rights Agent (the "Rights Agreement"), shall, by virtue of the
Merger and without any action on the part of the holder thereof, remain one
fully paid and validly issued, non-assessable share of Class A Common Stock of
the Surviving Corporation and shall retain the Right attached to such share
pursuant to the Rights Agreement.
2.2 CONVERSION OF CLASS B COMMON STOCK. At the Effective Time, each issued
share of Class B Common Stock shall, by virtue of the Merger and without any
action on the part of the holder thereof, become and be converted into one fully
paid and validly issued, non-assessable share of Class A Common Stock (a
"Converted Share"). Simultaneously, upon the conversion of each share of
Class B Common Stock into a Converted Share, the Right attached to such share of
Class B Common Stock under the Rights Agreement shall be cancelled, and a new
Right shall be issued for each Converted Share in accordance with Section 3(c)
of the Rights Agreement (except that the legend referred to therein shall only
be required to be borne by a new certificate issued for such Converted Share).
2.3 CANCELLATION OF SUB COMMON STOCK. At the Effective Time, each share of
Sub Common Stock issued and outstanding immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of the holder
thereof, be canceled and extinguished without any payment or other consideration
made with respect thereto.
2.4 EXCHANGE OF CERTIFICATES.
a. Prior to the Effective Time, the Company shall appoint an exchange
agent (the "Exchange Agent"), which may be the Company's stock transfer
agent, to act as the Company's agent for the issuance of Class A Common
Stock to holders of Class B Common Stock in the Merger.
b. As soon as practicable after the Effective Time, the Exchange Agent
shall mail to each holder of record of a certificate or certificates, which
immediately prior to the Effective Time represented outstanding shares of
Class B Common Stock, a letter of transmittal (which will specify that
delivery will be effected, and risk of loss and title to such certificates
will pass, only upon proper delivery of such certificates to the Exchange
Agent and shall be in such form and have such other provisions as the
Exchange Agent may reasonable specify), and instructions for use in
effecting the surrender of the certificates representing such shares of
Class B Common Stock, in exchange for the shares of Class A Common Stock
payable as a result of the Merger. Upon surrender to the Exchange Agent of a
certificate or certificates formerly representing shares of Class B Common
Stock and acceptance thereof by the Exchange Agent, the holder thereof shall
be entitled to receive either a
2
<PAGE>
certificate or certificates representing the shares of Class A Common into
which such shares of Class B Common Stock, formerly represented by such
surrendered certificate or certificates, shall have been converted at the
Effective Time pursuant to the Merger. The Exchange Agent shall accept such
certificates upon compliance with such reasonable terms and conditions as
the Exchange Agent may impose to effect an orderly exchange thereof in
accordance with normal exchange practices. After the Effective Time, there
shall be no further transfer on the records of the Company or its transfer
agent of certificates representing shares of Class B Common Stock and if
such certificates are presented to the Company for transfer, they shall be
canceled against delivery of certificates representing shares of Class A
Common Stock allocable to the shares of Class B Common Stock represented by
such certificate or certificates. If any certificate representing shares of
Class A Common Stock is to be issued to a name other than that in which the
certificate for the Class B Common Stock surrendered for exchange is
registered, it shall be a condition of such exchange that the certificate so
surrendered shall be properly endorsed, with signature guaranteed, or
otherwise in proper form for transfer and that the person requesting such
exchange shall pay to the Company, or its transfer agent, any transfer or
other taxes required by reason of the issuance of certificates in, or
payment of cash to, a name other than that of the registered holder of the
certificate surrendered, or establish to the satisfaction of the Company or
its transfer agent that such tax has been paid or is not applicable.
c. After the Effective Time and until surrendered as set forth in this
Section 2.4, certificates theretofore representing shares of Class B Common
Stock shall be deemed for all purposes as evidencing ownership of the number
of shares of Class A Common Stock into which such shares shall have been
converted by virtue of the Merger and the Rights attaching thereto pursuant
to the Rights Agreement (as described in Section 2.2 of this Agreement).
d. The Company and the Exchange Agent shall be entitled to deduct and
withhold from the consideration otherwise payable pursuant to this Agreement
to any holder of shares of Class B Common Stock such amounts as the Company
or the Exchange Agent is required to deduct and withhold with respect to the
making of such payment under the United States Internal Revenue Code of
1986, as amended (the "Code"), or any provision of state, local or foreign
tax law applicable to the making of such payment. To the extent that amounts
are so withheld by the Company or the Exchange Agent, such withheld amounts
shall be treated for all purposes of this Agreement as having been paid to
the holders of the shares of Class B Common Stock in respect of which such
deduction and withholding was made by the Company or the Exchange Agent.
e. No party to this Agreement shall be liable to any person or entity
in respect of any shares or amounts paid or delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
f. In the event any certificate or certificates formerly representing
shares of Class B Common Stock shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
certificate or certificates to be lost, stolen or destroyed, and if required
by the Surviving Corporation and the Exchange Agent, the posting by such
person of a bond in such amount as the Surviving Corporation may reasonably
require as indemnity against any claim that may be made against it with
respect to such certificate, the Exchange Agent will issue in exchange for
such lost, stolen or destroyed certificate the consideration deliverable in
respect thereof as determined in accordance with this Article 2.
3
<PAGE>
3. CONDITIONS.
The obligations of the parties hereto to consummate the Merger are subject
to the satisfaction of each of the following conditions:
3.1 STOCKHOLDER APPROVAL. This Agreement and the Merger contemplated
hereby shall have been duly approved by a majority of the voting power of the
outstanding shares of Class A Common Stock and Class B Common Stock voting
together as one class and by a majority of the outstanding shares of Class B
Common Stock voting as a separate Class. In addition, this Agreement and the
Merger shall have been duly approved and adopted by the Company, as the sole
holder of Sub Common Stock.
3.2 NO INJUNCTION OR PROCEEDING. No preliminary or permanent injunction,
temporary restraining order or other decree of a court, legislature or other
agency or instrumentality of federal, state or local government (a "Governmental
Entity") shall be in effect, no statute, rule or regulation shall have been
enacted by a Governmental Entity and no action, suit or proceeding by any
Governmental Entity shall have been instituted or threatened, which prohibits or
materially challenges the consummation of the Merger.
3.3 OTHER APPROVALS. All other filings, consents and approvals and the
satisfaction of all other requirements that are necessary, in the opinion of the
Company, for the consummation of the Merger and other transactions contemplated
by this Agreement shall have been obtained.
3.4 APPROVAL OF NYSE. The New York Stock Exchange shall have approved the
listing of the additional shares of Class A Common Stock issuable pursuant to
Section 2.2 of this Agreement.
4. TERMINATION; AMENDMENT
4.1 TERMINATION OF AGREEMENT. This Agreement may be terminated by the
Company at any time before the Effective Time if for any reason consummation of
the Merger is inadvisable in the sole discretion of its Board of Directors. Such
termination shall be effected by written notice by the Company to Sub. Upon the
giving of such notice, this Agreement shall be terminated and there shall be no
liability hereunder or on account of such termination on the part of the Company
or Sub or the directors, officers, employees, agents or stockholders of any of
them.
4.2 AMENDMENT. This Agreement may be amended or modified at any time by
mutual written agreement of the parties (a) in any respect prior to the approval
hereof by the stockholders of the Company entitled to vote hereon, and (b) in
any respect subsequent to such approval, provided that any such amendment or
modification subsequent to such approval shall not (i) change the method of
converting shares of Class B Common Stock into shares of Class A Common Stock,
(ii) alter or change any provision of the Charter or Bylaws of the Surviving
Corporation that would require the approval of stockholders, or (iii) otherwise
materially adversely affect the stockholders of the Company.
5. MISCELLANEOUS
5.1 SUCCESSORS. This Agreement shall be binding on the successors of the
Company and Sub.
5.2 COUNTERPARTS. This Agreement may be executed in one or more
counterparts.
5.3 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to the
conflicts of laws principles thereof.
5.4 NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement is intended to
confer upon any person or entity not a party to this Agreement any rights or
remedies under or by reason of this Agreement.
4
<PAGE>
IN WITNESS WHEREOF, the Boards of Directors of the parties hereto have
approved this Agreement and the duly authorized officers of each have executed
this Agreement on their behalf as of the date first above written.
<TABLE>
<S> <C> <C>
WADDELL & REED FINANCIAL, INC.
By: /s/ KEITH A. TUCKER
-----------------------------------------
Name: Keith A. Tucker
Title: Chairman of the Board and CEO
WDR SUB, INC.
By: /s/ ROBERT L. HECHLER
-----------------------------------------
Name: Robert L. Hechler
Title: President
</TABLE>
5
<PAGE>
EXHIBIT A
FORM OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
WADDELL & REED FINANCIAL, INC.
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
WADDELL & REED FINANCIAL, INC.
Waddell & Reed Financial, Inc., a corporation incorporated by the filing of
its original Certificate of Incorporation with the Secretary of State of the
State of Delaware on December 24, 1981, under the name of LIBFIN Company
desiring to amend and restate its Certificate of Incorporation, does hereby
certify as follows:
1. Said Certificate of Incorporation is hereby amended and restated so as
to read as follows:
FIRST: NAME.
The name of the corporation (which is hereinafter referred to as the
"CORPORATION") is:
WADDELL & REED FINANCIAL, INC.
SECOND: REGISTERED OFFICE AND AGENT.
The address of the Corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware, 19801, in
the County of New Castle. The name of the Corporation's registered agent at such
address is The Corporation Trust Company.
THIRD: PURPOSE.
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
FOURTH: CAPITAL STOCK.
4.1 AUTHORIZED SHARES. The total number of shares of all classes of stock
which the Corporation shall have authority to issue shall be two hundred
fifty-five million (255,000,000), of which two hundred fifty million
(250,000,000) shares are to be Class A Common Stock, having a par value of one
cent ($0.01) each; and five million (5,000,000) shares are to be Preferred
Stock, having a par value of one dollar ($1.00) each.
4.2 COMMON STOCK.
4.2.1 As used herein, the term "COMMON STOCK" means the Class A Common
Stock.
4.2.2 The holder of each outstanding share of Common Stock shall be
entitled to one vote in person or by proxy for each share on all matters
upon which the stockholders of the Corporation are entitled to vote.
4.2.3 Authority is hereby expressly granted to the Board of Directors
or any duly authorized committee thereof from time to time to issue any
authorized but unissued shares of Common Stock for such consideration and on
such terms as it may determine.
4.2.4 At any meeting of stockholders, the presence in person or by
proxy of the holders of shares entitled to cast a majority of all the votes
which could be cast at such meeting by the holders of all of the outstanding
shares of stock of the Corporation entitled to vote on every matter that is
to be voted on at such meeting shall constitute a quorum.
4.2.5 At every meeting of stockholders, (i) in all matters other than
the election of directors, a majority of the votes which could be cast at
such meeting upon a given question and (ii) in the case of the election of
directors, a plurality of the votes which could be cast at such meeting upon
such election, by such holders who are present in person or by proxy, shall
be necessary, in addition to any vote or other action that may be expressly
required by the provisions of this Certificate of Incorporation, the Bylaws
of the Corporation, or by the law of the State of Delaware, to decide such
question or election, and shall decide such question or election if no such
additional vote or other action is so required.
<PAGE>
4.2.6 Subject to the rights of any holders of Preferred Stock to elect
directors as provided in this Certificate of Incorporation, stockholder
action can be taken only at an annual or special meeting of stockholders and
stockholder action may not be taken by written consent in lieu of a meeting.
4.3 PREFERRED STOCK.
4.3.1 Authority is hereby expressly granted to the Board of Directors
from time to time to issue Preferred Stock, for such consideration and on
such terms as it may determine, as Preferred Stock of one or more series and
in connection with the creation of any such series to fix by the resolution
or resolutions providing for the issue of shares thereof the designation,
powers and relative participating, optional, or other special rights of such
series, and the qualifications, limitations, or restrictions thereof. Such
authority of the Board of Directors with respect to each such series shall
include, but not be limited to, the determination of the following:
(a) the distinctive designation of, and the number of shares comprising,
such series, which number may be (except where otherwise provided by
the Board of Directors in creating such series) increased or
decreased (but not below the number of shares thereof then
outstanding) from time to time by like action of the Board of
Directors;
(b) the dividend rate or amount for such series, the conditions and dates
upon which such dividends shall be payable, the relation which such
dividends bear to the dividends payable on any other class or classes
or any other series of any class or classes of stock, and whether
such dividends shall be cumulative, and if so, from which date or
dates for such series;
(c) whether or not the shares of such series shall be subject to
redemption by the Corporation and the times, prices, and other terms
and conditions of such redemption;
(d) whether or not the shares of such series shall be subject to the
operation of a sinking fund or purchase fund to be applied to the
redemption or purchase of such shares and if such a fund be
established, the amount thereof and the terms and provisions relative
to the application thereof;
(e) whether or not the shares of such series shall be convertible into or
exchangeable for shares of any other class or classes, or of any
other series of any class or classes, of stock of the Corporation and
if provision be made for conversion or exchange, the times, prices,
rates, adjustments, and other terms and conditions of such conversion
or exchange;
(f) whether or not the shares of such series shall have voting rights, in
addition to the voting rights provided by law, and if they are to
have such additional voting rights, the extent thereof;
(g) the rights of the shares of such series in the event of any
liquidation, dissolution, or winding up of the Corporation or upon
any distribution of its assets; and
(h) any other powers, preferences, and relative, participating, optional,
or other special rights of the shares of such series, and the
qualifications, limitations, or restrictions thereof, to the full
extent now or hereafter permitted by law and not inconsistent with
the provisions hereof.
4.3.2 All shares of any one series of Preferred Stock shall be
identical in all respects except as to the dates from which dividends
thereon may be cumulative. All series of the Preferred Stock shall rank
equally and be identical in all respects except as otherwise provided in the
resolution or resolutions providing for the issue of any series of Preferred
Stock.
4.3.3 Except as otherwise required by law, Section 4.3.4 hereof, or
provided by a resolution or resolutions of the Board of Directors creating
any series of Preferred Stock, the holders of Common Stock shall have the
exclusive power to vote; and the holders of Preferred Stock shall have no
voting power whatsoever. Except as otherwise provided in such a resolution
or resolutions or in Section 4.3.4
A-2
<PAGE>
hereof, the number of authorized shares of the Preferred Stock may be
increased or decreased by the affirmative vote of a majority of the
outstanding shares of capital stock of the Corporation entitled to vote.
4.3.4 DESIGNATION OF THE RIGHTS AND PREFERENCES OF THE SERIES A JUNIOR
PARTICIPATING PREFERRED STOCK. 750,000 shares of the authorized Preferred
Stock are hereby designated Series A Junior Participating Preferred Stock
("Series A Junior Participating Preferred Stock"). The rights and
preferences of the Series A Junior Participating Preferred Stock are as
follows:
(a) DIVIDENDS.
(1) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and
superior to the shares of Series A Junior Participating Preferred
Stock with respect to dividends, the holders of shares of
Series A Junior Participating Preferred Stock shall be entitled
to receive, when, as and if declared by the Board of Directors
out of funds legally available for the purpose, quarterly
dividends payable in cash on the first day of February, May,
August and November in each year (each such date being referred
to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share of Series A Junior
Participating Preferred Stock, in an amount per share (rounded to
the nearest cent) equal to the greater of (a) $1.00 or
(b) subject to the provision for adjustment hereinafter set
forth, 100 times the aggregate per share amount of all cash
dividends, and 100 times the aggregate per share amount (payable
in kind) of all non-cash dividends or other distributions other
than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date,
or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of
Series A Junior Participating Preferred Stock. In the event the
Corporation shall at any time after April 28, 1999 (the "Rights
Declaration Date") (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding
Common Stock, or (iii) combine the outstanding Common Stock into
a smaller number of shares, then in each such case the amount to
which holders of shares of Series A Junior Participating
Preferred Stock were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction the numerator of which is
the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to
such event.
(2) The Corporation shall declare a dividend or distribution on the
Series A Junior Participating Preferred Stock as provided in
Paragraph 4.3.4(a)(1) above immediately after it declares a
dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in
the event no dividend or distribution shall have been declared on
the Common Stock during the period between any Quarterly Dividend
Payment Date and the next subsequent Quarterly Dividend Payment
Date, a dividend of $1.00 per share on the Series A Junior
Participating Preferred Stock shall nevertheless be payable on
such subsequent Quarterly Dividend Payment Date.
(3) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Junior Participating Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issue
of such shares of Series A Junior Participating Preferred Stock,
unless the date of issue of such shares is prior to the record
date for the first
A-3
<PAGE>
Quarterly Dividend Payment Date, in which case dividends on such
shares shall begin to accrue from the date of issue of such
shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the
determination of holders of shares of Series A Junior
Participating Preferred Stock entitled to receive a quarterly
dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends shall begin to accrue and
be cumulative from such Quarterly Dividend Payment Date. Accrued
but unpaid dividends shall not bear interest. Dividends paid on
the shares of Series A Junior Participating Preferred Stock in an
amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro rata on
a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the
determination of holders of shares of Series A Junior
Participating Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date
shall be no more than 30 days prior to the date fixed for the
payment thereof.
(b) VOTING RIGHTS. The holders of shares of Series A Junior Participating
Preferred Stock shall have the following voting rights:
(1) Subject to the provision for adjustment hereinafter set forth,
each share of Series A Junior Participating Preferred Stock shall
entitle the holder thereof to 100 votes on all matters submitted
to a vote of the stockholders of the Corporation. In the event
the Corporation shall at any time after the Rights Declaration
Date (i) declare any dividend on the Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common
Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the number of
votes per share to which holders of shares of Series A Junior
Participating Preferred Stock were entitled immediately prior to
such event shall be adjusted by multiplying such number by a
fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(2) Except as otherwise provided herein or by law, the holders of
shares of Series A Junior Participating Preferred Stock and the
holders of shares of Common Stock shall vote together as one
class on all matters submitted to a vote of stockholders of the
Corporation.
(3) If at any time dividends on any Series A Junior Participating
Preferred Stock shall be in arrears in an amount equal to six
(6) quarterly dividends thereon, the occurrence of such
contingency shall mark the beginning of a period (herein called a
"default period") which shall extend until such time when all
accrued and unpaid dividends for all previous quarterly dividend
periods and for the current quarterly dividend period on all
shares of Series A Junior Participating Preferred Stock then
outstanding shall have been declared and paid or set apart for
payment. During each default period, all holders of Preferred
Stock (including holders of the Series A Junior Participating
Preferred Stock) with dividends in arrears in an amount equal to
six (6) quarterly dividends thereon, voting as a class,
irrespective of series, shall have the right to elect two
(2) directors.
(4) During any default period, the voting right described in
section 4.3.4(b)(3) of the holders of Series A Junior
Participating Preferred Stock may be exercised initially at a
special meeting called pursuant to section 4.3.4(b)(5) or at any
annual meeting of stockholders, and thereafter at annual meetings
of stockholders, provided that neither such voting right nor the
right of the holders of any other series of Preferred Stock, if
any, to increase, in certain cases, the authorized number of
directors shall be exercised
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unless the holders of ten percent (10%) in number of shares of
Preferred Stock outstanding shall be present in person or by
proxy. The absence of a quorum of the holders of Common Stock
shall not affect the exercise by the holders of Preferred Stock
of such voting right. At any meeting at which the holders of
Preferred Stock shall exercise such voting right initially during
an existing default period, they shall have the right, voting as
a class, to elect directors to fill such vacancies, if any, in
the Board of Directors as may then exist up to two (2) directors
or, if such right is exercised at an annual meeting, to elect two
(2) directors. If the number which may be so elected at any
special meeting does not amount to the required number, the
holders of the Preferred Stock shall have the right to make such
increase in the number of directors as shall be necessary to
permit the election by them of the required number. After the
holders of the Preferred Stock shall have exercised their right
to elect directors in any default period and during the
continuance of such period, the number of directors shall not be
increased or decreased except by vote of the holders of Preferred
Stock as herein provided or pursuant to the rights of any equity
securities ranking senior to or PARI PASSU with the Series A
Junior Participating Preferred Stock.
(5) Unless the holders of Preferred Stock shall, during an existing
default period, have previously exercised their right to elect
directors, the Board of Directors may order, or any stockholder
or stockholders owning in the aggregate not less than ten percent
(10%) of the total number of shares of Preferred Stock
outstanding, irrespective of series, may request, the calling of
a special meeting of the holders of Preferred Stock, which
meeting shall thereupon be called by the President, a
Vice-President or the Secretary of the Corporation. Notice of
such meeting and of any annual meeting at which holders of
Preferred Stock are entitled to vote pursuant to this
section 4.3.4(b)(5) shall be given to each holder of record of
Preferred Stock by mailing a copy of such notice to him at his
last address as the same appears on the books of the Corporation.
Such meeting shall be called for a time not earlier than 20 days
and not later than 60 days after such order or request or in
default of the calling of such meeting within 60 days after such
order or request, such meeting may be called on similar notice by
any stockholder or stockholders owning in the aggregate not less
than ten percent (10%) of the total number of shares of Preferred
Stock outstanding. Notwithstanding the provisions of this
section 4.3.4(b)(5), no such special meeting shall be called
during the period within 60 days immediately preceding the date
fixed for the next annual meeting of the stockholders.
(6) In any default period, the holders of Common Stock, and other
classes of stock of the Corporation if applicable, shall continue
to be entitled to elect the whole number of directors until the
holders of Preferred Stock shall have exercised their right to
elect two (2) directors voting as a class, after the exercise of
which right (x) the directors so elected by the holders of
Preferred Stock shall continue in office until their successors
shall have been elected by such holders or until the expiration
of the default period, and (y) any vacancy in the Board of
Directors may (except as provided in Section 4.3.4(b)(4)) be
filled by vote of a majority of the remaining directors
theretofore elected by the holders of the class of stock which
elected the director whose office shall have become vacant.
References in this Section 4.3.4(b) to directors elected by the
holders of a particular class of stock shall include directors
elected by such directors to fill vacancies as provided in
clause (y) of the foregoing sentence.
(7) Immediately upon the expiration of a default period, (x) the
right of the holders of Preferred Stock as a class to elect
directors shall cease, (y) the term of any directors elected by
the holders of Preferred Stock as a class shall terminate, and
(z) the number
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of directors shall be such number as may be provided for in the
certificate of incorporation or by-laws irrespective of any
increase made pursuant to the provisions of section 4.3.4(b)(4)
(such number being subject, however, to change thereafter in any
manner provided by law or in the certificate of incorporation or
by-laws). Any vacancies in the Board of Directors effected by the
provisions of clauses (y) and (z) in the preceding sentence may
be filled by a majority of the remaining directors.
(8) Except as set forth herein, holders of Series A Junior
Participating Preferred Stock shall have no special voting rights
and their consent shall not be required (except to the extent
they are entitled to vote with holders of Common Stock as set
forth herein) for taking any corporate action.
(c) CERTAIN RESTRICTIONS.
(1) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Participating Preferred Stock as
provided in Section 4.3.4(a) are in arrears, thereafter and until
all accrued and unpaid dividends and distributions, whether or
not declared, on shares of Series A Junior Participating
Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up)
to the Series A Junior Participating Preferred Stock;
(ii) declare or pay dividends on or make any other distributions
on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up)
with the Series A Junior Participating Preferred Stock,
except dividends paid ratably on the Series A Junior
Participating Preferred Stock and all such parity stock on
which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares
are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up)
with the Series A Junior Participating Preferred Stock,
provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such parity
stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A
Junior Participating Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares
of Series A Junior Participating Preferred Stock, or any
shares of stock ranking on a parity with the Series A
Junior Participating Preferred Stock, except in accordance
with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of
such shares upon such terms as the Board of Directors,
after consideration of the respective annual dividend rates
and other relative rights and preferences of the respective
series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective
series or classes.
(2) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration
any shares of stock of the Corporation unless the Corporation
could, under Section (1) of this 4.3.4(c), purchase or otherwise
acquire such shares at such time and in such manner.
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(d) REACQUIRED SHARES. Any shares of Series A Junior Participating
Preferred Stock purchased or otherwise acquired by the Corporation in
any manner whatsoever shall be retired and cancelled promptly after
the acquisition thereof. All such shares shall upon their
cancellation become authorized but unissued shares of Preferred Stock
and may be reissued as part of a new series of Preferred Stock to be
created by resolution or resolutions of the Board of Directors,
subject to the conditions and restrictions on issuance set forth
herein.
(e) LIQUIDATION, DISSOLUTION OR WINDING UP.
(1) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, no distribution shall be made to
the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Series A Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Series A Junior Participating
Preferred Stock shall have received an amount equal to $100 per
share of Series A Junior Participating Preferred Stock, plus an
amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment
(the "Series A Liquidation Preference"). Following the payment of
the full amount of the Series A Liquidation Preference, no
additional distributions shall be made to the holders of shares
of Series A Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Common Stock shall have
received an amount per share (the "Common Adjustment") equal to
the quotient obtained by dividing (i) the Series A Liquidation
Preference by (ii) 100 (as appropriately adjusted as set forth in
subparagraph (3) below to reflect such events as stock splits,
stock dividends and recapitalizations with respect to the Common
Stock) (such number in clause (ii), the "Adjustment Number").
Following the payment of the full amount of the Series A
Liquidation Preference and the Common Adjustment in respect of
all outstanding shares of Series A Junior Participating Preferred
Stock and Common Stock, respectively, holders of Series A Junior
Participating Preferred Stock and holders of shares of Common
Stock shall receive their ratable and proportionate share of the
remaining assets to be distributed in the ratio of the Adjustment
Number to 1 with respect to such Preferred Stock and Common
Stock, on a per share basis, respectively.
(2) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation
Preference and the liquidation preferences of all other series of
preferred stock, if any, which rank on a parity with the
Series A Junior Participating Preferred Stock, then such
remaining assets shall be distributed ratably to the holders of
the Series A Junior Participating Preferred Stock and such parity
shares in proportion to their respective liquidation preferences.
In the event, however, that there are not sufficient assets
available to permit payment in full of the Common Adjustment,
then such remaining assets shall be distributed ratably to the
holders of Common Stock.
(3) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable
in shares of Common Stock, (ii) subdivide the outstanding Common
Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the Adjustment
Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the
numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
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(f) CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into
any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other
stock or securities, cash and/or any other property, then in any such
case the shares of Series A Junior Participating Preferred Stock
shall at the same time be similarly exchanged or changed in an amount
per share (subject to the provision for adjustment hereinafter set
forth) equal to 100 times the aggregate amount of stock, securities,
cash and/or any other property (payable in kind), as the case may be,
into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding
Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the amount set forth
in the preceding sentence with respect to the exchange or change of
shares of Series A Junior Participating Preferred Stock shall be
adjusted by multiplying such amount by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares
of Common Stock that were outstanding immediately prior to such
event.
(g) NO REDEMPTION. The shares of Series A Junior Participating Preferred
Stock shall not be redeemable.
(h) RANKING. The Series A Junior Participating Preferred Stock shall
rank junior to all other series of the Corporation's Preferred Stock
as to the payment of dividends and the distribution of assets, unless
the terms of any such series shall provide otherwise.
(i) AMENDMENT. At any time when any shares of Series A Junior
Participating Preferred Stock are outstanding, the Amended and
Restated Certificate of Incorporation of the Corporation shall not be
amended in any manner which would materially alter or change the
powers, preferences or special rights of the Series A Junior
Participating Preferred Stock so as to affect them adversely without
the affirmative vote of the holders of a majority or more of the
outstanding shares of Series A Junior Participating Preferred Stock,
voting separately as a class.
(j) FRACTIONAL SHARES. Series A Junior Participating Preferred Stock may
be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting
rights, receive dividends, participate in distributions and to have
the benefit of all other rights of holders of Series A Junior
Participating Preferred Stock.
4.4 DIVIDENDS. Whenever dividends upon the Preferred Stock are at the time
outstanding and the dividend preference to which such stock is entitled shall
have been paid in full or declared and set apart for payment for all past
dividend periods, and after the provisions for any sinking or purchase fund or
funds for any series of Preferred Stock shall have been complied with, the Board
of Directors may declare and pay dividends on the Common Stock, payable in cash,
stock or otherwise; and the holders of shares of Preferred Stock shall not be
entitled to share therein, subject to the provisions of Section 4.3.4 hereof and
the provisions of the resolution or resolutions creating any series of Preferred
Stock.
4.5 LIQUIDATION. In the event of any liquidation, dissolution, or winding
up of the Corporation or upon the distribution of the assets of the Corporation
remaining, after the payment to the holders of the Preferred Stock of the full
preferential amounts to which they shall be entitled as provided in the
resolution or resolutions creating any series thereof, the remaining assets of
the Corporation shall be divided and distributed among the holders of the Common
Stock ratably, except as may otherwise be provided in any such resolution or
resolutions. Neither the merger or consolidation of the Corporation with another
corporation nor the sale or lease of all or substantially all the assets of the
Corporation shall be deemed to be a liquidation, dissolution, or winding up of
the Corporation or a distribution of its assets.
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4.6 AMENDMENT OF CERTIFICATE OF INCORPORATION. Except as otherwise
provided by law or by this Certificate of Incorporation, and subject to any
rights of the holders of Preferred Stock, the provisions of this Certificate of
Incorporation shall not be modified, revised, altered or amended, repealed or
rescinded in whole or in part, without the approval of a majority of the shares
of the Common Stock entitled to vote.
FIFTH: DIRECTORS.
5.1 STAGGERED BOARD. The Board of Directors shall consist of not less than
seven nor more than 15 persons. Subject to any rights of holders of Preferred
Stock to elect directors under specified circumstances, the exact number of
directors within the minimum and maximum limitations specified in the preceding
sentence shall be fixed from time to time by the Board of Directors pursuant to
a resolution adopted by a majority of the entire Board of Directors. The Board
of Directors shall be divided into three classes, designated as Class I,
Class II and Class III. Each class shall consist initially of four Class I
directors, four Class II directors and two Class III directors. Class I
directors shall be elected initially for a one-year term, Class II directors
initially for a two-year term and Class III directors initially for a three-year
term. At each succeeding annual meeting of stockholders beginning in 1999,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. If the number of directors is changed,
any increase or decrease shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as possible, and
any additional director of any class elected to fill a vacancy resulting from an
increase in such class shall hold office for a term that shall coincide with the
remaining term of that class, but in no case shall a decrease in the number of
directors shorten the term of any incumbent director. A director shall hold
office until the annual meeting for the year in which his or her term expires or
until his or her successor shall be elected and shall qualify, subject, however,
to prior death, resignation, retirement, disqualification or removal from
office. Any vacancy on the Board of Directors that results from an increase in
the number of directors shall be filled by a majority of the Board of Directors
then in office, provided that a quorum is present, and any other vacancy
occurring in the Board of Directors shall be filled by a majority of the Board
of Directors then in office, even if less than a quorum or a sole remaining
director. Any director elected to fill a vacancy not resulting from an increase
in the number of directors shall have the same remaining term as that of his or
her predecessor. Notwithstanding the foregoing, whenever the holders of any one
or more classes or series of Preferred Stock issued by the Corporation shall
have the right, voting separately by class or series, to elect directors at an
annual or special meeting of stockholders, the election, term of office, filling
of vacancies and other features of such directorships shall be governed by the
terms of this Certificate of Incorporation applicable thereto, and such
directors so elected shall not be divided into classes pursuant to this Article
Fifth unless expressly provided by such terms.
5.2 ELECTION. No holder of Common Stock shall have the right to exercise
cumulative voting rights. Unless and except to the extent that the Bylaws of the
Corporation shall so require, the election of directors of the Corporation need
not be by written ballot.
5.3 REMOVAL. Subject to the rights of holders of Preferred Stock to elect
directors under specified circumstances, directors may be removed only for cause
and only upon the affirmative vote of holders of at least 80% of the outstanding
shares of stock entitled to vote generally in the election of directors, voting
together as a single class.
SIXTH: BYLAWS.
The Board of Directors is expressly authorized and empowered to make, alter
and repeal the Bylaws of the Corporation, subject to the power of the
stockholders of the Corporation to alter or repeal any Bylaws made by the Board
of Directors.
SEVENTH: PREEMPTIVE RIGHTS.
No holder of Preferred Stock or Common Stock of the Corporation shall have
any preemptive right as such holder (other than such right, if any, as the Board
of Directors in its discretion may by resolution
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determine pursuant to this Article Seventh) to purchase, subscribe for or
otherwise acquire any shares of stock of the Corporation of any class now or
hereafter authorized, or any securities convertible into or exchangeable for any
such shares, or any warrants or any instruments evidencing rights or options to
subscribe for, purchase or otherwise acquire any such shares, whether such
shares, securities, warrants or other instruments are now, or shall hereafter
be, authorized, unissued or issued and thereafter acquired by the Corporation.
EIGHTH:
8.1 ELIMINATION OF CERTAIN LIABILITY OF DIRECTORS.
The directors of the Corporation shall be entitled to the benefits of all
limitations on the liability of directors generally that are now or hereafter
become available under the General Corporation Law of Delaware. Without limiting
the generality of the foregoing, a director of the Corporation shall not be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (a) for any
breach of the director's duty of loyalty to the Corporation or its stockholders,
(b) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (c) for paying a dividend or approving
a stock repurchase in violation of Section 174 of the Delaware General
Corporation Law, or (d) for any transaction from which the director derived an
improper personal benefit. Any repeal or modification of this Section 8.1 shall
be prospective only, and shall not affect, to the detriment of any director, any
limitation on the personal liability of a director of the Corporation existing
at the time of such repeal or modification.
8.2 INDEMNIFICATION AND INSURANCE.
8.2.1 RIGHT TO INDEMNIFICATION. Each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "PROCEEDING"), by reason of the fact that he or she, or a
person of whom he or she is the legal representative, is or was a director
or officer, of the Corporation or is or was serving at the request of the
Corporation as a director or officer of another company, partnership, joint
venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged
action in an official capacity as a director or officer or in any other
capacity while serving as a director or officer shall be indemnified and
held harmless by the Corporation to the fullest extent authorized by the
Delaware General Corporation Law, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that
such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment), against all expense, liability and loss (including attorneys'
fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or
to be paid in settlement) reasonably incurred or suffered by such person in
connection therewith and such indemnification shall continue as to a person
who has ceased to be a director or officer and shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that,
except as provided in Section 8.2.2 hereof, the Corporation shall indemnify
any such person seeking indemnification in connection with a proceeding (or
part thereof) initiated by such person only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation. The
right to indemnification conferred in this Section shall be a contract right
and shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the Delaware General Corporation
Law requires, the payment of such expenses incurred by a director or officer
in his or her capacity as a director or officer (and not in any other
capacity in which service was or is rendered by such person while a director
or officer, including, without limitation, service to an employee benefit
plan) in advance of the final disposition of a proceeding, shall be made
only upon delivery to the Corporation of an undertaking, by or on behalf of
such director or officer, to repay all amounts so advanced if it shall
ultimately be determined that such director or officer is not entitled to be
indemnified under this Section or otherwise. The
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Corporation may, by action of its Board of Directors, provide
indemnification to employees and agents of the Corporation with the same
scope and effect as the foregoing indemnification of directors and officers.
8.2.2 RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Section 8.2.1
is not paid in full by the Corporation within thirty days after a written
claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount
of the claim and, if successful in whole or in part, the claimant shall be
entitled to be paid also the expense of prosecuting such claim. It shall be
a defense to any such action (other than an action brought to enforce a
claim for expenses incurred in defending any proceeding in advance of its
final disposition where the required undertaking, if any is required, has
been tendered to the Corporation) that the claimant has not met the
standards of conduct which make it permissible under the Delaware General
Corporation Law for the Corporation to indemnify the claimant for the amount
claimed, but the burden of proving such defense shall be on the Corporation.
Neither the failure of the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the
claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the claimant
has not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that the claimant has not met the applicable
standard of conduct.
8.2.3 NON-EXCLUSIVITY OF RIGHTS. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Section shall not be exclusive of any
other right which any person may have or hereafter acquire under any
statute, provision of this Certificate of Incorporation, Bylaws, agreement,
vote of stockholders or disinterested directors or otherwise.
8.2.4 INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any such expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
2. This Amended and Restated Certificate of Incorporation has been duly
adopted by the Board of Directors of the Corporation in accordance with the
provisions of Section 242, of the General Corporation Law of the State of
Delaware and has been duly adopted in accordance with the provisions of the
Certificate of Incorporation of the Corporation heretofore amended.
3. This Amended and Restated Certificate of Incorporation shall become
effective at the time it is filed in the office of the Secretary of State of the
State of Delaware.
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IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this instrument to be signed in its name by its Chairman and
attested by its Secretary.
<TABLE>
<S> <C> <C>
WADDELL & REED FINANCIAL, INC.
By:
-----------------------------------------
Name: Keith A. Tucker
Title: Chairman of the Board and
Chief Executive Officer
</TABLE>
<TABLE>
<S> <C> <C>
ATTESTED:
-----------------------------------------
Name: Daniel C. Schulte
Title: General Counsel and Secretary
By:
</TABLE>
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EXHIBIT B
FORM OF
AMENDED AND RESTATED
BYLAWS OF
WADDELL AND REED FINANCIAL, INC.
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
WADDELL & REED FINANCIAL, INC.
EFFECTIVE AS OF APRIL , 2001
ARTICLE I. OFFICES
Section 1. REGISTERED OFFICE:
The registered office shall be established and maintained at the office of
the Corporation Trust Company, in the City of Wilmington, in the County of New
Castle, in the State of Delaware, and said corporation shall be the registered
agent of this corporation in charge thereof.
Section 2. OTHER OFFICES:
The Corporation may have other offices, either within or without the State
of Delaware, at such place or places as the Board of Directors may from time to
time appoint or the business of the Corporation may require. The principal place
of business of the Corporation shall be in Overland Park, Kansas.
ARTICLE II. MEETINGS OF STOCKHOLDERS
Section 1. STOCKHOLDER ACTION:
Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders. Subject to rights of holders of Preferred Stock to
elect additional directors under specified circumstances, special meetings of
stockholders of the Corporation may be called only by the Board of Directors
pursuant to a resolution approved by a majority of the entire Board of Directors
or the Chairman of the Board, upon not less than ten nor more than sixty days'
written notice.
Section 2. ANNUAL MEETINGS:
Annual meetings of stockholders shall be held at such place, either within
or without the State of Delaware, and at such time and date as the Board of
Directors, by resolution, shall determine and as set forth in the notice of the
meeting. In the event the Board of Directors fails to so determine the time,
date and place of meeting, the annual meeting of stockholders shall be held at
the principal executive offices of the Corporation in Kansas on the last
Wednesday of April. If the date of the annual meeting shall fall upon a legal
holiday, the meeting shall be held on the next succeeding business day. At each
annual meeting, the stockholders entitled to vote shall elect members of a class
of the Board of Directors, and they may transact such other corporate business
as may properly come before the meeting. If the presiding officer at an annual
meeting determines that business was not properly brought before the annual
meeting, the presiding officer shall declare to the meeting that such business
was not properly brought before the meeting and such business shall not be
transacted.
Section 3. VOTING AND PROXIES:
In accordance with the terms of the Certificate of Incorporation and in
accordance with the provisions of these Bylaws each holder of Class A Common
Stock shall be entitled to one vote, in person or by proxy, per share. No proxy
shall be voted after eleven months from its date unless such proxy provides for
a longer period. Such proxy shall be filed with the Secretary of the Corporation
before or at the time of the meeting. Voting at meetings of stockholders need
not be by written ballot unless such is demanded at the meeting before voting
begins by any stockholder. If a vote is taken by written ballot, then each such
ballot shall state the name of the stockholder or proxy voting and such other
information as the chairperson of the meeting deems appropriate, and if
authorized by the Board of Directors, the ballot may be submitted by electronic
transmission in the manner provided by law. All elections for directors shall be
decided by a
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plurality of votes cast; all other questions shall be decided by a majority of
votes cast, except as otherwise provided by these Bylaws, the Certificate of
Incorporation or the laws of the State of Delaware.
A complete list of the stockholders entitled to vote at the ensuing
election, arranged in alphabetical order, with the address of each, and the
number of shares held by each, shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten days prior to the meeting on a reasonably
accessible electronic network as permitted by law (provided that the information
required to gain access to the list is provided with the notice of the meeting)
or during the ordinary business hours at the principal place of business of the
Corporation. If the meeting is held at a place, the list shall also be produced
and kept at the time and place of the meeting during the whole time thereof, and
may be inspected by any stockholder who is present. If the meeting is held
solely by means of remote communication, then the list shall be open to the
examination of any stockholder during the whole time of the meeting on a
reasonably accessible electronic network, and the information required to access
the list shall be provided with the notice of the meeting.
Section 4. QUORUM:
A majority of the outstanding shares of the Corporation entitled to vote,
represented in person or by proxy, shall constitute a quorum at meetings of
stockholders. In determining whether a quorum is present treasury shares shall
not be counted. If less than a majority of the outstanding shares are
represented, a majority of the shares so represented may adjourn the meeting
from time to time without further notice, but until a quorum is secured no other
business may be transacted. The stockholders present at a duly organized meeting
may continue to transact business until an adjournment notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
Section 5. NOTICE OF MEETINGS:
Notice, stating the place, if any, date and time of the special or annual
meeting, and the general nature of the business to be considered, shall be given
in writing or by electronic transmission in the manner provided by law
(including, without limitation, as set forth in Article VI, Section 11 of these
Bylaws) to each stockholder entitled to vote thereat at such stockholder's
address as it appears on the records of the Corporation, not less than ten nor
more than sixty days before the date of the meeting. No business shall be
transacted at any special meeting other than that stated in the notice of such
special meeting. No business shall be transacted at any annual meeting other
than that stated in the notice of such annual meeting or brought before the
annual meeting by or at the direction of the Board. A stockholder proposal of
business to be considered at an annual meeting will be included in the notice of
such annual meeting and considered by the stockholders thereat if: (a) such
proposal is delivered, in writing, to the Secretary of the Corporation at the
principal executive offices of the Corporation not less than 120 days in advance
of the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting has been changed
by more than 30 days from the date of the previous year's annual meeting,
delivery of such proposal by the stockholder, to be timely, must be so delivered
not earlier than the close of business on the later of: (i) the 120th day prior
to such meeting, or (ii) the 10th day following the day on which public
announcement of the date of such meeting is first made, (b) such proposal is a
proper matter for stockholder action and (c) the stockholder complies with all
requirements of applicable law, including without limitation, the Securities and
Exchange Act of 1934, as amended.
ARTICLE III. DIRECTORS
Section 1. NUMBER, ELECTION AND TERMS:
The business and affairs of the Corporation shall be managed by or under the
direction of a Board of Directors consisting of not less than seven nor more
than 15 persons. Subject to any rights of holders of Preferred Stock to elect
directors under specified circumstances, the exact number of directors within
the minimum and maximum limitations specified in the preceding sentence shall be
fixed from time to time by
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the Board of Directors pursuant to a resolution adopted by a majority of the
entire Board of Directors. The Board of Directors shall be divided into three
classes, designated as Class I, Class II and Class III. Each class shall
consist, as nearly as may be possible, of one-third of the total number of
directors constituting the entire Board of Directors. The initial Board of
Directors elected following the filing of this Certificate of Incorporation
shall consist of four Class I directors, four Class II directors and two
Class III directors. Class I directors shall be elected initially for a one-year
term, Class II directors initially for a two-year term and Class III directors
initially for a three-year term. At each succeeding annual meeting of
stockholders beginning in 1999, successors to the class of directors whose term
expires at that annual meeting shall be elected for a three-year term. If the
number of directors is changed, any increase or decrease shall be apportioned
among the classes so as to maintain the number of directors in each class as
nearly equal as possible, and any additional director of any class elected to
fill a vacancy resulting from an increase in such class shall hold office for a
term that shall coincide with the remaining term of that class, but in no case
shall a decrease in the number of directors shorten the term of any incumbent
director. Directors need not be stockholders.
Section 2. RESIGNATIONS:
Any director, member of a committee or other officer may resign at any time
upon notice given in writing or by electronic transmission, and such resignation
shall take effect at the time of its receipt by the Chief Executive Officer or
Secretary or at such other time as may be specified therein. The acceptance of a
resignation shall not be necessary to make it effective.
Section 3. NEWLY CREATED DIRECTORSHIPS AND VACANCIES:
Subject to the rights of the holders of any series of Preferred Stock then
outstanding, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause shall, unless the Board of Directors otherwise determine,
be filled by a majority vote of the directors then in office even if less than a
quorum remain on the Board of Directors, or if all of the directors shall have
been removed, by stockholders with a majority of the outstanding shares of
stock, and directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of the class to which they have
been elected expires. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director.
If the office of any member of a committee or other officer becomes vacant,
the directors in office, by a majority vote, may appoint any qualified person to
fill such vacancy, who shall hold office for the unexpired term and until his
successor shall be duly chosen.
Subject to the rights of holders of Preferred Stock to elect directors under
specified circumstances, directors may be removed only for cause and only upon
the affirmative vote of holders of at least 80% of the then outstanding shares
of stock entitled to vote generally in the election of directors.
If the holders of any series of Preferred Stock then outstanding are
entitled to elect one or more directors, these provisions shall not apply, in
respect to the removal of a director or directors so elected, to the vote of the
holders of the outstanding shares of that series and the rights of the holders
of such shares shall be as set out in the Certificate of Designations,
Preferences and Rights for such shares.
Section 4. POWERS:
The Board of Directors shall exercise all the powers of the Corporation
except such as are by law, or by the Certificate of Incorporation of the
Corporation or by these Bylaws conferred upon or reserved to the stockholders.
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Section 5. ELECTION OF COMMITTEE MEMBERS:
At each annual meeting or at any regular meeting of the Board of Directors,
the directors may, by resolution or resolutions passed by a majority of the
whole Board, designate directors to serve as members of the executive committee,
the compensation committee, the finance committee, the nominating committee, and
the audit committee until the next annual meeting of the Board of Directors or
until their successors shall be duly elected and qualified or their earlier
resignation or removal. At any regular or special meeting of the Board of
Directors, the directors may elect additional advisors for these committees.
Such advisors may or may not be members of the Board of Directors and shall
serve until the next annual meeting of the Board of Directors or for the period
of time designated by the Board. The Board of Directors may from time to time
provide for such other committees as may be deemed necessary and assign to such
committees such authority and duties as are appropriate and allowed by Delaware
law.
Section 6. MEETINGS:
The directors may hold their annual meeting for the purpose of organization
and the transaction of business, if a quorum be present, immediately after the
annual meeting of the stockholders; or the time and place of such meeting may be
fixed by resolution of the directors.
Annual meetings of the directors may be held without notice at such places
and times as shall be determined from time to time by resolution of the
directors.
Special meetings of the Board of Directors may be called by the Chief
Executive Officer at any time or by the Secretary on the written request of any
two directors upon at least twelve hours personal notice to each director.
Notice of the time, date and place of such meeting shall be given, orally, in
writing or by electronic transmission (including electronic mail), by the person
or persons calling the meeting. Such special meetings shall be held at such
place or places as may be determined by the Chief Executive Officer or the
directors calling the meeting, and shall be stated in the notice of the call of
the meeting.
Unless otherwise restricted by the Certificate of Incorporation or these
Bylaws, members of the Board of Directors, or any committee designated by the
Board of Directors, may participate in a meeting of the Board of Directors, or
any committee, by means of conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
Section 7. QUORUM:
A majority of the directors shall constitute a quorum for the transaction of
business. If at any meeting of the Board of Directors there shall be less than a
quorum present, a majority of those present may adjourn the meeting from time to
time until a quorum is obtained, and no further notice thereof need be given
other than by announcement at the meeting which shall be so adjourned.
Section 8. COMPENSATION:
Directors shall not receive any stated salary for their services as
directors or as members of committees, except that by resolution of the Board of
Directors, retainer fees, meeting fees, expenses of attendance at meetings and
other benefits and payments may be authorized. Nothing herein contained shall be
construed to preclude any director from serving the Corporation in any other
capacity as an officer, agent or otherwise, and receiving compensation
therefore.
Section 9. ACTION WITHOUT MEETING:
Any action required or permitted to be taken at any meeting of the Board of
Directors, or of any committee thereof, may be taken without a meeting if all
members of the Board or such committee, as the case may be, consent thereto in
writing or by electronic transmission, and the writing or writings or electronic
transmission or transmissions are filed with the minutes of proceedings of the
Board or
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committee, respectively. Such filing shall be in paper form if the minutes are
maintained in paper form and shall be in electronic form if the minutes are
maintained in electronic form.
Section 10. AMENDMENT, REPEAL AND ADOPTION:
Notwithstanding anything contained in these Bylaws to the contrary the
shareholders may only amend or repeal, or adopt any provision inconsistent with
this Article III, with the affirmative vote of the holders of at least 80% of
the shares of the Corporation entitled to vote generally in the election of
directors.
ARTICLE IV. STANDING COMMITTEES
Section 1. EXECUTIVE COMMITTEE:
The executive committee of the Board of Directors shall consist of the
Chairman of the Board, the president, and not less than three nor more than
eight members elected by the directors from their own number. The chairman of
this committee shall be appointed by the Chairman of the Board. The executive
committee in the interim between meetings of the Board of Directors shall
exercise all of the powers of the Board of Directors.
Section 2. COMPENSATION COMMITTEE:
The compensation committee shall consist of not less than two nor more than
eight members. The chairman of this committee shall be appointed by the Chairman
of the Board. The compensation committee shall prescribe the compensation of all
officers having an annual compensation of one hundred fifty thousand dollars
($150,000) or more and administer all of the Corporations benefit and stock
option plans. The compensation of all other officers shall be determined by the
Chief Executive Officer.
Section 3. AUDIT COMMITTEE:
The audit committee shall consist of not less than three nor more than eight
members elected by the directors from among their own number; provided, however,
that a majority of the members of the committee shall be outside directors. The
chairman of this committee shall be elected by the full Board of Directors, or
if the chairman is not so elected by the full Board of Directors or if the
chairman elected by the full Board of Directors is not present at a particular
meeting, the members of the audit committee may designate a chairman by majority
vote of the committee membership in attendance. The audit committee shall
recommend to the Board the firm to be employed by the Corporation as its
external auditor; shall consult with the persons chosen to be the external
auditors with regard to the plan of audit; shall review the fees of the external
auditors for audit and non-audit services; shall review, in consultation with
the external auditors, their report of audit, or proposed report of audit, and
the accompanying management letter, if any; shall review with management and the
external auditor before publication or issuance, the annual financial
statements, and any annual reports to be filed with the Securities and Exchange
Commission; shall consult with the external auditors (periodically, as
appropriate, out of the presence of management) with regard to the adequacy of
the internal auditing and general accounting functions of the Corporation; shall
consult with the internal auditors (periodically, as appropriate, out of the
presence of management) with regard to cooperation of corporate divisions with
the internal auditing and accounting departments and the adequacy of corporate
systems of accounting and controls; shall serve as a communications liaison
between the Board of Directors, the external auditors, and the internal
auditors; and shall perform such other duties not inconsistent with the spirit
and purpose of the committee as are delegated to it by the Board of Directors.
Section 4. FINANCE COMMITTEE:
The Board of Directors may elect from its membership a finance committee of
not less than three nor more than eight members elected by the directors from
among their own number. The chairman of this committee shall be appointed by the
Chairman of the Board. The finance committee shall have special charge and
control of all financial affairs of the Company. The principal functions and
responsibilities of
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the finance committee are to: review and approve investment and loan policies;
review and approve asset-liability management policies; monitor corporate
financial results; recommend corporate financial actions, including dividends
and capital financing. The finance committee shall make recommendations to the
Board of Directors with respect to the terms and provisions of any issue of
securities of the Company, including equity and debt securities, and shall serve
as the pricing committee in connection with any such financing and shall
authorize the execution of such underwriting agreements as may be necessary or
desirable to effectuate such issue.
Section 5. NOMINATING COMMITTEE:
The nominating committee shall consist of all non-employee (outside)
directors of the Company. The chairman of this committee shall be appointed by
the Chairman of the Board. The nominating committee shall meet periodically to
review the qualifications of potential Board candidates from whatever source
received; shall report its findings to the Board and propose nominations for
Board membership for approval by the Board and for submission to stockholders
for approval; and shall review and make recommendations to the Board, where
appropriate, concerning the size of the Board and the frequency of meetings. The
nominating committee shall have and exercise all such power as it shall deem
necessary for the performance of its duties.
Section 6. MEETINGS:
Meetings of the executive committee, the finance committee, the nominating
committee, the compensation committee, and the audit committee shall be held on
call of the Chairman of the Board or any committee member. Meetings may be held
informally, by telephone, or by mail, and it is not necessary that members of
the committee be physically present together in order for a meeting to be held.
The greater of two or one-third of the members of a committee shall constitute a
quorum.
ARTICLE V. OFFICERS
Section 1. OFFICERS:
The officers of the Corporation shall be a President, such Vice-Presidents
as shall from time to time be deemed necessary, a Secretary, a Treasurer, and
such other officers as may be deemed appropriate. A Chairman of the Board and a
Vice Chairman of the Board may also be elected. All such officers shall be
elected by the Board of Directors and shall hold office until their successors
are elected and qualified. None of the officers of the Corporation need be
directors. More than one office may be held by the same person.
Section 2. CHAIRMAN OF THE BOARD:
In the event that there is a Chairman of the Board, he shall preside at all
meetings of the Board of Directors and stockholders. He shall have and perform
such duties as usually devolve upon his office and such other duties as are
prescribed by the Bylaws and by the Board of Directors.
Section 3. VICE CHAIRMAN OF THE BOARD:
The Vice Chairman of the Board shall in the absence or inability to act of
the Chairman of the Board preside at all meetings of the Board of Directors and
stockholders, and exercise and discharge the responsibilities and duties of the
Chairman of the Board. He shall have and perform such other duties as may be
prescribed or assigned by the Board of Directors or the Chairman of the Board.
Section 4. PRESIDENT:
The President shall perform such duties as usually devolve upon his office
and such other duties as are prescribed by these Bylaws, by the Board of
Directors, and by the Chairman. In the absence or inability to act of the
Chairman of the Board and the Vice Chairman of the Board or if the offices of
Chairman of the Board and Vice Chairman of the Board shall be vacant, the
President shall have and exercise all the
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powers and duties of such office. If the Chairman of the Board, Vice Chairman of
the Board or the President is absent from any meeting of the Board of Directors
or stockholders where either was to have presided, the other directors shall
elect one of their number to preside at the meeting.
Section 5. EXECUTIVE VICE PRESIDENT:
The Executive Vice President shall be the chief operating officer of the
Corporation, unless the Board elects a separate Chief Operating Officer, and
shall perform such duties as may be assigned to him from time to time by these
Bylaws, by the Board of Directors, and by the President.
Section 6. VICE PRESIDENTS:
The Vice Presidents shall perform such duties as may be assigned to them
from time to time by these Bylaws, the Board of Directors, the Chairman of the
Board, or the President.
Section 7. TREASURER:
The Treasurer shall have custody of all funds of the Corporation. The
Treasurer shall have and perform such duties as are incident to the office of
Treasurer and such other duties as may from time to time be assigned to him by
the Board of Directors, the Chairman, or the President.
Section 8. SECRETARY:
The Secretary shall keep minutes of all meetings of the stockholders and the
Board of Directors unless otherwise directed by those bodies. The Secretary
shall have custody of the corporate seal, and the Secretary or any Assistant
Secretary shall affix the same to all instruments or papers requiring the seal
of the Corporation. The Secretary, or in his absence, any Assistant Secretary,
shall attend to the giving and serving of all notices of the Corporation. The
Secretary shall perform all the duties incident to the office of Secretary,
subject to the control of the Board of Directors, and shall do and perform such
other duties as may from time to time be assigned by the Board of Directors, the
Chairman, or the President.
Section 9. OTHER OFFICERS AND AGENTS:
The Board of Directors may appoint such other officers and agents as it may
deem advisable, who shall exercise such powers and perform such duties as shall
be determined from time to time by the Board of Directors.
Section 10. CHIEF EXECUTIVE OFFICER:
The Chairman of the Board shall serve as the chief executive officer of the
Corporation. Subject to the control of the Board of Directors, the Chairman of
the Board shall be vested with authority to act for the Corporation, and shall
have general and active management of the business of the Corporation and such
other general powers and duties of supervision and management as usually devolve
upon such office and as may be prescribed from time to time by the Board of
Directors.
Section 11. ELECTION AND TERM:
The officers of the Corporation shall be elected annually by the Board of
Directors at the first meeting held after each annual meeting of stockholders.
Each officer shall hold office at the pleasure of the Board of Directors until
his death, resignation, retirement, or removal. Any officer may be elected by
the Board of Directors at other than annual meetings to serve until the first
meeting of the Board of Directors held after the annual meeting of stockholders
next following his election.
ARTICLE VI. MISCELLANEOUS
Section 1. CERTIFICATES OF STOCK:
A certificate of stock or certificates of stock, signed by the Chairman or
Vice Chairman of the Board, the President or Vice-President, the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant
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Secretary, shall be adopted by the Board of Directors and shall be issued to
each stockholder certifying the number of shares owned by such stockholder in
the Corporation. Any or all of the signatures may be facsimiles.
Section 2. LOST CERTIFICATES:
The Board of Directors may order a new certificate or certificates of stock
to be issued in the place of any certificate or certificates of the Corporation
alleged to have been lost or destroyed, but in every such case the owner of the
lost certificate or certificates shall first cause to be given to the
Corporation or its authorized agent a bond in such sum as said Board may direct,
as indemnity against any loss that the Corporation may incur by reason of such
replacement of the lost certificate or certificates; but the Board of Directors
may, at their discretion refuse to replace any lost certificate of stock save
upon the order of some court having jurisdiction in such matter and may cause
such legend to be inscribed on the new certificate or certificates as in the
Board's discretion may be necessary to prevent loss to the Corporation.
Section 3. TRANSFER OF SHARES:
The shares of stock of the Corporation shall be transferable only upon its
books by the holders thereof in person or by their duly authorized attorneys or
legal representatives, and upon such transfer the old certificates shall be
surrendered to the Corporation by the delivery thereof to the person in charge
of the stock and transfer books, and ledgers, or to the authorized agent of the
Corporation, by whom they shall be canceled, and new certificates shall
thereupon be issued. A record shall be made of each transfer and whenever a
transfer shall be made for collateral security, and not absolutely, it shall be
so expressed in the entry of the stock and transfer books.
The Corporation may decline to register on its stock books transfers of
stock standing in the name of infants, unless (a) the law of the state of which
the infant is a resident relieves the Corporation of all liability therefore in
case the infant or anyone acting for him thereafter elects to rescind such
transfer, or (b) a court having jurisdiction of the infant and the subject
matter enters a valid decree authorizing such transfer.
Section 4. FRACTIONAL SHARES:
No fractional part of a share of stock shall ever be issued by this
Corporation.
Section 5. STOCKHOLDERS RECORD DATE:
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty nor less than ten days before the date of such meeting,
nor more than sixty days prior to any other action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to adjournment of the meeting; provided, however, that
the Board of Directors may fix a new record date for the adjourned meeting.
Section 6. DIVIDENDS:
Subject to the provisions of the Certificate of Incorporation, the Board of
Directors may, out of funds legally available therefore at any regular or
special meeting, declare dividends upon the capital stock of the Corporation as
and when they deem expedient. Before declaring any dividend there may be set
apart out of any fund of the Corporation available for dividends, such sum or
sums as the directors from time to time in their discretion deem proper for
working capital or to serve as a fund to meet contingencies or for equalizing
dividends or for such other purposes as the directors shall deem conducive to
the interests of
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the Corporation. The Corporation may decline to pay cash dividends to infant
stockholders except where full and valid release may be granted by the infant or
under a decree of court of competent jurisdiction.
Section 7. SEAL:
The corporate seal shall consist of two concentric circles between which
shall be "WADDELL & REED FINANCIAL, INC." with a representation of the Corporate
Logogram in the center.
Section 8. FISCAL YEAR:
The fiscal year of the corporation shall be the calendar year or such other
period as shall be determined by resolution of the Board of Directors.
Section 9. CHECKS:
All checks, drafts or other orders for the payment off money, notes or other
evidences of indebtedness issued in the name of the Corporation shall be signed
by such officer or officers, agent or agents of the Corporation, and in such
manner as shall be determined from time to time by resolution of the Board of
Directors.
Section 10. FORM OF RECORDS: Any records maintained by the Corporation in
the regular course of its business, including its stock ledger, books of account
and minute books, may be kept on or by means of, or be in the form of, diskettes
or any other information storage device or method, provided that the records so
kept can be converted into clearly legible paper form within a reasonable time.
The Corporation shall so convert any records so kept upon the request of any
person entitled to inspect such records pursuant to any provision of the
Delaware General Corporation Law.
Section 11. NOTICE: (a) Except as otherwise specifically provided in these
Bylaws (including, without limitation, the provisions of Article VI,
Section 11(b) below) or required by law, all notices required to be given
pursuant to these Bylaws shall be in writing and may in every instance be
effectively given by hand delivery (including use of a delivery service), by
depositing such notice in the United States mail, postage prepaid, or by sending
such notice by prepaid telegram, telex, overnight express courier, mailgram or
facsimile. Any such notice shall be addressed to the person to whom notice is to
be given at such person's address as it appears on the records of the
Corporation. The notice shall be deemed given (i) in the case of hand delivery,
when received by the person to whom notice is to be given or by any person
accepting such notice on behalf of such person, (ii) in the case of delivery by
mail, upon deposit in the mail, (iii) in the case of delivery by overnight
express courier, when dispatched, and (iv) in the case of delivery via telegram,
telex, mailgram or facsimile, when dispatched.
(b) Without limiting the manner by which notice otherwise may be given
effectively to stockholders, any notice to stockholders given by the Corporation
under any provision of the Delaware General Corporation Law, the Certificate of
Incorporation, or these Bylaws shall be effective if given by a form of
electronic transmission consented to by the stockholder to whom the notice is
given. Any such consent shall be revocable by the stockholder by written notice
to the Corporation. Any such consent shall be deemed revoked if (i) the
Corporation is unable to deliver by electronic transmission two consecutive
notices given by the Corporation in accordance with such consent and (ii) such
inability becomes known to the Secretary or an Assistant Secretary of the
Corporation or to the transfer agent, or other person responsible for the giving
of notice; provided, however, the inadvertent failure to treat such inability as
a revocation shall not invalidate any meeting or other action. Notice given
pursuant to this Article VI, Section 11(b) shall be deemed given: (i) if by
facsimile telecommunication, when directed to a number at which the stockholder
has consented to receive notice; (ii) if by electronic mail, when directed to an
electronic mail address at which the stockholder has consented to receive
notice; (iii) if by a posting on an electronic network together with separate
notice to the stockholder of such specific posting, upon the later of (A) such
posting and (B) the giving of such separate notice; and (iv) if by any other
form of electronic transmission, when directed to the stockholder.
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(c) An affidavit of the Secretary or an Assistant Secretary or of the
transfer agent or other agent of the Corporation that the notice has been given
in writing or by a form of electronic transmission shall, in the absence of
fraud, be prima facie evidence of the facts stated therein.
Section 12. WAIVER OF NOTICE: Whenever notice is required to be given
under any provision of these Bylaws, a written waiver of notice, signed by the
person entitled to notice, or waiver by electronic transmission by such person,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting at the beginning of the meeting to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders, directors or members of a committee of directors need be
specified in any waiver of notice.
ARTICLE VII. AMENDMENTS
Except as otherwise provided in Article III of these Bylaws, these Bylaws
may be altered or repealed and Bylaws may be adopted at any annual meeting of
the stockholders, or at any special meeting thereof if notice of the proposed
alteration or repeal or Bylaw or Bylaws to be adopted is contained in the notice
of such special meeting, by the affirmative vote of a majority of the stock
issued and outstanding and entitled to vote thereat, or without any stockholder
action by the affirmative vote of a majority of the Board of Directors, at any
annual meeting of the Board of Directors, or at a special meeting of the Board
of Directors, if notice of the proposed alteration or repeal, or Bylaw or Bylaws
to be adopted, is contained in the notice of such special meeting.
B-10
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.2
<SEQUENCE>3
<FILENAME>a2041359zex-3_2.txt
<DESCRIPTION>AMENDED & RESTATED BYLAWS
<TEXT>
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED BYLAWS
of
WADDELL & REED FINANCIAL, INC.
-------------------
ARTICLE I. OFFICES
Section 1. REGISTERED OFFICE:
The registered office shall be established and maintained at the office
of the Corporation Trust Company, in the City of Wilmington, in the County of
New Castle, in the State of Delaware, and said corporation shall be the
registered agent of this corporation in charge thereof.
Section 2. OTHER OFFICES:
The Corporation may have other offices, either within or without the
State of Delaware, at such place or places as the Board of Directors may from
time to time appoint or the business of the Corporation may require. The
principal place of business of the Corporation shall be in Overland Park,
Kansas.
ARTICLE II. MEETINGS OF STOCKHOLDERS
Section 1. STOCKHOLDER ACTION:
Effective as of the Trigger Date (defined below) and subject to the
rights of any holders of Preferred Stock to elect directors as provided in the
Certificate of Incorporation of the Corporation, as amended (the "Certificate of
Incorporation"), any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the corporation and may not be effected by
any consent in writing by such stockholders. Subject to rights of holders of
Preferred Stock to elect additional directors as provided in the Certificate of
Incorporation, special meetings of stockholders of the Corporation may be called
only by the Board of Directors pursuant to a resolution approved by a
<PAGE>
majority of the entire Board of Directors or the Chairman of the Board, upon not
less than ten nor more than sixty days' written notice, provided that prior to
the Trigger Date, special meetings can also be called at the request of the
holders of a majority of the voting power of the then outstanding shares of
stock. For purposes of these Bylaws, "TRIGGER DATE" shall mean the date
Torchmark Corporation owns a beneficial interest of less than a majority of the
voting power of the then outstanding shares of stock entitled to vote generally
in the election of directors.
Section 2. ANNUAL MEETINGS:
Annual meetings of stockholders for the election of directors and for
such other business as may be stated in the notice of the meeting given by the
Corporation, shall be held at such place, either within or without the State of
Delaware, and at such time and date as the Board of Directors, by resolution,
shall determine and as set forth in the notice of the meeting. In the event the
Board of Directors fails to so determine the time, date and place of meeting,
the annual meeting of stockholders shall be held at the principal executive
offices of the Corporation in Kansas on the last Wednesday of April.
If the date of the annual meeting shall fall upon a legal holiday, the
meeting shall be held on the next succeeding business day. At each annual
meeting, the stockholders entitled to vote shall elect members of a class of the
Board of Directors, and they may transact such other corporate business as may
properly come before the meeting.
Section 3. VOTING AND PROXIES:
In accordance with the terms of the Certificate of Incorporation and in
accordance with the provisions of these Bylaws each holder of Class A Common
Stock shall be entitled to one vote, in person or by proxy, per share and each
holder of Class B Common Stock shall be entitled to five votes, in person or by
proxy, per share. Holders of Class A Common Stock shall not be
2
<PAGE>
eligible to vote on any alteration or change in the powers, preferences, or
special rights of the Class B Common Stock that would not adversely affect the
rights of Class A Common Stock and holders of Class B Common Stock shall not be
eligible to vote on any alteration or change in the powers, preferences or
special rights of Class A Common Stock that would not adversely affect the
rights of Class B Common Stock. No proxy shall be voted after eleven (11) months
from its date unless such proxy provides for a longer period. Such proxy shall
be filed with the Secretary of the Corporation before or at the time of the
meeting. Upon the demand of any stockholder, the vote for directors and the vote
upon any question before the meeting shall be by ballot. All elections for
directors shall be decided by a plurality vote; all other questions shall be
decided by a majority vote except as otherwise provided by these Bylaws, the
Certificate of Incorporation or the laws of the State of Delaware.
A complete list of the stockholders entitled to vote at the ensuing
election, arranged in alphabetical order, with the address of each, and the
number of shares held by each, shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
Section 4. QUORUM:
A majority of the voting power of the outstanding shares of the
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at meetings of stockholders. In determining whether a quorum
is present treasury shares shall not be counted. If less than a
3
<PAGE>
majority of the voting power of the outstanding shares are represented, a
majority of the voting power of the shares so represented may adjourn the
meeting from time to time without further notice, but until a quorum is secured
no other business may be transacted. The stockholders present at a duly
organized meeting may continue to transact business until an adjournment
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum. At any duly organized meeting, except as otherwise provided by these
Bylaws or in the Certificate of Incorporation, a vote of a majority of the
voting power of the stock represented thereat shall decide any question brought
before the meeting.
Section 5. NOTICE OF MEETINGS:
Written notice, stating the place, date and time of the meeting, and
the general nature of the business to be considered, shall be given to each
stockholder entitled to vote thereat at such stockholder's address as it appears
on the records of the Corporation, not less than ten nor more than sixty days
before the date of the meeting. No business other than that stated in the notice
shall be transacted at any special meeting or any annual meeting; provided,
business not stated in the notice of an annual meeting may be transacted at such
annual meeting with the unanimous consent of all the stockholders entitled to
vote thereat.
Section 6. ORDER OF BUSINESS:
The order of business at the annual meeting and, as far as practicable,
at all other meetings of the stockholders shall be as follows:
1. Calling of roll.
2. Proof of due notice of meeting.
3. Reading and disposal of any unapproved minutes.
4. Reports of officers and committees.
4
<PAGE>
5. Election of directors.
6. Unfinished business.
7. New business.
8. Adjournment.
ARTICLE III. DIRECTORS
Section 1. NUMBER, ELECTION AND TERMS:
The business and affairs of the Corporation shall be managed by or
under the direction of a Board of Directors consisting of not less than seven
nor more than 15 persons. Subject to any rights of holders of Preferred Stock to
elect directors as provided in the Certificate of Incorporation, the exact
number of directors within the minimum and maximum limitations specified in the
preceding sentence shall be fixed from time to time by the Board of Directors
pursuant to a resolution adopted by a majority of the entire Board of Directors.
The Board of Directors shall be divided into three classes, designated as Class
I, Class II and Class III. Each class shall consist initially of four Class I
directors, four Class II directors and two Class III directors. Class I
directors shall be elected initially for a one-year term, Class II directors
initially for a two-year term and Class III directors initially for a three-year
term. At each succeeding annual meeting of stockholders beginning in 1999,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. If the number of directors is changed,
any increase or decrease shall be apportioned among the classes so as to
apportion the number of directors in each class as nearly equal as possible, and
any additional director of any class elected to fill a vacancy resulting from an
increase in such class shall hold office for a term that shall coincide with the
remaining term of that class, but in no case shall a
5
<PAGE>
decrease in the number of directors shorten the term of any incumbent director.
Directors need not be stockholders.
Section 2. RESIGNATIONS:
Any director, member of a committee or other officer may resign at any
time. Such resignation shall be made in writing, and shall take effect at the
time of its receipt by the Chief Executive Officer or Secretary or at such other
time as may be specified therein. The acceptance of a resignation shall not be
necessary to make it effective.
Section 3. NEWLY CREATED DIRECTORSHIPS AND VACANCIES:
Subject to the rights of the holders of any series of Preferred Stock
then outstanding to elect directors as provided in the Certificate of
Incorporation, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause shall, unless the Board of Directors otherwise determine,
be filled by a majority vote of the directors then in office even if less than a
quorum remain on the Board of Directors, or if all of the directors shall have
been removed, by stockholders with a majority of the voting power of the
outstanding shares of stock, and directors so chosen shall hold office for a
term expiring at the annual meeting of stockholders at which the term of the
class to which they have been elected expires. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
If the office of any member of a committee or other officer becomes
vacant, the directors in office, by a majority vote, may appoint any qualified
person to fill such vacancy, who shall hold office for the unexpired term and
until his successor shall be duly chosen.
6
<PAGE>
Subject to the rights of holders of Preferred Stock to elect directors
under specified circumstances, effective as of the Trigger Date, directors may
be removed only for cause and only upon the affirmative vote of holders of at
least 80% of the voting power of all the then outstanding shares of stock
entitled to vote generally in the election of directors, voting together as a
single class; provided, however, that prior to such date, directors may be
removed, without cause, with the affirmative vote of the holders of at least a
majority of the voting power of the then outstanding shares of stock entitled to
vote generally in the election of directors, voting together as a single class.
If the holders of any series of Preferred Stock then outstanding are
entitled to elect one or more directors, these provisions shall not apply, in
respect to the removal of a director or directors so elected, to the vote of the
holders of the outstanding shares of that series and the rights of the holders
of such shares shall be as set out in the Certificate of Designations,
Preferences and Rights for such shares.
Section 4. POWERS:
The Board of Directors shall exercise all the powers of the Corporation
except such as are by law, or by the Certificate of Incorporation of the
Corporation or by these Bylaws conferred upon or reserved to the stockholders.
Section 5. ELECTION OF COMMITTEE MEMBERS:
At each regular annual meeting of the Board of Directors, the directors
may, by resolution or resolutions passed by a majority of the whole Board,
designate directors to serve as members of the executive committee, the
compensation committee, the finance committee, the nominating committee, and the
audit committee until the next regular meeting of the Board of Directors and
until their successors are duly designated. At any regular or special meeting of
the Board of
7
<PAGE>
Directors, the directors may elect additional advisors for these committees.
Such advisors may or may not be members of the Board of Directors and shall
serve until the next annual meeting of the Board of Directors or for the period
of time designated by the Board. The Board of Directors may from time to time
provide for such other committees as may be deemed necessary and assign to such
committees such authority and duties as are appropriate and allowed by Delaware
law.
Section 6. MEETINGS:
The directors may hold their annual meeting for the purpose of
organization and the transaction of business, if a quorum be present,
immediately after the annual meeting of the stockholders; or the time and place
of such meeting may be fixed by resolution of the directors.
Regular meetings of the directors may be held without notice at such
places and times as shall be determined from time to time by resolution of the
directors.
Special meetings of the Board of Directors may be called by the Chief
Executive Officer at any time or by the Secretary on the written request of any
two directors upon at least twelve hours personal notice to each director. For
purposes of this paragraph, personal notice shall be deemed given if telephonic
notice is given to the business office of a director during normal business
hours (8:00 a.m. to 5:00 p.m. in the respective time zone in which the
director's office is located). Such special meetings shall be held at such place
or places as may be determined by the Chief Executive Officer or the directors
calling the meeting, and shall be stated in the notice of the call of the
meeting.
Unless otherwise restricted by the Certificate of Incorporation or
these Bylaws, members of the Board of Directors, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in
8
<PAGE>
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
Section 7. QUORUM:
A majority of the directors shall constitute a quorum for the
transaction of business. If at any meeting of the Board of Directors there shall
be less than a quorum present, a majority of those present may adjourn the
meeting from time to time until a quorum is obtained, and no further notice
thereof need be given other than by announcement at the meeting which shall be
so adjourned.
Section 8. COMPENSATION:
Directors shall not receive any stated salary for their services as
directors or as members of committees, except that by resolution of the Board of
Directors, retainer fees, meeting fees, expenses of attendance at meetings and
other benefits and payments may be authorized. Nothing herein contained shall be
construed to preclude any director from serving the Corporation in any other
capacity as an officer, agent or otherwise, and receiving compensation therefor.
Section 9. ACTION WITHOUT MEETING:
Any action required or permitted to be taken at any meeting of the
Board of Directors or of any committee thereof, may be taken without a meeting,
if prior to such action a written consent thereto is signed by all members of
the Board of Directors, or of such committee as the case may be, and such
written consent is filed with the minutes of proceedings of the Board of
Directors or committee.
Section 10. AMENDMENT, REPEAL AND ADOPTION:
Notwithstanding anything contained in these Bylaws to the contrary the
shareholders may only amend or repeal, or adopt any provision inconsistent with
this Article III, with the
9
<PAGE>
affirmative vote of the holders of at least 80% of the voting power of all of
the shares of the Corporation entitled to vote generally in the election of
directors.
ARTICLE IV. STANDING COMMITTEES
Section 1. EXECUTIVE COMMITTEE:
The executive committee of the Board of Directors shall consist of the
chairman of the board, the president, and not less than three nor more than
eight members elected by the directors from their own number. The chairman of
this committee shall be selected by the Board of Directors. The executive
committee in the interim between meetings of the Board of Directors shall
exercise all of the powers of the Board of Directors.
Section 2. COMPENSATION COMMITTEE:
The compensation committee shall consist of not less than two nor more
than eight members. The chairman of this committee shall be selected by the
Chairman of the Board. The compensation committee shall prescribe the
compensation of all officers having an annual compensation of one hundred fifty
thousand dollars ($150,000) or more and administer all of the Corporation's
benefit and stock option plans. The compensation of all other officers shall be
determined by the Chief Executive Officer.
Section 3. AUDIT COMMITTEE:
The audit committee shall consist of not less than three nor more than
eight members elected by the directors from among their own number; provided,
however, that a majority of the members of the committee shall be outside
directors. The chairman of the committee shall also be selected by the Board of
Directors. The audit committee shall recommend to the Board the firm to be
employed by the Corporation as its external auditor; shall consult with the
persons chosen to be the external auditors with regard to the plan of audit;
shall review the fees of the
10
<PAGE>
external auditors for audit and non-audit services; shall review, in
consultation with the external auditors, their report of audit, or proposed
report of audit, and the accompanying management letter, if any; shall review
with management and the external auditor before publication or issuance, the
annual financial statement, and any annual reports to be filed with the
Securities and Exchange Commission; shall consult with the external auditors
(periodically, as appropriate, out of the presence of management) with regard to
the adequacy of the internal auditing and general accounting functions of the
Corporation; shall consult with the internal auditors (periodically, as
appropriate, out of the presence of management) with regard to cooperation of
corporate divisions with the internal auditing and accounting departments and
the adequacy of corporate systems of accounting and controls; shall serve as a
communications liaison between the Board of Directors, the external auditors,
and the internal auditors; and shall perform such other duties not inconsistent
with the spirit and purpose of the committee as are delegated to it by the Board
of Directors.
Section 4. FINANCE COMMITTEE:
The Board of Directors may elect from its membership a finance
committee of not less than three nor more than eight members elected by the
directors from among their own number. The Chairman of the committee shall also
be selected by the Board of Directors. The finance committee shall have special
charge and control of all financial affairs of the Company. The principal
functions and responsibilities of the finance committee are to: review and
approve investment and loan policies; review and approve asset-liability
management policies; monitor corporate financial results; recommend corporate
financial actions, including dividends and capital financing. The finance
committee shall make recommendations to the Board of Directors with respect to
the terms and provisions of any issue of securities of the Company, including
11
<PAGE>
equity and debt securities, and shall serve as the pricing committee in
connection with any such financing and shall authorize the execution of such
underwriting agreements as may be necessary or desirable to effectuate such
issue.
Section 5. NOMINATING COMMITTEE:
The nominating committee shall consist of all non-employee (outside)
directors of the Company, with its chairman to be named by the Board of
Directors. The nominating committee shall meet periodically to review the
qualifications of potential Board candidates from whatever source received;
shall report its findings to the Board and propose nominations for Board
membership for approval by the Board and for submission to stockholders for
approval; and shall review and make recommendations to the Board, where
appropriate, concerning the size of the Board and the frequency of meetings. The
nominating committee shall have and exercise all such power as it shall deem
necessary for the performance of its duties.
Section 6. MEETINGS:
Meetings of the executive committee, the finance committee, the
nominating committee, the compensation committee, and the audit committee shall
be held on call of the chairman of the board or any committee member. Meetings
may be held informally, by telephone, or by mail, and it is not necessary that
members of the committee be physically present together in order for a meeting
to be held. The greater of two or one-third of the members of a committee shall
constitute a quorum.
ARTICLE V. OFFICERS
Section 1. OFFICERS:
The officers of the Corporation shall be a President, such
Vice-Presidents as shall from time to time be deemed necessary, a Secretary, a
Treasurer, and such other officers as may be
12
<PAGE>
deemed appropriate. A Chairman of the Board and a Vice Chairman of the Board may
also be elected. All such officers shall be elected by the Board of Directors
and shall hold office until their successors are elected and qualified. None of
the officers of the Corporation need be directors. More than one office may be
held by the same person.
Section 2. CHAIRMAN OF THE BOARD:
In the event that there is a Chairman of the Board, he shall preside at
all meetings of the Board of Directors and stockholders. He shall have and
perform such duties as usually devolve upon his office and such other duties as
are prescribed by the Bylaws and by the Board of Directors.
Section 3. VICE CHAIRMAN OF THE BOARD:
The Vice Chairman of the Board shall in the absence or inability to act
of the Chairman of the Board preside at all meetings of the Board of Directors
and stockholders, and exercise and discharge the responsibilities and duties of
the Chairman of the Board. He shall have and perform such other duties as may be
prescribed or assigned by the Board of Directors or the Chairman of the Board.
Section 4. PRESIDENT:
The President shall perform such duties as usually devolve upon his
office and such other duties as are prescribed by these Bylaws, by the Board of
Directors, and by the Chairman. In the absence or inability to act of the
Chairman of the Board and the Vice Chairman of the Board or if the offices of
Chairman of the Board and Vice Chairman of the Board shall be vacant, the
President shall have and exercise all the powers and duties of such office. If
the Chairman of the Board, Vice Chairman of the Board or the President is absent
from any meeting of the Board of
13
<PAGE>
Directors or stockholders where either was to have presided, the other directors
shall elect one of their number to preside at the meeting.
Section 5. VICE PRESIDENTS:
The Vice Presidents shall perform such duties as may be assigned to
them from time to time by these Bylaws, the Board of Directors, the Chairman of
the Board, or the President.
Section 6. Executive Vice President:
The Executive Vice President shall be the chief operating officer of
the Corporation, unless the Board elects a separate Chief Operating Officer, and
shall perform such duties as may be assigned to him from time to time by these
Bylaws, by the Board of Directors, and by the President.
Section 7. TREASURER:
The Treasurer shall have custody of all funds of the Corporation. The
Treasurer shall have and perform such duties as are incident to the office of
Treasurer and such other duties as may from time to time be assigned to him by
the Board of Directors, the Chairman, or the President.
Section 8. SECRETARY:
The Secretary shall keep minutes of all meetings of the stockholders
and the Board of Directors unless otherwise directed by those bodies. The
Secretary shall have custody of the corporate seal, and the Secretary or any
Assistant Secretary shall affix the same to all instruments or papers requiring
the seal of the Corporation. The Secretary, or in his absence, any Assistant
Secretary, shall attend to the giving and serving of all notices of the
Corporation. The Secretary shall perform all the duties incident to the office
of Secretary, subject to the control of the Board
14
<PAGE>
of Directors, and shall do and perform such other duties as may from time to
time be assigned by the Board of Directors, the Chairman, or the President.
Section 9. OTHER OFFICERS AND AGENTS:
The Board of Directors may appoint such other officers and agents as it
may deem advisable, including, without limitation, a Chief Operating Officer,
who shall exercise such powers and perform such duties as shall be determined
from time to time by the Board of Directors.
Section 10. CHIEF EXECUTIVE OFFICER:
The Chairman of the Board shall serve as the chief executive officer of
the Corporation. Subject to the control of the Board of Directors, the Chairman
of the Board shall be vested with authority to act for the Corporation, and
shall have general and active management of the business of the Corporation and
such other general powers and duties of supervision and management as usually
devolve upon such office and as may be prescribed from time to time by the Board
of Directors.
Section 11. ELECTION AND TERM:
The officers of the Corporation shall be elected annually by the Board
of Directors at the first meeting held after each annual meeting of
stockholders. Each officer shall hold office at the pleasure of the Board of
Directors until his death, resignation, retirement, or removal. Any officer may
be elected by the Board of Directors at other than annual meetings to serve at
the pleasure of the Board of Directors until the first meeting of the Board of
Directors held after the annual meeting of stockholders next following his
election.
15
<PAGE>
ARTICLE VI. MISCELLANEOUS
Section 1. CERTIFICATES OF STOCK:
A certificate of stock or certificates of stock, signed by the Chairman
or Vice Chairman of the Board, or the President or Vice-President, and by the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary,
shall be adopted by the Board of Directors and shall be issued to each
stockholder certifying the number of shares owned by such stockholder in the
Corporation. Any or all of the signatures may be facsimiles.
Section 2. LOST CERTIFICATES:
The Board of Directors may order a new certificate or certificates of
stock to be issued in the place of any certificate or certificates of the
Corporation alleged to have been lost or destroyed, but in every such case the
owner of the lost certificate or certificates shall first cause to be given to
the Corporation or its authorized agent a bond in such sum as said Board may
direct, as indemnity against any loss that the Corporation may incur by reason
of such replacement of the lost certificate or certificates; but the Board of
Directors may, at their discretion refuse to replace any lost certificate of
stock save upon the order of some court having jurisdiction in such matter and
may cause such legend to be inscribed on the new certificate or certificates as
in the Board's discretion may be necessary to prevent loss to the Corporation.
Section 3. TRANSFER OF SHARES:
The shares of stock of the Corporation shall be transferable only upon
its books by the holders thereof in person or by their duly authorized attorneys
or legal representatives, and upon such transfer the old certificates shall be
surrendered to the Corporation by the delivery thereof to the person in charge
of the stock and transfer books, and ledgers, or to the authorized agent of the
Corporation, by whom they shall be canceled, and new certificates shall
thereupon be issued. A
16
<PAGE>
record shall be made of each transfer and whenever a transfer shall be made for
collateral security, and not absolutely, it shall be so expressed in the entry
of the stock and transfer books.
The Corporation may decline to register on its stock books transfers of
stock standing in the name of infants, unless (a) the law of the state of which
the infant is a resident relieves the Corporation of all liability therefor in
case the infant or anyone acting for him thereafter elects to rescind such
transfer, or (b) a court having jurisdiction of the infant and the subject
matter enters a valid decree authorizing such transfer.
Section 4. FRACTIONAL SHARES:
No fractional part of a share of stock shall ever be issued by this
Corporation.
Section 5. STOCKHOLDERS RECORD DATE:
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty nor less than ten days before the date of such meeting,
nor more than sixty days prior to any other action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to adjournment of the meeting; provided, however, that
the Board of Directors may fix a new record date for the adjourned meeting.
Section 6. DIVIDENDS:
Subject to the provisions of the Certificate of Incorporation, the
Board of Directors may, out of funds legally available therefore at any regular
or special meeting, declare dividends upon the capital stock of the Corporation
as and when they deem expedient. Before declaring any
17
<PAGE>
dividend there may be set apart out of any fund of the Corporation available for
dividends, such sum or sums as the directors from time to time in their
discretion deem proper for working capital or to serve as a fund to meet
contingencies or for equalizing dividends or for such other purposes as the
directors shall deem conducive to the interests of the Corporation. The
Corporation may decline to pay cash dividends to infant stockholders except
where full and valid release may be granted by the infant or under a decree of
court of competent jurisdiction.
Section 7. SEAL:
The corporate seal shall consist of two concentric circles between
which shall be "WADDELL & REED FINANCIAL, INC." with a representation of the
Corporate Logogram in the center.
Section 8. FISCAL YEAR:
The fiscal year of the corporation shall be the calendar year or such
other period as shall be determined by resolution of the Board of Directors.
Section 9. CHECKS:
All checks, drafts or other orders for the payment off money, notes or
other evidences of indebtedness issued in the name of the Corporation shall be
signed by such officer or officers, agent or agents of the Corporation, and in
such manner as shall be determined from time to time by resolution of the Board
of Directors.
Section 10. NOTICE AND WAIVER OF NOTICE:
Whenever any notice is required by these Bylaws to be given, personal
notice is not meant unless expressly so stated, and any notice so required shall
be deemed to be sufficient if given by depositing the same in the United States
mail, postage prepaid, addressed to the person entitled thereto at such person's
address as it appears on the records of the Corporation, and such
18
<PAGE>
notice shall be deemed to have been given on the date of such mailing.
Stockholders not entitled to vote shall not be entitled to receive notice of any
meetings except as otherwise provided by statute.
Whenever any notice whatever is required to be given under the
provisions of any law, or under the provisions of the Certificate of
Incorporation of the Corporation or these Bylaws, a waiver thereof in writing,
signed by the person or persons entitled to said notice, whether before or after
the time stated therein, shall be deemed equivalent thereto.
ARTICLE VII. AMENDMENTS
Except as otherwise provided in Article III of these Bylaws, these
Bylaws may be altered or repealed and Bylaws may be adopted at any annual
meeting of the stockholders, or at any special meeting thereof if notice of the
proposed alteration or repeal or Bylaw or Bylaws to be adopted is contained in
the notice of such special meeting, by the affirmative vote of a majority of the
voting power of the stock issued and outstanding and entitled to vote thereat,
or without any stockholder action by the affirmative vote of a majority of the
Board of Directors, at any regular meeting of the Board of Directors, or at a
special meeting of the Board of Directors, if notice of the proposed alteration
or repeal, or Bylaw or Bylaws to be adopted, is contained in the notice of such
special meeting.
19
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.4
<SEQUENCE>4
<FILENAME>a2041359zex-4_4.txt
<DESCRIPTION>FIRST AMEND TO RIGHTS AGMT EXHIBIT A RE: SERIES A
<TEXT>
<PAGE>
Exhibit 4.4
FIRST AMENDMENT TO RIGHTS AGREEMENT
THIS FIRST AMENDMENT TO RIGHTS AGREEMENT (this "Amendment"), dated to
be effective as of February 14, 2001, is between WADDELL & REED FINANCIAL, INC.,
a Delaware corporation (the "Company"), and FIRST CHICAGO TRUST COMPANY OF NEW
YORK, a New York trust company (the "Rights Agent"), at the direction of the
Company. Capitalized terms not defined herein have the same meaning as defined
in the Rights Agreement (as defined below).
WHEREAS, the Company and the Rights Agent entered into a Rights
Agreement dated as of April 28, 1999 (the "Rights Agreement");
WHEREAS, SECTION 27 of the Rights Agreement permits the amendment
of the Rights Agreement at the direction of the Company;
WHEREAS, the Company has entered into that certain merger agreement,
dated to be effective as of February 14, 2001, by and between the Company and
WDR Sub, Inc., a Delaware corporation wholly-owned by the Company (the "Merger
Agreement"), pursuant to which all the issued shares of the Company's Class B
Common Stock, $.01 par value per share, will be converted into shares of the
Company's Class A Common Stock, $.01 par value per share, (the "Converted
Shares");
WHEREAS, the Rights Agreement does not explicitly address the effects a
conversion of the shares of Class B Common Stock into shares of Class A Common
Stock will have upon the Rights attached to the shares of Class B Common Stock
or the Converted Shares;
WHEREAS, pursuant to a resolution duly adopted on January 18, 2001, the
Board of Directors of the Company adopted and authorized an amendment to the
Rights Agreement to clarify how the transactions contemplated by the Merger
Agreement will effect the Rights granted under the Rights Agreement;
WHEREAS, the Board of Directors of the Company has resolved and
determined that such amendment is desirable and consistent with, and for the
purpose of fulfilling, the objectives of the Board of Directors in connection
with the original adoption of the Rights Agreement;
NOW, THEREFORE, the Rights Agreement is hereby amended as follows:
A. The Rights Agreement shall be amended by inserting the following text
immediately following the text of Section 34:
"Section 35. CONVERSION OF SHARES OF COMMON STOCK. If the Company
consummates the merger (the "Merger") contemplated by that certain merger
agreement, dated as of February 14, 2001, by and between the Company and WDR
Sub, Inc., a Delaware corporation wholly-owned by the Company, each issued share
of Class B Common Stock, shall, by virtue of the Merger, and without any action
on the part of the holder thereof, become and be
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converted into one fully paid and validly issued, non-assessable share of Class
A Common Stock (a "Converted Share"). For purposes of this Agreement,
simultaneously upon the conversion of each share of Class B Common Stock into a
share of Class A Common Stock, the Right attached to such share of Class B
Common Stock shall be cancelled, and a Right shall be issued for each Converted
Share in accordance with Section 3(c) hereof except that the legend referred to
therein shall only be required to be borne by new certificates issued for
Converted Shares."
B. Upon the Effective Time, as defined in the Merger Agreement, the
Rights Agreement shall be amended as follows:
1. AMENDMENT TO THE PREAMBLE.
-------------------------
The preamble of the Rights Agreement is amended by deleting the phrase
"form of Certificate of" and inserting the phrase "Section 4.3.4 of the
Company's Amended and Restated Certificate of Incorporation (the "Designation of
the Rights and Preferences of the Series A Junior Participating Preferred
Stock")
2. AMENDMENT OF SECTION 1.
----------------------
a. SECTION 1(g) of the Rights Agreement is hereby amended in its
entirety to read as follows:
"(g) [intentionally left blank]"
b. SECTION 1(i) of the Rights Agreement is hereby amended in its
entirety to read as follows:
(i) "Common Stock" shall mean the Class A Common Stock, except
that "Common Stock" when used with reference to any Person
other than the Company shall mean the capital stock of such
Person with the greatest voting power, or the equity
securities or other equity interest having power to control or
direct the management, of such Person.
3. AMENDMENT TO THE TABLE OF CONTENTS.
----------------------------------
The Table of Contents of the Rights Agreement is hereby amended by
substituting the phrase "Designation of the Rights and Preferences of the Series
A Junior Participating Preferred Stock" for the phrase "Certificate of
Designation, Preferences and Rights" in the reference to EXHIBIT A in the Table
of Contents.
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4. AMENDMENT OF EXHIBIT A.
----------------------
EXHIBIT A to the Rights Agreement is hereby replaced with EXHIBIT A to
this Amendment.
5. AMENDMENT OF EXHIBIT C. The first full paragraph of EXHIBIT C to the
Rights Agreement is hereby amended in its entirety to read as follows:
On April 28, 1999, the Board of Directors of Waddell
& Reed Financial, Inc. (the "Company") declared a dividend
distribution of one Right for each outstanding share of Class
A Common Stock and Class B Common Stock of the Company to
stockholders of record at the close of business on May 12,
1999 (the "Record Date"). Subsequently, the Company converted
all issued shares of Class B Common Stock into shares of Class
A Common Stock, and therefore, the Rights attached to the
shares of Class B Common Stock were cancelled and new Rights
were issued with the shares of Class A Common Stock into which
the shares of Class B Common Stock were converted. In this
summary, the Class A Common Stock is referred to as "Common
Stock". Each Right entitles the registered holder to purchase
from the Company a unit consisting of one one-hundredth of a
share (a "Unit") of Series A Junior Participating Preferred
Stock, par value $1.00 per share (the "Series A Preferred
Stock") at a Purchase Price of $85.00 per Unit, subject to
adjustment. The description and terms of the Rights are set
forth in a Rights Agreement (the "Rights Agreement") between
the Company and First Chicago Trust Company of New York, as
Rights Agent.
4. EFFECTIVENESS.
Subject to the condition in Section B of this Amendment, this Amendment
shall be effective as of the date above first written, and all references to the
Rights Agreement shall, from and after such time, be deemed to be references to
the Rights Agreement as amended hereby.
5. CERTIFICATION.
The undersigned officer of the Company certifies by execution hereof
that this Amendment is in compliance with the terms of SECTION 27 of the Rights
Agreement.
6. MISCELLANEOUS.
This Amendment may be executed in any number of counterparts, each of
such counterparts shall for all purposes be deemed to be an original, and all
such counterparts shall together constitute but one and the same instrument. If
any term, provision, covenant or
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restriction of this Amendment is held by a court of competent jurisdiction or
other authority to be invalid, illegal, or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Amendment shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date and year first above written.
WADDELL & REED FINANCIAL, INC.
By: /s/ Keith A. Tucker
-------------------
Name: Keith A. Tucker
Title: Chairman and CEO
FIRST CHICAGO TRUST COMPANY OF NEW YORK,
as Rights Agent
By: /s/ Laurence A. Woods
---------------------
Name: Laurence A. Woods
Title: Vice President
5
<PAGE>
EXHIBIT A
RIGHTS, POWERS AND PREFERENCES OF THE SERIES A JUNIOR
PARTICIPATING PREFERRED STOCK
4.3.4 DESIGNATION OF THE RIGHTS AND PREFERENCES OF THE SERIES
A JUNIOR PARTICIPATING PREFERRED STOCK. 750,000 shares of the
authorized Preferred Stock are hereby designated Series A Junior
Participating Preferred Stock ("Series A Junior Participating Preferred
Stock"). The rights and preferences of the Series A Junior
Participating Preferred Stock are as follows:
(a) DIVIDENDS.
(1) Subject to the prior and superior rights of
the holders of any shares of any series of
Preferred Stock ranking prior and superior
to the shares of Series A Junior
Participating Preferred Stock with respect
to dividends, the holders of shares of
Series A Junior Participating Preferred
Stock shall be entitled to receive, when, as
and if declared by the Board of Directors
out of funds legally available for the
purpose, quarterly dividends payable in cash
on the first day of February, May, August
and November in each year (each such date
being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the
first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of
a share of Series A Junior Participating
Preferred Stock, in an amount per share
(rounded to the nearest cent) equal to the
greater of (a) $1.00 or (b) subject to the
provision for adjustment hereinafter set
forth, 100 times the aggregate per share
amount of all cash dividends, and 100 times
the aggregate per share amount (payable in
kind) of all non-cash dividends or other
distributions other than a dividend payable
in shares of Common Stock or a subdivision
of the outstanding shares of Common Stock
(by reclassification or otherwise), declared
on the Common Stock since the immediately
preceding Quarterly Dividend Payment Date,
or, with respect to the first Quarterly
Dividend Payment Date, since the first
issuance of any share or fraction of a share
of Series A Junior Participating Preferred
Stock. In the event the Corporation shall at
any time after April 28, 1999 (the "Rights
Declaration Date") (i) declare any dividend
on Common Stock payable in shares of Common
Stock, (ii) subdivide the outstanding Common
Stock, or (iii) combine the outstanding
Common Stock into a smaller number of
shares, then in each such case the amount to
which holders of shares of Series A Junior
Participating Preferred Stock were entitled
immediately prior to such event under clause
(b) of the preceding sentence shall be
adjusted by multiplying such amount by a
fraction the numerator of which is the
number of shares of Common Stock outstanding
immediately after such event and the
denominator of
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which is the number of shares of Common
Stock that were outstanding immediately
prior to such event.
(2) The Corporation shall declare a dividend or
distribution on the Series A Junior
Participating Preferred Stock as provided in
Paragraph 4.3.4(a)(1) above immediately
after it declares a dividend or distribution
on the Common Stock (other than a dividend
payable in shares of Common Stock); provided
that, in the event no dividend or
distribution shall have been declared on the
Common Stock during the period between any
Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date,
a dividend of $1.00 per share on the Series
A Junior Participating Preferred Stock shall
nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(3) Dividends shall begin to accrue and be
cumulative on outstanding shares of Series A
Junior Participating Preferred Stock from
the Quarterly Dividend Payment Date next
preceding the date of issue of such shares
of Series A Junior Participating Preferred
Stock, unless the date of issue of such
shares is prior to the record date for the
first Quarterly Dividend Payment Date, in
which case dividends on such shares shall
begin to accrue from the date of issue of
such shares, or unless the date of issue is
a Quarterly Dividend Payment Date or is a
date after the record date for the
determination of holders of shares of Series
A Junior Participating Preferred Stock
entitled to receive a quarterly dividend and
before such Quarterly Dividend Payment Date,
in either of which events such dividends
shall begin to accrue and be cumulative from
such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of
Series A Junior Participating Preferred
Stock in an amount less than the total
amount of such dividends at the time accrued
and payable on such shares shall be
allocated pro rata on a share-by-share basis
among all such shares at the time
outstanding. The Board of Directors may fix
a record date for the determination of
holders of shares of Series A Junior
Participating Preferred Stock entitled to
receive payment of a dividend or
distribution declared thereon, which record
date shall be no more than 30 days prior to
the date fixed for the payment thereof.
(b) VOTING RIGHTS. The holders of shares of Series A
Junior Participating Preferred Stock shall have the
following voting rights:
(1) Subject to the provision for adjustment
hereinafter set forth, each share of Series
A Junior Participating Preferred Stock shall
entitle the holder thereof to 100 votes on
all matters submitted to a vote of the
stockholders of the Corporation. In the
event the Corporation shall at any time
after the Rights Declaration Date (i)
declare any dividend on
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the Common Stock payable in shares of Common
Stock, (ii) subdivide the outstanding Common
Stock, or (iii) combine the outstanding
Common Stock into a smaller number of
shares, then in each such case the number of
votes per share to which holders of shares
of Series A Junior Participating Preferred
Stock were entitled immediately prior to
such event shall be adjusted by multiplying
such number by a fraction the numerator of
which is the number of shares of Common
Stock outstanding immediately after such
event and the denominator of which is the
number of shares of Common Stock that were
outstanding immediately prior to such event.
(2) Except as otherwise provided herein or by
law, the holders of shares of Series A
Junior Participating Preferred Stock and the
holders of shares of Common Stock shall vote
together as one class on all matters
submitted to a vote of stockholders of the
Corporation.
(4) If at any time dividends on any Series A
Junior Participating Preferred Stock shall
be in arrears in an amount equal to six (6)
quarterly dividends thereon, the occurrence
of such contingency shall mark the beginning
of a period (herein called a "default
period") which shall extend until such time
when all accrued and unpaid dividends for
all previous quarterly dividend periods and
for the current quarterly dividend period on
all shares of Series A Junior Participating
Preferred Stock then outstanding shall have
been declared and paid or set apart for
payment. During each default period, all
holders of Preferred Stock (including
holders of the Series A Junior Participating
Preferred Stock) with dividends in arrears
in an amount equal to six (6) quarterly
dividends thereon, voting as a class,
irrespective of series, shall have the right
to elect two (2) directors.
(5) During any default period, the voting right
described in section 4.3.4(b)(4) of the
holders of Series A Junior Participating
Preferred Stock may be exercised initially
at a special meeting called pursuant to
section 4.3.4(b)(6) or at any annual meeting
of stockholders, and thereafter at annual
meetings of stockholders, provided that
neither such voting right nor the right of
the holders of any other series of Preferred
Stock, if any, to increase, in certain
cases, the authorized number of directors
shall be exercised unless the holders of ten
percent (10%) in number of shares of
Preferred Stock outstanding shall be present
in person or by proxy. The absence of a
quorum of the holders of Common Stock shall
not affect the exercise by the holders of
Preferred Stock of such voting right. At any
meeting at which the holders of Preferred
Stock shall exercise such voting right
initially during an existing default period,
they shall have the right, voting as a
class, to elect directors to fill such
vacancies, if any, in the Board of Directors
as may then exist up to two (2) directors
or, if such right is exercised at an annual
meeting, to elect two (2) directors.
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If the number which may be so elected at any
special meeting does not amount to the
required number, the holders of the
Preferred Stock shall have the right to make
such increase in the number of directors as
shall be necessary to permit the election by
them of the required number. After the
holders of the Preferred Stock shall have
exercised their right to elect directors in
any default period and during the
continuance of such period, the number of
directors shall not be increased or
decreased except by vote of the holders of
Preferred Stock as herein provided or
pursuant to the rights of any equity
securities ranking senior to or PARI PASSU
with the Series A Junior Participating
Preferred Stock.
(6) Unless the holders of Preferred Stock shall,
during an existing default period, have
previously exercised their right to elect
directors, the Board of Directors may order,
or any stockholder or stockholders owning in
the aggregate not less than ten percent
(10%) of the total number of shares of
Preferred Stock outstanding, irrespective of
series, may request, the calling of a
special meeting of the holders of Preferred
Stock, which meeting shall thereupon be
called by the President, a Vice-President or
the Secretary of the Corporation. Notice of
such meeting and of any annual meeting at
which holders of Preferred Stock are
entitled to vote pursuant to this section
4.3.4(b)(6) shall be given to each holder of
record of Preferred Stock by mailing a copy
of such notice to him at his last address as
the same appears on the books of the
Corporation. Such meeting shall be called
for a time not earlier than 20 days and not
later than 60 days after such order or
request or in default of the calling of such
meeting within 60 days after such order or
request, such meeting may be called on
similar notice by any stockholder or
stockholders owning in the aggregate not
less than ten percent (10%) of the total
number of shares of Preferred Stock
outstanding. Notwithstanding the provisions
of this section 4.3.4(b)(6), no such special
meeting shall be called during the period
within 60 days immediately preceding the
date fixed for the next annual meeting of
the stockholders.
(7) In any default period, the holders of Common
Stock, and other classes of stock of the
Corporation if applicable, shall continue to
be entitled to elect the whole number of
directors until the holders of Preferred
Stock shall have exercised their right to
elect two (2) directors voting as a class,
after the exercise of which right (x) the
directors so elected by the holders of
Preferred Stock shall continue in office
until their successors shall have been
elected by such holders or until the
expiration of the default period, and (y)
any vacancy in the Board of Directors may
(except as provided in Section 4.3.4(b)(5))
be filled by vote of a majority of the
remaining directors theretofore elected by
the holders of the class of stock which
elected the director whose office shall have
become vacant. References in this Section
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4.3.4(b) to directors elected by the holders
of a particular class of stock shall include
directors elected by such directors to fill
vacancies as provided in clause (y) of the
foregoing sentence.
(8) Immediately upon the expiration of a default
period, (x) the right of the holders of
Preferred Stock as a class to elect
directors shall cease, (y) the term of any
directors elected by the holders of
Preferred Stock as a class shall terminate,
and (z) the number of directors shall be
such number as may be provided for in the
certificate of incorporation or by-laws
irrespective of any increase made pursuant
to the provisions of section 4.3.4(b)(5)
(such number being subject, however, to
change thereafter in any manner provided by
law or in the certificate of incorporation
or by-laws). Any vacancies in the Board of
Directors effected by the provisions of
clauses (y) and (z) in the preceding
sentence may be filled by a majority of the
remaining directors.
(9) Except as set forth herein, holders of
Series A Junior Participating Preferred
Stock shall have no special voting rights
and their consent shall not be required
(except to the extent they are entitled to
vote with holders of Common Stock as set
forth herein) for taking any corporate
action.
(c) CERTAIN RESTRICTIONS.
(1) Whenever quarterly dividends or other
dividends or distributions payable on the
Series A Junior Participating Preferred
Stock as provided in Section 4.3.4(a) are in
arrears, thereafter and until all accrued
and unpaid dividends and distributions,
whether or not declared, on shares of Series
A Junior Participating Preferred Stock
outstanding shall have been paid in full,
the Corporation shall not:
(i) declare or pay dividends on, make
any other distributions on, or
redeem or purchase or otherwise
acquire for consideration any shares
of stock ranking junior (either as
to dividends or upon liquidation,
dissolution or winding up) to the
Series A Junior Participating
Preferred Stock;
(ii) declare or pay dividends on or
make any other distributions on any
shares of stock ranking on a parity
(either as to dividends or upon
liquidation, dissolution or winding
up) with the Series A Junior
Participating Preferred Stock,
except dividends paid ratably
on the Series A Junior Participating
Preferred Stock and all such parity
stock on which dividends are payable
or in arrears in proportion to the
total amounts to which the holders
of all such shares are then
entitled;
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(iii) redeem or purchase or otherwise
acquire for consideration shares of
any stock ranking on a parity
(either as to dividends or upon
liquidation, dissolution or winding
up) with the Series A Junior
Participating Preferred Stock,
provided that the Corporation
may at any time redeem, purchase or
otherwise acquire shares of any such
parity stock in exchange for shares
of any stock of the Corporation
ranking junior (either as to
dividends or upon dissolution,
liquidation or winding up) to the
Series A Junior Participating
Preferred Stock; or
(iv) purchase or otherwise acquire for
consideration any shares of Series A
Junior Participating Preferred
Stock, or any shares of stock
ranking on a parity with the
Series A Junior Participating
Preferred Stock, except in
accordance with a purchase offer
made in writing or by publication
(as determined by the Board of
Directors) to all holders of such
shares upon such terms as the Board
of Directors, after consideration of
the respective annual dividend rates
and other relative rights and
preferences of the respective series
and classes, shall determine in good
faith will result in fair and
equitable treatment among the
respective series or classes.
(2) The Corporation shall not permit any
subsidiary of the Corporation to purchase or
otherwise acquire for consideration any
shares of stock of the Corporation unless
the Corporation could, under Section (1) of
this 4.3.4(c), purchase or otherwise acquire
such shares at such time and in such manner.
(d) REACQUIRED SHARES. Any shares of Series A Junior
Participating Preferred Stock purchased or otherwise
acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the
acquisition thereof. All such shares shall upon their
cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new
series of Preferred Stock to be created by resolution
or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth
herein.
(e) LIQUIDATION, DISSOLUTION OR WINDING UP.
(1) Upon any liquidation (voluntary or
otherwise), dissolution or winding up of the
Corporation, no distribution shall be made
to the holders of shares of stock ranking
junior (either as to dividends or upon
liquidation, dissolution or winding up) to
the Series A Junior Participating Preferred
Stock unless, prior thereto, the holders of
shares of Series A Junior Participating
Preferred Stock shall have received an
amount equal to $100 per share of Series A
Junior
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Participating Preferred Stock, plus an
amount equal to accrued and unpaid
dividends and distributions thereon, whether
or not declared, to the date of such payment
(the "Series A Liquidation Preference").
Following the payment of the full amount of
the Series A Liquidation Preference, no
additional distributions shall be made to
the holders of shares of Series A Junior
Participating Preferred Stock unless, prior
thereto, the holders of shares of Common
Stock shall have received an amount per
share (the "Common Adjustment") equal to the
quotient obtained by dividing (i) the Series
A Liquidation Preference by (ii) 100 (as
appropriately adjusted as set forth in
subparagraph (3) below to reflect such
events as stock splits, stock dividends and
recapitalizations with respect to the Common
Stock) (such number in clause (ii), the
"Adjustment Number"). Following the payment
of the full amount of the Series A
Liquidation Preference and the Common
Adjustment in respect of all outstanding
shares of Series A Junior Participating
Preferred Stock and Common Stock,
respectively, holders of Series A Junior
Participating Preferred Stock and holders of
shares of Common Stock shall receive their
ratable and proportionate share of the
remaining assets to be distributed in the
ratio of the Adjustment Number to 1 with
respect to such Preferred Stock and Common
Stock, on a per share basis, respectively.
(2) In the event, however, that there are not
sufficient assets available to permit
payment in full of the Series A Liquidation
Preference and the liquidation preferences
of all other series of preferred stock, if
any, which rank on a parity with the Series
A Junior Participating Preferred Stock, then
such remaining assets shall be distributed
ratably to the holders of the Series A
Junior Participating Preferred Stock and
such parity shares in proportion to their
respective liquidation preferences. In the
event, however, that there are not
sufficient assets available to permit
payment in full of the Common Adjustment,
then such remaining assets shall be
distributed ratably to the holders of Common
Stock.
(3) In the event the Corporation shall at any
time after the Rights Declaration Date (i)
declare any dividend on Common Stock payable
in shares of Common Stock, (ii) subdivide
the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a
smaller number of shares, then in each such
case the Adjustment Number in effect
immediately prior to such event shall be
adjusted by multiplying such Adjustment
Number by a fraction the numerator of which
is the number of shares of Common Stock
outstanding immediately after such event and
the denominator of which is the number of
shares of Common Stock that were outstanding
immediately prior to such event.
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(f) CONSOLIDATION, MERGER, ETC. In case the Corporation
shall enter into any consolidation, merger,
combination or other transaction in which the shares
of Common Stock are exchanged for or changed into
other stock or securities, cash and/or any other
property, then in any such case the shares of
Series A Junior Participating Preferred Stock shall
at the same time be similarly exchanged or changed in
an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to 100 times
the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the
case may be, into which or for which each share of
Common Stock is changed or exchanged. In the event
the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common
Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller
number of shares, then in each such case the amount
set forth in the preceding sentence with respect to
the exchange or change of shares of Series A
Junior Participating Preferred Stock shall be
adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common
Stock outstanding immediately after such event and
the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior
to such event.
(g) NO REDEMPTION. The shares of Series A Junior
Participating Preferred Stock shall not be
redeemable.
(h) RANKING. The Series A Junior Participating Preferred
Stock shall rank junior to all other series of the
Corporation's Preferred Stock as to the payment of
dividends and the distribution of assets, unless the
terms of any such series shall provide otherwise.
(i) AMENDMENT. At any time when any shares of Series A
Junior Participating Preferred Stock are outstanding,
the Amended and Restated Certificate of Incorporation
of the Corporation shall not be amended in any manner
which would materially alter or change the powers,
preferences or special rights of the Series A Junior
Participating Preferred Stock so as to affect them
adversely without the affirmative vote of the holders
of a majority or more of the outstanding shares of
Series A Junior Participating Preferred Stock, voting
separately as a class.
(j) FRACTIONAL SHARES. Series A Junior Participating
Preferred Stock may be issued in fractions of a share
which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting
rights, receive dividends, participate in
distributions and to have the benefit of all other
rights of holders of Series A Junior Participating
Preferred Stock.
8
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.5
<SEQUENCE>5
<FILENAME>a2041359zex-10_5.txt
<DESCRIPTION>GENERAL AGENT AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.5
GENERAL AGENT AGREEMENT
THIS AGREEMENT, effective this 20th day of October, 2000, is made by and
among Nationwide Life Insurance Company, Nationwide Life and Annuity
Insurance Company, (collectively, "Nationwide") WADDELL & REED, INC. on its
own behalf and on behalf of its affiliated Corporate Insurance Agencies
(Collectively referred to as "Agency") and ("Broker/Dealer").
Nationwide hereby appoints Broker/Dealer and Agency (collectively, "General
Agent") as General Agent with the rights, powers, duties and liabilities set
forth herein. General Agent hereby accepts the appointment.
General Agent acknowledges, understands and agrees that although Nationwide
Life Insurance Company ("NWL") and Nationwide Life and Annuity Insurance
Company ("NWLAIC") are collectively referred to herein as "Nationwide", NWL
and NWLAIC are separate corporate entities, and that the rights and
obligations of each under this Agreement are to be exclusively determined on
the basis of which of the two entities (NWL or NWLAIC) is the issuing company
of the product(s) specified in Exhibit A, and being sold pursuant to this
Agreement.
Nationwide acknowledges, understands and agrees that although Broker/Dealer
and its affiliated Corporate insurance agencies are collectively, referred to
herein as "General Agent", Broker/Dealer and each of the Corporate insurance
agencies are separate corporate entities, and that the rights and obligations
of each under this Agreement are to be exclusively determined on the basis of
which of the entities is acting as agent with respect to the product(s)
specified in Exhibit A and being sold pursuant to this Agreement.
IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN MADE, THE PARTIES AGREE AS
FOLLOWS:
1. SCOPE. This Agreement shall supersede the General Agent Agreement by
and between Nationwide Life Insurance Company, Nationwide Life and
Annuity Insurance Company, and Waddell & Reed, Inc. dated December 6,
1999, and all other prior agreements between the parties, with respect
to the matters addressed herein. All of the insurance or annuity
products sold under this Agreement shall be referred to as "Contract(s)"
except when particular provisions relate solely to variable contracts
required to be registered under the Securities Act of 1933 ("1933 Act")
and/or the Investment Company Act of 1940 ("1940 Act") and such
contracts shall be referred to as "Variable Contracts". The Contracts
which may be sold under this Agreement are listed in the Compensation
Schedules which are included in Exhibit A. These Compensation Schedules
may be amended upon written agreement of Nationwide and General Agent.
In consideration of the services to be performed hereunder, Nationwide
agrees to pay General Agent compensation, in accordance with the
Exhibits to this Agreement, as may be amended from time to time by
mutual written agreement of the parties, based on purchase payments due
and received by Nationwide on Contracts issued upon applications
submitted either directly or through registered representatives and
agents, on or after the date of this Agreement.
2. EXCLUSIVITY. Except as otherwise provided herein, Nationwide will be
the exclusive provider to General Agent of the products specified in
Exhibit B for a period of five- (5) years. During this five- (5) year
period, General Agent will not offer any other competitor's products to
their clients, except as otherwise provided herein. Notwithstanding the
foregoing, this exclusivity provision will not apply to (a) clients
transferring similar investment products from one investment advisor
and/or broker-
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dealer to General Agent, but only to the extent of the transfer itself,
(b) products offered by General Agent's former affiliate, United Investors
Life Insurance Company, (c) additions made by General Agent clients to
products owned prior to the commencement of distribution of like Nationwide
products by General Agent pursuant to this agreement, (d) sales made in
New York prior to the development by Nationwide of replacement products
for sale in New York, and (e) sales made by new General Agent financial
advisors to prospects to which non-Nationwide products were offered prior
to their engagement by General Agent. General Agent will make a good
faith effort to monitor and report these exceptions to ensure that the
principle of overall exclusivity is maintained.
Nationwide will provide sufficient resources to fulfill mutually agreed
upon product feature, support and service level standards. It is
understood and agreed that such exclusivity shall terminate at General
Agent's option if (a) Nationwide fails to meet the agreed upon product
feature, support and service standards and (b) Nationwide experiences a
change of control involving an unaffiliated organization. Nationwide may
also terminate its exclusive relationship with General Agent if General
Agent fails to meet its obligations as set forth herein.
Notwithstanding the foregoing, if General Agent experiences a change of
control involving an unaffiliated organization and such organization
desires for General Agent to sell its products or the products of one or
more of its affiliates ("Acquirer Products"), this exclusivity provision
will not apply to the Acquirer Products. It is understood and agreed
that if such a change of control should occur, and General Agent
commences offering Acquirer Products, General Agent shall use its best
efforts to insure that Nationwide's products receive and maintain an
equitable competitive position in General Agent's distribution system
throughout the exclusive period. For purposes of this provision, an
"equitable competitive position" shall mean, the opportunity for
Nationwide to provide products with substantially similar costs,
features commissions, fund diversification and positioning as the
Acquirer Products. In the event such a change of control occurs and
General Agent commences offering Acquirer Products, the exception from
this exclusivity provision identified in section (b) of the previous
paragraph, regarding a change of control at Nationwide involving an
unaffiliated organization, shall cease to apply.
3. AUTHORITY. Agency and Broker/Dealer are hereby authorized, through
their individual agents ("Agents"), representatives or duly licensed
affiliated agencies who are duly licensed and registered as required by
law, to solicit and procure applications for the Contracts in accordance
with the terms and conditions of this Agreement, and are authorized in
connection therewith:
a. to collect purchase payments on Contracts for which applications
are submitted;
b. when requested and as directed by Nationwide to deliver Contracts
after the terms and conditions governing such delivery are completed,
provided that no such delivery of a Contract shall be deemed to
constitute a warranty by General Agent that such terms and conditions
have been complied with;
c. to perform any other act related to the Contracts that is
authorized in writing by Nationwide and is permissible under the law;
and
d. General Agent will pay all fees required to obtain and/or maintain
any licenses or registrations required by state or federal law for
General Agent and agents of General Agent. Nationwide will pay the
fees in connection with the initial appointment with Nationwide of
agents of General Agent. Any subsequent appointment fees will be the
responsibility of the General Agent or as mutually agreed upon with
Nationwide.
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4. Right to Sell; Regulatory Approvals.
a. General Agent is authorized to sell the Contracts set forth in the
Compensation Schedule (Exhibit A) as now and hereafter attached to
this Agreement. The Compensation Schedule is hereby incorporated by
reference.
b. Except as disclosed to General Agent in writing, Nationwide
represents and warrants that it has the authority to issue
Contracts in the states where the General Agent is authorized to
conduct business. Nationwide agrees to notify General Agent
promptly of any change in such authority.
General Agent agrees that it will solicit applications for
Nationwide only in those states in which such Contracts are
approved.
c. General Agent will not solicit applications in any state unless the
Agent signing the application has been properly licensed by the
appropriate regulatory agency in that state, which may include
registrations as a registered representative of Broker/Dealer if
Variable Contracts are being sold. As a licensed appointee of
Nationwide, General Agent will comply with the statutory and
regulatory obligations related to the solicitation and procurement
of applications for Contracts.
d. If General Agent engages in sales of the Contracts on the premises
of or in cooperation with financial institutions (including banks,
savings and loan institutions, or credit unions), General Agent
shall, as required by applicable law, maintain separation of its
business from the business of such financial institution, including
separation of records. General Agent shall also conduct its
business at all times so as not to lead to confusion between the
business conducted by General Agent and the business conducted by
the financial institution.
The parties to the Agreement hereby agree to abide by, observe, and
otherwise conduct the business contemplated under the Agreement in
a manner consistent with the Guidelines set forth in the
Interagency Statement on Retail Sales of Non-Deposit Investment
Products, issued jointly by the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation, the
Office of the Comptroller of the Currency, and the Office of Thrift
Supervision on February 15, 1994, or any modifications or
interpretations thereof.
5. AGENT SUPERVISION
a. Before an Agent is permitted to solicit and procure applications
for the Contracts, General Agent and Agent shall have entered into
an agreement pursuant to which such Agent will be appointed as an
agent of General Agent and in which Agent will agree that Agent's
selling activities relating to the Contracts will be under the
supervision and control of General Agent. The Agent's right to
continue to sell the Contracts is subject to Agent's continued
compliance with such agreement.
b. If an Agent fails to meet the rules and standards imposed by
General Agent, General Agent shall take such disciplinary action as
it deems appropriate. If an Agent fails or refuses to submit to
supervision of General Agent in accordance with this Agreement,
General Agent shall immediately notify such Agent that such Agent
is no longer authorized to sell the Contracts and shall take
whatever additional action may be necessary to terminate the sales
activities of such Agent relating to the Contracts including
immediate notification to Nationwide of such termination.
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c. In the event that General Agent regards itself as exempt from the
licensing requirements of a state insurance authority, then General
Agent hereby warrants and guarantees that it shall exercise
supervisory control over the training and conduct of its Agents in
a manner consistent with state insurance requirements with respect
to fair, accurate and good faith representations of product
information in the solicitation process, with due regard to the
financial status of individual consumers and the appropriateness of
the Contract as an investment for such individual consumers. Any
intentional or negligent failure in this regard, by any Agent of
General Agent, shall require General Agent to immediately terminate
such Agent's ability to sell the Contracts and to notify Nationwide
of such termination. In addition, General Agent will ensure that
its Agents comply with all applicable state insurance requirements
and have obtained and maintain any security licenses required by
the state insurance authorities.
6. SALE OF VARIABLE CONTRACTS.
a. General Agent agrees that each Agent who sells Variable Contracts
will be a registered representative of Broker/Dealer (for purposes
of this section, "Registered Representative") with the National
Association of Securities Dealers Inc. (the "NDAS") before the
Agent engages into the offer and sale of Variable Contracts.
Broker/Dealer shall certify the status of each Registered
Representative's qualifications to Nationwide's satisfaction and
shall notify Nationwide if any such person ceases to be a
Registered Representative of Broker/Dealer.
b. Broker/Dealer shall have full responsibility for the training and
supervision of the Registered Representatives that offer and sell
the Variable Contracts. This training shall include training in the
sale of variable contracts. All Registered Representatives shall be
subject to the control of Broker/Dealer in connection with the
offer and sale of such Variable Contracts.
c. Broker/Dealer will fully comply with the requirements of the NASD,
the Securities Exchange Act of 1934, and all other applicable
federal or state laws and will establish such rules and procedures
as may be necessary to cause diligent supervision of the securities
activities of the Registered Representatives. Broker/Dealer shall
furnish records necessary to document such supervision at
Nationwide's reasonable request.
d. Before a Registered Representative is permitted to solicit and
procure applications for the Variable Contracts, Broker/Dealer and
the Registered Representative shall have entered into an agreement
pursuant to which the Registered Representative will become a
Registered Representative of Broker/Dealer and will agree that
their selling activities relating to the Variable Contracts will be
under the supervision and control of Broker/Dealer. The right to
continue to sell such Variable Contracts is subject to continued
compliance with such agreement.
e. If a Registered Representative fails to meet the rules and
standards imposed by Broker/Dealer, Broker/Dealer shall take such
disciplinary action as it deems appropriate. If a Registered
Representative fails or refuses to submit to supervision of
Broker/Dealer in accordance with this Agreement, Broker/Dealer
shall immediately notify such Registered Representative that he is
no longer authorized to sell the Variable Contracts, and
Broker/Dealer shall take whatever additional action may be
necessary to terminate the sales activities of such Registered
Representative relating to the Variable Contracts including
immediate notification to Nationwide of such termination.
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f. Nationwide represents that (a) the Variable Contracts are properly
registered under the 1933 Act and/or 1940 Act and the registration
statements and the Variable Contracts will remain in full force and
effect for the duration of this Agreement, and (b) the Variable
Contracts are exempted or excepted from registration under state
securities laws. If any state should amend its current securities
laws to require registration of insurance contracts, then Nationwide
will comply with the amended state law.
g. In connection with the conduct of its business, Broker/Dealer shall
be provided with prospectuses relating to the Variable Contracts
and such other material as Nationwide determines to be necessary.
Nationwide represents and warrants to Broker/Dealer that all
prospectuses and other material, which Nationwide makes available
to Broker/Dealer will comply in all respects with any and all
applicable federal and state securities laws.
7. INDEPENDENT CONTRACTOR.
General Agent is free to exercise its own judgment as to the persons
from whom it will solicit applications for Contracts as well as the
time, manner and place of solicitation, and Nationwide will not
unreasonably interfere with its activity or manner of performance under
this Agreement as an independent contractor.
Nothing contained in this Agreement shall create, or shall be construed
to create, the relationship of an employer and employee between
Nationwide and General Agent.
8. COLLECTION OF PURCHASE PAYMENTS.
All Contract purchase payments on applications procured by or through
General Agent, which General Agent may collect, are collected on behalf
of Nationwide. All purchase payments shall be in check or wire transfer.
All such monies received by General Agent shall be collected and
transmitted promptly to Nationwide in a manner agreed to by both General
Agent and Nationwide.
9. LIMITATIONS ON AUTHORITY. Unless otherwise authorized by Nationwide in
writing pursuant to Section 3(c), General Agent shall have no authority
on behalf of Nationwide to:
a. make, alter or discharge any Contract,
b. incur any indebtedness or liability, expend or contract for the
expenditure of funds of Nationwide,
c. extend the time for payment of any purchase payment, bind
Nationwide to the reinstatement of any terminated Contract, or
accept notes for payment of purchase payments,
d. waive or modify any terms, conditions or limitations of any
Contract, adjust or settle any claim or commit Nationwide with
respect thereto except as provided in Section 13 c.,
e. enter into legal proceedings in connection with any matter
pertaining to Nationwide's business without the prior written consent
of Nationwide unless General Agent is named in such proceedings or
General Agent could be subject to paying all or a part of any
judgment. General Agent must immediately give Nationwide written
notification of the legal proceeding. Where General Agent is either
named or may be subject to paying all or a portion of any judgment,
General Agent may retain counsel of its choice,
f. use the registered marks of Nationwide without receiving prior
written approval of Nationwide,
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g. represent products of Nationwide except as referenced in the
prospectus,
h. advertise or publish any matter or thing concerning Nationwide or
the Contracts without the prior written permission of Nationwide,
except as provided in Section 14.a.,
i. open any bank account or trust account on behalf of, for the
benefit of, or containing the name of Nationwide.
j. directly or indirectly cause or endeavor to cause any General Agent
or their Agents to terminate or alter their association with
Nationwide, or will not advise or encourage any Nationwide Contract
Owner to relinquish, surrender, replace or lapse their Nationwide
contract unless such action is in the best interest of the Contract
Owner as reasonably determined by the General Agent.
k. do or perform any acts or things other than expressly authorized
herein.
10. AGENTS.
a. General Agent shall select Agents subject to the provisions of this
Agreement and Nationwide shall appoint the selected Agents or
provide to General Agent in writing a reasonable basis for not
making such appointment. General Agent shall notify Nationwide
promptly, in writing, upon the giving or receipt of any notice of
termination of an Agent. General Agent will provide Nationwide with
any documentation necessary for the appointment of the Agents.
Nationwide reserves the right to terminate the appointment of any
Agent in its reasonable discretion. Nationwide will promptly notify
the General Agent of the termination of the appointment of any
Agent and the basis therefor.
b. At all times during which an Agent is appointed by Nationwide to
sell Contracts, General Agent shall ensure that each Agent has
obtained and maintains all applicable licenses in accordance with
applicable state and federal laws and regulations. General Agent
shall provide Nationwide on request evidence of applicable
insurance licenses of General Agent's Agents.
c. General Agent maintains the responsibility to ensure its Agents
comply with the terms of the Agreement.
11. COMPENSATION.
a. Nationwide agrees to pay General Agent compensation, in accordance
with the Compensation Schedules to this Agreement as may be amended
from time to time by mutual written agreement of the parties.
b. Nationwide will pay all compensation due General Agent or any
Agents, either directly to General Agent or, as necessary to meet
legal requirements, to the licensed General Agent affiliate or
other affiliated entity which is permitted to receive such
compensation under applicable state law. In states where corporate
licenses are not granted, General Agent represents and warrants
that it or its affiliated entity has the necessary relationship
with the Agents based upon which such affiliated entity is
permitted to receive compensation under applicable state insurance
law except as otherwise approved by Nationwide. General Agent
hereby warrants that all necessary contractual arrangements are in
place to enable Nationwide to pay General Agent, or any of its
affiliates, for business produced by Agents in the jurisdiction in
which they hold licenses. General Agent shall pay all compensation
due to Agents or any other person with respect to the Contracts,
and no such Agent or other person shall have any claim against
Nationwide on account of the sale or service of any Contract.
Nationwide shall have no obligation to make compensation payments
except as
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provided above. If Nationwide permits the General Agent to retain
compensation before remitting purchase payments, then the Net
Compensation Addendum shall specify that authority. Should Nationwide
pay General Agent for premiums later returned or credited to the
customer or any other overpayment to General Agent, Nationwide shall
have, in addition to all other creditor rights, the right to deduct
such overpayment from any current or future compensation due General
Agent.
c. All trail commissions, if any, shall be paid by Nationwide to
General Agent with respect to all Contracts sold by Agents on or
before the date of termination of this Agreement. In the event
Nationwide receives written authorization from an appointed officer
of the General Agent to transfer a Contract paying trail
commissions to a new General Agent, all subsequent trail
commissions as of the effective date of the transfer will be paid
to the new General Agent of record. In the event Nationwide
receives a written request from a contract owner to transfer a
contract to a new General Agent, all subsequent trail commissions
as of the effective date of the transfer will be paid to the new
General Agent of record. This paragraph shall not be in derogation
of any right of offset or other remedy Nationwide may have on
monies owed by General Agent or by the new General Agent of record.
General Agent agrees to maintain any or all federal or state
license and appointment including any applicable renewal fees
required, except to the extend Nationwide is responsible therefor
pursuant to this Agreement, in order to receive trail commissions
from Nationwide.
d. Notwithstanding any other provisions of this Agreement Nationwide
shall not be obligated to pay any compensation which would be in
violation of the applicable laws, rules or regulations of any
jurisdiction, subject to Section 13 of this Agreement.
12. SEGREGATED BANK ACCOUNT.
All purchase payments received by General Agent on behalf of Nationwide,
including purchase payments received by General Agent from Agents, shall be
held in a segregated bank account and shall be forwarded to Nationwide in
accordance with mutually agreed upon instructions.
13. INDEMNIFICATION.
a. Nationwide agrees to indemnify and hold General Agent harmless from
any and all losses, claims, damages, liabilities or expenses to which
General Agent may become subject under any statute, regulation, common
law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses relate directly to the sale of the Contracts and arise as
a direct consequence of:
1) any material misrepresentation or omission, or alleged
misrepresentation or omission, contained in the registration
statement, prospectuses, the Contracts, this Agreement or any
other document prepared or distributed by Nationwide including,
but not limited to, advertising or sales literature;
2) any failure by Nationwide or its employees, whether negligent or
intentional, to perform the duties and discharge the obligations
contemplated in this Agreement; and
3) any fraudulent, unauthorized or wrongful act or omission by
Nationwide or its employees or agents.
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b. General Agent agrees to indemnify and hold Nationwide harmless from
any and all losses, claims, damages, liabilities or expenses to which
Nationwide may become subject under any statute, regulation, common
law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses related directly to the sale of the Contracts and arise as
a direct consequence of:
1) any material misrepresentation or omission, or alleged
misrepresentation or omission involving the sales contained
within this Agreement provided that such misrepresentations or
omissions are not attributable to any failure by Nationwide;
2) any failure by General Agent or its employees or Agents, whether
negligent or intentional, to perform the duties and discharge the
obligations contemplated in this agreement; and
3) any fraudulent, unauthorized or wrongful act or omission by
General Agent or its employees or Agents.
c. In the event that Nationwide is compelled or agrees to pay any amount
in the settlement of any claim, judgment, arbitration or similar
action and, in conjunction therewith, General Agent voluntarily agrees
to reimburse Nationwide, either partially or totally, Nationwide may
deduct the amount of the reimbursement from any sales compensation
subsequently payable to General Agent. Nothing herein shall obligate
General Agent to provide any such voluntary reimbursement.
d. Neither Nationwide or General Agent shall be liable, as the
indemnifying party pursuant to Sections 13a and 13b, if the losses,
claims, damages, liabilities or legal expenses incurred by the
indemnified party arise out of the indemnified party's willful
misfeasance, bad faith, or gross negligence in the performance of its
duties, or through the reckless disregard of the indemnified party's
duties under this Agreement.
e. Nationwide and General Agent will promptly notify each other of the
commencement of any litigation or proceedings, or the assertion of any
claim or any material inquiries related to the duties set forth in the
Agreement.
f. This indemnification shall be in addition to any other course of
action Nationwide or General Agent may have.
14. AGREEMENTS.
a. All advertising material and sales promotional material published by
General Agent or its Agents that specifically name Nationwide or
reference the Contracts shall be and remain the sole and exclusive
property of General Agent and shall be used solely and exclusively by
General Agent and its Agents. Such material shall be submitted to
Nationwide for its approval prior to its use by General Agent or
Agents. Nationwide shall provide its approval in writing. Such
material shall not be used by Nationwide or its other agents without
prior written consent of General Agent.
b. Nationwide and General Agent shall keep thorough and correct records,
books, and accounts on all transactions arising out of this Agreement,
and shall preserve and hold all documents, correspondence and records
relating to Contracts which come into its possession or under its
control. All such books or accounts, documents, correspondence and
records of each party pertaining to or used by it in connection with
its operations hereunder shall belong to it, and
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at all times shall be open to inspection by any officer or duly
authorized representative of the other party.
c. In the course of normal customer servicing of existing Contracts or
if required by law, Nationwide may contact by mail or otherwise any
client, agent, account executive, or employee of General Agent or
other individual acting in a similar capacity if deemed appropriate
by Nationwide.
d. Each party agrees to promptly notify the others in writing of any
written customer complaint or notice of regulatory investigation it
receives which may involve the others.
e. Each party represents and warrants that the entering into and
performance of this Agreement does not and will not conflict with
or cause a breach of any other agreement to which any of them is a
party.
f. Each party represents and warrants that it has full power and
authority to enter into this Agreement and to carry out its duties
and obligations hereunder.
g. Agency represents and warrants that it has the authority to execute
this Agreement on its own behalf and on behalf of any of its
affiliated agencies providing the services set forth in this
Agreement in order for General Agent to meet all applicable legal
requirements. All the necessary arrangements are in place to bind
Agency's affiliated agencies to the terms and conditions of this
Agreement.
15. TERMINATION.
a. Each party may terminate this Agreement for cause at any time,
without prior written notice, if another party (1) fails to comply
with the laws or regulations of any state or other governmental
agency or body having jurisdiction over the sale of insurance or
securities, (2) misappropriates any money or property belonging to
another party, (3) subjects an other party to any actual or
potential liability due to misfeasance, malfeasance, or
nonfeasance, (4) commits any fraud upon another party, (5) has an
assignment for the benefit of creditors, (6) incurs bankruptcy, or
(7) commits a material breach of this Agreement.
b. Nationwide may terminate the relationship and any obligations set
forth herein if Waddell & Reed experiences a change of control, if
said change of control materially alters General Agent's ability to
perform its obligations under this agreement.
c. This Agreement may be terminated by a party upon six months written
notice to the other parties.
16. MISCELLANEOUS PROVISIONS.
a. General Agent may assign or pledge any rights under this Agreement
with Nationwide's prior written consent.
b. The forbearance or neglect of Nationwide, Broker/Dealer or Agency
to insist upon strict compliance by a party, with any of the
provisions of this Agreement, whether continuing or not, or to
declare a forfeiture of termination against that party, shall not
be construed as a waiver of any of the rights or privileges of the
parties. No waiver of any right or privilege of Nationwide,
Broker/Dealer or Agency arising from any default or failure of
performance by a party shall affect
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the rights or privileges of the other parties in the event of a
further default or failure of performance.
c. Communications sent pursuant to provisions of this item shall be in
writing and shall be delivered personally or sent by U.S. mail or
commercial courier:
If to Nationwide: Nationwide Life Insurance
Company and/or
Nationwide Life and Annuity
Insurance Company
One Nationwide Plaza
Columbus, OH 43215
Attn: Vice President,
Individual Annuity Operations
If to General Agent: Waddell & Reed, Inc.
Attn: Legal Department
6300 Lamar Avenue
Overland Park, KS 66202
Any party may change its address by so notifying the other parties in
writing. Any notice shall be deemed given only upon receipt by the party
to be notified.
d. Except as otherwise provided in this Agreement, this Agreement may
not be amended or modified except by a written Agreement executed
by the parties.
e. This Agreement (including Amendments and Compensation Schedules)
constitutes the entire agreement between the parties and supersedes
all prior agreements, understandings and arrangements, oral and
written, between the parties with respect to the subject matter
hereof.
f. This Agreement shall be binding upon the parties and their
respective successors and assigns.
g. This Agreement shall be governed and construed in accordance with
the laws of the State of Ohio.
h. In case any provision in this Agreement shall be invalid, illegal
or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not be affected or impaired.
i. The paragraph headings are for reference purposes only and shall
not be deemed to be a part of this Agreement or to affect the
meaning or interpretation of the Agreement.
j. This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original instrument and all of
which together shall be deemed to be one and the same instrument.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
WADDELL & REED, INC. NATIONWIDE LIFE INSURANCE
COMPANY
on it's own behalf and on the behalf
of its affiliated Corporate Agencies NATIONWIDE LIFE AND ANNUITY
(General Agent) INSURANCE COMPANY
By: /s/ Thomas W. Butch By: /s/ Rhodes B. Baker
-------------------------------- ---------------------------------
Title: Executive Vice President Title: VP
-------------------------------- ---------------------------------
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EXHIBIT A
COMPENSATION SCHEDULE
Effective Date: October 20, 2000
This is the Compensation Schedule for the General Agent Agreement between
Nationwide and General Agent.
1. Nationwide shall pay General Agent compensation computed on the premiums
or purchase payments paid to, received and accepted by Nationwide on
contract applications procured by General Agent in accordance with this
Agreement, and at the rates set forth in this schedule and all
amendments attached hereto.
2. Unless otherwise provided in an applicable Net Compensation Addendum,
nothing herein shall be construed as giving General Agent the right to
withhold or net such compensation from premium or purchase payments it
shall receive.
3. Except as otherwise provided in this Agreement, Nationwide will prepare
a compensation statement for periods ending on the 7th, 15th, 22nd and
the last business day of each month and shall deliver the statement, and
any compensation due there under, to General Agent within 15 business
days of the end of such period for the following products: Waddell &
Reed Advisors Select Life, Waddell & Reed Advisors Survivorship Life,
Waddell & Reed Advisors Term One/Ten/Twenty and Waddell & Reed Advisors
Term Ten/Twenty-NY.
The billing cycle for compensation associated with the Waddell & Reed
Advisors Retirement Plan product, is the 1st day of the month through
the 15th day and the 16th day through the last business day of the month.
The compensation cycle for the following products will be daily:
Waddell & Reed Advisor Select Annuity
Waddell & Reed Advisors Select Plus Annuity
Waddell & Reed Advisors Select Plus Annuity NY
4. The compensation rates which shall apply to business produced by General
Agent pursuant to this Agreement are attached to this Exhibit as one or
more Compensation Schedules, which may be amended from time to time as
provided for in this Agreement. The Compensation Schedules also apply to
all state specific versions of the contract form numbers listed on the
Compensation Schedules.
Some of the Contracts listed in the Compensation Schedules may not be
available for sale in all states. General Agent is responsible for
ascertaining whether it has the authority, pursuant to state and federal
law, to sell the Contracts in the jurisdictions in which the Contracts
have been approved and in which General Agent is appointed by Nationwide.
5. No compensation shall be payable, and Nationwide may chargeback any
compensation that may have been paid in any of the following situations:
(i) Nationwide, in its good faith discretion, determines not to issue
the Contract applied for; (ii) Nationwide refunds the premiums or
purchase payments upon the applicant's surrender or withdrawal pursuant
to any "free-look" privilege; (iii) Nationwide refunds the premiums paid
as a result of a complaint by the Contract holder or applicant; or (iv)
Nationwide determines that any person soliciting an application was
required to be licensed and was not or that any other person or entity
receiving compensation for soliciting application or premiums for the
Contracts is not or was not duly licensed as an insurance agent and
appointed (v) if Nationwide determines at any time that the applicant
did not meet applicable underwriting standards, including but not
limited to, the maximum issue age.
6. Compensations or replacements or conversions shall be allowed in
accordance with the Company rules in force at the time such replacement
or conversion is effected.
7. Nationwide will not pay compensation on an internal exchange unless
otherwise provided in this Agreement.
THIS EXHIBIT ESTABLISHES THE COMPENSATION RATES FOR PURCHASE PAYMENTS
SPECIFIED HEREIN AND IN NO WAY SUPERSEDES OR REVOKES ANY OTHER TERMS IN THE
AGREEMENT. ALL OTHER PROVISIONS OF THE AGREEMENT ARE UNAFFECTED BY THIS
EXHIBIT.
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EXHIBIT B
EXCLUSIVITY
Nationwide will be the exclusive provider to Waddell & Reed for the following
products:
1. Waddell & Reed Advisor Select Annuity
2. Waddell & Reed Advisors Select Plus Annuity
3. Waddell & Reed Advisors Select Plus Annuity NY
4. Waddell & Reed Advisors Select Life
5. Waddell & Reed Advisors Retirement Plan
There will be no Exclusivity Arrangement regarding the following products:
1. Waddell & Reed Advisors Survivorship Life
2. Waddell & Reed Advisors Term Ten/Twenty
3. Waddell & Reed Advisors Term Ten/Twenty NY
Upon the mutual agreement of both parties, this EXHIBIT may be amended from
time to time with the addition of certain other annuity or insurance products.
*Actual form numbers to be used in certain states may have different
identifying suffixes, which reflect certain unique characteristics of the
contract mandated by the particular state insurance authority.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.6
<SEQUENCE>6
<FILENAME>a2041359zex-10_6.txt
<DESCRIPTION>FUND PARTICIPATION AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.6
FUND PARTICIPATION AGREEMENT
This Fund Participation Agreement ("Agreement"), dated as of the 1st day of
December, 2000 is made by and between Nationwide Life Insurance Company and/or
Nationwide Life and Annuity Insurance Company (separately or collectively
"Nationwide") on behalf of the Nationwide separate accounts identified on
Exhibit A which is attached hereto and may be amended from time to time
("Variable Accounts"), and WADDELL & REED SERVICES COMPANY ("WRSCO") and WADDELL
& REED, INC. ("W&R, INC.") which serve respectively as the accounting
services/shareholder servicing agent and the distributor to the W&R TARGET
FUNDS, INC. (the "Funds") listed on Exhibit A. WRSCO and W&R, INC. are
collectively referred to throughout this Agreement as "W&R."
WHEREAS, the Contracts allow for the allocation of net amounts received by
Nationwide to separate sub-accounts of the Variable Accounts for investment in
shares of the Funds and other similar funds as agreed by W&R and Nationwide; and
WHEREAS, selection of a particular sub-account (corresponding to a particular
Fund) is made by the Contract owner; or, in the case of certain group Contracts,
by participants in various types of retirement plans which have purchased such
group Contracts, and such Contract owners and/or participants may reallocate
their investment options among the sub-accounts of the Variable Accounts in
accordance with the terms of the Variable Accounts in accordance with the terms
of the Contracts; and
WHEREAS, Nationwide and W&R mutually desire the inclusion of the Funds as
underlying investment media for variable life insurance policies and/or variable
annuity contracts as agreed by W&R and Nationwide (collectively, the
"Contracts") issued by Nationwide;
NOW THEREFORE, Nationwide and W&R, in consideration of the promises and
undertakings described herein, agree as follows:
1. (a) Nationwide represents and warrants that the Variable Accounts have
been established and are in good standing under Ohio Law; and the
Variable Accounts have been registered as unit investment trusts under
the Investment Company Act of 1940, as amended (the "1940 Act") and
will remain so registered, or are exempt from registration pursuant to
section 3(c)(11) of the 1940 Act;
(b) Nationwide represents and warrants that it is an insurance company
duly organized and in good standing under the laws of its state of
incorporation and that it has legally and validly established each
Variable Account and Contract;
(c) Nationwide represents and warrants that the Contracts will be
registered under the Securities Act of 1933, as amended ("1933 Act")
unless an exemption from registration is available prior to any
issuance or sale of the Contracts and that the Contracts will be
issued in compliance in all material respects with applicable federal
and state laws.
2. Each party recognizes that the Funds shall be the exclusive underlying
investments for the Contracts developed for exclusive distribution by W&R.
The Funds may be available in other Contracts upon mutual agreement of
Nationwide and W&R.
3. Subject to the terms and conditions of this Agreement, Nationwide shall be
appointed to, and agrees, to act as a limited agent of W&R, for the sole
purpose of receiving instructions for the purchase and redemption of Fund
shares (from Contract owners or participants making investment allocation
decisions under the Contracts) prior to the close of regular trading each
Business Day. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Funds calculate their net
asset value as set forth in the Funds' most recent Prospectuses and
Statements of Additional Information. Except as particularly stated in this
paragraph, Nationwide shall have no authority to act on behalf of W&R or to
incur any cost or liability on its behalf.
W&R will use its reasonable best efforts to provide closing net asset
value, change in net asset value, dividend or daily accrual rate
information and capital gain information by 6:00 p.m. Eastern Time each
1
<PAGE>
Business Day to Nationwide. Nationwide shall use this data to calculate
unit values. Unit values shall be used to process that same Business Day's
Variable Account transactions. Orders for purchases or redemptions shall be
placed with W&R or its specified agent no later than 10:00 a.m. of the
following Business Day. Orders for shares of Funds shall be accepted and
executed at the time they are received by W&R and at the net asset value
price determined as of the close of trading on the previous Business Day.
The Funds may refuse to sell shares to any person or may suspend or
terminate the offering of its shares if such action is required by law or
by regulatory authorities having jurisdiction or is, in the sole discretion
of the directors of the Funds, necessary in the best interest of the
shareholders of the Funds. W&R will not accept any order made on a
conditional basis or subject to any delay or contingency. Nationwide shall
only place purchase orders for shares of Funds on behalf of its customers
whose addresses recorded on Nationwide's books are in a state or other
jurisdiction in which the Funds are registered or qualified for sale, or
are exempt from registration or qualification as confirmed in writing by
W&R.
Payment for net purchases shall be wired to a custodial account designated
by W&R and payment for net redemptions will be wired to an account
designated by Nationwide. Dividends and capital gain distributions shall be
reinvested in additional Fund shares at net asset value. Notwithstanding
the above, W&R shall not be held responsible for providing Nationwide with
ex-date net asset value, change in net asset value, dividend or capital
gain information when the New York Stock Exchange is closed, when an
emergency exists making the valuation of net assets not reasonably
practicable, or during any period when the Securities and Exchange
Commission ("SEC") has by order permitted the suspension of pricing shares
for the protection of shareholders.
Issuance and transfer of Fund shares will be by book entry only. Share
certificates will not be issued to Nationwide for any Variable Account.
Fund shares will be recorded in the appropriate title for each Variable
Account.
Nationwide agrees to provide W&R, upon request, written reports indicating
the number of shareholders that hold interests in the Funds and such other
information (including books and records) that W&R may reasonably request
or as may be necessary or advisable to enable it to comply with any law,
regulation or order.
4. All expenses incident to the performance by W&R and the Funds under this
Agreement shall be paid by W&R and the Funds. W&R shall promptly provide
Nationwide (or its designee), or cause Nationwide (or its designee) to be
provided with, a reasonable quantity of the Funds' Statements of Additional
Information and any supplements, and a camera-ready copy of the Funds'
Prospectus and any Supplements for use by Nationwide in producing a
combined prospectus for each Contract incorporating both the Contract
Prospectus and the Funds' Prospectus. Costs for production of such
documents shall be allocated as set forth in the Administrative Services
Agreement, dated September 1, 2000 by and between Nationwide and Waddell &
Reed, Inc.
5. Nationwide and its agents shall make no representations concerning the
Funds or Fund shares except those contained in the Funds' then current
Prospectuses, Statements of Additional Information or other documents
produced by W&R (or an entity on its behalf) which contain information
about the Funds. Nationwide agrees to allow a reasonable period of time for
W&R to review any advertising and sales literature drafted by Nationwide
(or agents on its behalf) with respect to the Funds prior to submitting
such material to any regulator.
2
<PAGE>
6. W&R represents that the Funds are currently qualified as regulated
investment companies under Subchapter M of the Internal Revenue Code of
1986 (the "Code"), as amended, and that the Funds shall make every effort
to maintain such qualification. W&R shall promptly notify Nationwide upon
having a reasonable basis for believing that the Funds have ceased to so
qualify, or that they may not qualify as such in the future.
W&R represents that the Funds currently comply with the diversification
requirements pursuant to Section 817(h) of the Code and Section 1.817-5(b)
of the Federal Tax Regulations and that the Funds will make every effort to
maintain the Funds' compliance with such diversification requirements,
unless the Funds are otherwise exempt from section 817(h) and/or except as
otherwise disclosed in the Funds' prospectus. W&R will notify Nationwide
promptly upon having a reasonable basis for believing that the Funds have
ceased to so qualify, or that the Funds might not so qualify in the future.
Unless otherwise exempt, W&R shall provide to Nationwide a statement
indicating compliance with Section 817(h) and a schedule of investment
holdings, to be received by Nationwide no later than twenty-five (25) days
following the end of each calendar quarter.
Nationwide represents that the Contracts are currently, and at the time of
issuance will be, treated as annuity contracts or life insurance policies,
whichever is appropriate under applicable provisions of the Code, and that
it shall make every effort to maintain such treatment. Nationwide will
promptly notify W&R upon having a reasonable basis for believing that the
Contracts have ceased to be treated as annuity contracts or life insurance
polices, or that the Contracts may not be so treated in the future.
Unless the Funds are exempt from the requirements of section 817(h),
Nationwide represents that each Variable Account is a "segregated asset
account" and that interests in each Variable Account are offered
exclusively through the purchase of a "variable contract", within the
meaning of such terms pursuant to section 1.817-5(f)(2) of the Federal Tax
Regulations, that it shall make every effort to continue to meet such
definitional requirements, and that it shall notify W&R immediately upon
having a reasonable basis for believing that such requirements have ceased
to be met or that they may not be met in the future.
7. Within five (5) Business Days after the end of each calendar month, W&R
shall provide Nationwide a monthly statement of account, which shall
confirm all transactions made during that particular month in the Variable
Accounts.
8. (a) The directors of the Funds will monitor the operations of the Funds
for the existence of any material irreconcilable conflict among the
interest of all Contract owners of all separate accounts investing in
the Funds. W&R shall notify Nationwide of the potential for, or the
determination of, such irreconcilable material conflict. An
irreconcilable conflict may arise, among other things, from (i) an
action by any state insurance regulatory authority; (ii) a change in
applicable insurance laws or regulations; (iii) a tax ruling or
provision of the Code or the regulations thereunder; (iv) any other
development relating to the tax treatment of insurers, contract
holders or policy owners or beneficiaries of variable annuity or
variable life insurance products; (v) the manner in which the
investments of the Funds are managed; (vi) a difference in voting
instructions given by variable annuity contract owners, on the one
hand, and variable life insurance policy owners on the other hand, or
by the contract holders or policy owners of different participating
insurance companies; or (vii) a decision by an insurer to override the
voting instructions of participating contract owners.
(b) Nationwide is responsible for reporting any potential or existing
conflicts to W&R and the Funds. Nationwide will be responsible for
assisting the directors in carrying out their responsibilities under
this provision by providing the directors with all information
reasonably necessary for them to consider the issues raised. The Funds
will also require Waddell & Reed Investment Management Company
("WRIMCO") (the Funds' investment adviser) to report to the directors
any such conflict that comes to the attention of WRIMCO.
(c) If a majority of the directors of the Funds or a majority of the
disinterested directors determine that a material irreconcilable
conflict exists involving Nationwide, Nationwide shall, at its expense
and
3
<PAGE>
to the extent reasonably practicable (as determined by a majority of
the disinterested directors), take whatever steps are necessary to
eliminate the irreconcilable material conflict, including, but not
limited to, withdrawing the assets allocable to some or all of the
Variable Accounts from the Funds and reinvesting such assets in a
different investment medium, including another Fund, offering to the
affected Contract owners the option of making such a change or
offering a new funding medium, including a registered investment
company.
For purposes of this provision, the directors or the disinterested
directors shall determine whether any proposed action adequately remedies
any irreconcilable material conflict. In the event of a determination of an
irreconcilable material conflict, the directors shall cause the Funds to
take such action, such as establishment of one or more additional Funds, as
they reasonably determine to be in the interest of all shareholders and
Contract owners in view of all the applicable factors such as the cost,
feasibility, tax, regulatory and other considerations. In no event will the
Funds be required by this provision to establish a new funding medium for
any Contract.
Nationwide shall not be required by this provision to establish a new
funding medium for any Contract if an offer to do so has been declined by a
vote of a majority of the Contract owners materially adversely affected by
the material irreconcilable conflict. Nationwide will decline an offer to
establish a new funding medium only if Nationwide believes it is in the
best interest of its Contract owners.
9. This Agreement shall terminate as to the sale and issuance of new
Contracts:
(a) at the option of Nationwide or W&R upon at least 60 days advance
written notice to the other;
(b) in the event of termination of the General Agency Agreement between
Waddell & Reed, Inc. and Nationwide;
(c) at any time, upon W&R's election, if the Funds determine that
liquidation of the Funds is in the best interest of the Funds and
their beneficial owners. Reasonable advance notice of election to
liquidate shall be furnished by W&R to permit the substitution of Fund
shares with the shares of another investment company pursuant to SEC
regulation;
(d) if the Contracts are not treated as annuity contracts or life
insurance policies by the applicable regulators or under applicable
rules or regulations;
(e) if the Variable Accounts are not deemed "segregated asset accounts" by
the applicable regulators or under applicable rules or regulations;
(f) at the option of Nationwide, if Fund shares are not available for any
reason to meet the requirements of Contracts as determined by
Nationwide. Reasonable advance notice of election to terminate (and
time to cure) shall be furnished by Nationwide;
(g) at the option of Nationwide or W&R, upon institution of relevant
formal proceedings against the broker-dealer(s) marketing the
Contracts, the Variable Accounts, Nationwide or the Funds by the NASD,
IRS, the Department of Labor, the SEC, state insurance departments or
any other regulatory body, the expected or anticipated outcome of
which would, in the reasonable judgment of the terminating party,
materially impair the other party's ability to meet and perform its
obligations under this Agreement. Prompt notice of an election to
terminate under this provision shall be furnished by the terminating
party and shall be effective upon receipt;
(h) upon a decision by Nationwide, in accordance with regulations of the
SEC, to substitute such Fund shares with the shares of another
investment company for Contracts for which the Fund shares have been
selected to serve as the underlying investment medium, provided,
however, that Nationwide shall not take any action to remove the Funds
as the underlying investment medium for the Contracts developed for
exclusive distribution by W&R. Nationwide shall give at least 60 days
written notice to the Funds and W&R of any proposal to substitute Fund
shares;
(i) upon assignment of this Agreement unless such assignment is made with
the written consent of each other party; and
(j) in the event Fund shares are not registered, issued or sold pursuant
to Federal law, or such law precludes the use of Fund shares as an
underlying investment medium of Contracts issued or to be issued by
Nationwide. Prompt written notice shall be given by either party to
the other in the event the conditions of this provision occur.
4
<PAGE>
10. Each notice required by this Agreement shall be given orally and confirmed
in writing to:
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
One Nationwide Plaza 1-09-V3
Columbus, Ohio 43215
Attention: Compliance Officer
Waddell & Reed, Inc.
Waddell & Reed Services Company
6300 Lamar Avenue
Overland Park, KS 66202
Attention: Legal Department
W&R Target Funds, Inc.
6300 Lamar Avenue
Overland Park, KS 66202
Attention: Treasurer
With a copy to:
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
One Nationwide Plaza 1-09-V3
Columbus, Ohio 43215
Attention: Director - Securities
W&R Target Funds, Inc.
6300 Lamar Avenue
Overland Park, KS 66202
Attention: Secretary
Any party may change its address by notifying the other party(ies) in
writing.
11. So long as and to the extent that the SEC continues to interpret the 1940
Act to require pass-through voting privileges for variable contract owners,
Nationwide shall distribute all proxy material furnished by W&R (provided
that such material is received by Nationwide at least 10 business days
prior to the date scheduled for mailing to Contract owners) and shall vote
Fund shares in accordance with instructions received from the Contract
owners who have such interests in such Fund shares. Nationwide shall vote
the Fund shares for which no instructions have been received in the same
proportion as Fund shares for which said instructions have been received
from Contract owners, provided that such proportional voting is not
prohibited by the Contract owner's related plan or trust document.
Nationwide and its agents will in no way recommend action in connection
with or oppose or interfere with the solicitation of proxies for the Fund
shares held for the benefit of such Contract owners.
5
<PAGE>
12. (a) Nationwide agrees to reimburse and/or indemnify and hold harmless W&R,
the Funds, and each of their directors, officers, employees, agents
and each person, if any, who controls or is controlled by W&R within
the meaning of the Securities Act of 1933 (the "1933 Act")
(collectively, "Affiliated Party") against any losses, claims, damages
or liabilities ("Losses") to which W&R or any such Affiliated Party
may become subject, under the 1933 Act or otherwise, insofar as such
Losses (or actions in respect thereof) arise out of or are based upon,
but not limited to:
(i) any untrue statement or alleged untrue statement of any material
fact contained in information furnished by Nationwide;
(ii) the omission or the alleged omission to state in the
Registration Statements or Prospectuses of the Variable
Accounts, or Contract, or in any sales literature generated or
approved by Nationwide on behalf of the Variable Accounts or
Contracts, a material fact required to be stated therein or
necessary to make the statements therein not misleading;
(iii) conduct, statements or representations of Nationwide or its
agents, with respect to the sale and distribution of Contracts
for which Fund shares are an underlying investment;
(iv) the failure of Nationwide to provide the services and furnish
the materials under the terms of this Agreement;
(v) a breach of this Agreement or of any of the representations
contained herein; or
(vi) any failure to register the Contracts or the Variable Accounts
under federal or state securities laws, state insurance laws or
to otherwise comply with such laws, rules, regulations or
orders.
Provided however, that Nationwide shall not be liable in any such case
to the extent any such statement, omission or representation or such
alleged statement, alleged omission or alleged representation was made
in reliance upon and in conformity with written information furnished
to Nationwide by or on behalf of W&R specifically for use therein.
Nationwide shall reimburse any legal or other expenses reasonably
incurred by W&R, the Funds, or any Affiliated Party in connection with
investigating or defending any such Losses, provided, however, that
Nationwide shall have prior approval of the use of said counsel or the
expenditure of said fees.
This indemnity agreement shall be in addition to any liability which
Nationwide may otherwise have.
(b) W&R and the Funds agree to indemnify and hold harmless Nationwide and
each of its directors, officers, employees, agents and each person,
(collectively, "Nationwide Affiliated Party"), who controls Nationwide
within the meaning of the 1933 Act against any Losses to which
Nationwide or any such Nationwide Affiliated Party may become subject,
under the 1933 Act or otherwise, insofar as such Losses (or actions in
respect thereof) arise out of or are based upon; but not limited to:
(i) any untrue statement or alleged untrue statement of any material
fact contained in any information furnished by W&R or the Funds,
including but not limited to, the Registration Statements,
Prospectuses or sales literature of the Funds;
(ii) the omission or the alleged omission to state in the
Registration Statements or Prospectuses of the Funds a material
fact required to be stated therein or necessary to make the
statements therein not misleading;
(iii) W&R's failure to keep the Funds fully diversified and qualified
as regulated investment companies as required by the applicable
provisions of the Code, the 1940 Act, and the applicable
regulations promulgated thereunder;
(iv) the failure of W&R to provide the services and furnish the
materials under the terms of this Agreement;
(v) a breach of this Agreement or of any of the representations
contained herein; or
(vi) any failure to register the Funds under federal or state
securities laws or to otherwise comply with such laws, rules,
regulations or orders.
6
<PAGE>
Provided however, that W&R and the Funds shall not be liable in any
such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an act or omission of Nationwide or
untrue statement or omission or alleged omission made in conformity
with written information furnished to W&R or the Funds by Nationwide
specifically for use therein.
W&R and the Funds shall reimburse any reasonable legal or other
expenses reasonably incurred by Nationwide or any Nationwide
Affiliated Party in connection with investigating or defending any
such Losses, provided, however, that W&R and the Funds shall have
prior approval of the use of said counsel or the expenditure of said
fees.
This indemnity agreement will be in addition to any liability which
W&R and the Funds may otherwise have.
(c) Each party shall promptly notify the other party(ies) in writing of
any situation which presents or appears to involve a claim which may
be the subject of indemnification under this Agreement and the
indemnifying party shall have the option to defend against any such
claim. In the event the indemnifying party so elects, it shall notify
the indemnified party and shall assume the defense of such claim, and
the indemnified party shall cooperate fully with the indemnifying
party, at the indemnifying party's expense, in the defense of such
claim. Notwithstanding the foregoing, the indemnified party shall be
entitled to participate in the defense of such claim at its own
expense through counsel of its own choosing. Neither party shall admit
to wrong-doing nor make any compromise in any action or proceeding
which may result in a finding of wrongdoing by the other party without
the other party's prior written consent. Any notice given by the
indemnifying party to an indemnified party or participation in or
control of the litigation of any such claim by the indemnifying party
shall in no event be deemed to be an admission by the indemnifying
party of culpability, and the indemnifying party shall be free to
contest liability among the parties with respect to the claim.
13. Subject to Section 9(h) of this Agreement, W&R may request or Nationwide
may initiate the filing of a substitution application pursuant to Section
26(c) of the 1940 Act to substitute shares of a Fund held by a Nationwide
Variable Account for another investment media ("Substitution Application").
The costs associated with a Substitution Application shall be allocated as
follows:
(a) In the event W&R requests Nationwide to submit a Substitution
Application, W&R shall reimburse Nationwide for all reasonable costs
incurred by Nationwide with respect to such Substitution Application.
W&R shall be obligated to reimburse Nationwide under this provision
irrespective of whether the Substitution Application requested by W&R
is effectuated.
(b) In the event Nationwide initiates a Substitution Application and the
Fund being substituted is offered by separate accounts of companies
other than Nationwide, Nationwide shall bear all costs associated with
the Substitution Application irrespective of whether the Substitution
Application is effectuated.
(c) In the event Nationwide initiates a Substitution Application in
accordance with Section 9(h), Nationwide shall bear the costs incurred
in the transfer.
14. The forbearance or neglect of any party to insist upon strict compliance by
another party with any of the provisions of this Agreement, whether
continuing or not, or to declare a forfeiture of termination against the
other parties, shall not be construed as a waiver of any of the rights or
privileges of any party hereunder. No waiver of any right or privilege of
any party arising from any default or failure of performance by any party
shall affect the rights or privileges of the other parties in the event of
a further default or failure of performance.
15. This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of Ohio, without respect to its
choice of law provisions and in accordance with the 1940 Act. In the case
of any conflict, the 1940 Act shall control.
7
<PAGE>
16. Each party hereby represents and warrants to the other that the persons
executing this Agreement on its behalf are duly authorized and empowered to
execute and deliver the Agreement and that the Agreement constitutes its
legal, valid and binding obligation, enforceable against it in accordance
with its terms. Except as particularly set forth herein, neither party
assumes any responsibility hereunder, and will not be liable to the other
for any damage, loss of data, delay or any other loss whatsoever caused by
events beyond its reasonable control.
17. Nationwide acknowledges that the identity of W&R's (and its affiliates'
and/or subsidiaries') customers and all information maintained about those
customers constitute the valuable property of W&R. Nationwide agrees that,
should it come into contact or possession of any such information
(including, but not limited to, lists or compilations of the identity of
such customers), Nationwide shall hold such information or property in
confidence and shall not use, disclose or distribute any such information
or property except with W&R's prior written consent or as required by law
or judicial process.
W&R acknowledges that the identity of Nationwide's (and its affiliates'
and/or subsidiaries') customers and all information maintained about those
customers constitute the valuable property of Nationwide. W&R agrees that,
should it come into contact or possession of any such information
(including, but not limited to, lists or compilations of the identity of
such customers), W&R shall hold such information or property in confidence
and shall not use, disclose or distribute any such information or property
except with Nationwide's prior written consent or as required by law or
judicial process.
This section shall survive the expiration or termination of this Agreement.
18. Nothing in this Agreement shall be deemed to create a partnership or joint
venture by and among the parties hereto.
19. This Agreement supersedes any and all prior Fund Participation Agreements
made by and between the parties.
20. Except to amend Exhibit A, or as otherwise provided in this Agreement, this
Agreement may not be amended or modified except by a written amendment
executed by each of the parties.
8
<PAGE>
21. This Agreement may be executed by facsimile signature and it may be
executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
NATIONWIDE LIFE INSURANCE COMPANY AND NATIONWIDE LIFE
AND ANNUITY INSURANCE COMPANY
/s/ William G. Goslee
----------------------------------------------
By: William G. Goslee
Title: Vice President
Investment Management Relationships
WADDELL & REED, INC.
/s/ Thomas W. Butch
----------------------------------------------
By: Thomas W. Butch
Title: Executive Vice President
WADDELL & REED SERVICES COMPANY
/s/ Michael D. Strohm
----------------------------------------------
By: Michael D. Strohm
Title: President
W&R Target Funds, Inc.
/s/ Robert L. Hechler
----------------------------------------------
By: Robert L. Hechler
Title: President
9
<PAGE>
EXHIBIT A
This Exhibit corresponds to the Fund Participation Agreement dated
December 1, 2000.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
VARIABLE ACCOUNTS OF NATIONWIDE CORRESPONDING NATIONWIDE CONTRACTS CORRESPONDING FUNDS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nationwide VA Separate Account-D o Waddell & Reed Advisors W&R Target Funds, Inc.
Select Annuity o Asset Strategy Portfolio
o Balanced Portfolio
o Bond Portfolio
o Core Equity Portfolio
(formerly, Income Portfolio)
o Growth Portfolio
o High Income Portfolio
o International Portfolio
o Limited-Term Bond Portfolio
o Money Market Portfolio
o Science and Technology
Portfolio
o Small Cap Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Nationwide VLI Separate Account-5 o Waddell & Reed Advisors W&R Target Funds, Inc.
Select Life o Asset Strategy Portfolio
o Waddell & Reed Advisors o Balanced Portfolio
Select Survivorship Life o Bond Portfolio
o Core Equity Portfolio
(formerly, Income Portfolio)
o Growth Portfolio
o High Income Portfolio
o International Portfolio
o Limited-Term Bond Portfolio
o Money Market Portfolio
o Science and Technology
Portfolio
o Small Cap Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Nationwide Variable Account-9 o Waddell & Reed Advisors W&R Target Funds, Inc.
Select Plus Annuity o Asset Strategy Portfolio
(proprietary version of o Balanced Portfolio
Future (1933 Act o Bond Portfolio
No.333-28995)) o Core Equity Portfolio
(formerly, Income Portfolio)
o Growth Portfolio
o High Income Portfolio
o International Portfolio
o Limited-Term Bond Portfolio
o Money Market Portfolio
o Science and Technology
Portfolio
o Small Cap Portfolio
</TABLE>
10
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.9
<SEQUENCE>7
<FILENAME>a2041359zex-10_9.txt
<DESCRIPTION>LETTER AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.9
[LOGO] Anthony L. McWhorter FSA, MAAA
PRESIDENT
205-325-2758
FAX 205-325-2520
UNITED INVESTORS LIFE 2001 THIRD AVENUE SOUTH (35233) POST OFFICE BOX 10207,
BIRMINGHAM, ALABAMA 35202-0207
July 8, 1999
Mr. Robert Hechler
President
Waddell & Reed, Inc.
6300 Lamar
Shawnee Miss