-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JgYavL5bN4ps76kc6xFKGIV+/okZDERMqbSPxte09IbbgnavbJL1TRAGwYxEFqW4 wxrTl17VTrBsqlxprMMjjw== 0000038777-03-000693.txt : 20031222 0000038777-03-000693.hdr.sgml : 20031222 20031219213626 ACCESSION NUMBER: 0000038777-03-000693 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN RESOURCES INC CENTRAL INDEX KEY: 0000038777 STANDARD INDUSTRIAL CLASSIFICATION: INVESTMENT ADVICE [6282] IRS NUMBER: 132670991 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09318 FILM NUMBER: 031066388 BUSINESS ADDRESS: STREET 1: ONE FRANKLIN PARKWAY STREET 2: BUILDING 920 CITY: SAN MATEO STATE: CA ZIP: 94403 BUSINESS PHONE: 650-312-2000 MAIL ADDRESS: STREET 1: FRANKLIN RESOURCES INC STREET 2: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403 10-K 1 form10k_03.txt FOR THE PERIOD ENDED SEPTEMBER 30, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-9318 FRANKLIN RESOURCES, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-2670991 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including Area Code: (650) 312-2000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, par value New York Stock Exchange $.10 per share Pacific Exchange London Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by "X" 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 at least the past 90 days. YES[X] NO[ ] Indicate by "X" mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by "X" mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES[X] NO[ ] The aggregate market value of the voting stock ("Common Stock") held by non-affiliates of the Registrant, as of March 31, 2003 (the last business day of Registrant's second quarter of fiscal 2003), was approximately $4.75 billion based upon the last sale price reported for such date on the New York Stock Exchange. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination is not necessarily conclusive. Number of shares of the Registrant's common stock outstanding at December 1, 2003: 248,473,077 DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the Registrant's proxy statement for its annual meeting of stockholders (the "Proxy Statement") to be held on January 29, 2004, which will be filed with the Securities and Exchange Commission (the "SEC"), are incorporated by reference into Part III of this report. INDEX TO ANNUAL REPORT ON FORM 10-K PAGE NUMBER REFERENCE TO THIS FORM 10-K 2003 ANNUAL REPORT REQUIRED INFORMATION ON FORM 10-K PART I ITEM 1. BUSINESS 4 General 4 Company History and Acquisitions 4 Lines of Business 5 Investment Management and Related Services 5 Banking/Finance Operations 19 Regulatory Considerations 20 Competition 22 Financial Information About Industry Segments 22 Intellectual Property 22 Employees 23 Available Information 23 Executive Officers of the Registrant 23 ITEM 2. PROPERTIES 25 ITEM 3. LEGAL PROCEEDINGS 26 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 26 ITEM 6. SELECTED FINANCIAL DATA 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 27 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 44 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 45 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 79 ITEM 9A. CONTROLS AND PROCEDURES 79 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 79 Proxy: "Proposal 1: Election of Directors"* ITEM 11. EXECUTIVE COMPENSATION 79 Proxy: "Proposal 1: Election of Directors"* ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 80 Equity Compensation Plan Information Proxy: "Security Ownership of Principal Shareholders" and "Security Ownership of Management"* 2 PAGE NUMBER REFERENCE TO THIS FORM 10-K 2003 ANNUAL REPORT REQUIRED INFORMATION ON FORM 10-K ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 80 Proxy: "Proposal 1: Election of Directors - Certain Relationships and Related Transactions"* ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 80 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 81 SIGNATURES 82 * Incorporated by reference to the Proxy Statement. 3 PART I FORWARD-LOOKING STATEMENTS. In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, including the risk factors explained in the section entitled Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), that could cause our actual results to differ materially from those reflected in the forward-looking statements. When used in this report, words or phrases about the future such as "expected to", "could have", "will continue", "anticipates", "estimates" or similar expressions are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Statements in MD&A and elsewhere in this report that speculate about future events are "forward-looking statements". Forward-looking statements are our best prediction at the time that they are made, and you should not rely on them. If a circumstance occurs that causes any of our forward-looking statements to be inaccurate, we do not have an obligation to announce publicly the change to our expectations, or to make any revision to the forward-looking statements. ITEM 1. BUSINESS GENERAL Franklin Resources, Inc. ("FRI" or the "Company"), is a diversified financial services company, which is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and as a financial holding company under the Gramm-Leach-Bliley Act (the "GLB Act"). Through our wholly-owned direct and indirect subsidiary companies, we provide a broad range of investment advisory, investment management and related services to open-end investment companies, including our own family of retail mutual funds, institutional accounts, high net-worth families, individuals and separate accounts in the United States (the "U.S.") and internationally. Our "sponsored investment products" include a broad range of domestic and global/international equity, hybrid/balanced, fixed-income, and money market mutual funds as well as other investment products, which are sold to the public under the Franklin, Templeton, Mutual Series, Bissett and Fiduciary Trust brand names. As of September 30, 2003, we had $301.9 billion in assets under our management with approximately 14.2 million billable shareholder accounts worldwide. In support of our primary business and operating segment, investment management, we also provide certain related services, including transfer agency, fund administration, distribution, shareholder processing, custodial, trustee and other fiduciary services. In our secondary business and operating segment, banking/finance, we provide clients with select retail-banking and consumer loan services through our bank subsidiaries. The common stock of FRI is traded in the U.S. primarily on the New York Stock Exchange and the Pacific Exchange under the ticker symbol "BEN" and under the ticker symbol "FRK" on the London Stock Exchange. The term "Franklin(R) Templeton(R) Investments" as used in this document, refers to Franklin Resources, Inc. and its consolidated subsidiaries. COMPANY HISTORY AND ACQUISITIONS Franklin Templeton Investments and its predecessors have been engaged in the financial services business since 1947. Franklin Resources, Inc. was incorporated in Delaware in November 1969. We originated our mutual fund business with the Franklin family of funds, which is now known as the Franklin Funds(R). We expanded our business, in part, by acquiring companies engaged in the investment advisory and investment management business. In October 1992, we acquired substantially all of the assets and liabilities of the investment adviser to the Templeton, Galbraith & Hansberger Ltd. financial services business. This acquisition added the Templeton family of funds to our Company. The Templeton funds are known for their international and global investment objectives and value style of investing. In November 1996, we acquired certain assets and liabilities of Heine Securities Corporation, which provided investment management services to various accounts and investment companies, including Mutual Series Fund Inc., now known as Franklin Mutual Series Fund Inc. ("Mutual Series"). The Mutual Series funds are primarily value oriented equity funds. We expanded our business in Korea in July 2000 when we purchased all of the remaining outstanding shares of a Korean asset management company, in which we previously held a partial interest. With assets under 4 management approaching $3 billion in Korea, we are now one of the larger foreign money managers in that country. We acquired all of the outstanding shares of Bissett & Associates Investment Management, Ltd. ("Bissett") in October 2000 for approximately $95 million. Bissett now operates as part of our Canadian subsidiary, Franklin Templeton Investments Corp. ("FTIC"). With the addition of Bissett, we added Bissett's family of mutual funds to our existing Canadian based funds and expanded our investment advisory services throughout Canada to a broad range of clients, including institutional clients such as pension plans, municipalities, universities, charitable foundations and private clients. In April 2001, we acquired Fiduciary Trust Company International, a bank organized under the New York State Banking Law ("Fiduciary Trust"). Following the acquisition, Fiduciary Trust became a wholly-owned subsidiary of Franklin Resources, Inc. The stock transaction was valued at approximately $776 million at closing. Fiduciary Trust has a reputation as one of the leading providers of investment management and related trust and custody services to institutional clients and high net-worth families and individuals. With the acquisition of Fiduciary Trust, we also added Fiduciary Trust's U.S. and non-U.S. mutual funds to our product line. In July 2002, our 75% owned subsidiary, Templeton Asset Management (India) Private Limited, acquired all of the outstanding shares of Pioneer ITI AMC Limited ("Pioneer") for approximately $55.4 million. Pioneer is an Indian investment management company with approximately $800 million in assets under management as of the purchase date. The acquisition made us one of the largest private sector fund companies in India, with combined assets at the time of acquisition of approximately $1.6 billion and more than 850,000 shareholder accounts. In October 2003, we acquired Darby Overseas Investments, Ltd. and Darby Overseas Partners, L.P. (collectively, "Darby") for $75.9 million. We had previously owned 12.66% of Darby, and with the completion of the acquisition, we now have a 100% ownership interest. The acquisition was made in accordance with an agreement entered into on August 1, 2003. Darby, based in Washington, D.C., sponsors and manages funds for institutional investors and high net-worth clients that invest primarily in emerging markets private equity and mezzanine finance transactions, including specialized sector funds. LINES OF BUSINESS I. INVESTMENT MANAGEMENT AND RELATED SERVICES We derive substantially all of our revenues from providing investment advisory, investment management, distribution and administrative services to our various family of funds, high net-worth clients, institutional accounts and separate accounts. Our revenues depend to a large extent on the amount of assets under management. Underwriting and distribution revenues, also a large source of revenue, consist of sales charges and commissions derived from sales of our sponsored investment products and distribution and service fees. When used in this report "Franklin Templeton mutual funds" or "funds" means all of the Franklin, Templeton, Mutual Series, Bissett, and Fiduciary Trust mutual funds; "sponsored investment products" means all of the Franklin Templeton mutual funds together with closed-end investment companies, foreign-based investment products, and other U.S. and international private, institutional, high net-worth and separate accounts. 5 A. ASSETS UNDER MANAGEMENT ("AUM") Investment management fees, our most substantial source of revenue, are based upon the dollar value of assets under management, because we earn most of our revenues from fees linked to the amount of assets in the accounts that we advise. As of September 30, 2003, the type of assets under management by investment objective held by investors on a worldwide basis was: TYPE OF ASSETS VALUE IN BILLIONS % TOTAL OF AUM - ------------------------------------------------------------------- ----------------- -------------- EQUITY Growth potential, income potential or various combinations thereof. $155.2 51% FIXED-INCOME Both long and short-term. $95.1 32% HYBRID/BALANCED Asset allocation, balanced, flexible and income-mixed funds. $45.8 15% MONEY MARKET Short-term liquid assets. $5.8 2%
Broadly speaking, the change in the net assets of the sponsored investment products depends upon two factors: (1) the level of sales (inflows) as compared to the level of redemptions (outflows); and (2) the increase or decrease in the market value of the securities held in the portfolio of investments. The organization is subject to the risk of asset volatility, resulting from changes in the domestic and global financial and equity markets. In addition, because we generally derive higher revenues and income from our equity assets, a shift in assets from equity to fixed-income and hybrid/balanced funds reduces total revenue and thus, net income. Despite such risk of asset volatility, we believe that we are more competitive as a result of the greater diversity of sponsored investment products available to our customer base. B. TYPES OF INVESTMENT MANAGEMENT AND RELATED SERVICES A majority of our revenues are derived from providing investment management, advisory, distribution, transfer agency and related services for the Franklin Templeton mutual funds. We advise, manage and implement the investment activities of and provide other administrative services necessary to operate our registered investment companies, the related U.S.-open-end and closed-end funds or series and our many non-U.S. based sponsored investment products. 1. FUND ADVISORY SERVICES We earn investment management fee revenues by providing investment advisory and management services pursuant to investment management agreements with each fund. This business is primarily conducted through our wholly-owned direct and indirect subsidiary companies, including, among others, the following: Fiduciary International, Inc. ("FII"), a registered investment adviser under the Investment Advisers Act of 1940 (the "Advisers Act"), provides investment advisory and portfolio management to certain mutual funds and separate accounts; Franklin Advisers, Inc. ("FAV"), a registered investment adviser under the Advisers Act, provides investment advisory, portfolio management and administrative services to various Franklin Templeton mutual funds, sub-advisory services to non-affiliated entities and advisory services to institutional accounts; Franklin Advisory Services, LLC ("FAS"), a registered investment adviser under the Advisers Act, provides investment advisory and portfolio management services to certain of the Franklin Templeton mutual funds and also provides sub-advisory services to non-affiliated entities; Franklin Mutual Advisers, LLC ("FMA"), a registered investment adviser under the Advisers Act, provides investment and portfolio management services to the Mutual Series funds and also to several of the Franklin Templeton Variable Insurance Products Trust funds; Franklin Templeton Alternative Strategies, Inc. ("FTAS"), a registered investment adviser under the Advisers Act and a registered Commodity Pool Operator under the Commodity Exchange Act, provides investment advisory, portfolio management and administrative services to certain of our sponsored investment products with mandates in alternative investments; 6 Franklin Templeton Institutional, LLC ("FTI"), a registered investment adviser under the Advisers Act, provides investment advisory, portfolio management and administrative services to institutional clients; Franklin Templeton Investment Management Limited ("FTIML"), a registered foreign equivalent investment adviser in the United Kingdom and a registered investment adviser under the Advisers Act, serves as an investment adviser to various of our investment companies registered in foreign jurisdictions, including Europe; Franklin Templeton Investment Trust Management Co., Ltd. ("FTITMC"), a registered foreign equivalent investment adviser in Korea, provides investment trust management services and also manages equity and fixed income products in Korea; Franklin Templeton Investments (Asia) Limited ("FTIL"), a registered investment adviser under the Advisers Act and a foreign equivalent of an investment adviser in Hong Kong, provides certain advisory services and distributes investment products in Hong Kong; Franklin Templeton Investments Corp. ("FTIC"), a registered foreign equivalent investment adviser with many of the Canadian securities commissions, a mutual fund dealer with the Ontario Securities Commission and Alberta Securities Commission and an investment adviser under the Advisers Act, provides investment advisory, portfolio management, distribution and administrative services for Canadian registered retail funds and sub-advisory services to certain institutional and private accounts; Franklin Templeton Investments Japan Limited ("FTIJL"), a registered foreign equivalent investment adviser in Japan, provides investment advisory, portfolio management and administrative services to certain of our funds in Japan and manages Japan equity funds that are sold in other regions; Templeton Asset Management (India) Private Limited ("TAMPL"), an "Asset Management Company" approved by the Securities and Exchange Board of India, provides investment advisory, portfolio management and administrative services to certain mutual funds in India; Templeton Asset Management Ltd. ("TAML"), a registered investment adviser under the Advisers Act and a registered foreign equivalent investment adviser in Singapore and Hong Kong, provides investment advisory and related services to certain Templeton developing markets funds and portfolios; Templeton Global Advisors Limited ("TGAL"), a registered investment adviser under the Advisers Act, provides investment advisory, portfolio management, and administrative services to certain of the Templeton funds and advisory services to institutional and private accounts; and Templeton Investment Counsel, LLC ("TICL"), a registered investment adviser under the Advisers Act, provides investment advisory, portfolio management and administrative services to certain of the Templeton funds, sub-advisory services to certain of the Franklin Funds and advisory services to institutional and private accounts. Our subsidiary investment advisers conduct investment research and determine which securities the U.S.-registered open-end and closed-end funds will purchase, hold or sell under the supervision and oversight of the fund's board of trustees, directors or administrative managers. In addition, the subsidiary companies take all steps necessary to implement such decisions, including selecting brokers and dealers, executing and settling trades in accordance with detailed criteria set forth in the management agreement for each fund, internal policies, and applicable law and practice. In addition, certain of our subsidiary companies provide similar investment management and administrative services to a number of non-U.S. open-end and closed-end investment companies, as well as other U.S. and international private and institutional accounts, including certain of our sponsored investment companies organized in Luxembourg and Ireland. Our investment advisory services include fundamental investment research and valuation analyses, including original economic, political, industry and company research, company visits and inspections, and the utilization of such sources as company public records and activities, management interviews, company prepared information, and other publicly available information, as well as analyses of suppliers, customers and competitors. In addition, research services provided by brokerage firms are used to support our findings. Investment management and related services are provided pursuant to agreements in effect with each of our U.S.-registered open-end and closed-end funds. Comparable agreements are in effect with foreign-registered funds and private accounts. In general, the management agreements for our U.S.-registered open-end and closed-end funds must be renewed each year, and must be specifically approved at least annually by a vote of 7 such funds' board of trustees or directors or by a vote of the holders of a majority of such funds' outstanding voting securities. Foreign-registered funds and private and institutional accounts have various termination rights, and review and renewal provisions that are not discussed in this report. Under the majority of investment management agreements, the U.S.-registered open-end and closed-end funds pay us a fee payable monthly in arrears based upon a fund's average daily net assets. Annual fee rates under the various global investment management agreements generally range from 0.15% to a maximum of 2.50% and are often reduced as net assets exceed various threshold levels. The funds generally pay their own expenses such as legal, custody and audit fees, reporting costs, board and shareholder meeting costs, the United States Securities and Exchange Commission ("SEC") and state registration fees and similar expenses. We use a "master/feeder" fund structure in certain situations. This structure allows an investment adviser to manage a single portfolio of securities at the "master fund" level and have multiple "feeder funds" that invest all of their respective assets into the master fund. Individual and institutional shareholders invest in the "feeder funds" which can offer a variety of service and distribution options. An advisory fee is charged at the master fund level, and administrative and shareholder servicing fees are charged at the feeder fund level. Our investment management agreements permit us to serve as an adviser to more than one fund so long as our ability to render services to each of the funds is not impaired, and so long as purchases and sales for various advised funds are made on an equitable basis. Our management personnel and the fund directors or boards of trustees regularly review the fund advisory and other administrative fee structures in light of fund performance, the level and range of services provided, industry conditions and other relevant factors. Advisory and other administrative fees are generally waived or voluntarily reduced when a new fund is established and then increased to contractual levels within an established timeline or as net asset values reach certain levels. Each U.S. investment management or advisory agreement between certain of our subsidiary companies and each fund automatically terminates in the event of its "assignment", as defined in the Investment Company Act of 1940 (the " `40 Act"). In addition, either party may terminate the agreement without penalty after written notice ranging from 30 to 60 days. If management agreements representing a significant portion of our assets under management were terminated, it would have a material adverse impact on our Company. To date, none of our management agreements with any of our retail Franklin Templeton mutual funds have been involuntarily terminated. 2. UNDERWRITING AND DISTRIBUTION A large portion of our revenues under the investment management operating segment are generated from providing underwriting and distribution services. Franklin/Templeton Distributors, Inc. ("FTDI"), a wholly-owned subsidiary of the Company, acts as the principal underwriter and distributor of shares of most of our U.S.-registered open-end mutual funds. During fiscal year 2003, Templeton/Franklin Investment Services, Inc. ("TFIS") served as principal underwriter and distributor for several of our U.S. funds. We earn underwriting and distribution fees primarily by distributing the funds pursuant to distribution agreements between FTDI or TFIS and the funds. Under each distribution agreement, we offer and sell the fund's shares on a continuous basis and pay certain costs associated with underwriting and distributing the funds, including the costs of developing and producing sales literature and printing of prospectuses, which may be then either partially or fully reimbursed by the funds. Most of our U.S. and non-U.S.-registered retail funds are distributed with a multi-class share structure. We adopted this share structure to provide investors with greater sales charge alternatives for their investments. Class A shares represent a traditional fee structure whereby the investor pays a commission at the time of purchase unless minimum investment criteria are met. Class B shares, which are available in many of our funds in the U.S. and globally, have no front-end sales charges but instead have a declining schedule of sales charges (called contingent deferred sales charges) if the investor redeems within a number of years from the original purchase date. Class C shares have a pricing structure combining aspects of conventional front-end, back-end and level-load pricing. Class R shares with reduced sales charges are available for purchase by certain retirement plan accounts in the U.S. only. Globally, we offer Advisor Class shares in many of our Franklin Templeton mutual funds and in the U.S. we offer Z Class shares in Mutual Series funds on a limited basis, both of which have no sales charges. Franklin Global Trust offers four series of funds, managed by our subsidiary FII, which are sold with no sales charge to high net-worth clients of Fiduciary Trust. The Advisor and Z Class shares are available to our officers, 8 directors, current and former employees, and are also offered to institutions and investment advisory clients (both affiliated and unaffiliated), as well as individuals generally investing $5 million or more. In the U.S., we also sell money market funds to investors without a sales charge. Under the terms and conditions described in the prospectuses or the statements of additional information for some funds, certain investors can purchase shares at net asset value or at reduced sales charges. In addition, investors may generally exchange their shares of a fund at net asset value for shares within the same class of another Franklin Templeton mutual fund without having to pay additional sales charges. Our insurance product funds offered for sale in the U.S. have a two-class share structure, Class 1 and Class 2, which are offered at net asset value without a sales load directly to the insurance company separate accounts (the shareholder). The only difference between the two classes is that Class 2 shares are assessed a distribution and service fee ("12b-1 fee") (as described below) payable to those who sell and distribute Class 2 shares and provide services to shareholders and contract owners (e.g., FTDI), the insurance company or others. These 12b-1 fees are generally assessed quarterly at an annual rate of 0.25% of the average daily net assets of the class. Globally, we offer other types of share classes based on the local needs of the investors in a particular market. In the majority of cases, investors in any class of shares within the U.S. or globally may exchange their shares for a like class of shares in another fund, subject to certain fees that may apply. The following table summarizes the sales charges and distribution and service fee structure for various share classes of our U.S.-registered retail mutual funds. The fees below generally apply to our U.S.-registered retail mutual funds, however, there are exceptions to this fee schedule for some funds.
SALES CHARGES AND DISTRIBUTION AND SERVICE FEES FOR MOST U.S.-REGISTERED RETAIL FUNDS - ------------------------------------------------------------------------------------- CLASS A CLASS B CLASS C SHARES U.S. RETAIL FUNDS SHARES SHARES (c) (d) CLASS R SHARES - ------------------------------- ------------- -------------- ------------------ --------------------- Sales Charge at Time of Sale Equity 5.75% (a) None. 1.00% None. Fixed-income 4.25% (a) None. 1.00% None. - ------------------------------- ------------- -------------- ------------------ --------------------- Contingent Deferred Sales None. (b) 4% maximum 1% if 1% if shareholder Charge declining shareholder sells shares to zero sells shares within 18 months after 6 within 18 of investment. years of months of each investment. investment. - ------------------------------- ------------- -------------- ------------------ --------------------- Maximum Yearly 12b-1 Plan Fees Equity 0.35% 1.00% 1.00% 0.50% Fixed-income Taxable 0.25% 0.65% 0.65% 0.50% Tax-free 0.10% 0.65% 0.65% None. - ------------------------------- ------------- -------------- ------------------ --------------------- Types of investors that may Any. Any. Any. See Note (f) below. purchase this share class - ------------------------------- ------------- -------------- ------------------ ---------------------
9 U.S. RETAIL FUNDS ADVISOR CLASS SHARES Z CLASS SHARES (e) - ------------------------------- ---------------------------- --------------------------------------- Sales Charge At Time of Sale None. None. Equity Fixed-income - ------------------------------- ---------------------------- --------------------------------------- Contingent Deferred Sales None. None. Charge - ------------------------------- ---------------------------- --------------------------------------- Maximum Yearly 12b-1 Plan Fees None. None. - ------------------------------- ---------------------------- --------------------------------------- Types of investors that may Officers, directors and Officers, directors and current and purchase this share class current and former former employees of Franklin employees of Franklin Templeton Investments; institutions, Templeton Investments; investment advisory clients, institutions, investment individuals investing $5 million or advisory clients, more in Franklin Templeton mutual individuals investing $5 funds or Mutual Series funds and million or more in shareholders that hold shares of the Franklin, Templeton mutual Mutual Series funds reclassified as Z funds or Mutual Series Class shares. funds. - ------------------------------- ---------------------------- ---------------------------------------
(a) Reductions in the maximum sales charges may be available depending upon the amount invested and the type of investor. In some cases noted in each fund's prospectus or statement of additional information, certain investors may invest in Class A shares at net asset value (with no load). In connection with certain of these no-load purchases, FTDI may make a payment out of its own resources to a broker/dealer involved with that sale. (b) For Net Asset Value ("NAV") purchases over $1 million, a contingent deferred sales charge ("CDSC") of 1.00% may apply to shares redeemed within 18 months. (c) Class B shares convert to Class A shares after eight (8) years of ownership. (d) FTDI pays a 2.00% dealer commission to brokers of record of Class C shares, which consists of a 1.00% sales charge assessed to the investor at the time of sale, and 1.00% of which is paid by FTDI. FTDI recovers a portion of the amount it pays to brokers by retaining certain 12b-1 fees assessed during the first 12 months and from collecting contingent deferred sales charges on any redemptions made within 18 months of the time of sale. (e) When the Company entered into management contracts for the Mutual Series funds, the outstanding shares of Mutual Series funds were reclassified as Z Class shares on October 31, 1996. Current shareholders who held shares of any Mutual Series funds on October 31, 1996 may continue to purchase Z Class shares of any Mutual Series fund. Shareholders of the Z Class shares may also exchange into Advisor Class shares of other Franklin Templeton mutual funds if otherwise meeting the Advisor Class shares' eligibility requirements. Alternatively, Z Class shareholders may exchange into Class A shares of other Franklin Templeton mutual funds at net asset value, which are subject to 12b-1 fees. FTDI may make a payment out of its own resources to a broker/dealer involved in selling Z Class shares. (f) The types of investors that may purchase Class R shares include, employer sponsored retirement plans; plans serviced by FTIS with assets of less than $10 million; any trust or plan established as part of a qualified tuition program under Section 529 of the Internal Revenue Code; DCS Plans with assets of less than $10 million; and investors who open a rollover account with less than $1 million or a rollover account from a Franklin Templeton money purchase plan in existence prior to January 1, 2002 to a new or existing profit sharing plan. Our non-U.S.-registered funds, including the Tax Class shares offered in Canada, have various sales charges and fee structures that are not discussed in this report. The distribution agreements with the U.S.-registered Franklin Templeton mutual funds generally provide for FTDI to pay commission expenses for sales of fund shares to broker/dealers. These broker/dealers receive various sales commissions and other fees from FTDI, including fees from the investors in the funds and the funds themselves, for services in matching investors with funds whose investment objectives match such investors' goals and risk profiles. Broker/dealers may also receive fees for their assistance in explaining the operations of the funds, in servicing the investor's account, reporting and various other distribution services. Franklin Templeton mutual fund shares are sold primarily through a large network of independent intermediaries, including broker/dealers, banks and other similar financial advisers. We are heavily dependent upon these distribution channels and business relationships. There is increasing competition for access to these channels, which has caused our distribution costs to rise and could cause further increases in the future as competition continues and service expectations increase. As of September 30, 2003, over 3,700 local, regional, and national securities brokerage firms offered shares of the U.S.-registered Franklin Templeton mutual funds for sale to the investing public. In the U.S., we have approximately 69 general wholesalers and 7 retirement plan wholesalers who interface with the broker/dealer community. 10 Most of the U.S.-registered Franklin Templeton mutual funds, with the exception of certain Franklin Templeton money market funds, have adopted distribution plans (the "Plans") under Rule 12b-1 promulgated under the `40 Act ("Rule 12b-1"). The Plans are established for an initial term of one (1) year and, thereafter, must be approved annually by the particular fund's board of directors/trustees and by a majority of its disinterested fund directors/trustees. All such Plans are subject to termination at any time by a majority vote of the disinterested directors/trustees or by the particular fund shareholders. The Plans permit the funds to bear certain expenses relating to the distribution of their shares, such as expenses for marketing, advertising, printing and sales promotion. The implementation of the Plans provided for a lower fee on Class A shares acquired prior to the adoption of such Plans. Fees from the Plans are paid primarily to third-party dealers who provide service to the shareholder accounts, and engage in distribution activities. FTDI may also receive reimbursement from the funds for various expenses that FTDI incurs in distributing the funds, such as marketing, advertising, printing and sales promotion subject to the Plans' limitations on amounts. Each fund has a percentage limit for these types of expenses based on average daily net assets under management. Similar arrangements exist with the distribution of our global funds and in all cases the distributor of the funds in the local market arranges for and pays commission. Class B and C shares are generally more costly to us in the year of sale, but they allow us to be competitive by increasing our presence in various distribution channels. We have arranged to finance Class B and certain Class C share deferred commissions arising from our U.S., Canadian and European operations through Lightning Finance Company Limited, a company in which we have a 49% ownership interest. The repayment of the financing advances is limited to the cash flows generated by the funds' 12b-1 Plans and by any contingent deferred sales charges collected in connection with early redemptions (within six years after purchase on Class B shares). The sales commissions and payments below, payable to qualifying broker/dealers, generally apply to our U.S.-registered retail funds, however, there are exceptions to this schedule for some funds.
SALES COMMISSIONS AND OTHER PAYMENTS PAID TO QUALIFYING BROKER/DEALERS AND OTHER INTERMEDIARIES FOR MOST U.S.-REGISTERED RETAIL FUNDS U.S. RETAIL FUNDS CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS R SHARES (g) - ----------------------------------- --------------- --------------- -------------- ------------------ Dealer Commission at Time of Sale Equity 5.00% 4.00% 2.00% 1.00% Fixed-income 4.00% 3.00% (b) 2.00% 1.00% - ----------------------------------- --------------- --------------- -------------- ------------------ Maximum Yearly 12b-1 Plan Fees Equity 0.25% (a) 1.00% (c) 1.00% (e) 0.35% Fixed-income 0.35% Taxable 0.25% (a) 0.65% (d) 0.65% (f) Tax-free 0.10% 0.65% (d) 0.65% (f) - ----------------------------------- --------------- --------------- -------------- ------------------
(a) The fees referenced above generally apply, however, there are certain individual funds that may apply a different fee structure, including the Rising Dividends Fund whose 12b-1 fee is 0.50%, certain equity funds whose 12b-1 fees are 0.35% and certain taxable fixed-income funds whose 12b-1 fees are 0.15%. (b) Certain fixed-income funds now pay 4.00%. (c) FTDI receives a fee equal to 0.75% and pays 0.25% to the broker/dealer on the daily average assets in the account. After 8 years from the date of the investment, Class B shares are converted into Class A shares. (d) FTDI receives a fee equal to 0.50% and pays 0.15% to the broker/dealer on the daily average assets in the account. After 8 years from the date of the investment, Class B shares are converted into Class A shares. (e) FTDI retains a fee equal to 0.75% and pays 0.25% to the dealer/broker on the average assets in the account for the first twelve (12) months following the sale, after which the full 12b-1 fee is paid to the broker/dealer. (f) FTDI retains a fee equal to 0.50% and pays 0.15% to the dealer/broker on the assets in the account for the first twelve (12) months following the sale, after which it is paid to the broker/dealer. (g) With respect to Class R Shares, dealers may be eligible to receive a 12b-1 fee of 0.35% starting in the 13th month. During the first 12 months, the full 12b-1 fee will be paid to FTDI to partially offset commission paid at the time of purchase. Starting in the 13th month, FTDI will receive 0.15%. Dealers may be eligible to receive the full 0.50% 12b-1 fee starting at the time of purchase if they forego the prepaid commission of 1%. Our various foreign subsidiaries provide underwriting and distribution services for our non-U.S.-registered open-end mutual funds, and pay various sales commissions and other payments to qualifying broker dealers and other intermediaries who are not discussed in this report. 11 3. SHAREHOLDER SERVICES Our subsidiary, Franklin Templeton Investor Services, LLC ("FTIS"), provides shareholder record keeping services and acts as transfer agent and dividend-paying agent for the U.S.-registered Franklin Templeton open-end funds. FTIS is registered with the SEC as a transfer agent under the Securities Exchange Act of 1934. FTIS is compensated under an agreement with each fund on the basis of an annual fee per account, which varies with the fund and the type of services being provided, and is reimbursed for out-of-pocket expenses. In addition, certain funds compensate FTIS based on assets under management. Other subsidiaries provide the same services to the open-end funds offered for sale in Canada, Europe, Asia, and other regions internationally, under similar fee arrangements. 4. ADMINISTRATIVE SERVICES Generally, the funds themselves have no paid employees. Through our subsidiaries, including Franklin Templeton Services, LLC ("FTS"), we provide and pay the salaries of personnel who serve as officers of our U.S.-registered open-end and closed-end funds, including the President and other administrative personnel as necessary to conduct such funds' day-to-day business operations. These personnel provide information, ensure compliance with securities regulations, maintain accounting systems and controls, prepare annual reports and perform other administrative activities. FTS is compensated under an agreement with certain funds on the basis of assets under management. C. HIGH NET-WORTH INVESTMENT MANAGEMENT Through our subsidiary, Fiduciary Trust, and our Canadian high net-worth business unit, Bissett, we provide global investment management services to and market and sell our sponsored investment products to high net-worth individuals and families. At Fiduciary Trust, these services focus on managing family wealth from generation to generation through a full service package including wealth management, estate planning, private funds, private banking, and custody services. Our high net-worth client business seeks to maintain relationships that span generations and help families plan the best method of intergenerational wealth transfer. Individual client assets are held in accounts separately managed by individual portfolio managers. These portfolio managers determine asset allocation and stock selection for client accounts, taking into consideration each client's specific long-term objectives while utilizing our macroeconomic and individual stock research. We offer clients personalized attention and estate planning expertise in an integrated package of services under the Family Resource Management(R) ("FRM") brand. Services under FRM provide clients with an integrated strategy to optimize wealth accumulation and maximize after-tax wealth transfer to the next generation. These services include advice concerning strategic planning and asset allocation, investment management, and custody and reporting. D. INSTITUTIONAL INVESTMENT MANAGEMENT We provide a broad array of investment management services to institutional clients, focusing on foundations, endowment funds and government and corporate pension funds. Our subsidiaries offer a wide range of both domestic and international equity, fixed-income and specialty products through a variety of investment vehicles, including separate and commingled accounts and open-ended domestic and offshore mutual funds. We operate our institutional business through a series of legal entities globally, including FTI. These entities distribute, and market our investment advisory capabilities to our institutional accounts under the Franklin, Templeton, Mutual Series, Bissett and Fiduciary Trust brand names globally. We primarily attract new institutional business through our strong relationships with pension and management consultants and through additional mandates from our existing client relationships. The Retirement Group, a division of our U.S. subsidiary FTDI, services sponsors of defined contribution plans, including 401(k)'s, bundled defined contribution plans, variable annuity products and individual retirement accounts. This business unit allows us to focus on expanding sales of our asset management capabilities to the retirement industry by offering a number of investment options, including sub-advised portfolios, mutual funds, education savings plans and variable insurance trusts. 12 E. MANAGED ACCOUNTS Through our subsidiaries, Franklin Private Client Group, Inc. ("FPCG"), a registered investment adviser, and Templeton Private Client Group ("TPCG"), a division of TFIS, we provide private portfolio management services and advisory services through third party broker/dealer wrap fee programs. Our subsidiary, TFIS, also serves as a direct marketing broker/dealer for institutional investors in the Franklin Templeton mutual funds. Through our various subsidiaries, we also market and distribute our sponsored investment products to individually managed and separate accounts. F. TRUST AND CUSTODY Our subsidiary, Fiduciary Trust, provides trust and custody business including global master custody and support services to high net-worth and institutional clients. Through various trust company subsidiaries, including Fiduciary Trust, we offer a wide range of investment-related services, including, custody and administration, trust services, estate planning, tax planning, securities brokerage, trade clearance and private banking to high net-worth individuals, families and institutional clients in the U.S. and abroad. In addition to custody services, we also offer clients a series of other services, including foreign exchange, performance measurement, securities lending and brokerage services. We provide planned giving administration for non-profit organizations and related custody services, including pooled income funds, charitable remainder trusts, charitable lead trusts and gift annuities, for which we may or may not act as trustee. Our other subsidiaries involved in the trust business, either as trust companies or companies investing in trust companies, include Fiduciary Investment Corporation, an investment company incorporated under New York State Banking Law and an indirect holding company for many of the trust company subsidiaries; Fiduciary Trust International of the South, a Florida state-chartered limited purpose trust company; Fiduciary Trust International of California, a California state-chartered limited purpose trust company; Fiduciary Trust International of Delaware, a Delaware state-chartered limited purpose trust company; FTI-Banque Fiduciary Trust, a Swiss bank based in Geneva, Switzerland; FTCI (Cayman) Ltd., an offshore trust company licensed as a bank and trust company (with a type "B" license) in the Cayman Islands; and Franklin Templeton Bank & Trust, F.S.B. ("FTB&T"). All of the trust companies referenced above have full trust powers. FTB&T, among other things, exercises full trust powers and serves primarily as custodian of Individual Retirement Accounts ("IRA") and business retirement plans. G. SUMMARY OF OUR SPONSORED INVESTMENT PRODUCTS Our sponsored investment products are offered to retail, institutional, high net-worth and separate account clients, which include individual investors, qualified groups, trustees, tax-deferred (such as IRAs in the U.S., RSP's in Canada) or money purchase plans, employee benefit and profit sharing plans, trust companies, bank trust departments and institutional investors in approximately 137 countries. 1. INVESTMENT OBJECTIVES The sponsored investment products that we offer accommodate a variety of investment goals, including growth, growth at a reasonable price, value, capital appreciation, growth and income, income, tax-free income and preservation of capital. In seeking to achieve such objectives, each portfolio emphasizes different investment securities. Our equity investment products include some that are value-oriented, others that reflect a growth style of investing and some that use a combination of growth and value. Value investing focuses on identifying companies, which our research analysts and portfolio managers believe are undervalued, based on a number of factors. Portfolios that seek capital appreciation invest primarily in equity securities in a wide variety of international and U.S. markets; some seek broad national market exposure, while others focus on narrower sectors such as precious metals, health care, emerging technology, large-cap companies, small-cap companies, real estate securities and utilities. Growth investing relies on the review of macroeconomic, industry and sector trends to identify companies that exhibit superior growth potential relative to industry peers and the broad market. Unlike other management styles that focus on short-term market trends, our growth portfolio investment management team invests in companies demonstrating long-term growth potential, based mainly on proprietary in-house analysis and research. 13 Portfolios seeking income generally focus on taxable and tax-exempt money market instruments, tax-exempt municipal bonds, global fixed-income securities, fixed-income debt securities of corporations and of the U.S. government and its sponsored agencies and instrumentalities such as the Government National Mortgage Association, the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation, and of the various states in the U.S. Still others focus on investments in particular countries and regions, such as emerging markets. Again, we also provide investment management and related services to a number of closed-end investment companies whose shares are traded on various major U.S. and some international stock exchanges. In addition, we provide investment management, marketing and distribution services to SICAV ("Societe d'Investissement a Capital Variable") funds and umbrella unit trusts organized in Luxembourg and Ireland, respectively, which are distributed in international market places, as well as to locally organized funds in various countries outside the U.S. Our sponsored investment products also include portfolios managed for some of the world's largest corporations, endowments, charitable foundations, pension funds, wealthy individuals and other institutions. We use various investment techniques to focus on specific client objectives for these specialized portfolios. 2. TYPES OF SPONSORED INVESTMENT PRODUCTS As of September 30, 2003 we had $301.9 billion in assets under management. Our U.S.-registered open-end mutual funds (excluding our insurance products trust) accounted for $175.5 billion of our assets under management. As of September 30, 2003, the net assets under management of our five (5) largest funds were Franklin Income Fund ($16.1 billion), Templeton Growth Fund ($14.7 billion), Franklin California Tax-Free Income Fund, Inc. ($13.7 billion), Templeton Foreign Fund ($11.7 billion), and Franklin U.S. Government Securities Fund ($9.1 billion). These 5 mutual funds represented, in the aggregate, 21.6% of our assets under management. Currently no single sponsored investment product revenues represent more than 10% of total revenues. Franklin Templeton Variable Insurance Products Trust, our insurance products trust, offers 22 funds, with assets of $9.9 billion as of September 30, 2003. The insurance product funds are available as investment options through variable insurance contracts. Most of the funds have been fashioned after some of the more popular funds offered to the general public and are managed, in most cases, by the same investment adviser. Our U.S. closed-end and interval (floating rate) funds accounted for $4.5 billion of our assets under management. U.S. wrap fee, partnership, and trust accounts made up $6.3 billion of our assets under management. On a Company-wide basis, institutional separate and high net-worth accounts accounted for $68.9 billion of assets under management. In addition, $36.8 billion of our assets under management were held in foreign-based funds and open-end and closed-end accounts whose investment objectives vary, but are primarily international and global equity-oriented. The following table shows the various types of our U.S.-registered open-end mutual funds and dedicated insurance product funds as of September 30, 2003, and is categorized using the Investment Company Institute ("ICI") definitions, which are more detailed than the broad investment objective definitions used in MD&A and in our Consolidated Financial Statements. 14
U.S.-REGISTERED OPEN-END MUTUAL FUNDS (a) NO. OF CATEGORY NO. OF INSURANCE (AND APPROXIMATE ASSETS UNDER MUTUAL PRODUCT MANAGEMENT, AS OF SEPTEMBER 30, INVESTMENT OBJECTIVE FUNDS FUNDS 2003) IN BILLIONS - ----------------------------------- ------------------------------------------- --------- ---------- I. EQUITY FUNDS ($97.3) - ----------------------------------- ------------------------------------------- --------- ---------- A. Capital Appreciation Funds Seek capital appreciation; dividends are ($22.1) not a primary consideration. - ----------------------------------- ------------------------------------------- --------- ---------- 1. Aggressive Growth Funds Invest primarily in common stocks of small, growth companies. 5 2 - ----------------------------------- ------------------------------------------- --------- ---------- 2. Growth Funds Invest primarily in common stocks of well-established companies. 9 2 - ----------------------------------- ------------------------------------------- --------- ---------- 3. Sector Funds Invest primarily in companies in related 8 2 fields. - ----------------------------------- ------------------------------------------- --------- ---------- B. World Equity Funds Invest primarily in stocks of foreign ($50.5) companies. - ----------------------------------- ------------------------------------------- --------- ---------- 1. Emerging Market Funds Invest primarily in companies based in developing regions of the world. 2 1 - ----------------------------------- ------------------------------------------- --------- ---------- 2. Global Equity Funds Invest primarily in equity securities traded worldwide, including those of U.S. 13 2 companies. - ----------------------------------- ------------------------------------------- --------- ---------- 3. International Equity Funds Invest primarily in equity securities of companies located outside the United 6 1 States. - ----------------------------------- ------------------------------------------- --------- ---------- 4. Regional Equity Funds Invest in companies based in a specific part of the world. 3 0 - ----------------------------------- ------------------------------------------- --------- ---------- C. Total Return Funds ($24.7) Seek a combination of current income and capital appreciation. - ----------------------------------- ------------------------------------------- --------- ---------- 1. Growth and Income Funds Invest primarily in common stocks of established companies with the potential for growth and a consistent record of 8 3 dividend payments. - ----------------------------------- ------------------------------------------- --------- ---------- II. HYBRID/BALANCED FUNDS May invest in a mix of equities, fixed-income ($17.5) securities, and derivative instruments. - ----------------------------------- ------------------------------------------- --------- ---------- A. Asset Allocation Funds ($0.5) Invest in various asset classes including, but not limited to, equities, fixed-income securities, and money market instruments. They seek high total return by maintaining precise weightings in 5 1 asset classes. - ----------------------------------- ------------------------------------------- --------- ---------- B. Income-Mixed Funds ($17.0) Invest in a variety of income-producing securities, including equities and fixed-income securities. These funds seek a high level of current income without regard to capital appreciation. 1 1 - ----------------------------------- ------------------------------------------- --------- ---------- III. TAXABLE BOND FUNDS ($16.4) - ----------------------------------- ------------------------------------------- --------- ---------- A. High Yield Funds ($3.0) Invest two-thirds or more of their portfolios in lower-rated U.S. corporate bonds (Baa or lower by Moody's and BBB or lower by Standard & Poor's rating 2 1 services). - ----------------------------------- ------------------------------------------- --------- ---------- (a) This table excludes separately managed accounts, trust and partnership accounts and closed-end funds. A significant number of institutional assets are invested in U.S. open-end mutual funds and are disclosed in the table.
15
NO. OF CATEGORY NO. OF INSURANCE (AND APPROXIMATE ASSETS UNDER MUTUAL PRODUCT MANAGEMENT, AS OF SEPTEMBER 30, INVESTMENT OBJECTIVE FUNDS FUNDS 2003) IN BILLIONS - ----------------------------------- ------------------------------------------- --------- ---------- B. World Bond Funds ($1.0) Invest in debt securities offered by foreign companies and governments. They seek the highest level of current income available worldwide. - ----------------------------------- ------------------------------------------- --------- ---------- 1. Global Bonds Funds: Invest in debt securities worldwide with no General stated average maturity or an average maturity of five years or more. These funds may invest up to 25 percent of assets in companies located in the United 1 2 States. - ----------------------------------- ------------------------------------------- --------- ---------- 2. Global Bond Funds: Invest in debt securities worldwide with Short Term an average maturity of one to five years. These funds may invest up to 25 percent of assets in companies located in the 1 0 United States. - ----------------------------------- ------------------------------------------- --------- ---------- 3. Other World Bond Funds Invest in international bond and emerging market debt funds, foreign government and corporate debt instruments. Two-thirds of an international bonds fund's portfolio must be invested outside the United States. Emerging market debt funds invest primarily in debt from 1 0 underdeveloped regions of the world. - ----------------------------------- ------------------------------------------- --------- ---------- C. Government Bond Funds Invest in U.S. government bonds of varying ($11.1) maturities. They seek high current income. - ----------------------------------- ------------------------------------------- --------- ---------- 1. Government Bond Funds: Invest two-thirds or more of their Intermediate Term portfolios in U.S. government securities with an average maturity of five to ten years. Securities utilized by investment managers may change with market 0 1 conditions. - ----------------------------------- ------------------------------------------- --------- ---------- 2. Government Bond Funds: Invest two-thirds or more of their Short Term portfolios in U.S. government securities with an average maturity of one to five years. Securities utilized by investment managers may change with market 1 0 conditions. - ----------------------------------- ------------------------------------------- --------- ---------- 3. Mortgage-Backed Funds Invest two-thirds or more of their portfolios in pooled mortgage-backed 3 0 securities. - ----------------------------------- ------------------------------------------- --------- ---------- D. Strategic Income Funds ($1.1) Invest in a combination of U.S. fixed-income securities to provide a high level of current income. 4 2 - ----------------------------------- ------------------------------------------- --------- ---------- E. Corporate Bond Funds ($0.2) Seek current income by investing in high- quality debt securities issued by U.S. corporations. - ----------------------------------- ------------------------------------------- --------- ---------- 1. Corporate Bond Funds: Invest two-thirds or more of their portfolios Short Term in U.S. corporate bonds with an average maturity of one to five years. These funds seek a high level of income with less price 1 0 volatility than intermediate-term bond funds. - ----------------------------------- ------------------------------------------- --------- ----------
16
NO. OF CATEGORY NO. OF INSURANCE (AND APPROXIMATE ASSETS UNDER MUTUAL PRODUCT MANAGEMENT, AS OF SEPTEMBER 30, INVESTMENT OBJECTIVE FUNDS FUNDS 2003) IN BILLIONS - ------------------------------------------------------------------------------- --------- ---------- IV. TAX-FREE BOND FUNDS ($49.9) - ------------------------------------------------------------------------------- --------- ---------- A. State Municipal Bond Invest primarily in municipal bonds Funds ($35.0) issued by a particular state. These funds seek high after-tax income for residents of individual states. - ----------------------------------- ------------------------------------------- --------- ---------- 1. State Municipal Bond Invest primarily in the single-state Funds: municipal bonds with an average maturity General of greater than five years or no specific stated maturity. The income from these funds is largely exempt from federal as well as state income tax for residents of 29 0 the state. - ----------------------------------- ------------------------------------------- --------- ---------- 2. State Municipal Bond Invest primarily in single-state municipal Funds: bonds with an average maturity of one to Short Term five years. The income from these funds is largely exempt from federal as well as state 2 0 income tax for residents of the state. - ----------------------------------- ------------------------------------------- --------- ---------- B. National Municipal Bond Invest primarily in the bonds of various Funds ($14.9) municipal issuers in the United States. These funds seek high current income free from federal income tax. - ----------------------------------- ------------------------------------------- --------- ---------- 1. National Municipal Bond Invest primarily in municipal bonds with Funds: an average maturity of more than five General years or no specific stated maturity. 4 0 - ----------------------------------- ------------------------------------------- --------- ---------- 2. National Municipal Bond Invest primarily in municipal bonds with Funds: an average maturity of one to five years. Short Term 1 0 - ----------------------------------- ------------------------------------------- --------- ---------- V. MONEY MARKET FUNDS ($4.3) - ------------------------------------------------------------------------------- --------- ---------- A. Taxable Money Market Invest in short-term, high-grade money Funds ($3.4) market securities and must have average maturities of 90 days or less. These funds seek the highest level of income consistent with preservation of capital (i.e., maintaining a stable share price). - ----------------------------------- ------------------------------------------- --------- ---------- 1. Taxable Money Market Invest primarily in U.S. Treasury Funds: obligations and other financial Government instruments issued or guaranteed by the U.S. government, its agencies, or its 2 0 instrumentalities. - ----------------------------------- ------------------------------------------- --------- ---------- 2. Taxable Money Market Invest primarily in a variety of money Funds: market instruments, including Non-Government certificates of deposit from larger banks, commercial paper, and bankers' 5 1 acceptances. - ----------------------------------- ------------------------------------------- --------- ---------- B. Tax-Exempt Money Market Invest in short-term municipal securities Funds ($0.9) and must have average maturities of 90 days or less. These funds seek the highest level of income - free from federal and, in some cases, state and local taxes - consistent with preservation of capital. - ----------------------------------- ------------------------------------------- --------- ----------
17
NO. OF CATEGORY NO. OF INSURANCE (AND APPROXIMATE ASSETS UNDER MUTUAL PRODUCT MANAGEMENT, AS OF SEPTEMBER 30, INVESTMENT OBJECTIVE FUNDS FUNDS 2003) IN BILLIONS - ------------------------------------------------------------------------------- --------- ---------- 1. National Tax-Exempt Invest in short-term securities of various Money Market Funds U.S. municipal issuers. 1 0 - ----------------------------------- ------------------------------------------- --------- ---------- 2. State Tax-Exempt Invest primarily in short-term securities Money Market Funds of municipal issuers in a single state to achieve the highest level of tax-free income for residents of that state. 2 0 - ----------------------------------- ------------------------------------------- --------- ---------- The following table sets forth the types of our non-U.S. open-end mutual funds as of September 30, 2003 and is categorized by investment objectives and sales region.
NON-U.S. OPEN-END MUTUAL FUNDS (A) NO. OF CATEGORY MUTUAL (AND APPROXIMATE ASSETS UNDER FUNDS BY SALES MANAGEMENT, AS OF SEPTEMBER 30, INVESTMENT OBJECTIVE REGION 2003) IN BILLIONS - ----------------------------------- ------------------------------------------- --------------- ---- I. EQUITY FUNDS ($19.8) - ----------------------------------- ------------------------------------------- --------------- ---- A. Global/International Equity Invest in securities of companies traded Asia Pacific: 34 ($18.5) worldwide, including foreign and U.S. Canada: 18 companies. U.K./Europe: 27 - ----------------------------------- ------------------------------------------- --------------- ---- B. Domestic (U.S.) Equity ($1.3) Invest in equity securities of U.S. Canada: 5 companies. U.K./Europe: 11 - ------------------------------------------------------------------------------- --------------- ---- II. FIXED-INCOME FUNDS ($10.2) - ------------------------------------------------------------------------------- --------------- ---- A. Global/International Invest worldwide in debt securities Asia Pacific: 30 Fixed-Income ($3.4) offered by foreign companies and Canada: 4 governments. These funds may invest U.K./Europe: 7 assets in debt securities offered by companies located in the U.S. - ----------------------------------- ------------------------------------------- --------------- ---- B. Domestic Fixed-Income ($6.8) Invest in debt securities offered by U.S. Asia Pacific: 1 companies and the U.S. government and/or U.K./Europe: 5 municipalities located in the U.S. - ----------------------------------- ------------------------------------------- --------------- ---- III. HYBRID/BALANCED May invest in a mix of global equity, Asia Pacific: 21 FUNDS ($1.2) fixed-income securities and derivative Canada: 5 instruments. U.K./Europe: 4 - ----------------------------------- ------------------------------------------- --------------- ---- IV. TAXABLE MONEY Market securities issued or guaranteed by Asia Pacific: 7 FUNDS ($1.5) domestic or global governments or Canada: 3 agencies. U.K./Europe: 2 - ----------------------------------- ------------------------------------------- --------------- ---- (a) Does not include the Franklin Templeton Global Fund, the Fiduciary Emerging Markets Bond Fund plc, nor fund-of-fund mutual funds. For purposes of this table, we consider the sales region to be where a fund is based and primarily sold and not necessarily the region where a particular fund is invested. Many funds are also distributed across different sales regions (e.g., SICAV funds are based, primarily sold in and therefore considered to be within the U.K./Europe sales region, although also distributed in the Asia Pacific sales region), but are only designated a single sales region in the table.
3. FUND INTRODUCTIONS, MERGERS AND LIQUIDATIONS In an effort to address changing market conditions and evolving investor needs, from time to time we introduce new funds, merge existing funds or liquidate existing funds. During the fiscal year ended September 30, 2003, we added and introduced a number of funds in the U.S., Canada and other regions internationally. 18 In the U.S., we expanded our product line, recognizing shifts in market and investor sentiment. We added three new limited term tax-free products, providing investors with additional fund options to tailor their fixed income portfolios. We introduced two new fund-of-fund mutual funds, providing investors with equity performing portfolios consisting of many of our core funds. We also expanded our efforts in the U.S. education savings market and were awarded New Jersey's 529 mandate for marketing and managing investments through NJ-BEST and the Franklin Templeton 529 College Savings Plan. We also made available an array of mutual funds and alternative investment products to our institutional and high net-worth clients. In Canada, we introduced a portfolio of funds that provided our Canadian clients with diversified investment choices. We also introduced Tapestry Pooled Portfolios, a program of eleven actively managed pooled portfolios offering a blend of investment styles and asset classes, including alternative investments. Additionally, we added a new diversified income portfolio to the Quotential Program, a growing dealer-distributed wrap program in Canada. In other regions internationally, we launched new funds and investment products that addressed the unique needs of local markets. Through our Luxembourg-domiciled SICAV, seven new funds were introduced. In other country specific markets, including the United Kingdom, Korea, Singapore and India, we initiated new local products to support expansion in these regions. During the fiscal year ended September 30, 2003, the following fund mergers and liquidations occurred: 1 variable annuity fund merged into another variable annuity fund and 1 variable annuity fund was liquidated; 5 U.S. registered open end mutual funds were merged into other U.S. registered open end mutual funds; 7 non-U.S. registered open end mutual funds were merged into other non-U.S. registered open end mutual funds and 5 non-U.S. registered open end mutual funds were liquidated; 4 Dublin-domiciled Fiduciary Trust funds were liquidated and 4 merged into U.K products. II. BANKING/FINANCE OPERATIONS Our secondary business segment is banking/finance, which offers select retail-banking and consumer lending services. Our subsidiary, Fiduciary Trust, is a New York state chartered bank and provides private banking services primarily to high net-worth clients who maintain trust, custody and/or investment management accounts with Fiduciary Trust. Fiduciary Trust's private banking and credit products include, among others, loans secured by marketable securities, foreign exchange services, deposit accounts and other banking services. As discussed in Investment Management and Related Services, Fiduciary Trust also offers investment management, trust and estate, custody and related services to institutional accounts and high net-worth individuals and families. Franklin Capital Corporation ("FCC") is a subsidiary of FRI, which engages primarily in the purchase, securitization and servicing of retail installment sales contracts ("automobile contracts") originated by independent automobile dealerships. FCC is incorporated and headquartered in Utah and conducts its business primarily in the Western region of the U.S. As of September 30, 2003, FCC's total assets included $130.0 million of outstanding automobile contracts. During fiscal 2003, FCC securitized approximately $446.7 million of automobile contract receivables for which it maintains servicing rights. As of September 30, 2003, FCC serviced $680.7 million of receivables that have been securitized to date. See Note 7 in the Notes to the Financial Statements. Our securitized automobile contracts business is subject to marketplace fluctuation and competes with businesses with significantly larger portfolios. Auto loan portfolio losses can be influenced significantly by trends in the economy and credit markets, which reduce borrowers' ability to repay loans. A more detailed analysis of loan losses and delinquency rates in our consumer lending and dealer auto loan business is contained in Note 6 in the Notes to the Financial Statements. Our subsidiary Franklin Templeton Bank & Trust, F.S.B. ("FTB&T"), with total assets of $174.4 million, as of September 30, 2003, provides FDIC insured deposit accounts and general consumer loan products such as credit card loans, unsecured loans, loans secured by marketable securities, mortgage loans, debit card products and auto loans. FTB&T (formerly known as Franklin Bank) became chartered as a federal savings bank on May 1, 2000 when the Office of Thrift Supervision approved FTB&T's application to convert from a California state banking charter to a federal thrift charter. Immediately following the conversion of FTB&T's state charter 19 to a federal thrift charter, Franklin Templeton Trust Company, a California chartered trust company, was merged into FTB&T and continues to perform its prior activities as a division of FTB&T. Our other banking subsidiaries include, FTI-Banque Fiduciary Trust, a Swiss bank based in Geneva, Switzerland, which provides an array of private banking trust and investment services to clients outside of the U.S., and FTCI (Cayman) Ltd., a licensed bank and trust company in the Cayman Islands. REGULATORY CONSIDERATIONS Virtually all aspects of our business, including those conducted through our various subsidiaries, are subject to various federal, state, and foreign regulation, and supervision. Domestically, we are subject to regulation and supervision by, among others, the SEC, the National Association of Securities Dealers ("NASD"), the Federal Reserve Board (the "FRB"), the Federal Deposit Insurance Corporation ("FDIC"), the Office of Thrift Supervision and the New York State Banking Department. Globally, we are subject to regulation and supervision by, among others, the Ontario and Alberta Securities Commissions in Canada, the Monetary Authority of Singapore, the Financial Services Authority in the United Kingdom, the Central Bank of Ireland, the Securities and Futures Commission of Hong Kong, the Korean Ministry of Finance and Economy and the Financial Supervisory Commission in Korea, and the Securities Exchange Board of India. The Advisers Act imposes numerous obligations on our subsidiaries, which are registered in the U.S. as investment advisers, including record keeping, operating and marketing requirements, disclosure obligations and prohibitions on fraudulent activities. The `40 Act imposes similar obligations on the investment companies that are advised by our subsidiaries. The SEC is authorized to institute proceedings AND impose sanctions for violations of the Advisers Act and the `40 Act, ranging from fines and censure to termination of an investment adviser's registration. As part of various ongoing investigations by the SEC, the U.S. Attorney for the Northern District of California, the U.S. Attorney for the District of Massachusetts, the New York Attorney General and the Secretary of State of Massachusetts relating to certain practices in the mutual fund industry, including late trading, market timing and sales compensation arrangements, the Company and its subsidiaries (as used in this section, together, the "Company"), as well as certain current or former executives and employees of the Company, have received requests for information and/or subpoenas to testify or produce documents. The Company and, where applicable, the relevant individuals, are providing documents and information in response to these requests and subpoenas. In addition, the Company is responding to requests for similar kinds of information from regulatory authorities in some of the foreign countries where the Company conducts its global asset management business. See also Note 13 in the Notes to the Consolidated Financial Statements. FRI and many of the investment companies advised by our various subsidiaries are also subject to the federal and state laws affecting corporate governance, including the Sarbanes-Oxley Act of 2002, as well as rules adopted by the SEC. As a New York Stock Exchange ("NYSE") listed company, we are also subject to the rules of the NYSE, including the corporate governance standards that were recently approved by the SEC. Since 1993, the NASD Conduct Rules have limited the amount of aggregate sales charges which may be paid in connection with the purchase and holding of investment company shares sold through brokers. The effect of the rule might be to limit the amount of fees that could be paid pursuant to a fund's 12b-1 Plan to FTDI, our principal underwriting and distribution subsidiary, which earns underwriting commissions on the distribution of fund shares in the U.S. Such limitations would apply in a situation where a fund has no, or limited, new sales for a prolonged period of time. None of the Franklin Templeton mutual funds are in, or close to, that situation at the present time. Following the acquisition of Fiduciary Trust, in fiscal 2001, the Company became a bank holding company under the BHC Act and is subject to supervision and regulation by the FRB. Pursuant to the GLB Act, as a qualifying bank holding company, we also became a financial holding company, which enables us to affiliate with a far broader range of financial companies than had previously been permitted for bank holding companies. Permitted affiliates include securities brokers, underwriters and dealers, investment managers, mutual fund distributors, insurance companies and companies engaged in other activities that are "financial in nature or incidental thereto" or "complementary" to a financial activity. The FRB has issued interim rules specifying that organizing, sponsoring, and managing a mutual fund are activities that are permissible for financial holding companies under certain guidelines. A bank holding company may elect to become a 20 financial holding company if, as in our case, each of its subsidiary banks and other depository institution subsidiaries is well capitalized, is well managed (with the exception of Fiduciary Trust, which is exempt from the Community Reinvestment Act ("CRA")) and has at least a "satisfactory" rating under the CRA. The FRB may impose limitations, restrictions, or prohibitions on the activities or acquisitions of a financial holding company if the FRB believes that the Company does not have the appropriate financial and managerial resources to commence or conduct an activity, make an acquisition, or retain ownership of a company. The GLB Act establishes the FRB as the umbrella supervisor for financial holding companies and adopts an administrative approach to regulation that generally requires the FRB to defer to the actions and requirements of the U.S. "functional" regulators of subsidiary broker/dealers, investment advisers, investment companies, insurance companies, and other regulated non-depository institutions. FRB policy provides that, as a matter of prudent banking, a bank holding company generally should not pay dividends unless its net income is sufficient to fully fund the dividends and the prospective rate of earnings retention appears to be consistent with the capital needs, asset quality and overall financial condition of the holding company and its bank and thrift institution subsidiaries. As we are a bank holding company, this policy may be applied to us even though we are also a financial holding company. Almost every aspect of the operations and financial condition of our banking and thrift subsidiaries are subject to extensive regulation and supervision and to various requirements and restrictions under federal and state law, including requirements governing capital adequacy, management practices, liquidity, branching, earnings, loans, dividends, investments, reserves against deposits, and the provision of services. Under federal law, a depository institution is prohibited from paying a dividend if the depository institution would thereafter be "undercapitalized" as determined by the federal bank regulatory agencies. The relevant federal banking regulatory agencies, and the state banking regulatory agencies, also have authority to prohibit a bank or a bank holding company from engaging in what, in the opinion of the regulatory body, constitutes an unsafe or unsound practice. Each of our banking subsidiaries is subject to restrictions under federal law that limit transactions with FRI and its non-bank subsidiaries, including loans and other extensions of credit, investments or asset purchases. These and various other transactions, including any payment of money to FRI and its non-bank subsidiaries, must be on terms and conditions that are, or in good faith would be, offered to companies that are not affiliated with these companies. Federal banking agencies are required to take prompt supervisory and regulatory actions with respect to institutions that do not meet minimum capital standards. There are five defined capital tiers, the highest of which is "well capitalized". A depository institution is generally prohibited from making capital distributions, including paying dividends, or paying management fees to a holding company if the institution would thereafter be undercapitalized. Undercapitalized institutions may not accept, renew or roll over brokered deposits. To remain a financial holding company, each company's banking subsidiaries must be well capitalized and well managed. As of September 30, 2003, our bank and thrift subsidiaries continued to be considered "well capitalized" and "well managed". If a banking subsidiary of a financial holding company has not received a rating of at least "satisfactory" on its most recent CRA examination, the FRB may prohibit the financial holding company or its banking subsidiary from engaging in additional financial activities. The FRB has adopted various capital guidelines for bank holding companies. The GLB Act authorizes the FRB to establish consolidated capital requirements for financial holding companies. The GLB Act generally prohibits the FRB from imposing capital requirements on functionally regulated non-bank subsidiaries of a financial holding company, such as broker/dealers and investment advisers. The FRB has not published consolidated capital requirements specific to financial holding companies, but may do so in the future. The federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and supervisory agreements could subject FRI, our thrift and banking subsidiaries, as well as officers, directors and other so-called "institution-affiliated parties" of these organizations, to administrative sanctions and potentially substantial civil money penalties. In addition, the appropriate federal banking agency may appoint the FDIC as conservator or receiver for a banking institution, or the FDIC may appoint itself if any one or more of a number of circumstances exist. 21 COMPETITION The financial services industry is highly competitive and has increasingly become a global industry. There are approximately 8,200 open-end investment companies of varying sizes, investment policies and objectives whose shares are being offered to the public in the U.S. Due to our international presence and varied product mix, it is difficult to assess our market position relative to other investment managers on a worldwide basis, but we believe that we are one of the more widely diversified investment managers in the U.S. We believe that our equity and fixed-income asset mix coupled with our global presence will serve our competitive needs well over the long term. We continue to focus on the performance of our investment products, service to customers and extensive marketing activities with our strong broker/dealer and other financial institution distribution network as well as high net-worth customers. We face strong competition from numerous investment management, stock brokerage and investment banking firms, insurance companies, banks, savings and loan associations and other financial institutions, which offer a wide range of financial and investment management services to the same institutional accounts, separate accounts and high net-worth customers that we are seeking to attract. In recent years, there has been a trend of consolidation in the financial services industry, resulting in stronger competitors with greater financial resources than us. We rely largely on intermediaries to sell and distribute Franklin Templeton mutual fund shares. In addition to offering our products, many of these intermediaries also have mutual funds under their own names that compete directly with our products. These intermediaries could decide to limit or restrict the sale of our fund shares, which could lower our future sales and cause our revenues to decline. We have and continue to pursue sales relationships with all types of intermediaries to broaden our distribution network. We have experienced increased costs related to maintaining our distribution channels and we anticipate that this trend will continue. We have implemented an award winning Internet platform to compete with the rapidly developing and evolving capabilities being offered with this technology. Together with several large financial services companies, we made a capital investment in the development of an industry-wide Internet portal, known as Advisorcentral.com, which provides our broker, dealer and investment adviser customers with the ability to view their clients' holdings using one log-in ID. As investor interest in the mutual fund industry has increased, competitive pressures have increased on sales charges of broker/dealer distributed funds. We believe that, although this trend will continue, a significant portion of the investing public still relies on the services of the broker/dealer or financial adviser community, particularly during weaker market conditions. We believe that we are well positioned to deal with changes in marketing trends as a result of our already extensive advertising activities and broad based marketplace recognition. We conduct significant advertising and promotional campaigns through various media sources to promote brand recognition. We advertise in major national financial publications, as well as on radio and television to promote brand name recognition and to assist our distribution network. Such activities include purchasing network and cable programming, sponsorship of sporting events, and extensive newspaper and magazine advertising. Diverse and strong competition affects the banking/finance segment of our business as well, and limits the fees that can be charged for our services. For example, in the banking segment we compete with many types of institutions for consumer loans, including the finance subsidiaries of large automobile manufacturers, which have offered special incentives to stimulate automobile sales, including no-interest loans. These product offerings by our competitors limit the interest rates that we can charge on consumer loans. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Information on our operations in various geographic areas of the world and a breakout of business segment information is contained in Note 18 in the Notes to the Consolidated Financial Statements. INTELLECTUAL PROPERTY We have used, registered, and/or applied to register certain trademarks and service marks to distinguish our sponsored investment products and services from those of our competitors in the U.S. and in foreign countries 22 and jurisdictions, including, but not limited to, Franklin(R), Templeton(R), Bissett(R), Mutual Series(R), and FiduciaryTM. We enforce our trademark, service mark and trade name rights in the U.S. and abroad. EMPLOYEES As of September 30, 2003, we employed approximately 6,500 employees and operated offices in 28 countries. We consider our relations with our employees to be satisfactory. AVAILABLE INFORMATION Franklin Resources, Inc. files reports with the SEC. Copies of any of these filings can be obtained from the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. We also file reports with the SEC electronically via the Internet. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers who file electronically with the SEC, at http://www.sec.gov. Additional information about Franklin Resources, Inc. can also be obtained at our website at http://www.franklintempleton.com. We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. CORPORATE GOVERNANCE GUIDELINES. The Company has adopted Corporate Governance Guidelines. The Corporate Governance Guidelines are posted on the Company's website and are available in print to any shareholder who requests a copy. COMMITTEE CHARTERS. The Board of Directors has an Audit Committee, Compensation Committee and Corporate Governance Committee. The Board of Directors has adopted written charters for each committee, which are posted on the Company's website and are available in print to any shareholder who requests a copy. EXECUTIVE OFFICERS OF THE REGISTRANT The following information on the executive officers of FRI, including their principal occupations for the past five (5) years, is given as of December 1, 2003. PENELOPE S. ALEXANDER AGE 43 Vice President, Human Resources - U.S. of FRI since May 2003; officer of other FRI subsidiaries; employed by FRI or its subsidiaries in various other capacities for more than the past five (5) years. JAMES R. BAIO AGE 49 Senior Vice President and Chief Financial Officer of FRI since May 2003; officer of other FRI subsidiaries; employed by FRI or its subsidiaries in various other capacities for more than the past five (5) years. JENNIFER J. BOLT AGE 39 Senior Vice President and Chief Information Officer of FRI since May 2003; officer and/or director of other FRI subsidiaries since June 1994; employed by FRI or its subsidiaries in various other capacities for more than the past five (5) years. 23 HARMON E. BURNS AGE 58 DIRECTOR SINCE 1991 Vice Chairman and Director of FRI; formerly Executive Vice President and director of FRI for more than the past five (5) years; Member - Office of the Chairman of FRI; officer and/or director of many other FRI subsidiaries; officer and/or director or trustee in 49 investment companies of Franklin Templeton Investments. MARTIN L. FLANAGAN AGE 43 President of FRI; formerly Senior Vice President and Chief Financial Officer for more than the past five (5) years; officer and/or director of many other FRI subsidiaries; officer, director and/or trustee in 49 investment companies of Franklin Templeton Investments. Mr. Flanagan has been appointed to serve as Co-Chief Executive Officer of FRI effective January 1, 2004. HOLLY E. GIBSON AGE 37 Vice President - Corporate Communications of FRI since May 2003 and Director of Corporate Communications for the past five (5) years. BARBARA J. GREEN AGE 56 Vice President and Deputy General Counsel of FRI since January 2000 and Secretary of FRI since October 2003; officer of many other FRI subsidiaries; officer in 52 investment companies of Franklin Templeton Investments. DONNA S. IKEDA AGE 47 Vice President, Human Resources - International of FRI since May, 2003 and formerly Vice President - Human Resources of FRI for more than the past five (5) years. CHARLES B. JOHNSON AGE 70 DIRECTOR SINCE 1969 Chairman of the Board, Chief Executive Officer and director of FRI for more than the past five (5) years; Member - Office of the Chairman of FRI; officer and/or director of many other FRI subsidiaries; officer and/or director or trustee in 46 investment companies of Franklin Templeton Investments. Effective January 1, 2004, Mr. C. B. Johnson will no longer serve as Chief Executive Officer of FRI, but will continue to serve as Chairman of the Board and a director of FRI. GREGORY E. JOHNSON AGE 42 President of FRI; formerly Vice President of FRI for more than the past five (5) years; officer of many other FRI subsidiaries and in two investment companies of Franklin Templeton Investments. Mr. G. Johnson has been appointed to serve as Co-Chief Executive Officer of FRI effective January 1, 2004. RUPERT H. JOHNSON, JR. AGE 63 DIRECTOR SINCE 1969 Vice Chairman of FRI; formerly Executive Vice President and director of FRI for more than the past five (5) years; Member - Office of the Chairman of FRI; officer and/or director of many other FRI subsidiaries; officer and/or director or trustee in 49 investment companies of Franklin Templeton Investments. 24 LESLIE M. KRATTER AGE 58 Senior Vice President (since 2000) and Assistant Secretary (since 2003) of FRI; formerly Secretary from March 1998 to October 2003 and Vice President of FRI since March 1993. KENNETH A. LEWIS AGE 42 Vice President and Treasurer of FRI since June 2002 and officer of many other FRI subsidiaries for the past five (5) years. MURRAY L. SIMPSON AGE 66 Executive Vice President and General Counsel of FRI since January 2000; officer in 51 investment companies of Franklin Templeton Investments. Previously Managing Director and Chief Executive Officer of Franklin Templeton Investments (Asia) Limited (formerly, Templeton Franklin Investment Services (Asia), Limited) from 1994-2000. CHARLES R. SIMS AGE 42 Vice President of FRI and officer of many other FRI subsidiaries for the past five (5) years. ANNE M. TATLOCK AGE 64 Vice Chairman, Member - Office of the Chairman and director of FRI; Chairman of the Board, Chief Executive Officer (since 2000), and Director of Fiduciary Trust, a subsidiary of FRI; formerly President of Fiduciary Trust for more than the past five (5) years; officer and/or director of certain other subsidiaries of FRI. Director, Fortune Brands, Inc. and Merck & Co., Inc. FAMILY RELATIONS. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Peter M. Sacerdote, a director of FRI, is a brother-in-law of Charles B. Johnson and Rupert H. Johnson, Jr. Gregory E. Johnson is the son of Charles B. Johnson, the nephew of Rupert H. Johnson, Jr. and Peter Sacerdote and the brother of Jennifer Bolt. Jennifer Bolt is the daughter of Charles B. Johnson, the niece of Rupert H. Johnson, Jr. and Peter Sacerdote and the sister of Gregory E. Johnson. ITEM 2. PROPERTIES We conduct our worldwide operations using a combination of leased and owned facilities. While we believe we have sufficient facilities to conduct business during fiscal 2004, we will continue to lease, acquire and dispose of facilities throughout the world as necessary. We lease space domestically primarily in California, Connecticut, Delaware, Florida, Michigan, New Jersey, New York, Utah, Washington and the District of Columbia, and internationally in various locations, including Australia, Belgium, Brazil, Canada, China, England, France, Germany, Holland, Hong Kong, India, Ireland, Italy, Japan, Korea, Luxembourg, Poland, Russia, Scotland, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Turkey and the United Arab Emirates. As of September 30, 2003, we leased and occupied approximately 865,000 square feet of space. We have also leased and subsequently subleased to third parties a total of 297,000 square feet of space. In addition, we own 6 buildings near Sacramento, California, 5 buildings in St. Petersburg, Florida, 2 buildings in Nassau, Bahamas, 5 buildings in India, as well as space in office buildings in Argentina, China and Singapore. In addition, we operate 4 buildings in San Mateo, California under an operating lease with a related lessor trust. The buildings we own consist of approximately 1.67 million square feet. We have subleased to third parties approximately 104,000 square feet of excess owned space. Since we operate on a unified basis, corporate activities, fund related activities, accounting operations, sales, real estate and retail-banking and consumer lending operations, management information system activities, publishing and printing operations, 25 shareholder service operations and other business activities and operations take place in a variety of such locations. ITEM 3. LEGAL PROCEEDINGS In October and November, 2003, three lawsuits were brought against subsidiaries of the Company alleging breach of fiduciary duty with respect to the valuation of the portfolio securities of certain Franklin Templeton funds and seeking monetary damages and costs. BRADFISCH v. TEMPLETON FUNDS, INC. AND TEMPLETON GLOBAL ADVISORS LIMITED, Case 2003 L 001361, was filed on October 3, 2003 in the Circuit Court for the Third Judicial Circuit, Madison County, Illinois, and relates to the Templeton World Fund. WOODBURY v. TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC. AND TEMPLETON INVESTMENT COUNSEL, LLC, Case 2003 L 001362, was filed on October 3, 2003 in the Circuit Court for the Third Judicial Circuit, Madison County, Illinois, and relates to the Templeton Global Smaller Companies Fund, Inc. Both cases were removed to the United States District Court for the Southern District of Illinois on November 14, 2003. The complaint in KENERLEY v. TEMPLETON FUNDS, INC. AND TEMPLETON GLOBAL ADVISORS LIMITED, Case No. 03-770 GPM, was filed in the United States District Court for the Southern District of Illinois and served on the defendants on November 25, 2003. This lawsuit relates to the Templeton World Fund and alleges breach of fiduciary duties imposed by Section 36(a) of the Investment Company Act of 1940 and pendant state law claims. Management strongly believes that the claims made in each of these lawsuits are without merit and intends vigorously to defend against them. Except for the matters described above, there have been no material developments in the litigation previously reported in our Form 10-Q for the period ended June 30, 2003 as filed with the SEC on August 14, 2003. We are involved from time to time in litigation relating to claims arising in the normal course of business. Management is of the opinion that the ultimate resolution of such claims will not materially affect our business or financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of security holders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the New York Stock Exchange ("NYSE") and the Pacific Exchange under the ticker symbol "BEN", and the London Stock Exchange under the ticker symbol "FRK". On September 30, 2003, the closing price of FRI's common stock on the NYSE was $44.21 per share. At December 1, 2003, there were approximately 4,900 shareholders of record. The following table sets forth the high and low sales prices for our common stock on the NYSE. 2003 FISCAL YEAR 2002 FISCAL YEAR - ------------------------------------ -------------- -------------- ------ ------------ -------------- QUARTER HIGH LOW HIGH LOW - ------------------------------------ -------------- -------------- ------ ------------ -------------- October-December $37.85 $27.90 $37.85 $30.85 January-March $37.01 $29.99 $44.15 $34.52 April-June $40.85 $32.84 $44.48 $39.45 July-September $46.95 $38.66 $43.15 $29.52
We declared dividends of $0.30 per share in fiscal 2003 and $0.28 per share in fiscal 2002. We expect to continue paying dividends on a quarterly basis to holders of our common stock depending upon earnings and other relevant factors. 26 ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS (IN MILLIONS, EXCEPT ASSETS UNDER MANAGEMENT, PER SHARE AMOUNTS AND EMPLOYEE HEADCOUNT) AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2003 2002 2001 2000 1999 - ------------------------------------------------ --------- ---------- ---------- ---------- --------- SUMMARY OF OPERATIONS Operating revenues $2,624.4 $2,518.5 $2,354.8 $2,340.1 $2,262.5 Net income 502.8 432.7 484.7 562.1 426.7 FINANCIAL DATA Total assets $6,970.7 $6,422.7 $6,265.7 $4,042.4 $3,666.8 Long-term debt 1,108.9 595.1 566.0 294.1 294.3 Stockholders' equity 4,310.1 4,266.9 3,977.9 2,965.5 2,657.0 Operating cash flow 548.0 736.8 553.2 701.7 584.5 ASSETS UNDER MANAGEMENT (IN BILLIONS) Period ending $301.9 $247.8 $246.4 $229.9 $218.1 Simple monthly average 269.8 263.2 243.4 227.7 219.8 PER COMMON SHARE Earnings Basic $1.98 $1.66 $1.92 $2.28 $1.69 Diluted 1.97 1.65 1.91 2.28 1.69 Cash dividends 0.30 0.28 0.26 0.24 0.22 Book value 17.53 16.50 15.25 12.17 10.59 EMPLOYEE HEADCOUNT 6,504 6,711 6,868 6,489 6,650 - ---------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS In this section, we discuss our results of operations and our financial condition. In addition to historical information, we also make some statements relating to the future, which are called "forward-looking statements". These forward-looking statements involve a number of risks, uncertainties and other important factors that could cause our actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward-looking statements. For this reason, you should not rely too heavily on them and should review the "Risk Factors" section, where we discuss these statements in more detail. GENERAL We derive the majority of our operating revenues, operating expenses and net income from providing investment advisory and related services to retail mutual funds, institutional, high net-worth, private accounts and other investment products. This is our primary business activity and operating segment. The mutual funds and other products that we advise, collectively called our sponsored investment products, are distributed to the public globally under five distinct names: * Franklin * Templeton * Mutual Series * Bissett * Fiduciary Trust Our sponsored investment products include a broad range of global/international equity, U.S. domestic, hybrid/balanced, fixed-income and money market mutual funds, as well as other investment products that meet a wide variety of specific investment needs of individuals and institutions. The level of our revenues depends largely on the level and relative mix of assets under management. To a lesser degree, our revenues also depend on the level of mutual fund sales and the number of mutual fund shareholder accounts. The fees charged for our services are based on contracts with our sponsored investment products or our clients. These arrangements could change in the future. 27 Our secondary business and operating segment is banking/finance. Our banking/finance group offers selected retail-banking services to high net-worth individuals, foundations and institutions, and consumer lending services. Our consumer lending activities include automotive lending related to the purchase, securitization, and servicing of retail installment sales contracts originated by independent automobile dealerships, consumer credit and debit cards, real estate equity lines, and home equity/mortgage loans. RESULTS OF OPERATIONS The table below presents the highlights of our operations for the last three fiscal years. (IN MILLIONS EXCEPT PER SHARE AMOUNTS) 2003 2002 FOR THE YEARS ENDED SEPTEMBER 30, 2003 2002 2001 VS 2002 VS 2001 - ---------------------------------- ----------- ------------- ------------- -------------- ----------- NET INCOME $502.8 $432.7 $484.7 16% (11)% EARNINGS PER COMMON SHARE Basic $1.98 $1.66 $1.92 19% (14)% Diluted 1.97 1.65 1.91 19% (14)% OPERATING MARGIN 25% 23% 22% -- -- - ---------------------------------- ----------- ------------- ------------- -------------- -----------
Net income increased by 16% and diluted earnings per share increased by 19% in fiscal 2003. The increase was primarily due to higher operating revenues consistent with a 3% increase in our simple monthly average assets under management, higher gross sales, and an increase in billable shareholder accounts, as well as higher investment and other income in fiscal 2003 due to an other-than-temporary decline in the value of certain investments in fiscal 2002. These increases were partially offset by higher underwriting and distribution expenses and a higher effective tax rate in fiscal 2003 as compared to the prior year. An increase in repurchases of our stock, resulting in a decline in diluted weighted-average shares outstanding from 262.1 million in fiscal 2002 to 254.7 million in fiscal 2003, also contributed to the increase in diluted earnings per common share. Net income decreased by 11% and diluted earnings per share decreased by 14% in fiscal 2002 primarily due to lower investment and other income related to an other-than-temporary decline in the value of certain investments and increased operating expenses, partially offset by higher revenues.
ASSETS UNDER MANAGEMENT (IN BILLIONS) 2003 2002 AS OF THE YEARS ENDED SEPTEMBER 30, 2003 2002 2001 VS 2002 VS 2001 - ------------------------------------ --------- ------------- ------------- -------------- ----------- EQUITY Global/international $99.8 $76.5 $80.2 30% (5)% Domestic (U.S.) 55.4 41.4 44.5 34% (7)% - ------------------------------------ --------- ------------- ------------- -------------- ----------- TOTAL EQUITY 155.2 117.9 124.7 32% (5)% HYBRID/BALANCED 45.8 36.6 36.1 25% 1% FIXED-INCOME Tax-free 52.2 52.8 48.4 (1)% 9% Taxable Domestic (U.S.) 31.1 26.1 24.4 19% 7% Global/international 11.8 8.6 7.2 37% 19% - ------------------------------------ --------- ------------- ------------- -------------- ----------- TOTAL FIXED-INCOME 95.1 87.5 80.0 9% 9% MONEY MARKET 5.8 5.8 5.6 -- 4% - ------------------------------------ --------- ------------- ------------- -------------- ----------- TOTAL $301.9 $247.8 $246.4 22% 1% - ------------------------------------ --------- ------------- ------------- -------------- ----------- Simple monthly average for the $269.8 $263.2 $243.4 3% 8% year /1/ - ------------------------------------ --------- ------------- ------------- -------------- ----------- /1/ Investment management fees from approximately 50% of our assets under management at September 30, 2003 were calculated using daily average assets under management.
28 Our assets under management at September 30, 2003 were $301.9 billion, 22% higher than they were a year ago, due to excess sales over redemptions ("net inflows") of $14.4 billion and market appreciation of $42.0 billion, primarily in the latter half of fiscal 2003. Simple monthly average assets under management, which are generally more indicative of investment management fee revenue trends than the year over year change in ending assets under management, increased 3% during fiscal 2003. The simple monthly average mix of assets under management for the last three fiscal years is shown below.
AS OF THE YEARS ENDED SEPTEMBER 30, 2003 2002 2001 - ----------------------------------------------------------------------------------------------------- PERCENTAGE OF SIMPLE MONTHLY AVERAGE ASSETS UNDER MANAGEMENT Equity 49% 52% 59% Fixed-income 34% 31% 29% Hybrid/balanced 15% 15% 10% Money market 2% 2% 2% - ----------------------------------------------------------------------------------------------------- Total 100% 100% 100% - -----------------------------------------------------------------------------------------------------
The following table presents industry data showing average effective investment management fee rates /2/ for the years ended September 30, 2003, 2002 and 2001. The data was obtained from Lipper(R) Inc. and our actual effective fee rates may vary from these rates. FOR THE YEARS ENDED SEPTEMBER 30, 2003 2002 2001 - ------------------------------------ ---------------------- ---------------------- ------------------ EQUITY Global/international 0.71% 0.71% 0.72% Domestic (U.S.) 0.54% 0.55% 0.55% HYBRID/BALANCED 0.42% 0.45% 0.46% FIXED-INCOME Tax-free 0.42% 0.43% 0.43% Taxable Domestic (U.S.) 0.43% 0.43% 0.45% Global/international 0.60% 0.59% 0.59% MONEY MARKET 0.27% 0.27% 0.28% - ------------------------------------ ---------------------- ---------------------- ------------------ /2/ Calculated by Franklin Templeton Investments based on asset-weighted averages of management fee rates provided by Lipper(R) Inc. Industry effective investment management fee rates are calculated using all U.S.-based, open-ended funds that reported expense data to Lipper(R) Inc. as of the funds' most recent annual report date, and for which management fee rates were greater or equal to zero. Industry effective fee rates reflect the investment management expenses of retail and institutional funds drawn from all distribution channels, without exception. The averages reflect combined retail and institutional funds data and include all share classes, and all distribution channels, without exception. Variable annuities are not included.
For the 2003 fiscal year, our effective investment management fee rate (investment management fees divided by simple monthly average assets under management) declined to 0.55% from 0.56% in fiscal 2002. The change in the mix of assets under management, resulting from higher relative net inflows and appreciation for fixed-income as compared to equity products, led to the slight decrease in the effective investment management fee rate. Generally, fixed-income and hybrid/balanced products carry a lower management fee than equity assets. The decline in the effective management fee rate to 0.56% in fiscal 2002 as compared to 0.58% in fiscal 2001 was largely due to the inclusion of the assets under management of Fiduciary Trust Company International ("Fiduciary Trust") beginning in fiscal 2001 and market depreciation in equity assets in fiscal 2002. Approximately 64% of Fiduciary Trust's assets under management were classified as hybrid/balanced assets at the time of acquisition in April 2001. 29 Assets under management by shareholder location were as follows: (IN BILLIONS) AS OF THE YEAR ENDED SEPTEMBER 30, 2003 - ---------------------------------------- ------------ United States $239.9 Canada 21.5 Europe 19.9 Asia/Pacific and other 20.6 - ---------------------------------------- ------------ Total $301.9 - ---------------------------------------- ------------ Investors in the United States owned approximately 79% of our assets under management at September 30, 2003 and approximately 72% of our revenues originated in the United States in fiscal 2003. Investment advisory and administrative services related to these assets may be provided in jurisdictions outside the United States in accordance with contractual arrangements with our sponsored investment products. Components of the change in our assets under management were as follows:
(IN BILLIONS) AS OF AND FOR THE YEARS ENDED 2003 2002 SEPTEMBER 30, 2003 2002 2001 VS 2002 VS 2001 - ------------------------------------- -------- ------------- ------------- --------------- --------- Beginning assets under management $247.8 $246.4 $229.9 1% 7% Sales 81.3 72.4 58.5 12% 24% Reinvested dividends 3.7 4.8 9.0 (23)% (47)% Redemptions (66.9) (57.5) (58.6) 16% (2)% Distributions (6.0) (7.2) (12.0) (17)% (40)% Acquisitions -- 0.8 49.5 (100)% (98)% Appreciation (depreciation) 42.0 (11.9) (29.9) N/A (60)% - ------------------------------------- -------- ------------- ------------- --------------- --------- Ending assets under management $301.9 $247.8 $246.4 22% 1% - ------------------------------------- -------- ------------- ------------- --------------- ---------
During fiscal 2003 and 2002, our sponsored investment products experienced overall net inflows in contrast to the slight net outflows experienced in fiscal 2001. Gross product sales increased 12% while redemptions increased 16% in 2003. Our acquisition of Pioneer ITI AMC Limited ("Pioneer"), an Indian investment management company, in July 2002 increased our assets under management by $0.8 billion as of the date of this acquisition. In 2001, the acquisition of Bissett and Associates Investment Management Ltd. ("Bissett"), in October 2000, increased our assets under management by $3.7 billion, and the Fiduciary Trust acquisition, in April 2001, increased our assets under management by $45.8 billion, as of the dates of those acquisitions. Our products experienced $42.0 billion in appreciation in fiscal 2003 as compared to market depreciation in both fiscal 2002 and 2001 consistent with an overall increase in domestic and global equity markets in the latter half of 2003. 30 OPERATING REVENUES The table below presents the percentage change in each revenue category between fiscal 2003 and fiscal 2002 and between fiscal 2002 and fiscal 2001. 2003 2002 PERCENTAGE OF TOTAL REVENUES VS 2002 VS 2001 2003 2002 2001 - ------------------------------------------ --------- ----------- ------------ ------------- --------- Investment management fees 2% 4% 57% 58% 60% Underwriting and distribution fees 7% 12% 32% 31% 30% Shareholder servicing fees 14% (4)% 8% 8% 8% Consolidated sponsored investment products income, net N/A N/A -- -- -- Other, net 5% 86% 3% 3% 2% - ------------------------------------------ --------- ----------- ------------ ------------- --------- TOTAL OPERATING REVENUES 4% 7% 100% 100% 100% - ------------------------------------------ --------- ----------- ------------ ------------- ---------
SUMMARY In fiscal 2003, total operating revenues increased 4% over the prior year due to increased investment management, shareholder servicing and underwriting and distribution fees, consistent with a 3% increase in simple monthly average assets under management, an increase in billable shareholder accounts and higher gross product sales. In fiscal 2002, total operating revenues increased 7% over the prior year. Investment management and underwriting and distribution fees increased due to higher net sales and higher average assets under management. Other, net revenue increased due to the inclusion of Fiduciary Trust revenues for a full fiscal year in 2002, as well as higher net gains related to auto loan securitizations included in other, net revenue. INVESTMENT MANAGEMENT FEES Investment management fees, accounting for 57% of our operating revenues in fiscal 2003, include both investment advisory and administration fees. These fees are generally calculated under contractual arrangements with our sponsored investment products as a percentage of the market value of assets under management. Annual rates vary by investment objective and type of services provided. In return for these fees, we provide a combination of investment advisory, administrative and other management services. Investment management fees increased 2% in fiscal 2003 consistent with a 3% increase in simple monthly average assets under management, partially offset by a slight decline in our effective investment management fee rate resulting from a shift in average asset mix toward fixed-income products, which generally carry a lower management fee than equity assets. Investment management fees increased 4% in fiscal 2002 primarily due to increased net sales, which increased assets under management, and the impact of including Fiduciary Trust for a full fiscal year. This increase was partially offset by a shift in our average asset mix toward fixed-income investment products, which led to a decrease in our effective investment management fee rate. UNDERWRITING AND DISTRIBUTION FEES We earn underwriting fees from the sale of some classes of sponsored investment products on which investors pay a sales commission at the time of purchase. Sales commissions are reduced or eliminated on some classes of shares and for sales to shareholders or intermediaries that exceed specified minimum amounts. Therefore, underwriting fees will change with the overall level of gross sales and the relative mix of sales between different share classes. Many of our sponsored investment products pay distribution fees in return for sales, marketing and distribution efforts on their behalf. While other contractual arrangements exist in international jurisdictions, in the United States, distribution fees include "12b-1 fees". These fees are subject to maximum payout levels based on a percentage of the assets in each fund and other regulatory limitations. We pay a significant portion of 31 underwriting and distribution fees to the financial advisors and other intermediaries who sell our sponsored investment products to the public on our behalf. See the description of underwriting and distribution expenses below. Overall, underwriting and distribution fees increased 7% in fiscal 2003. Underwriting fees increased 8% primarily due to a 12% increase in gross product sales, partially offset by a change in the sales mix. Distribution fees increased 6% consistent with a 3% increase in simple monthly average assets under management and a change in the asset mix. Underwriting and distribution fees increased 12% in fiscal 2002. Underwriting fees increased 24% consistent with a 24% increase in gross product sales, and distribution fees increased 5% consistent with an 8% increase in simple monthly average assets under management. SHAREHOLDER SERVICING FEES Shareholder servicing fees are generally fixed charges per shareholder account that vary with the particular type of fund and the service being rendered. In some instances, sponsored investment products are charged these fees based on the level of assets under management. We receive fees as compensation for providing transfer agency services, including providing customer statements, transaction processing, customer service and tax reporting. In the United States, transfer agency service agreements provide that accounts closed in a calendar year remain billable through the second quarter of the following calendar year at a reduced rate. In Canada, such agreements provide that accounts closed in the calendar year remain billable for four months after the end of the calendar year. Accordingly, the level of fees will vary with the growth in new accounts and the level of closed accounts that remain billable. Shareholder servicing fees increased 14% in fiscal 2003. The increase reflects an increase in the overall number of billable shareholder accounts, partially offset by a decline in fee rates chargeable on accounts closed in the prior calendar year, under revised shareholder service fee agreements in the United States that became effective on January 1, 2003. The 0.7 million shareholder accounts added in July 2002 as a result of the acquisition of Pioneer also contributed to the increase in average billable accounts in fiscal 2003. Shareholder servicing fees decreased 4% in fiscal 2002 consistent with a decrease in the quarterly average number of billable accounts. OTHER, NET Other, net consists primarily of revenues from the banking/finance operating segment as well as income from custody services. Revenues from the banking/finance operating segment include interest income on loans, servicing income, and investment income on banking/finance investment securities, and are reduced by interest expense and the provision for probable loan losses. Other, net increased 5% in fiscal 2003 as a result of higher net interest income and auto loan servicing income, partially offset by lower custody fees. Other, net increased 86% in fiscal 2002 primarily due to the inclusion of Fiduciary Trust's banking and custody activities for a full fiscal year in 2002 and increased gains recognized on auto loan portfolio sales. 32 OPERATING EXPENSES The table below presents the percentage change in each expense category between fiscal 2003 and fiscal 2002 and between fiscal 2002 and fiscal 2001. 2003 2002 PERCENTAGE OF TOTAL EXPENSES VS 2002 VS 2001 2003 2002 2001 - ---------------------------------------------- -------------- ----------- -------- ------ ------- Underwriting and distribution 6% 12% 38% 37% 35% Compensation and benefits 1% 5% 33% 33% 33% Information systems, technology and occupancy (3)% 12% 14% 15% 14% Advertising and promotion (14)% 1% 5% 6% 6% Amortization of deferred sales commissions 9% (2)% 4% 3% 4% Amortization of intangible assets (1)% (70)% 1% 1% 3% September 11, 2001 (recovery) expense, net N/A (100)% 0% 0% 0% Other 19% (2)% 5% 5% 5% - ---------------------------------------------- -------------- ----------- -------- ------ ------- TOTAL OPERATING EXPENSES 2% 5% 100% 100% 100% - ---------------------------------------------- -------------- ----------- -------- ------ -------
SUMMARY Operating expenses increased 2% during fiscal 2003 primarily due to higher underwriting and distribution and other expenses, which were partly offset by lower advertising and promotion, and information systems, technology and occupancy costs. Operating expenses increased 5% during fiscal 2002. This increase was primarily due to increased underwriting and distribution fees consistent with higher underwriting and distribution revenue, and higher compensation and benefits and technology and occupancy costs primarily due to the inclusion of Fiduciary Trust's activity for a full fiscal year in 2002. The increase in these expense categories was offset in part by a decline in amortization of intangible assets on discontinuation of the amortization of goodwill and indefinite-lived intangible assets. UNDERWRITING AND DISTRIBUTION Underwriting and distribution includes expenses paid to financial advisers and other third parties for selling, distributing and providing ongoing services to investors in our sponsored investment products. Underwriting and distribution expenses increased 6% in fiscal 2003 and 12% in fiscal 2002 consistent with similar trends in underwriting and distribution revenues. COMPENSATION AND BENEFITS Compensation and benefits increased 1% during fiscal 2003. Although we experienced a decrease in retention bonus commitments related to the acquisition of Fiduciary Trust, we have also experienced increases in employee insurance and other benefits costs in fiscal 2003. We employed approximately 6,500 people at September 30, 2003 compared to approximately 6,700 at the same time last year. In order to hire and retain key employees, we are committed to keeping our salaries and benefit packages competitive, which means that the level of compensation and benefits may increase more quickly or decrease more slowly than our revenues. Compensation and benefits increased 5% during fiscal 2002. This increase was primarily due to the inclusion of Fiduciary Trust's activity for a full fiscal year, partially offset by an overall decline in employees as well as the decision made by management during the quarter ended December 2001 to reduce employee salaries by 5% or 10%, depending on specific salary categories. In May 2002, we reinstated salaries for employees whose salaries were reduced by 5% and, in July 2002, we reinstated employee salaries in the 10% reduction category. 33 INFORMATION SYSTEMS, TECHNOLOGY AND OCCUPANCY Information systems, technology and occupancy costs decreased 3% in fiscal 2003. This decrease was primarily due to decreased purchases of information system and technology equipment leading to decreased depreciation (certain of our technology equipment is periodically replaced with new equipment under our technology outsourcing agreement) and lower expenditures on technology projects. While continuing to work on new technology initiatives and investment in our technology infrastructure, we have slowed down a number of initiatives and delayed the start of other technology projects given the recent economic slowdown and our focus on cost control and management. Information systems, technology and occupancy costs increased 12% in fiscal 2002. This increase was primarily due to the inclusion of costs related to the outsourcing of the management of our data center and distributed server operations and added technology and occupancy costs of the Fiduciary Trust acquisition for a full fiscal year in 2002. Details of capitalized information systems and technology costs for the last three fiscal years were as follows: (IN THOUSANDS) 2003 2002 2001 - ---------------------------------------------------------------------------------------------------- Net carrying amount at beginning of period $121,486 $162,857 $156,895 Additions during period, net of disposals and other adjustments 25,812 35,570 69,794 Net assets purchased through acquisitions -- 206 11,266 Amortization during period (68,172) (77,147) (75,098) - ---------------------------------------------------------------------------------------------------- Net carrying amount at end of period $79,126 $121,486 $162,857 - ----------------------------------------------------------------------------------------------------
ADVERTISING AND PROMOTION Advertising and promotion decreased 14% during fiscal 2003 and increased 1% in fiscal 2002. During fiscal 2002 we incurred higher promotion and advertising costs to educate the sales channels and the investing public about the strong relative investment performance of our sponsored investment products. We are committed to investing in advertising and promotion in response to changing business conditions, which means that the level of advertising and promotion expenditures may increase more rapidly or decrease more slowly than our revenues. AMORTIZATION OF DEFERRED SALES COMMISSIONS Certain fund share classes, including Class B, are sold without a front-end sales charge to shareholders, although our distribution subsidiaries pay a commission on the sale. In the United States, Class A shares are sold without a front-end sales charge to shareholders when minimum investment criteria are met. However, our U.S. distribution subsidiary pays a commission on these sales. Class C shares are sold with a front-end sales charge that is lower than the commission paid by the U.S. distributor. We defer and amortize all up-front commissions paid by our distribution subsidiaries over 18 months to 8 years depending on share class or financing arrangements. We have arranged to finance our Class B and C deferred commission assets ("DCA") arising from our U.S., Canadian and European operations through Lightning Finance Company Limited ("LFL"), a company in which we have a 49% ownership interest. In the United States, LFL has entered into a financing agreement with our U.S. distribution subsidiary and we maintain a continuing interest in the assets until resold by LFL. As a result, we retain DCA sold to LFL under the U.S. agreement in our financial statements and amortize them over an 8-year period, or until sold by LFL to third-parties. In contrast to the U.S. arrangement, LFL has entered into direct agreements with our Canadian and European sponsored investment products, and, as a result, we do not record DCA from these sources in our financial statements. Amortization of deferred sales commissions increased 9% in fiscal 2003 from the prior year primarily due to increased gross product sales and because LFL did not sell any U.S. DCA in a securitization transaction in 34 fiscal 2003, while it sold approximately $61.5 million U.S. DCA in fiscal 2002. Amortization of deferred sales commissions decreased 2% in fiscal 2002, due to changes in sales mix and existing financing arrangements. AMORTIZATION OF INTANGIBLE ASSETS Amortization of intangible assets decreased 1% in fiscal 2003, primarily due to foreign currency movements. Amortization of intangible assets decreased 70% in fiscal 2002 due to the adoption of Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"), on October 1, 2001. Under SFAS 142, we ceased to amortize goodwill and indefinite-lived intangible assets. This resulted in a reduction in amortization expense of approximately $50 million in fiscal 2002 as compared to the prior year. As of March 31, 2003, we completed our most recent annual impairment test of goodwill and indefinite-lived and definite-lived intangible assets and we determined that there was no impairment to these assets as of October 1, 2002. OTHER INCOME (EXPENSE) Other income (expense) includes investment and other income and interest expense. Beginning July 1, 2003, realized and unrealized gains (losses), net, of sponsored investment products that were consolidated in our financial statements on adoption of the Financial Accounting Standards Board ("FASB") Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), are also included in this classification. See the description of FIN 46 in Critical Accounting Policies below. Investment and other income is comprised primarily of the following: * dividends from investments * interest income from investments in bonds and government securities * realized gains and losses on investments * foreign currency exchange gains and losses * miscellaneous income, including gain or loss on disposal of property. Net other income was $52.1 million in fiscal 2003 as compared to a net expense of $7.2 million in fiscal 2002 due to a $60.1 million other-than-temporary decline in value of some of our investments recognized in the fourth quarter of fiscal 2002. Net other income was $125.8 million in fiscal 2001 due to net realized gains of approximately $34.2 million on the sale of certain sponsored investment products held for investment purposes and other realized gains of $24.6 million related to the sale of our former headquarters building in San Mateo. TAXES ON INCOME As a multi-national corporation, we provide investment management services to a wide range of international investment products, often managed from locations outside the United States. Some of these jurisdictions have lower tax rates than the United States. The mix of income (primarily investment management fees) subject to these lower rates, when aggregated with income originating in the United States, produces a lower overall effective tax rate than existing U.S. Federal and state tax rates. Our effective income tax rate for fiscal 2003 increased to 28% compared to 25% in fiscal 2002 and 24% in fiscal 2001. The effective tax rate will continue to reflect the relative contributions of foreign earnings that are subject to reduced tax rates and that are not currently included in U.S. taxable income, as well as other factors. MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At September 30, 2003, we had $1,053.7 million in cash and cash equivalents, as compared to $980.6 million at September 30, 2002. Cash and cash equivalents include cash, U.S. Treasury bills and other debt instruments with maturities of three months or less from the purchase date and other highly liquid investments that are readily convertible into cash, including money market funds. Liquid assets, which consist of cash and cash equivalents, investments available-for-sale and current receivables, increased to $3,272.3 million at September 30, 2003 from $2,826.0 million at September 30, 2002. Liquid assets have increased in fiscal 2003 primarily due to cash provided by operating activities, proceeds received from auto loan securitizations and the issuance of medium-term notes, offset in part by common stock repurchases and loan origination activity. 35 Outstanding debt, including Federal Home Loan Bank advances and current maturities of long-term debt, increased to $1,123.7 million at September 30, 2003, compared to $611.5 million at September 30, 2002. The balance at September 30, 2003 included $520.3 million in principal and accrued interest related to outstanding convertible notes, $420.0 million in five-year senior notes and $168.8 million in other long-term debt, including current maturities. Other long-term debt consisted primarily of deferred commission liabilities recognized in relation to U.S. DCA financed by LFL that had not yet been sold by LFL in a securitization transaction (see Note 11 to the consolidated financial statements for a further description of debt outstanding). Each of the $1,000 (principal amount at maturity) convertible notes is convertible into 9.3604 shares of our common stock. We may redeem the convertible notes for cash on or after May 11, 2006 at their accreted value. On May 12, 2003, at the option of the holders, we repurchased convertible notes with a face value of $5.9 million principal amount at maturity, for $3.5 million in cash, the accreted value of the notes as of May 11, 2003. We may have to repurchase the convertible notes at their accreted value, at the option of the holders, on May 11 of 2004, 2006, 2011, 2016, 2021 and 2026. In this event, we may choose to pay the purchase price in cash or shares of our common stock. The amount of convertible notes that will be redeemed depends on, among other factors, the performance of our common stock. As of September 30, 2002, outstanding debt included $514.2 million related to the convertible notes and $88.8 million of other long-term debt, including current maturities. The increase in outstanding debt from September 30, 2002 is primarily due to the issuance of the five-year senior notes in April 2003, the increase in U.S. DCA financed by LFL, and the accretion of interest on the convertible notes. As of September 30, 2003, we had $500.0 million of commercial paper and $300.0 million of debt and equity securities available to be issued under shelf registration statements filed with the Securities and Exchange Commission. Our committed revolving credit facilities at September 30, 2003 totaled $420.0 million, of which, $210.0 million was under a 364-day facility. The remaining $210.0 million facility is under a five-year facility that will expire in June 2007. In addition, at September 30, 2003, our banking/finance operating segment had $559.5 million in available uncommitted short-term bank lines under the Federal Reserve Funds system, the Federal Reserve Bank discount window, and Federal Home Loan Bank short-term borrowing capacity. Our ability to access the capital markets in a timely manner depends on a number of factors including our credit rating, the condition of the global economy, investors' willingness to purchase our securities, interest rates, credit spreads and the valuation levels of equity markets. In extreme circumstances, we might not be able to access this liquidity readily. Our banking/finance operating segment periodically enters into auto loan securitization transactions with qualified special purpose entities, which then issue asset-backed securities to private investors. Gross sale proceeds from these transactions were $464.4 million in fiscal 2003 and $565.2 million in fiscal 2002. The outstanding loan balances held by these special purpose entities were $680.7 million as of September 30, 2003 and $530.9 million as of September 30, 2002. Our ability to access the securitization market will directly affect our plans to finance the auto loan portfolio in the future. The sales commissions that we have financed globally through LFL during fiscal 2003, were approximately $161.3 million compared to $135.3 million in fiscal 2002. LFL's ability to access credit facilities and the securitization market will directly affect our existing financing arrangements. We expect that the main uses of cash will be to: * expand our core business * make strategic acquisitions * acquire shares of our common stock * fund property and equipment purchases * pay operating expenses of the business * enhance our technology infrastructure * improve our business processes * pay shareholder dividends * repay and service debt. 36 We believe that we can meet our present and reasonably foreseeable operating cash needs and future commitments through the following: * existing liquid assets * continuing cash flow from operations * borrowing capacity under current credit facilities * ability to issue debt or equity securities * mutual fund sales commission financing arrangement. In particular, we expect to finance future investment in our banking/finance activities through operating cash flows, debt, increased deposit base, or through the securitization of a portion of the receivables from consumer lending activities. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS Our contractual cash obligations and commitments as of September 30, 2003 were as follows: PAYMENTS DUE BY PERIOD ------------------------------------------------------ LESS MORE (IN THOUSANDS) TOTAL THAN 1 1-3 4-5 THAN 5 YEAR YEARS YEARS YEARS - ---------------------------------------------- ----------- ---------- --------- ----------- --------- Long-term debt obligations $1,108,881 $22,450 $46,300 $468,236 $571,895 Operating lease obligations 268,577 34,760 60,881 49,189 123,747 - ---------------------------------------------- ----------- ---------- --------- ----------- ---------
In addition, at September 30, 2003, the banking/finance operating segment had commitments to extend credit aggregating $280.5 million, primarily under its credit card lines and had issued financial standby letters of credit totaling $5.5 million on which beneficiaries would be able to draw upon in the event of non-performance by our customers, primarily in relation to lease and lien obligations of these banking customers. These standby letters of credit, issued prior to January 1, 2003, were secured by marketable securities with a fair value of $15.2 million as of September 30, 2003 and commercial real estate. OFF-BALANCE SHEET ARRANGEMENTS As discussed above, we obtain financing for sales commissions that we pay to brokers on Class B and C shares through LFL, a company incorporated in Ireland whose sole business purpose is to finance our DCA. We hold a 49% ownership interest in LFL and we account for this ownership interest using the equity method of accounting. Our exposure to loss related to our investment in LFL is limited to the carrying value of our investment and loans, and interest and fees receivable from LFL. At September 30, 2003, those amounts approximated $54.7 million. During fiscal 2003, we financed approximately $161.3 million of sales commissions through LFL and we recognized pre-tax income of approximately $0.7 million for our share of the net income of LFL. As discussed above, our banking/finance operating segment periodically enters into auto loan securitization transactions with qualified special purpose entities, which then issue asset-backed securities to private investors. Our main objective in entering in securitization transactions is to obtain financing for auto loan activities. Securitized loans held by the securitization trusts totaled $680.7 million at September 30, 2003 and $530.9 million at September 30, 2002. In relation to these transactions, we are obligated to cover shortfalls in amounts due to the holders of the notes up to certain levels as specified under the related agreements. As of September 30, 2003, the maximum potential amount of future payments was $13.7 million relating to guarantees made prior to January 1, 2003. In addition, our consolidated balance sheet at September 30, 2003 included a $0.1 million liability to reflect obligations arising from an auto securitization transaction that we entered into in June 2003. We are contingently liable for approximately $145.0 million in residual guarantees under an operating lease for our global corporate headquarters campus in San Mateo, California. This represents about 85% of the total construction costs of $170.0 million. We are also contingently liable to purchase the corporate headquarters campus for an amount equal to the final construction costs of $170.0 million if an event of default occurs under the agreement. An event of default includes, but is not limited to, failure to make lease payments when due and 37 failure to maintain required insurance. Management considers the possibility of default under the provisions of the agreement to be remote. Currently, the lease is treated as an operating lease, as none of the capitalization criteria under Statement of Financial Accounting Standards No. 13, "Accounting for Leases", were met at the inception of the lease. We anticipate that we will consolidate our corporate headquarters campus under the requirements of FIN 46 in the period ending December 31, 2003. CRITICAL ACCOUNTING POLICIES Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and assumptions that impact our financial position and results of operations. These estimates and assumptions are affected by our application of accounting policies. Below we describe certain critical accounting policies that we believe are important to understanding our results of operations and financial position. In addition, please refer to Note 1 to the consolidated financial statements for further discussion of our accounting policies. INTANGIBLE ASSETS At September 30, 2003 our assets included intangible assets as follows: (IN THOUSANDS) NET CARRYING AMOUNT - ------------------------------------------------------------ ----------------- Goodwill $1,335,517 Intangible assets - definite-lived 205,636 Intangible assets - indefinite-lived 478,645 - ------------------------------------------------------------ ----------------- Total $2,019,798 - ------------------------------------------------------------ ----------------- Under SFAS 142, we are required to test the fair value of goodwill and indefinite-lived intangibles when there is an indication of impairment, or at least once a year. As of March 31, 2003, we completed our annual impairment test of goodwill and indefinite-lived and definite-lived intangible assets and we determined that there was no impairment to these assets as of October 1, 2002. The fair value of indefinite-lived intangible assets is determined based on anticipated discounted cash flows. Goodwill is impaired when the carrying amount of the reporting unit exceeds the implied fair value of the reporting unit. In estimating the fair value of the reporting unit, we use valuation techniques based on discounted cash flows similar to models employed in analyzing the purchase price of an acquisition target. Intangible assets subject to amortization are reviewed for impairment at each reporting period on the basis of the expected future undiscounted operating cash flows, without interest charges, to be derived from these assets. In performing our analysis, we used certain assumptions and estimates including those related to discount rates and the expected future period of cash flows to be derived from the assets, based on, among other factors, historical trends and the characteristics of the assets. While we believe that our testing was appropriate, if these estimates and assumptions change in the future, we may be required to record impairment charges or otherwise increase amortization expense. INCOME TAXES As a multinational corporation, we operate in various locations outside the United States. We have not made a provision for U.S. taxes on the cumulative undistributed earnings of foreign subsidiaries as those earnings are intended to be reinvested for an indefinite period of time. These earnings approximated $2.1 billion at September 30, 2003. Changes to our policy of reinvesting foreign earnings may have a significant effect on our financial condition and results of operation. 38 VALUATION OF INVESTMENTS We record substantially all investments in our financial statements at fair value or amounts that approximate fair value. Where available, we use prices from independent sources such as listed market prices or broker or dealer price quotations. For investments in illiquid and privately held securities that do not have readily determinable fair values, we estimate the value of the securities based upon available information. However, even where the value of a security is derived from an independent market price or broker or dealer quote, some assumptions may be required to determine the fair value. For example, we generally assume that the size of positions in securities that we hold would not be large enough to affect the quoted price of the securities when sold, and that any such sale would happen in an orderly manner. However, these assumptions may be incorrect and the actual value realized on sale could differ from the current carrying value. We evaluate our investments for other-than-temporary decline in value on a periodic basis. This may exist when the fair value of an investment security has been below the current value for an extended period of time. As most of our investments are carried at fair value, if an other-than-temporary decline in value is determined to exist, the unrealized investment loss recorded net of tax in accumulated other comprehensive income is realized as a charge to net income, in the period in which the other-than-temporary decline in value is determined. In fiscal 2002, we recognized $60.1 million for an other-than-temporary decline in the value of certain investments. While we believe that we have accurately estimated the amount of other-than-temporary decline in value in our portfolio, different assumptions could result in changes to the recorded amounts in our financial statements. LOSS CONTINGENCIES We are involved in various lawsuits and claims encountered in the normal course of business. When such a matter arises and periodically thereafter, we consult with our legal counsel and evaluate the merits of the claim based on the facts available at that time. In management's opinion, an adequate accrual has been made as of September 30, 2003 to provide for any probable losses that may arise from these matters. VARIABLE INTEREST ENTITIES FIN 46, issued in January 2003, requires consolidation of a variable interest entity ("VIE") by the enterprise that has the majority of the risks or rewards of ownership, referred to as the primary beneficiary. The consolidation and disclosure provisions of FIN 46 are effective immediately for VIEs created after January 31, 2003, and, originally, for interim or annual reporting periods beginning after June 15, 2003 for VIEs created before February 1, 2003. However, in October 2003, the FASB issued Staff Position FIN 46-6, "Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities" ("FSP FIN 46-6"), deferring the consolidation provisions of FIN 46 to interim or annual reporting periods ending after December 15, 2003 for VIEs created before February 1, 2003. Six VIEs, all sponsored investment products with inception dates after January 31, 2003, have been consolidated in our financial statements at September 30, 2003. The effect of this consolidation was to increase our consolidated net income by $1.1 million and our financial position by $10.4 million for and as of the year ended September 30, 2003. Our exposure to loss related to our investment in these consolidated VIEs is limited to our investment and fees earned, but not yet received, totaling $38.7 million at September 30, 2003. We are continuing our evaluation of sponsored investment products and will adopt the consolidation provisions of FIN 46 for products created before February 1, 2003 in the quarter ending December 31, 2003, in accordance with FSP FIN 46-6. Based on the current requirements of FIN 46, we estimate that the effect of adoption on our consolidated balance sheet as of December 31, 2003 will be to increase assets by approximately $1,119.2 million, based on September 30, 2003 values. Our exposure to loss as a result of our investment in these VIEs is limited to our investment, totaling $167.1 million at September 30, 2003, and fees earned but not yet received. In addition, as the primary beneficiary of our corporate headquarters campus, a lessor trust, we anticipate that we will consolidate the trust under the provisions of FIN 46 as of December 31, 2003. The impact of consolidating the trust will be to increase property and equipment, net by approximately $157.6 million and current maturities of long-term debt, by approximately $164.9 million as of this date. 39 In relation to our purchase of Darby Overseas Investments, Ltd. and Darby Overseas, L.P., we anticipate that we will consolidate sponsored investment products with total assets of approximately $444.4 million as of October 1, 2003. Evaluating whether related entities are VIEs and determining whether we qualify as the primary beneficiary of these VIEs, is highly complex and involves the use of estimates and assumptions. In general, when we estimate the expected residual returns of a VIE based on discounted cash flows, we make certain assumptions about discount rates. In addition, we determine the volatility of the VIE's expected returns based on available historical information and management's estimates. While we believe that our testing and approach were appropriate, future changes in estimates and assumptions may affect our decision to consolidate one or more VIEs in our financial statements. See Note 14 to the consolidated financial statements for additional FIN 46 disclosures. BANKING/FINANCE GROUP INTEREST INCOME AND MARGIN ANALYSIS The following table presents the banking/finance group's net interest income and margin for the fiscal years ended September 30, 2003 and 2002: 2003 2002 - -------------------------------------- ----------- --------- ---------- --------- --------- ----------- AVERAGE AVERAGE AVERAGE AVERAGE (IN THOUSANDS) BALANCE INTEREST RATE BALANCE INTEREST RATE - -------------------------------------- ----------- --------- ---------- --------- --------- ----------- Federal funds sold and securities purchased under agreements to resell $59,799 $889 1.49% $91,496 $1,438 1.57% Investment securities, available-for-sale 421,320 18,207 4.32% 368,693 18,366 4.98% Loans receivable /3/ 460,295 30,354 6.59% 490,729 33,523 6.83% - -------------------------------------- ----------- --------- ---------- --------- --------- ----------- Total earning assets $941,414 $49,450 5.25% $950,918 $53,327 5.61% Interest-bearing deposits $697,273 $6,374 0.91% $814,159 $9,812 1.21% Inter-segment debt 121,489 2,501 2.06% 150,566 5,415 3.60% Federal funds purchased and securities sold under agreements to repurchase 16,325 261 1.60% 19,233 392 2.04% - -------------------------------------- ----------- --------- ---------- --------- --------- ----------- Total interest-bearing liabilities $835,087 $9,136 1.09% $983,958 $15,619 1.59% - -------------------------------------- ----------- --------- ---------- --------- --------- ----------- Net interest income and margin $40,314 4.28% $37,708 3.97% - -------------------------------------- ----------- --------- ---------- --------- --------- ----------- /3/ Non-accrual loans are included in the average loans receivable balance.
40
QUARTERLY INFORMATION (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA) QUARTER FIRST SECOND THIRD FOURTH - --------------------------------------------------------------------------------------------------- 2003 Revenues $605,451 $613,135 $683,907 $721,955 Operating income $139,455 $139,706 $169,375 $199,540 Net income $109,760 $109,603 $131,388 $152,079 Earnings per share: Basic $0.43 $0.43 $0.52 $0.61 Diluted $0.43 $0.43 $0.52 $0.61 Dividend per share $0.075 $0.075 $0.075 $0.075 Common stock price per share: High $37.85 $37.01 $40.85 $46.95 Low $27.90 $29.99 $32.84 $38.66 - --------------------------------------------------------------------------------------------------- 2002 Revenues $618,207 $625,968 $666,050 $608,307 Operating income $142,865 $148,019 $153,852 $140,766 Net income $118,519 $119,996 $125,690 $68,518 Earnings per share: Basic $0.45 $0.46 $0.48 $0.26 Diluted $0.45 $0.46 $0.48 $0.26 Dividend per share $0.070 $0.070 $0.070 $0.070 Common stock price per share: High $37.85 $44.15 $44.48 $43.15 Low $30.85 $34.52 $39.45 $29.52 - --------------------------------------------------------------------------------------------------- 2001 Revenues $564,074 $577,413 $609,473 $603,883 Operating income $148,978 $144,473 $124,696 $93,848 Net income $149,465 $131,684 $119,703 $83,869 Earnings per share: Basic $0.61 $0.54 $0.46 $0.32 Diluted $0.61 $0.54 $0.46 $0.32 Dividend per share $0.065 $0.065 $0.065 $0.065 Common stock price per share: High $45.50 $48.30 $47.40 $46.07 Low $34.00 $34.20 $36.05 $31.65 - ---------------------------------------------------------------------------------------------------
RISK FACTORS WE FACE STRONG COMPETITION FROM NUMEROUS AND SOMETIMES LARGER COMPANIES. We compete with numerous investment management companies, stock brokerage and investment banking firms, insurance companies, banks, savings and loan associations and other financial institutions. Continuing consolidation in the financial services industry has created stronger competitors with greater financial resources and broader distribution channels than our own. Additionally, competing securities dealers whom we rely upon to distribute our mutual funds also sell their own proprietary funds and investment products, which could limit the distribution of our investment products. To the extent that existing or potential customers, including securities dealers, decide to invest in or distribute the products of our competitors, the sales of our products as well as our market share, revenues and net income could decline. CHANGES IN THE DISTRIBUTION CHANNELS ON WHICH WE DEPEND COULD REDUCE OUR REVENUES AND HINDER OUR GROWTH. We derive nearly all of our fund sales through broker/dealers and other similar investment advisors. Increasing competition for these distribution channels has caused our distribution costs to rise and could cause further increases in the future. Higher distribution costs lower our net revenues and earnings. Additionally, if one of the major financial advisors who distribute our products were to cease their operations, it could have a significant adverse impact on our revenues and earnings. Moreover, our failure to maintain strong business 41 relationships with these advisors would impair our ability to distribute and sell our products, which would have a negative effect on our level of assets under management, related revenues and overall business and financial condition. WE HAVE BECOME SUBJECT TO AN INCREASED RISK OF ASSET VOLATILITY FROM CHANGES IN THE GLOBAL EQUITY MARKETS. We have become subject to an increased risk of asset volatility from changes in the domestic and global financial and equity markets due to the continuing threat of terrorism. Declines in these markets have caused in the past, and would cause in the future, a decline in our revenue and income. THE LEVELS OF OUR ASSETS UNDER MANAGEMENT, WHICH IN TURN IMPACT REVENUES, ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS. Global economic conditions, changes in the equity market place, interest rates, inflation rates, the yield curve and other factors that are difficult to predict affect the mix, market values and levels of our assets under management. Changing market conditions may cause a shift in our asset mix towards fixed-income products and a related decline in our revenue and income, since we generally derive higher fee revenues and income from equity assets than from fixed-income products we manage. Similarly, our securitized consumer receivables business is subject to marketplace fluctuation. WE FACE RISKS ASSOCIATED WITH CONDUCTING OPERATIONS IN NUMEROUS FOREIGN COUNTRIES. We sell mutual funds and offer investment advisory and related services in many different regulatory jurisdictions around the world, and intend to continue to expand our operations internationally. Regulators in these jurisdictions could change their policies or laws in a manner that might restrict or otherwise impede our ability to distribute or register investment products in their respective markets. OUR ABILITY TO SUCCESSFULLY INTEGRATE THE WIDELY VARIED SEGMENTS OF OUR BUSINESS CAN BE IMPEDED BY SYSTEMS AND OTHER TECHNOLOGICAL LIMITATIONS. Our continued success in effectively managing and growing our business both domestically and abroad, depends on our ability to integrate the varied accounting, financial, information and operational systems of our various businesses on a global basis. OUR INABILITY TO MEET CASH NEEDS COULD HAVE A NEGATIVE EFFECT ON OUR FINANCIAL CONDITION AND BUSINESS OPERATIONS. Our ability to meet anticipated cash needs depends upon factors including our asset value, our creditworthiness as perceived by lenders and the market value of our stock. Similarly, our ability to securitize and hedge future loan portfolios and credit card receivables, and to obtain continued financing for Class B and C shares, is also subject to the market's perception of those assets, finance rates offered by competitors, and the general market for private debt. If we are unable to obtain these funds and financing, we may be forced to incur unanticipated costs or revise our business plans. CERTAIN OF THE PORTFOLIOS WE MANAGE INCLUDING OUR EMERGING MARKET PORTFOLIOS AND RELATED REVENUES ARE VULNERABLE TO MARKET-SPECIFIC POLITICAL OR ECONOMIC RISKS. Our emerging market portfolios and revenues derived from managing these portfolios are subject to significant risks of loss from political and diplomatic developments, currency fluctuations, social instability, changes in governmental polices, expropriation, nationalization, asset confiscation and changes in legislation related to foreign ownership. Foreign trading markets, particularly in some emerging market countries are often smaller, less liquid, less regulated and significantly more volatile than the U.S. and other established markets. DIVERSE AND STRONG COMPETITION LIMITS THE INTEREST RATES THAT WE CAN CHARGE ON CONSUMER LOANS. We compete with many types of institutions for consumer loans, which can provide loans at significantly below-market interest rates in connection with automobile sales or in some cases zero interest rates. Our inability to compete effectively against these companies or to maintain our relationships with the various automobile dealers through whom we offer consumer loans could limit the growth of our consumer loan business. Economic and credit market downturns could reduce the ability of our customers to repay loans, which could cause our consumer loan portfolio losses to increase. WE ARE SUBJECT TO FEDERAL RESERVE BOARD REGULATION. Upon completion of our acquisition of Fiduciary Trust in April 2001, we became a bank holding company and a financial holding company subject to the supervision and regulation of the Federal Reserve Board. We are subject to the restrictions, limitations, or prohibitions of the Bank Holding Company Act of 1956 and the Gramm-Leach-Bliley Act. The Federal Reserve Board may impose additional limitations or restrictions on our activities, including if the Federal Reserve Board believes 42 that we do not have the appropriate financial and managerial resources to commence or conduct an activity or make an acquisition. The Federal Reserve Board may also take actions as appropriate to enforce applicable federal law. TECHNOLOGY AND OPERATING RISK COULD CONSTRAIN OUR OPERATIONS. We are highly dependent on the integrity of our technology, operating systems and premises. Although we have in place certain disaster recovery plans, we may experience system delays and interruptions as a result of natural disasters, power failures, acts of war, and third party failures, which could negatively impact our operations. VARIOUS ONGOING GOVERNMENTAL INVESTIGATIONS AND REGULATORY ACTIONS AND REFORMS RELATING TO CERTAIN PRACTICES IN THE MUTUAL FUND INDUSTRY COULD ADVERSELY IMPACT OUR ASSETS UNDER MANAGEMENT, FUTURE FINANCIAL RESULTS AND INCREASE OUR COSTS OF DOING BUSINESS. As part of various ongoing investigations by the U.S. Securities and Exchange Commission ("SEC"), the U.S. Attorney for the Northern District of California, the U.S. Attorney for the District of Massachusetts, the New York Attorney General and the Secretary of State of Massachusetts relating to certain practices in the mutual fund industry, including late trading, market timing and sales compensation arrangements, Franklin Resources, Inc. and its subsidiaries (as used in this section, together, the "Company"), as well as certain current or former executives and employees of the Company, have received requests for information and/or subpoenas to testify or produce documents. The Company and, where applicable, the relevant individuals, are providing documents and information in response to these requests and subpoenas. In addition, the Company is responding to requests for similar kinds of information from regulatory authorities in some of the foreign countries where the Company conducts its global asset management business. The Company also has been conducting its own internal fact-finding inquiry with the assistance of outside counsel. The Company is seeking to determine whether any shareholders of the Franklin, Templeton and Mutual Series Funds (each a "Fund" and together, "Funds"), including Company employees, were permitted to engage in late trading or in market timing transactions contrary to the policies of the affected Fund and, if so, the circumstances and persons involved. The Company is committed to taking action to protect the interests of our Funds' shareholders, including appropriate action against any Company personnel found to have knowingly permitted or personally engaged in improper trading practices. To date, the Company has identified some instances of frequent trading in shares of certain Funds by a few current or former employees in their personal 401(k) plan accounts. These individuals include one trader and one officer of the Funds. These two individuals have been placed on administrative leave and the officer has resigned from his positions with the Funds. Although our inquiry is not complete, to date we have found no instances of inappropriate mutual fund trading by any portfolio manager, investment analyst or officer of Franklin Resources, Inc. The independent directors of the Funds and the Company have retained independent outside counsel to review these matters, to determine if any violations of law or policies or inappropriate trading occurred, to conduct such further inquiries as counsel may deem necessary and to report their findings and recommendations to the independent directors of the Funds and the Company's board of directors. The Company's internal inquiry regarding market timing and late trading is still ongoing, and we have not yet completed the gathering or evaluation of the relevant facts. Although we have not identified any late trading problems, we have identified various instances of frequent trading where we have questions about the propriety of what occurred and what responsibility, if any, the Company may bear. Pending completion of the fact-finding process, one officer of a subsidiary of the Company has been placed on administrative leave. If the Company finds that it bears responsibility for any unlawful or inappropriate conduct that caused losses to our Funds, we are committed to making the Funds whole. Separately, in connection with the SEC's private investigation that resulted in a proceeding against Morgan Stanley DW, Inc., the Company has been asked to furnish documents and testimony relating to its arrangements to compensate brokers who sell Fund shares. Effective November 28, 2003, the Company determined not to direct any further brokerage where the allocation is based on sale of Fund shares in order to satisfy preferred list or other shelf space arrangements, which determination may have a material adverse financial impact on the Company. 43 The Company cannot state with certainty the eventual outcome of the foregoing governmental investigations, the review by independent outside counsel or the Company's own internal investigation, which could have a material negative financial impact on the Company. However, public trust and confidence are critical to the Company's business and any material loss of investor and/or client confidence could result in a significant decline in assets under management by the Company, which would have an adverse effect on future financial results. In addition, pending regulatory and legislative actions and reforms affecting the mutual fund industry may significantly increase the Company's costs of doing business and/or negatively impact its revenues, either of which could have a material negative impact on the Company's financial results. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, our financial position is subject to market risk: the potential loss due to changes in the value of investments resulting from adverse changes in interest rates, foreign exchange and/or equity prices. Management is responsible for managing this risk. Our Enterprise Risk Management Committee is responsible for providing a framework to assist management to identify, assess and manage market and other risks. We are exposed to changes in interest rates primarily through financing transactions and portfolio debt holdings available-for-sale, which are carried at fair value in our financial statements. As of September 30, 2003, a significant percentage of our outstanding debt was at fixed interest rates. In our banking/finance operating segment, we monitor the net interest rate margin and the average maturity of interest earning assets, as well as funding sources. In addition, as of September 30, 2003, we have considered the potential impact of the effect on the banking/finance operating segment balances, our outstanding debt and portfolio debt holdings, individually and collectively, of a 100 basis point (1%) movement in market interest rates. We do not expect this change would have a material impact on our operating revenues or results of operations in either scenario. We operate primarily in the United States, but also provide services and earn revenues in Canada, the Bahamas, Europe, Asia, South America, Africa and Australia. A significant portion of these revenues and associated expenses, however, are denominated in U.S. dollars. Therefore, our exposure to foreign currency fluctuations in our revenues and expenses is not material at this time. This situation may change in the future as our business continues to grow outside the United States. We are also exposed to equity price fluctuations through securities we hold that are carried at fair value. To mitigate this risk, we maintain a diversified investment portfolio. 44 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index of Consolidated Financial Statements for the years ended September 30, 2003, 2002, and 2001. CONTENTS PAGE Consolidated Financial Statements of Franklin Resources, Inc.: Consolidated Statements of Income for the years ended September 30, 2003, 2002, and 2001 46 Consolidated Balance Sheets as of September 30, 2003 and 2002 47 Consolidated Statements of Stockholders' Equity and Comprehensive Income as of and for the years ended September 30, 2003, 2002, and 2001 49 Consolidated Statements of Cash Flows for the years ended September 30, 2003, 2002, and 2001 51 Notes to Consolidated Financial Statements 52 Report of Independent Auditors 78 All schedules have been omitted as the information is provided in the financial statements or in related notes thereto or is not required to be filed as the information is not applicable. 45
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002 2001 FOR THE YEARS ENDED SEPTEMBER 30, - ---------------------------------------------------------------------------------------------------- OPERATING REVENUES Investment management fees $1,487,331 $1,462,655 $1,407,202 Underwriting and distribution fees 844,674 792,697 709,476 Shareholder servicing fees 217,225 191,302 199,525 Consolidated sponsored investment products income, net 93 -- -- Other, net 75,125 71,878 38,640 - ---------------------------------------------------------------------------------------------------- Total operating revenues 2,624,448 2,518,532 2,354,843 OPERATING EXPENSES Underwriting and distribution 760,843 716,234 636,868 Compensation and benefits 649,882 645,104 615,281 Information systems, technology and occupancy 285,329 294,161 263,297 Advertising and promotion 92,399 106,877 106,261 Amortization of deferred sales commissions 73,501 67,608 68,977 Amortization of intangible assets 16,961 17,107 56,590 September 11, 2001 (recovery) expense, net (4,401) -- 7,649 Other 101,858 85,939 87,925 - ---------------------------------------------------------------------------------------------------- Total operating expenses 1,976,372 1,933,030 1,842,848 Operating income 648,076 585,502 511,995 OTHER INCOME (EXPENSES) Consolidated sponsored investment products gains, net 1,645 -- -- Investment and other income 70,392 5,075 136,351 Interest expense (19,910) (12,302) (10,556) - ---------------------------------------------------------------------------------------------------- Other income (expenses), net 52,127 (7,227) 125,795 Income before taxes on income 700,203 578,275 637,790 Taxes on income 197,373 145,552 153,069 - ---------------------------------------------------------------------------------------------------- NET INCOME $502,830 $432,723 $484,721 - ---------------------------------------------------------------------------------------------------- Earnings per share Basic $1.98 $1.66 $1.92 Diluted $1.97 $1.65 $1.91 Dividends per share $0.30 $0.28 $0.26 See accompanying notes to the consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) AS OF SEPTEMBER 30, 2003 2002 - ---------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $1,017,023 $850,940 Receivables 338,292 292,325 Investment securities, trading and available-for-sale 1,521,933 1,121,011 Prepaid expenses and other 91,579 97,783 - ---------------------------------------------------------------------------------------------------- Total current assets 2,968,827 2,362,059 BANKING/FINANCE ASSETS Cash and cash equivalents 36,672 129,664 Loans receivable, net 470,672 444,338 Investment securities, available-for-sale 358,387 432,081 Other 52,694 45,889 - ---------------------------------------------------------------------------------------------------- Total banking/finance assets 918,425 1,051,972 NON-CURRENT ASSETS Investments, other 280,356 263,927 Deferred sales commissions 215,816 130,617 Property and equipment, net 356,772 394,172 Goodwill 1,335,517 1,321,939 Other intangible assets, net 684,281 697,246 Receivable from banking/finance group 102,864 100,705 Other 107,891 100,101 - ---------------------------------------------------------------------------------------------------- Total non-current assets 3,083,497 3,008,707 - ---------------------------------------------------------------------------------------------------- TOTAL ASSETS $6,970,749 $6,422,738 - ---------------------------------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) 2003 2002 AS OF SEPTEMBER 30, - ---------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Compensation and benefits $225,446 $228,093 Current maturities of long-term debt 287 7,830 Accounts payable and accrued expenses 112,630 117,246 Commissions 95,560 81,033 Income taxes 43,500 12,510 Other 11,103 8,307 - ---------------------------------------------------------------------------------------------------- Total current liabilities 488,526 455,019 BANKING/FINANCE LIABILITIES Deposits 633,983 733,571 Payable to parent 102,864 100,705 Other 65,133 49,660 - ---------------------------------------------------------------------------------------------------- Total banking/finance liabilities 801,980 883,936 NON-CURRENT LIABILITIES Long-term debt 1,108,881 595,148 Deferred taxes 203,498 175,176 Other 57,756 46,513 - ---------------------------------------------------------------------------------------------------- Total non-current liabilities 1,370,135 816,837 - ---------------------------------------------------------------------------------------------------- Total liabilities 2,660,641 2,155,792 - ---------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTE 13) STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value, 1,000,000 shares authorized; none issued -- -- Common stock, $0.10 par value, 500,000,000 shares authorized; 245,931,522 and 258,555,285 shares issued and outstanding, for 2003 and 2002 24,593 25,856 Capital in excess of par value 108,024 598,196 Retained earnings 4,129,644 3,702,636 Accumulated other comprehensive income (loss) 47,847 (59,742) - ---------------------------------------------------------------------------------------------------- Total stockholders' equity 4,310,108 4,266,946 - ---------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,970,749 $6,422,738 - ---------------------------------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (IN THOUSANDS) SHARES CAPITAL IN AS OF AND FOR THE YEARS ENDED COMMON COMMON EXCESS OF SEPTEMBER 30, 2003, 2002, AND 2001 STOCK STOCK PAR VALUE - -------------------------------------------------------- -------------- --------------- ------------ BALANCE, OCTOBER 1, 2000 243,730 $24,373 $-- Net income Other comprehensive income: Net unrealized loss on investments Currency translation adjustments Total comprehensive income Purchase of stock (4,200) (420) (163,438) Cash dividends on common stock Issuance of restricted shares, net 716 71 32,313 Employee stock plan (ESIP) shares 359 36 13,077 Stock issued to acquire Fiduciary Trust 20,187 2,019 773,768 Exercise of options and other 6 1 2,158 - -------------------------------------------------------- -------------- --------------- ------------ BALANCE, SEPTEMBER 30, 2001 260,798 26,080 657,878 - -------------------------------------------------------- -------------- --------------- ------------ Net income Other comprehensive income: Net unrealized loss on investments Currency translation adjustments Minimum pension liability adjustment Total comprehensive income Purchase of stock (3,929) (393) (124,538) Cash dividends on common stock Issuance of restricted shares, net 842 84 27,469 Employee stock plan (ESIP) shares 436 44 14,323 Proceeds from issuance of put options 6,954 Exercise of options and other 408 41 16,110 - -------------------------------------------------------- -------------- --------------- ------------ BALANCE, SEPTEMBER 30, 2002 258,555 25,856 598,196 - -------------------------------------------------------- -------------- --------------- ------------ Net income Other comprehensive income: Net unrealized gains on investments Currency translation adjustments Minimum pension liability adjustment Total comprehensive income Purchase of stock (15,275) (1,528) (574,153) Cash dividends on common stock Issuance of restricted shares, net 913 91 28,282 Employee stock plan (ESIP) shares 524 52 16,785 Net put option premiums and settlements 1,335 Reclassification of put options to liability (7,289) Exercise of options and other 1,215 122 44,868 - -------------------------------------------------------- -------------- --------------- ------------ BALANCE, SEPTEMBER 30, 2003 245,932 $24,593 $108,024 - -------------------------------------------------------- -------------- --------------- ------------ [Table continued on next page] See accompanying notes to the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME [Table continued from previous page] (IN THOUSANDS) ACCUMULATED OTHER TOTAL TOTAL AS OF AND FOR THE YEARS ENDED RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE SEPTEMBER 30, 2003, 2002, AND 2001 EARNINGS OTHER INCOME (LOSS) EQUITY INCOME - ---------------------------------------------- ---------------- ----------- -------------- ---------------- -------------- BALANCE, OCTOBER 1, 2000 $2,932,166 $(3,422) $12,376 $2,965,493 Net income 484,721 484,721 $484,721 Other comprehensive income: Net unrealized loss on investments (58,170) (58,170) (58,170) Currency translation adjustments (3,247) (3,247) (3,247) -------------- Total comprehensive income $423,304 Purchase of stock (8,255) (172,113) Cash dividends on common stock (65,653) (65,653) Issuance of restricted shares, net 3,422 35,806 Employee stock plan (ESIP) shares 13,113 Stock issued to acquire Fiduciary Trust 775,787 Exercise of options and other 2,159 - ---------------------------------------------- ---------------- ----------- -------------- ---------------- -------------- BALANCE, SEPTEMBER 30, 2001 3,342,979 -- (49,041) 3,977,896 - ---------------------------------------------- ---------------- ----------- -------------- ---------------- -------------- Net income 432,723 432,723 $432,723 Other comprehensive income: Net unrealized loss on investments (4,084) (4,084) (4,084) Currency translation adjustments (837) (837) (837) Minimum pension liability adjustment (5,780) (5,780) (5,780) ------------- Total comprehensive income $422,022 Purchase of stock (124,931) Cash dividends on common stock (73,066) (73,066) Issuance of restricted shares, net 27,553 Employee stock plan (ESIP) shares 14,367 Proceeds from issuance of put options 6,954 Exercise of options and other 16,151 - ---------------------------------------------- ---------------- ----------- -------------- ---------------- -------------- BALANCE, SEPTEMBER 30, 2002 3,702,636 -- (59,742) 4,266,946 - ---------------------------------------------- ---------------- ----------- -------------- ---------------- -------------- Net income 502,830 502,830 $502,830 Other comprehensive income: Net unrealized gains on investments 72,222 72,222 72,222 Currency translation adjustments 30,727 30,727 30,727 Minimum pension liability adjustment 4,640 4,640 4,640 ------------ Total comprehensive income $610,419 Purchase of stock (575,681) Cash dividends on common stock (75,822) (75,822) Issuance of restricted shares, net 28,373 Employee stock plan (ESIP) shares 16,837 Net put option premiums and settlements 1,335 Reclassification of put options to liability (7,289) Exercise of options and other 44,990 - ---------------------------------------------- ---------------- ----------- -------------- ---------------- -------------- BALANCE, SEPTEMBER 30, 2003 $4,129,644 $-- $47,847 $4,310,108 - ---------------------------------------------- ---------------- ----------- -------------- ---------------- -------------- See accompanying notes to the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) FOR THE YEARS ENDED SEPTEMBER 30, 2003 2002 2001 - -------------------------------------------------------------------------------------------------------------------------- NET INCOME $502,830 $432,723 $484,721 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: (Increase) decrease in receivables, prepaid expenses and other (49,205) 66,266 (88,360) Net advances of deferred sales commissions (158,942) (102,092) (86,305) Increase (decrease) in other current liabilities 50,643 (4,705) 5,517 (Decrease) increase in deferred income taxes and taxes payable (20,894) 72,025 (21,038) Increase (decrease) in commissions payable 14,526 (2,485) 6,552 Increase in accrued compensation and benefits 30,367 26,655 54,056 Depreciation and amortization 177,420 183,121 223,846 Losses (gains) on asset disposal, net and other 1,280 5,224 (45,687) Other-than-temporary decline in investments value -- 60,068 -- September 11, 2001 asset write-offs -- -- 19,885 - -------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 548,025 736,800 553,187 Purchase of investments (2,344,548) (1,502,820) (947,615) Liquidation of investments 1,977,077 1,284,557 463,276 Purchase of banking/finance investments (275,407) (273,099) (103,872) Liquidation of banking/finance investments 439,264 209,678 187,082 Net proceeds from securitization of loans receivable 442,961 558,082 139,295 Net origination of loans receivable (471,234) (426,386) (294,557) Additions of property and equipment (52,653) (53,062) (107,326) Proceeds from sale of property and equipment 2,494 9,569 10,392 Acquisitions of subsidiaries, net of cash acquired -- (51,779) (99,058) Insurance proceeds related to September 11, 2001 event 10,643 28,562 -- - -------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (271,403) (216,698) (752,383) (Decrease) increase in bank deposits (99,588) 9,963 67,297 Exercise of common stock options 43,435 17,047 2,158 Net put option premiums and settlements 1,335 6,059 -- Dividends paid on common stock (75,441) (71,778) (63,471) Purchase of stock (575,681) (124,931) (172,113) Increase in debt 523,627 103,794 711,847 Payments on debt (23,218) (75,859) (496,320) - -------------------------------------------------------------------------------------------------------------------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (203,531) (135,705) 49,398 Increase (decrease) in cash and cash equivalents 73,091 384,397 (149,798) Cash and cash equivalents, beginning of year 980,604 596,207 746,005 - -------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $1,053,695 $980,604 $596,207 - -------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest, including banking/finance group interest except inter-segment interest $19,260 $16,746 $17,746 Income taxes 142,799 125,083 148,268 SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION Value of common stock issued, primarily restricted stock $28,465 $28,009 $28,640 Value of common stock issued to acquire Fiduciary Trust -- -- 775,786 Fair value of Fiduciary Trust assets acquired -- -- 1,538,084 Fair value of Fiduciary Trust liabilities acquired -- -- 757,722 - -------------------------------------------------------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements.
51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES We derive the majority of our revenues and net income from providing investment management, administration, distribution and related services to the Franklin, Templeton, Mutual Series, Bissett and Fiduciary Trust funds, institutional, high net-worth and other investment products, collectively called our sponsored investment products. Services to our sponsored investment products are provided under contracts that set forth the level and nature of the fees to be charged for these services. The majority of our revenues relate to mutual fund products that are subject to contracts that are periodically reviewed and approved by each mutual fund's Board of Directors/Trustees and/or its shareholders. Currently, no single sponsored investment product's revenues represent more than 10% of total revenues. BASIS OF PRESENTATION. The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America, which require us to estimate certain amounts. Actual amounts may differ from these estimates. Certain comparative amounts for prior years have been reclassified to conform to the fiscal 2003 financial statement presentation. The consolidated financial statements include the accounts of Franklin Resources, Inc. and its subsidiaries ("Franklin Templeton Investments") consolidated under Financial Accounting Standards Board ("FASB") Accounting Research Bulletin No. 51 "Consolidated Financial Statements" and FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (see Note 2). All material inter-company accounts and transactions have been eliminated except that we have not eliminated the receivable from banking/finance group and payable to parent from our consolidated balance sheets which represent balances outstanding related to the funding of banking activities, including auto and credit card loan financing. In addition, the related inter-company interest expense is included in other, net revenue and the inter-company interest income is included in investment and other income in our consolidated statements of income (see Note 20). This treatment provides additional information on funding sources available to the banking/finance group and on its operations. CASH AND CASH EQUIVALENTS include cash on hand, demand deposits with banks, debt instruments with maturities of three months or less from the purchase date and other highly liquid investments, including money market funds, which are readily convertible into cash. INVESTMENT SECURITIES, TRADING are carried at fair value with changes in fair value recognized in our consolidated net income. Trading securities relate to securities held by sponsored investment products that have been consolidated in our financial statements under FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (see Note 2). INVESTMENT SECURITIES, AVAILABLE-FOR-SALE are carried at fair value. Fair values for investments in our sponsored investment products are based on the last reported net asset value. Fair values for other investments are based on the last reported price on the exchange on which they are traded. Realized gains and losses are included in investment income currently based on specific identification. Unrealized gains and losses are recorded net of tax as part of accumulated other comprehensive income until realized. When the cost of an investment exceeds its fair value, we review the investment for an other-than-temporary decline in value. In making the determination of whether the decline is other-than-temporary, we use a systematic methodology that includes consideration of the duration and extent to which the fair value is less than cost, the financial condition of the investee, including industry and sector performance, and our intent and ability to hold the investment. When a decline in fair value of an available-for-sale security is determined to be other-than-temporary, the unrealized loss recorded net of tax in accumulated other comprehensive income is realized as a charge to net income. DERIVATIVES. Generally, we do not hold or issue derivative financial instruments for trading purposes. Periodically, we enter into interest-rate swap agreements to reduce variable interest-rate exposure with respect to our commercial paper, designated as cash flow hedges, and to hedge exposures or modify the interest rate characteristics of fixed-rate borrowings with maturities in excess of one year, designated as fair value hedges. As of September 30, 2003, we held interest rate swaps with a total notional amount of $43 million and these were reported at their fair value of $2.6 million. 52 We periodically enter into spot and forward currency contracts as principal to facilitate client transactions and, on limited occasions, hold currency options for our own account. It is our policy that substantially all forward contracts be covered no later than the close of business each day. Gains or losses on these contracts are reflected in the consolidated statements of income. The gross fair market value of all contracts outstanding that had a positive fair market value totaled $2.9 million at September 30, 2003. This represents a credit exposure to the extent that counterparties fail to settle their contractual obligations. This risk is mitigated by the use of master netting agreements, careful evaluation of counterparty credit standings, diversification and limits. From time to time, we sell put options giving the purchaser the right to sell shares of our common stock to us at a specified price upon exercise of the options on the designated expiration dates if certain conditions are met. The likelihood that we will have to purchase our stock and the purchase price is contingent on the market value of our stock when the put option contract becomes exercisable. At September 30, 2003, there were approximately 1.9 million put options outstanding. These options expire in December 2003 and January 2004 and have an average exercise price of $34. All of these options were issued prior to June 1, 2003, and through June 30, 2003 were treated as equity instruments. The related premium received was recorded in stockholders' equity as capital in excess of par value. Beginning in July 2003, these put options were recognized as liabilities and carried at fair value in our books and records in accordance with SFAS 150 (see Note 2). We recognized total gains of $6.9 million from put options in investment and other income in fiscal 2003, including $4.6 million related to the cumulative effect of a change in accounting principle on adoption, and $1.9 million in realized gains when 1.0 million options expired in July 2003. LOANS RECEIVABLE. Our banking/finance group offers retail-banking and consumer lending services. We accrue interest on loans using the simple interest method. The majority of retail-banking loans are at variable rates, which are adjusted periodically. Loans originated and intended for sale are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance included in other, net revenues. ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses on our consumer loan portfolio is maintained at a level sufficient to absorb probable losses inherent in the loan portfolio. Probable losses are estimated for the consumer loan portfolio based on contractual delinquency status and historical loss experience. The allowance on our consumer portfolio is based on aggregated portfolio segment evaluations, generally by loan type, and reflects our judgment of portfolio risk factors such as economic conditions, bankruptcy trends, product mix, geographic concentrations and other similar items. A loan is charged to the allowance for loan losses when it is deemed to be uncollectible, taking into consideration the value of the collateral, the financial condition of the borrower and other factors. Recoveries on loans previously charged-off as uncollectible are credited to the allowance for loan losses. The allowance for loan losses on our auto loan portfolio includes a portion of acquisition discounts from our purchase of automobile installment loan contracts, commonly referred to as dealer holdbacks. This allocation represents our estimate of the losses expected over the life of the loan. We have not recorded an allowance for probable loan losses on our retail-banking loans and advances as these loans are generally payable on demand and are fully secured by assets under our custody. Advances on customers' accounts are generally secured or subject to rights of offset and, consistent with past experience, no loan losses are anticipated. Past due loans 90 days or more in both our consumer lending and retail-banking portfolios are reviewed individually to determine whether they are collectible. If warranted, after considering collateral level and other factors, loans 90 days past due are placed on non-accrual status. Interest collections on non-accrual loans for which the ultimate collectibility of principal is uncertain are applied as principal reductions; otherwise, such collections are credited to income when received. INVESTMENTS, OTHER include investments that we intend to hold for a period in excess of one year. Investments are accounted for using the equity method of accounting if we are able to exercise significant influence, but not control, over the investee. Significant influence is generally considered to exist when an ownership interest in the voting stock of the investee is between 20% and 50%, although other factors, such as representation on the investee's board of directors and the impact of commercial arrangements are also considered in determining whether the equity method of accounting is appropriate. Lower thresholds are used for our investments in limited partnerships in determining whether we are able to exercise significant influence. 53 Companies in which we hold in excess of 50% ownership interest are consolidated in our financial statements. We are also required to consolidate variable interest entities in relation to which we are the primary beneficiary as defined in FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (see Note 2). Investments are accounted for under the cost method if we are not able to exercise significant influence over the investee. In addition, investments, other include debt instruments carried at fair value in accordance with our treatment of investment securities, available-for-sale. These include collateralized debt obligations ("CDOs"), which are valued based on cash flow projections. Investments, other are adjusted for other-than-temporary declines in value. When a decline in fair value of an investment carried at fair value is determined to be other-than-temporary, the unrealized loss recorded net of tax in accumulated other comprehensive income is realized as a charge to net income. When a decline in fair value of an investment carried at cost is determined to be other-than-temporary, the investment is written down to fair value and the loss in indicated value is included in earnings. DEFERRED SALES COMMISSIONS. Sales commissions paid to brokers and other investment advisors in connection with the sale of shares of our mutual funds sold without a front-end sales charge are capitalized and amortized over periods not exceeding eight years - the periods in which we estimate that they will be recovered from distribution plan payments and from contingent deferred sales charges. PROPERTY AND EQUIPMENT are recorded at cost and are depreciated on the straight-line basis over their estimated useful lives. Expenditures for repairs and maintenance are charged to expense when incurred. We amortize leasehold improvements on the straight-line basis over their estimated useful lives or the lease term, whichever is shorter. SOFTWARE DEVELOPED FOR INTERNAL USE. Some internal and external costs incurred in connection with developing or obtaining software for internal use are capitalized. These capitalized costs are included in property and equipment, net on our consolidated balance sheets and are amortized beginning when the software project is complete and the application is put into production, over the estimated useful life of the software. GOODWILL AND OTHER INTANGIBLE ASSETS. Intangible assets consist primarily of the estimated value of mutual fund management contracts and customer base resulting from our acquisition of the assets and liabilities of Templeton, Galbraith & Hansberger Ltd. in October 1992 and Heine Securities Corporation in November 1996, as well as the purchase of the following companies: * Bissett and Associates Investment Management Ltd. ("Bissett") in October 2000; * Fiduciary Trust Company International ("Fiduciary Trust") in April 2001; and * Pioneer ITI AMC Limited ("Pioneer") in July 2002. We amortize intangible assets over their estimated useful lives, ranging from 5 to 15 years, using the straight-line method, unless the asset is determined to have an indefinite useful life. Amounts assigned to indefinite-lived intangible assets primarily represent the value of contracts to manage mutual fund assets, for which there is no foreseeable limit on the contract period. Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. In accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), indefinite-lived intangible assets and goodwill are not amortized. We review goodwill and other indefinite-lived intangible assets when there is an indication of impairment, or at least annually, to determine whether the value of the assets is impaired. If an asset is impaired, the difference between the carrying amount of the asset reflected on the financial statements and its current fair value is recognized as an expense in the period in which the impairment occurs. For intangible assets with indefinite lives, fair value is determined based on anticipated discounted cash flows. Goodwill is impaired when the carrying amount of the reporting unit exceeds the implied fair value of the reporting unit. In estimating the fair value of the reporting unit, we use valuation techniques based on discounted cash flows similar to models employed in analyzing the purchase price of an acquisition target. Goodwill has been assigned to our investment management operating segment. 54 Intangible assets subject to amortization are reviewed for impairment at each reporting period on the basis of the expected future undiscounted operating cash flows, without interest charges, to be derived from these assets. See Note 9 for additional information regarding goodwill and other intangible assets. DEMAND AND INTEREST BEARING DEPOSITS. The fair value of demand deposits are, by definition, equal to their carrying amounts. The interest-bearing deposits are variable rate and short-term and, therefore, the carrying amounts approximate their fair values. REVENUES. We recognize investment management fees, shareholder servicing fees, investment income and distribution fees as earned, over the period in which services are rendered. Investment management fees are determined based on a percentage of assets under management. Generally, shareholder servicing fees are calculated based on the number of accounts serviced. We record underwriting commissions related to the sale of shares of our sponsored investment products on the trade date. ADVERTISING AND PROMOTION. We expense costs of advertising and promotion as incurred. FOREIGN CURRENCY TRANSLATION. Assets and liabilities of foreign subsidiaries are translated at current exchange rates as of the end of the accounting period, and related revenues and expenses are translated at average exchange rates in effect during the period. Net exchange gains and losses resulting from translation are excluded from income and are recorded as part of accumulated other comprehensive income. Foreign currency transaction gains and losses are reflected in income currently. DIVIDENDS. For the years ended September 30, 2003, 2002, and 2001, we declared dividends to common stockholders of $0.30, $0.28 and $0.26 per share. STOCK-BASED COMPENSATION. As allowed under the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), we have elected to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for our stock-based plans. Accordingly, no compensation costs are recognized with respect to stock options granted when the exercise price is equal to the market value of the stock, or with respect to shares issued under the Employee Stock Investment Plan ("ESIP"). We recognize compensation expense for the matching contribution that we may elect to make in connection with the Employee Stock Investment Plan over the 18-month holding period and for the full cost of restricted stock grants in the year that they are earned. If we had determined compensation costs for our stock option plans and our ESIP (see descriptions in Notes 15 and 16) based upon fair values at the grant dates in accordance with the provisions of SFAS 123, our net income and earnings per share would have been reduced to the pro forma amounts indicated below. For pro forma purposes, the estimated fair value of options was calculated using the Black-Scholes option-pricing model and is amortized over the options' vesting periods.
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED SEPTEMBER 30, 2003 2002 2001 - ---------------------------------------------------------- ------------- --------------- ----------- Net income, as reported $502,830 $432,723 $484,721 Less: additional stock-based compensation expense determined under the fair value method, net of tax 65,294 59,339 39,421 - ---------------------------------------------------------- ------------- --------------- ----------- PRO FORMA NET INCOME $437,536 $373,384 $445,300 - ---------------------------------------------------------- ------------- --------------- ----------- BASIC EARNINGS PER SHARE As reported $1.98 $1.66 $1.92 Pro forma 1.72 1.43 1.76 DILUTED EARNINGS PER SHARE As reported $1.97 $1.65 $1.91 Pro forma 1.72 1.42 1.76 - ---------------------------------------------------------- ------------- --------------- -----------
55 The weighted-average estimated fair value of options granted on the date of grant using Black-Scholes option-pricing model was as follows:
FOR THE YEARS ENDED SEPTEMBER 30, 2003 2002 2001 - ---------------------------------------------------------- ------------- -------------- ------------ Weighted-average fair value of options granted $14.67 $16.14 $19.58 Assumptions made: Dividend yield 1% 1% 1% Expected volatility 40% 42% 40% Risk-free interest rate 4% 4% 5% Expected life 3 - 8 years 3 - 6 years 2 - 9 years - ---------------------------------------------------------- ------------- -------------- ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME is reported in our consolidated statements of stockholders' equity and includes net income, minimum pension liability adjustment, unrealized gains (losses) on investment securities available-for-sale, net of income taxes and currency translation adjustments. The changes in net unrealized gains (losses) on investment securities include reclassification adjustments relating to the net realized gains on the sale of investment securities of $9.3 million, $5.7 million and $34.2 million during fiscal 2003, 2002, and 2001. The tax effect of the change in unrealized gains (losses) on investment securities was $28.2 million, $(1.7) million and $(18.4) million during fiscal 2003, 2002, and 2001.
EARNINGS PER SHARE. We computed earnings per share as follows: (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2003 2002 2001 - ---------------------------------------------------------------------------------------------------- Net income $502,830 $432,723 $484,721 - ---------------------------------------------------------------------------------------------------- Weighted-average shares outstanding - basic 253,714 261,239 252,628 Incremental shares from assumed conversions 967 815 1,035 - ---------------------------------------------------------------------------------------------------- Weighted-average shares outstanding - diluted 254,681 262,054 253,663 - ---------------------------------------------------------------------------------------------------- Earnings per share: Basic $1.98 $1.66 $1.92 Diluted $1.97 $1.65 $1.91 - ----------------------------------------------------------------------------------------------------
NOTE 2 - NEW ACCOUNTING STANDARDS In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). Under FIN 46, a variable interest entity ("VIE") is defined as a corporation, trust, partnership or other entity where the equity investment holders have not contributed sufficient capital to finance the activities of the VIE or the equity investment holders do not have defined rights and obligations normally associated with an equity investment. FIN 46 requires consolidation of a VIE by the enterprise that has the majority of the risks and rewards of ownership, referred to as the primary beneficiary. See Note 14 for a discussion of the impact of FIN 46 on our consolidated results of operation and financial position. In April 2003, Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"), was issued. SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 did not have a significant impact on our consolidated operating results or financial position. 56 In May 2003, Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"), was issued. SFAS 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that these instruments be classified as liabilities in statements of financial position. SFAS 150 was effective immediately for financial instruments entered into or modified after May 31, 2003, and for interim or annual periods beginning after June 15, 2003 for transactions entered into before June 1, 2003. The adoption of SFAS 150, which affected our treatment of put options on our stock, did not have a significant impact on our consolidated operating results or financial position. NOTE 3 - ACQUISITIONS On October 1, 2003, we completed the acquisition of the remaining interest in Darby Overseas Investments, Ltd. and Darby Overseas Partners, L.P. (collectively "Darby"), in which we formerly held a 12.7% interest, for an additional investment of approximately $75.9 million in cash, and we recorded the transaction as of this date. The excess of the purchase price, including our acquisition costs, over the fair value of the net assets acquired resulted in goodwill of approximately $37.0 million and we recognized other intangible assets of approximately $3.4 million. At September 30, 2003, Darby had approximately $0.9 billion in assets under management relating to private equity, mezzanine and emerging markets fixed-income products. On July 26, 2002, our 75% owned subsidiary, Templeton Asset Management (India) Private Limited, acquired all of the issued and outstanding shares of Pioneer, an Indian investment management company with approximately $0.8 billion in assets under management as of the purchase date. This all-cash transaction was valued at approximately $55.4 million. Our consolidated financial statements include the operating results of Pioneer from July 26, 2002. We recognized goodwill of $38.7 million and indefinite-lived management contracts of $13.1 million from this acquisition. On April 10, 2001, we acquired Fiduciary Trust. Each share of Fiduciary Trust's common stock was exchanged for 2.7744 shares of our common stock, resulting in the issuance in the aggregate of approximately 20,187,000 shares of our common stock. The value of the shares issued in exchange for Fiduciary Trust was approximately $775.8 million. We accounted for this transaction using the purchase method of accounting. The excess of the purchase price, including our acquisition costs, over the fair value of the net assets acquired resulted in goodwill of $559.5 million. Net assets acquired included $235.5 million of other intangible assets. As of September 30, 2001, we wrote off the net intangible asset related to Fiduciary Trust's headquarters lease of $8.2 million as a result of the September 11, 2001 terrorist attack. See Note 19. The estimated life of the other intangible assets is 15 years. On October 2, 2000, we acquired all of the issued and outstanding shares of Bissett, a Canadian asset management company. The all-cash transaction was valued at approximately $95 million. Intangible assets of approximately $89 million with lives ranging from 15 to 40 years were recorded as a result of the acquisition. We accounted for this transaction using the purchase method. Our consolidated financial statements include the operating results of Bissett from October 2, 2000. We have not presented proforma combined results of operations for these acquisitions, because the results of operations as reported in the accompanying consolidated statements of income would not have been materially different. NOTE 4 - CASH AND CASH EQUIVALENTS Cash and cash equivalents at September 30, 2003 and 2002, consisted of the following:
(IN THOUSANDS) 2003 2002 - ------------------------------------------------------------------------- ------------- ------------ Cash and due from banks $260,530 $224,214 Federal funds sold and securities purchased under agreements to resell 3,741 82,150 Other 789,424 674,240 - ------------------------------------------------------------------------- ------------- ------------ TOTAL $1,053,695 $980,604 - ------------------------------------------------------------------------- ------------- ------------
57 Cash and cash equivalents, other includes money market mutual fund investments and U.S. Treasury bills. Federal Reserve Board regulations require reserve balances on deposits to be maintained with the Federal Reserve Banks by banking subsidiaries. The required reserve balance was $1.5 million at September 30, 2003 and $5.3 million at September 30, 2002. NOTE 5 - INVESTMENT SECURITIES AND OTHER INVESTMENTS Investment securities at September 30, 2003 and 2002, consisted of the following:
AMORTIZED GROSS UNREALIZED FAIR (IN THOUSANDS) COST GAINS LOSSES VALUE - -------------------------------------------------- ----------- ------------ ----------- ------------ 2003 INVESTMENT SECURITIES, TRADING $39,903 $1,510 $(34) $41,379 INVESTMENT SECURITIES, AVAILABLE-FOR-SALE Sponsored investment products 412,414 20,392 (7,634) 425,172 Securities of U.S. states and political subdivisions 11,423 593 -- 12,016 Securities of U.S. Treasury, federal agencies and other 1,375,087 6,940 (1,132) 1,380,895 Equities 20,953 561 (656) 20,858 - -------------------------------------------------- ------------- ---------- ----------- ------------ Total investment securities, available-for-sale 1,819,877 28,486 (9,422) 1,838,941 - -------------------------------------------------- ------------- ---------- ----------- ------------ TOTAL INVESTMENTS, TRADING AND AVAILABLE-FOR-SALE $1,859,780 $29,996 $(9,456) $1,880,320 - -------------------------------------------------- ------------- ---------- ----------- ------------ INVESTMENTS, OTHER Investment in equity-method investees $77,919 $-- $-- $77,919 Equities and other 170,885 31,978 (426) 202,437 - -------------------------------------------------- ------------- ---------- ----------- ------------ TOTAL INVESTMENTS, OTHER $248,804 $31,978 $(426) $280,356 - -------------------------------------------------- ------------- ---------- ----------- ------------ 2002 INVESTMENT SECURITIES, AVAILABLE-FOR-SALE Sponsored investment products $421,612 $7,309 $(66,888) $362,033 Securities of U.S. states and political subdivisions 10,758 597 -- 11,355 Securities of U.S. Treasury, federal agencies and other 1,159,126 18,058 -- 1,177,184 Equities 1,264 1,269 (13) 2,520 - -------------------------------------------------- ------------- ---------- ----------- ------------- TOTAL $1,592,760 $27,233 $(66,901) $1,553,092 - -------------------------------------------------- ------------- ---------- ----------- ------------- INVESTMENTS, OTHER Investment in equity-method investees $65,347 $-- $-- $65,347 Equities and other 189,008 18,702 (9,130) 198,580 - -------------------------------------------------- ------------- ---------- ----------- ------------- TOTAL $254,355 $18,702 $(9,130) $263,927 - -------------------------------------------------- ------------- ---------- ----------- -------------
Investments, other included investments that we intend to hold for a period in excess of one year. Investments in equity method investees include investment partnerships where we have significant influence. Equities and other investments include debt, including CDOs, and other securities with a determinable fair value as well as investments carried at cost. Gross unrealized losses on investment securities, available-for-sale and investments, other at September 30, 2003 were deemed to be temporary in nature. See Note 1 for a description of our investments valuation methodology. As of September 30, 2003 and 2002, banking/finance operating segment investment securities with aggregate book values of $28.4 million and $19.5 million were pledged as collateral as required by federal and state regulators and the Federal Home Loan Bank. 58 At September 30, 2003, maturities of securities of the U.S. Treasury and federal agencies and the U.S. states and political subdivisions were as follows:
(IN THOUSANDS) AMORTIZED COST FAIR VALUE - ----------------------------------------------------------------------------------------------------- SECURITIES OF U.S. TREASURY AND FEDERAL AGENCIES Due in one year or less $1,056,963 $1,057,495 Due after one year through five years 111,417 116,711 Due after five years through ten years -- -- Due after ten years 206,707 206,689 - ----------------------------------------------------------------------------------------------------- TOTAL $1,375,087 $1,380,895 - ----------------------------------------------------------------------------------------------------- SECURITIES OF U.S. STATES AND POLITICAL SUBDIVISIONS Due in one year or less $1,578 $1,597 Due after one year through five years 6,584 6,988 Due after five years through ten years 2,767 2,901 Due after ten years 494 529 - ----------------------------------------------------------------------------------------------------- TOTAL $11,423 $12,016 - -----------------------------------------------------------------------------------------------------
NOTE 6 - LOANS AND ALLOWANCE FOR LOAN LOSSES A summary of banking/finance operating segment loans receivable by major category as of September 30, 2003 and 2002 is shown below. Included in installment loans to individuals are auto and credit card receivables. Other loans include secured loans made to Fiduciary Trust clients. No loan loss allowance is recognized on Fiduciary Trust's retail-banking loans and advances as described in Note 1. (IN THOUSANDS) 2003 2002 - ----------------------------------------------------------------------------------------------------- Commercial $60,541 $67,772 Real estate (subject to collateral) 67,598 99,935 Installment loans to individuals 190,754 158,159 Other 160,329 127,506 - ----------------------------------------------------------------------------------------------------- Loans receivable 479,222 453,372 Less: allowance for loan losses (8,550) (9,034) - ----------------------------------------------------------------------------------------------------- LOANS RECEIVABLE, NET $470,672 $444,338 - -----------------------------------------------------------------------------------------------------
At September 30, 2003, real estate (subject to collateral) loans included $3.0 millions of loans held for sale, which are carried at the lower of cost or estimated fair value in the aggregate. Maturities of loans at September 30, 2003 were as follows: AFTER 1 ONE YEAR OR THROUGH 5 AFTER 5 (IN THOUSANDS) LESS YEARS YEARS TOTAL - ----------------------------------------------------------------------------------------------------- Commercial $60,541 $-- $-- $60,541 Real estate (subject to collateral) 20 4,487 63,091 67,598 Installment loans to individuals 62,844 112,603 15,307 190,754 Other 148,126 12,203 -- 160,329 - ----------------------------------------------------------------------------------------------------- TOTAL $271,531 $129,293 $78,398 $479,222 - -----------------------------------------------------------------------------------------------------
59 The following table summarizes contractual maturities of loans due after one year by repricing characteristic at September 30, 2003: (IN THOUSANDS) CARRYING AMOUNT - -------------------------------------------------------------------------------- Loans at predetermined interest rates $133,172 Loans at floating or adjustable rates 74,519 - -------------------------------------------------------------------------------- TOTAL $207,691 - -------------------------------------------------------------------------------- Changes in the allowance for loan losses during 2003 and 2002 were as follows: (IN THOUSANDS) 2003 2002 - ----------------------------------------------------------------------------------------------------- Balance, beginning of year $9,034 $9,568 Provision for loan losses 13,423 13,890 Charge-offs (8,046) (8,639) Recoveries 2,393 1,845 - ----------------------------------------------------------------------------------------------------- Total allowance for loan losses before other adjustments 16,804 16,664 Loans securitized (12,020) (10,903) Dealer holdback and other 3,766 3,273 - ----------------------------------------------------------------------------------------------------- BALANCE, END OF YEAR $8,550 $9,034 - ----------------------------------------------------------------------------------------------------- Total net loan charge-offs as a percentage of average total loans 1.23% 1.38% Allowance as a percentage of total loans 1.78% 1.99% - -----------------------------------------------------------------------------------------------------
The following is a summary of delinquency information for fiscal 2003, 2002, and 2001: (IN THOUSANDS) 2003 2002 2001 - ------------------------------------------------------- -------------- --------------- -------------- Commercial loans, 90 days or more delinquent $13,063 $300 $300 Installment loans, 90 days or more delinquent 897 750 292 Non-accrual loans 510 439 306 - ------------------------------------------------------- -------------- --------------- --------------
NOTE 7 - SECURITIZATION OF LOANS RECEIVABLE From time to time, we enter into auto loan securitization transactions with qualified special purpose entities and record these transactions as sales. The following table shows details of auto loan securitization transactions for the years ended September 30, 2003, 2002 and 2001: (IN THOUSANDS) 2003 2002 2001 - ----------------------------------------------------------------------------------------------------- Gross sale proceeds $464,372 $565,154 $145,385 Net carrying amount of loans sold 446,672 544,831 142,541 - ----------------------------------------------------------------------------------------------------- PRE-TAX GAIN $17,700 $20,323 $2,844 - -----------------------------------------------------------------------------------------------------
When we sell auto loans in a securitization transaction, we record an interest-only strip receivable. The interest-only strip receivable represents our contractual right to receive interest from the pool of securitized loans after the payment of required amounts to holders of the securities and certain other costs associated with the securitization. Gross sales proceeds include the fair value of the interest-only strips. 60 We generally estimate fair value based on the present value of future expected cash flows. The key assumptions used in the present value calculations of our securitization transactions at the date of securitization were as follows: 2003 2002 2001 - ----------------------------------------------------------------------------------------------------- Excess cash flow discount rate (annual rate) 12.0% 12.0% 12.0% Cumulative life loss rate 3.7% / 4.3% 3.3% / 3.8% 3.5% Pre-payment speed assumption (average monthly rate) 1.8% 1.5% 1.5% - -----------------------------------------------------------------------------------------------------
We determined these assumptions using data from comparable transactions, historical information and management's estimate. Interest-only strip receivables are generally restricted assets and subject to limited recourse provisions. We generally estimate the fair value of the interest-only strips at each period-end based on the present value of future expected cash flows, consistent with the methodology used at the date of securitization. The following shows, as of September 30, 2003 and September 30, 2002, the carrying value and the sensitivity of the interest-only strip receivable to hypothetical adverse changes in the key economic assumptions used to measure fair value: (IN THOUSANDS) 2003 2002 - ---------------------------------------------------------------------------------------------------- CARRYING AMOUNT/FAIR VALUE OF INTEREST-ONLY STRIPS $36,010 $29,088 EXCESS CASH FLOW DISCOUNT RATE (ANNUAL RATE) 12.0% 12.0% Impact on fair value of 10% adverse change $(493) $(400) Impact on fair value of 20% adverse change $(971) $(789) CUMULATIVE LIFE LOSS RATE 3.9% 3.6% Impact on fair value of 10% adverse change $(2,412) $(1,787) Impact on fair value of 20% adverse change $(4,725) $(3,579) PRE-PAYMENT SPEED ASSUMPTION (AVERAGE MONTHLY RATE) 1.8% 1.7% Impact on fair value of 10% adverse change $(3,505) $(2,632) Impact on fair value of 20% adverse change $(7,501) $(5,155) - ----------------------------------------------------------------------------------------------------
Actual future market conditions may differ materially. Accordingly, this sensitivity analysis should not be considered our projections of future events or losses. We receive annual servicing fees ranging from 1% to 2% of the loans securitized for services we provide to the securitization trusts. We also receive the rights to future cash flows, if any, arising after the investors in the securitization trust have received their contracted return. The following is a summary of cash flows received from and paid to securitization trusts during fiscal 2003, 2002, and 2001: (IN THOUSANDS) 2003 2002 2001 - ---------------------------------------------------------------------------------------------------- Servicing fees received $10,598 $7,921 $4,538 Other cash flows received 18,283 15,375 7,401 Purchase of loans from trusts (10,804) (8,659) (521) - ----------------------------------------------------------------------------------------------------
Amounts payable to the trustee related to loan principal and interest collected on behalf of the trusts of $34.4 million as of September 30, 2003 and $24.9 million as of September 30, 2002 are included in other banking/finance liabilities. 61 The securitized loan portfolio that we manage and the related delinquencies as of September 30, 2003 and September 30, 2002 were as follows: (IN THOUSANDS) 2003 2002 - -------------------------------------------------------------------------------- Securitized loans held by securitization trusts $680,695 $530,896 Delinquencies 12,911 9,317 - -------------------------------------------------------------------------------- Net charge-offs on the securitized loan portfolios were $12.6 million in fiscal 2003, $6.5 million in fiscal 2002 and $3.5 million in fiscal 2001. NOTE 8 - PROPERTY AND EQUIPMENT The following is a summary of property and equipment at September 30, 2003 and 2002: (IN THOUSANDS) USEFUL LIVES IN YEARS 2003 2002 - ---------------------------------------------------------------------------------------------------- Furniture, software and equipment 3 - 5 $558,435 $526,256 Premises and leasehold improvements 5 - 35 207,191 195,024 Land -- 71,383 66,923 - ---------------------------------------------------------- ------------- --------------- ----------- 837,009 788,203 Less: Accumulated depreciation and amortization (480,237) (394,031) - ---------------------------------------------------------- ------------- --------------- ----------- PROPERTY AND EQUIPMENT, NET $356,772 $394,172 - ---------------------------------------------------------- ------------- --------------- -----------
NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS Intangible assets at September 30, 2003 and September 30, 2002 were as follows: GROSS NET CARRYING ACCUMULATED CARRYING (IN THOUSANDS) AMOUNT AMORTIZATION AMOUNT - ---------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 2003 Amortized intangible assets: Customer base $232,800 $(39,057) $193,743 Other 31,546 (19,653) 11,893 - ---------------------------------------------------------------------------------------------------- 264,346 (58,710) 205,636 Non-amortized intangible assets: Management contracts 478,645 -- 478,645 - ---------------------------------------------------------------------------------------------------- TOTAL $742,991 $(58,710) $684,281 - ---------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 2002 Amortized intangible assets: Customer base $231,935 $(23,358) $208,577 Other 31,546 (18,181) 13,365 - ---------------------------------------------------------------------------------------------------- 263,481 (41,539) 221,942 Non-amortized intangible assets: Management contracts 475,304 -- 475,304 - ---------------------------------------------------------------------------------------------------- TOTAL $738,785 $(41,539) $697,246 - ----------------------------------------------------------------------------------------------------
62 The change in the carrying amount of goodwill during the year ended September 30, 2003 was as follows: (IN THOUSANDS) - -------------------------------------------------------------------------------- Balance, October 1, 2002 $1,321,939 Foreign currency movements 13,578 - -------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 2003 $1,335,517 - -------------------------------------------------------------------------------- We adopted Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and SFAS 142 on October 1, 2001. SFAS 141 and SFAS 142 address the initial recognition and measurement of intangible assets acquired and the recognition and measurement of goodwill and other intangible assets after acquisition. Under the new standards, all goodwill and indefinite-lived intangible assets, including those acquired before initial application of the standards, will not be amortized but will be tested for impairment at least annually. Accordingly, on October 1, 2001, we ceased amortization on goodwill and indefinite-lived assets. The following table reflects our results as though we had adopted SFAS 142 on October 1, 2000. (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED SEPTEMBER 30, 2003 2002 2001 - ------------------------------------------------------------------------------------------------------ Net income as reported $502,830 $432,723 $484,721 Goodwill amortization -- -- 29,443 Indefinite-lived intangibles amortization -- -- 13,152 Tax effect at effective tax rate -- -- (10,223) - ------------------------------------------------------------------------------------------------------ NET INCOME AS ADJUSTED $502,830 $432,723 $517,093 - ------------------------------------------------------------------------------------------------------ Basic earnings per share as reported $1.98 $1.66 $1.92 Diluted earnings per share as reported $1.97 $1.65 $1.91 Basic earnings per share as adjusted $1.98 $1.66 $2.05 Diluted earnings per share as adjusted $1.97 $1.65 $2.04
All of our goodwill and intangible assets, including those arising from the purchase of Fiduciary Trust in April 2001, relate to our investment management operating segment. Indefinite-lived intangible assets represent the value of management contracts with our sponsored investment products. Estimated amortization expense for each of the next 5 fiscal years is as follows: (IN THOUSANDS) FOR THE YEARS ENDING SEPTEMBER 30, - -------------------------------------------------------------------------------- 2004 $16,991 2005 16,991 2006 16,991 2007 16,991 2008 16,991 - -------------------------------------------------------------------------------- As of March 31, 2003, we completed the impairment testing of goodwill and indefinite-lived intangible assets under the guidance set out in SFAS 142 and we determined that there was no impairment in the value of goodwill and indefinite-lived assets recorded in our books and records as of October 1, 2002. 63 NOTE 10 - DEPOSITS Deposits at September 30, 2003 and 2002 were as follows: (IN THOUSANDS) 2003 2002 - -------------------------------------------------------------------------------- DOMESTIC Interest-bearing $570,854 $670,448 Noninterest-bearing 41,337 45,332 - -------------------------------------------------------------------------------- Total domestic deposits 612,191 715,780 - -------------------------------------------------------------------------------- FOREIGN Interest-bearing 12,893 12,725 Noninterest-bearing 8,899 5,066 - -------------------------------------------------------------------------------- Total foreign deposits 21,792 17,791 - -------------------------------------------------------------------------------- TOTAL $633,983 $733,571 - -------------------------------------------------------------------------------- Maturities of time certificates in amounts of $100,000 or more at September 30, 2003 were: (IN THOUSANDS) DOMESTIC (U.S.) FOREIGN TOTAL - -------------------------------------------------------------------------------- 3 months or less $5,303 $12,893 $18,196 Over 3 months through 6 months 1,080 -- 1,080 Over 6 months through 12 months 298 -- 298 Over 12 months 893 -- 893 - -------------------------------------------------------------------------------- TOTAL $7,574 $12,893 $20,467 - -------------------------------------------------------------------------------- NOTE 11 - DEBT Outstanding debt at September 30, 2003 and September 30, 2002 consisted of the following: (IN THOUSANDS) 2003 2002 WEIGHTED WEIGHTED AVERAGE AVERAGE 2003 RATE 2002 RATE - ------------------------------------------- ------------------ ------------ ----------- ------------ CURRENT: Federal funds purchased $-- 1.49% $-- 1.57% Federal Home Loan Bank advances 14,500 1.19% 8,500 1.94% Current maturities of long-term debt 287 7,830 - ------------------------------------------- ------------------ ------------ ----------- ------------ 14,787 16,330 NON-CURRENT: Convertible Notes (including accrued interest) 520,325 1.88% 514,190 1.88% Medium Term Notes 420,000 3.70% -- N/A Other 168,556 80,958 - ------------------------------------------- ------------------ ------------ ----------- ------------ 1,108,881 595,148 - ------------------------------------------- ------------------ ------------ ----------- ------------ TOTAL DEBT $1,123,668 $611,478 - ------------------------------------------- ------------------ ------------ ----------- ------------
Federal funds purchased and Federal Home Loan Bank advances are included in other liabilities of the banking/finance operating segment. Other long-term debt consists primarily of deferred commission liability recognized in relation to U.S. deferred commission assets financed by Lightning Finance Company Limited ("LFL") that were not sold by LFL in a securitization transaction as of September 30, 2003 and September 30, 2002. 64 As of September 30, 2003, maturities of long-term debt were as follows: (IN THOUSANDS) CARRYING AMOUNT - -------------------------------------------------------------------------------- 2004 $22,450 2005 22,913 2006 23,387 2007 23,871 2008 444,365 Thereafter 571,895 - -------------------------------------------------------------------------------- TOTAL LONG-TERM DEBT $1,108,881 - -------------------------------------------------------------------------------- In April 2003, we completed the sale of five-year senior notes due April 15, 2008 totaling $420.0 million (the "Medium Term Notes"). The senior notes, which were offered to qualified institutional buyers only, carry an interest rate of 3.7% and are not redeemable prior to maturity by either us or the note holders. Interest payments are due semi-annually. In May 2001, we received approximately $490.0 million in net proceeds from the sale of $877.0 million principal amount at maturity of zero-coupon convertible senior notes due 2031 (the "Convertible Notes"). The Convertible Notes, which were offered to qualified institutional buyers only, carry an interest rate of 1.875% per annum, with an initial conversion premium of 43%. Each of the $1,000 (principal amount at maturity) Convertible Notes is convertible into 9.3604 shares of our common stock. We may redeem the Convertible Notes for cash on or after May 11, 2006 at their accreted value. On May 12, 2003, at the option of the holders, we repurchased Convertible Notes with a face value of $5.9 million principal amount at maturity, for $3.5 million in cash, the accreted value of the notes as of May 11, 2003. We may have to repurchase the Convertible Notes at their accreted value, at the option of the holders, on May 11 of 2004, 2006, 2011, 2016, 2021 and 2026. In this event, we may choose to pay the purchase price in cash or shares of our common stock. The amount of Convertible Notes that will be redeemed depends on, among other factors, the performance of our common stock. At September 30, 2003, approximately $500.0 million was available to us under an unused commercial paper program and an additional $300.0 million was available to us under shelf registration statements with the Securities and Exchange Commission permitting the issuance of debt and equity securities. Our committed revolving credit facilities at September 30, 2003 totaled $420.0 million, of which, $210.0 million was under a 364-day facility. The remaining $210.0 million facility was under a five-year facility that will expire in June 2007. The agreements related to the revolving credit facilities include various restrictive covenants, including: a capitalization ratio, interest coverage ratio, minimum working capital and limitations on additional debt. In addition, at September 30, 2003, our banking/finance operating segment had $559.5 million in available uncommitted short-term bank lines under the Federal Reserve Funds system, the Federal Reserve Bank discount window, and Federal Home Loan Bank short-term borrowing capacity. NOTE 12 - TAXES ON INCOME Taxes on income for the years ended September 30, 2003, 2002, and 2001 were as follows: (IN THOUSANDS) FOR THE YEARS ENDED SEPTEMBER 30, 2003 2002 2001 - ---------------------------------------------------------- ------------- --------------- ----------- Current Federal $125,743 $71,400 $84,220 State 13,846 17,065 16,694 Foreign 31,329 38,653 41,532 Deferred expense 26,455 18,434 10,623 - ---------------------------------------------------------- ------------- --------------- ----------- TOTAL PROVISION FOR INCOME TAXES $197,373 $145,552 $153,069 - ---------------------------------------------------------- ------------- --------------- -----------
65 Included in income before taxes was $305.2 million, $283.7 million and $357.0 million of foreign income for the years ended September 30, 2003, 2002, and 2001. The provision for U.S. income taxes includes benefits of $6.3 million for the year ended September 30, 2003 related to the utilization of net operating loss carry-forwards. The major components of the net deferred tax liability as of September 30, 2003 and 2002 were as follows: (IN THOUSANDS) 2003 2002 - -------------------------------------------------------------------------------- DEFERRED TAX ASSETS State taxes $5,975 $5,088 Loan loss reserves 3,251 4,007 Deferred compensation and employee benefits 27,259 26,117 Restricted stock compensation plan 38,074 32,925 Severance and retention compensation 3,250 20,735 Net operating loss and foreign tax credit carry-forwards 74,729 70,030 Investments -- 2,144 Other 14,169 16,260 - -------------------------------------------------------------------------------- Total deferred tax assets 166,707 177,306 Valuation allowance for tax carry-forwards (74,629) (64,939) - -------------------------------------------------------------------------------- Deferred tax assets, net of valuation allowance 92,078 112,367 DEFERRED TAX LIABILITIES Depreciation on fixed assets 13,523 14,271 Goodwill and other purchased intangibles 153,009 145,110 Deferred commissions 17,056 14,968 Interest expense on convertible notes 21,116 11,863 Investments 1,951 -- Other 19,307 22,511 - -------------------------------------------------------------------------------- Total deferred tax liabilities 225,962 208,723 - -------------------------------------------------------------------------------- NET DEFERRED TAX LIABILITY $(133,884) $(96,356) - -------------------------------------------------------------------------------- At September 30, 2003, there were approximately $43.6 million of foreign net operating loss carry-forwards, approximately $21.8 million of which expire between 2004 and 2011 with the remaining carry-forwards having an indefinite life. In addition, there were approximately $710.0 million in state net operating loss carry-forwards that expire between 2004 and 2023. There were also approximately $17.4 million in federal foreign tax credit carry-forwards, which will expire between 2004 and 2007. A valuation allowance has been recognized to offset the related deferred tax assets due to the uncertainty of realizing the benefit of the loss and credit carry-forwards. We have made no provision for U.S. taxes on $2,140.9 million of cumulative undistributed earnings of foreign subsidiaries as those earnings are intended to be reinvested for an indefinite period of time. Determination of the potential amount of unrecognized deferred U.S. income tax liability related to such reinvested income is not practicable because of the numerous assumptions associated with this hypothetical calculation; however, foreign tax credits would be available to reduce some portion of this amount. 66 The following is a reconciliation between the amount of tax expense at the Federal statutory rate and taxes on income as reflected in operations for the years ended September 30, 2003, 2002 and 2001: (IN THOUSANDS) FOR THE YEARS ENDED SEPTEMBER 30, 2003 2002 2001 - ---------------------------------------------------------- ------------- --------------- ----------- Federal statutory rate 35% 35% 35% Federal taxes at statutory rate $245,071 $202,396 $223,226 State taxes, net of Federal tax effect 9,640 10,661 11,716 Effect of foreign operations (63,841) (52,269) (75,963) Other 6,503 (15,236) (5,910) - ---------------------------------------------------------- ------------- --------------- ----------- ACTUAL TAX PROVISION $197,373 $145,552 $153,069 Effective tax rate 28% 25% 24% - ---------------------------------------------------------- ------------- --------------- -----------
NOTE 13 - COMMITMENTS AND CONTINGENCIES GUARANTEES Under Financial Accounting Standards Board Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", we are required, on a prospective basis, to recognize in our financial statements a liability for the fair value of any guarantees issued or modified after December 31, 2002 as well as make additional disclosures about existing guarantees. In October 1999, we entered into an agreement for the lease of our corporate headquarters campus in San Mateo, California from a lessor trust under an operating lease that expires in fiscal 2005, with additional renewal options for a further period of up to 10 years. In connection with this lease, we are contingently liable for approximately $145.0 million in residual guarantees, representing approximately 85% of the total construction costs of $170.0 million. We would become liable under this residual guarantee if we were unable or unwilling to exercise our renewal option to extend the lease term or buy the corporate headquarters campus, or if we were unable to arrange for the sale of the campus for more than $145.0 million. We are also contingently liable to purchase the corporate headquarters campus for an amount equal to the final construction costs of $170.0 million if an event of default occurs under the agreement. An event of default includes, but is not limited to, failure to make lease payments when due and failure to maintain required insurance. Management considers the possibility of default under the provisions of the agreement to be remote. Currently, the lease is treated as an operating lease as none of the capitalization criteria under Statement of Financial Accounting Standards No. 13, "Accounting for Leases", were met at the inception of the lease. We anticipate that we will consolidate our headquarters campus under the requirements of FIN 46 in the period ending December 31, 2003. In relation to the auto loan securitization transactions that we have entered into with a number of qualified special purpose entities, we are obligated to cover shortfalls in amounts due to the holders of the notes up to certain levels as specified under the related agreements. As of September 30, 2003, the maximum potential amount of future payments was $13.7 million relating to guarantees made prior to January 1, 2003. In addition, our consolidated balance sheet at September 30, 2003 included a $0.1 million liability to reflect obligations arising from an auto securitization transaction in June 2003. At September 30, 2003, our banking/finance operating segment had issued financial standby letters of credit totaling $5.5 million on which beneficiaries would be able to draw upon in the event of non-performance by our customers, primarily in relation to lease and lien obligations of these banking customers. These standby letters of credit, issued prior to January 1, 2003, were secured by marketable securities with a fair value of $15.2 million as of September 30, 2003 and commercial real estate. 67 MUTUAL FUND INVESTIGATIONS As part of various ongoing investigations by the U.S. Securities and Exchange Commission ("SEC"), the U.S. Attorney for the Northern District of California, the U.S. Attorney for the District of Massachusetts, the New York Attorney General and the Secretary of State of Massachusetts relating to certain practices in the mutual fund industry, including late trading, market timing and sales compensation arrangements, Franklin Resources, Inc. and its subsidiaries (as used in this section, together, the "Company"), as well as certain current or former executives and employees of the Company, have received requests for information and/or subpoenas to testify or produce documents. The Company and, where applicable, the relevant individuals, are providing documents and information in response to these requests and subpoenas. In addition, the Company is responding to requests for similar kinds of information from regulatory authorities in some of the foreign countries where the Company conducts its global asset management business. The Company also has been conducting its own internal fact-finding inquiry with the assistance of outside counsel. The Company is seeking to determine whether any shareholders of the Franklin, Templeton and Mutual Series Funds (each a "Fund" and together, "Funds"), including Company employees, were permitted to engage in late trading or in market timing transactions contrary to the policies of the affected Fund and, if so, the circumstances and persons involved. The Company is committed to taking action to protect the interests of our Funds' shareholders, including appropriate action against any Company personnel found to have knowingly permitted or personally engaged in improper trading practices. To date, the Company has identified some instances of frequent trading in shares of certain Funds by a few current or former employees in their personal 401(k) plan accounts. These individuals include one trader and one officer of the Funds. These two individuals have been placed on administrative leave and the officer has resigned from his positions with the Funds. Although our inquiry is not complete, to date we have found no instances of inappropriate mutual fund trading by any portfolio manager, investment analyst or officer of Franklin Resources, Inc. The independent directors of the Funds and the Company have retained independent outside counsel to review these matters, to determine if any violations of law or policies or inappropriate trading occurred, to conduct such further inquiries as counsel may deem necessary and to report their findings and recommendations to the independent directors of the Funds and the Company's board of directors. The Company's internal inquiry regarding market timing and late trading is still ongoing, and we have not yet completed the gathering or evaluation of the relevant facts. Although we have not identified any late trading problems, we have identified various instances of frequent trading where we have questions about the propriety of what occurred and what responsibility, if any, the Company may bear. Pending completion of the fact-finding process, one officer of a subsidiary of the Company has been placed on administrative leave. If the Company finds that it bears responsibility for any unlawful or inappropriate conduct that caused losses to our Funds, we are committed to making the Funds whole. Separately, in connection with the SEC's private investigation that resulted in a proceeding against Morgan Stanley DW, Inc., the Company has been asked to furnish documents and testimony relating to its arrangements to compensate brokers who sell Fund shares. Effective November 28, 2003, the Company determined not to direct any further brokerage where the allocation is based on sale of Fund shares in order to satisfy preferred list or other shelf space arrangements, which determination may have a material adverse financial impact on the Company. The Company cannot state with certainty the eventual outcome of the foregoing governmental investigations, the review by independent outside counsel or the Company's own internal investigation, which could have a material negative financial impact on the Company. However, public trust and confidence are critical to the Company's business and any material loss of investor and/or client confidence could result in a significant decline in assets under management by the Company, which would have an adverse effect on future financial results. 68 In addition, pending regulatory and legislative actions and reforms affecting the mutual fund industry may significantly increase the Company's costs of doing business and/or negatively impact its revenues, either of which could have a material negative impact on the Company's financial results. LEGAL PROCEEDINGS In October and November, 2003, three lawsuits were brought against subsidiaries of the Company alleging breach of fiduciary duty with respect to the valuation of the portfolio securities of certain Franklin Templeton funds and seeking monetary damages and costs. BRADFISCH v. TEMPLETON FUNDS, INC. AND TEMPLETON GLOBAL ADVISORS LIMITED, Case 2003 L 001361, was filed on October 3, 2003 in the Circuit Court for the Third Judicial Circuit, Madison County, Illinois, and relates to the Templeton World Fund. WOODBURY v. TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC. AND TEMPLETON INVESTMENT COUNSEL, LLC, Case 2003 L 001362, was filed on October 3, 2003 in the Circuit Court for the Third Judicial Circuit, Madison County, Illinois, and relates to the Templeton Global Smaller Companies Fund, Inc. Both cases were removed to the United States District Court for the Southern District of Illinois on November 14, 2003. The complaint in KENERLEY v. TEMPLETON FUNDS, INC. AND TEMPLETON GLOBAL ADVISORS LIMITED, Case No. 03-770 GPM, was filed in the United States District Court for the Southern District of Illinois and served on the defendants on November 25, 2003. This lawsuit relates to the Templeton World Fund and alleges breach of fiduciary duties imposed by Section 36(a) of the Investment Company Act of 1940 and pendant state law claims. Management strongly believes that the claims made in each of these lawsuits are without merit and intends vigorously to defend against them. OTHER COMMITMENTS AND CONTINGENCIES We lease office space and equipment under long-term operating leases expiring at various dates through fiscal year 2017. Lease expense aggregated $39.5 million, $34.8 million and $41.3 million for the fiscal years ended September 30, 2003, 2002, and 2001. Future minimum lease payments under non-cancelable operating leases are as follows: (IN THOUSANDS) AMOUNT - -------------------------------------------------------------------------------- 2004 $34,760 2005 31,614 2006 29,267 2007 25,327 2008 23,862 Thereafter 123,747 - -------------------------------------------------------------------------------- TOTAL MINIMUM LEASE PAYMENTS $268,577 - -------------------------------------------------------------------------------- At September 30, 2003, the banking/finance operating segment had commitments to extend credit aggregating $280.5 million, primarily under its credit card lines. In July 2003, we renegotiated an agreement to outsource management of our data center and distributed server operations, originally signed in February 2001. We may terminate the amended agreement any time after July 1, 2006 by incurring a termination charge. The maximum termination charge payable will depend on the termination date of the amended agreement, the service levels before our termination of the agreement, costs incurred by our service provider to wind-down the services and costs associated with assuming equipment leases. As of September 30, 2003, we estimate that the termination fee payable in July 2006, not including costs associated with assuming equipment leases would approximate $14.3 million and would decrease each month for the subsequent two years. 69 NOTE 14 - TRANSACTIONS WITH VARIABLE INTEREST ENTITIES FIN 46, issued in January 2003, requires consolidation of a variable interest entity ("VIE") by the enterprise that has the majority of the risks and rewards of ownership, referred to as the primary beneficiary. The consolidation and disclosure provisions of FIN 46 are effective immediately for VIEs created after January 31, 2003, and, originally, for interim or annual reporting periods beginning after June 15, 2003 for VIEs created before February 1, 2003. However, in October 2003, the FASB issued Staff Position FIN 46-6, "Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities" ("FSP FIN 46-6"), deferring the consolidation provisions of FIN 46 to interim or annual reporting periods ending after December 15, 2003 for VIEs created before February 1, 2003. Six VIEs, all sponsored investment products with inception dates after January 31, 2003, have been consolidated in our financial statements as of and for the quarter-ended September 30, 2003. The effect of this consolidation was to increase our consolidated net income by $1.1 million and our financial position by $10.4 million for and as of the year ended September 30, 2003. Our exposure to loss related to our investment in these consolidated VIEs is limited to our investment and fees earned, but not yet received, totaling $38.7 million at September 30, 2003. The tables below present the effect of consolidating these VIEs in our consolidated financial statements as of and for the year ended September 30, 2003: (IN THOUSANDS) AMOUNTS BEFORE FIN 46 FIN 46 FOR THE YEAR ENDED SEPTEMBER 30, 2003 ADJUSTMENTS ADJUSTMENTS CONSOLIDATED - -------------------------------------------------------------------------------------------------------------------------- OPERATING REVENUES Investment management fees $1,487,465 $(134) $1,487,331 Underwriting and distribution fees 844,712 (38) 844,674 Shareholder servicing fees 217,227 (2) 217,225 Consolidated sponsored investment products income, net -- 93 93 Other, net 75,125 -- 75,125 - -------------------------------------------------------------------------------------------------------------------------- Total operating revenues 2,624,529 (81) 2,624,448 - -------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 1,976,372 -- 1,976,372 Operating income 648,157 (81) 648,076 OTHER INCOME (EXPENSES) Consolidated sponsored investment products realized gains, net -- 169 169 Consolidated sponsored investment products unrealized gains, net -- 1,476 1,476 Investment and other income 70,349 43 70,392 Interest expense (19,910) -- (19,910) - -------------------------------------------------------------------------------------------------------------------------- Other income, net 50,439 1,688 52,127 Income before taxes on income 698,596 1,607 700,203 Taxes on income 196,907 466 197,373 - -------------------------------------------------------------------------------------------------------------------------- NET INCOME $501,689 $1,141 $502,830 - --------------------------------------------------------------------------------------------------------------------------
70 (IN THOUSANDS) BALANCE BEFORE FIN 46 FIN 46 AS OF THE YEAR ENDED SEPTEMBER 30, 2003 ADJUSTMENTS ADJUSTMENTS CONSOLIDATED - -------------------------------------------------------------------------------------------------------------------------- ASSETS Current assets $2,958,469 $10,358 $2,968,827 Banking/finance assets 918,425 -- 918,425 Non-current assets 3,083,497 -- 3,083,497 - -------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $6,960,391 $10,358 $6,970,749 - -------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities $486,458 $2,068 $488,526 Banking/finance liabilities 801,980 -- 801,980 Non-current liabilities 1,361,845 8,290 1,370,135 - -------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 2,650,283 10,358 2,660,641 - -------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 4,310,108 -- 4,310,108 - -------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,960,391 $10,358 $6,970,749 - --------------------------------------------------------------------------------------------------------------------------
We will adopt the consolidation provisions of FIN 46 for VIEs created before February 1, 2003 in the quarter ending December 31, 2003, in accordance with FSP FIN 46-6. Based on the current requirements of FIN 46 and using September 30, 2003 values, the table below summarizes our best estimate of the increase in assets in our consolidated balance sheet on adoption on December 31, 2003. The table also provides detail on the total assets of VIEs in relation to which we are a significant variable interest holder but not the primary beneficiary, and our exposure to loss as a result of our interest in these VIEs as of September 30, 2003. It should be noted that our measure of exposure does not reflect our estimate of the actual losses that could result from adverse changes. (IN MILLIONS) PRIMARY BENEFICIARY SIGNIFICANT VARIABLE INTEREST HOLDER - ---------------------------------------------------------------------------------------------------- DESCRIPTION TOTAL ASSETS RECOURSE /1/ TOTAL ASSETS EXPOSURE - ---------------------------------------------------------------------------------------------------- Sponsored investment products $1,119.2 None Corporate headquarters campus /2/ $157.6 $12.4 Collateralized debt obligation entities $1,785.5 $17.4 Lightning Finance Company Limited $328.6 $54.7 - ----------------------------------------------------------------------------------------------------
/1/ This column reflects the extent, if any, to which investors have recourse to Franklin Templeton Investments beyond the carrying value of assets held in the VIE. /2/ Based on estimated carrying values as of December 31, 2003. Exposure to loss arising from our investment in the sponsored investment products that we believe that we will consolidate on December 31, 2003 is limited to our investment, totaling $167.1 million at September 30, 2003, and fees earned but not yet received. As the primary beneficiary of our corporate headquarters campus, a lessor trust, we anticipate that we will consolidate the trust under the provisions of FIN 46 as of December 31, 2003. The impact of consolidating the trust will be to increase property and equipment, net by approximately $157.6 million and current maturities of long-term debt, by approximately $164.9 million as of this date. In relation to our purchase of Darby, we anticipate that we will consolidate sponsored investment products with approximately $444.4 million in total assets as of October 1, 2003. 71 NOTE 15 - EMPLOYEE STOCK AWARD AND OPTION PLANS We sponsor a Universal Stock Incentive Plan ("USIP") and an Annual Incentive Compensation Plan ("AICP"). Under the terms of these plans, eligible employees may receive cash and stock awards based on the performance of Franklin Templeton Investments and that of the individual employee. The USIP provides for the issuance of up to 36.0 million shares of our common stock for various stock-related awards, including those related to the AICP. As of September 30, 2003 and prior to considering fiscal 2003 grants, we had approximately 11.1 million shares available for grant under the USIP, including those related to the AICP. In addition to the annual award of stock under the plan, we may award options and other forms of stock-based compensation to some employees. The Compensation Committee of the Board of Directors determines the terms and conditions of awards under the plans. Total stock-based compensation cost during fiscal 2003, 2002 and 2001 was $37.2 million, $42.1 million and $26.6 million. Information regarding stock options is as follows: 2003 2002 2001 - ------------------------------------ -------------------- ---------------------- ------------------ (SHARES IN THOUSANDS) WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE - ------------------------------------ ---------- --------- ---------- ----------- -------- --------- Outstanding, beginning of year 11,679 $37.00 8,397 $36.94 2,222 $32.52 Granted 3,565 $33.18 4,208 $37.10 6,640 $38.41 Exercised/cancelled (1,955) $36.06 (926) $37.03 (465) $36.70 Outstanding, end of year 13,289 $36.11 11,679 $37.00 8,397 $36.94 Exercisable, end of year 8,654 $36.40 5,479 $36.66 2,602 $35.65 - ------------------------------------ ---------- --------- ---------- ----------- -------- ---------
The range of exercise prices for these outstanding options at September 30, 2003 was from $28.19 to $45.73. Of the exercisable options, 91% were exercisable at prices ranging from $32.63 to $38.38. The weighted-average remaining contractual life for the options was 7 years. Generally, these options vest over a 3-year period and are exercisable for up to 10 years from the grant date. NOTE 16 - EMPLOYEE STOCK INVESTMENT PLAN We have a qualified, non-compensatory Employee Stock Investment Plan ("ESIP"), which allows participants who meet certain eligibility criteria to buy shares of our common stock at 90% of their market value on defined dates. Our stockholders approved 4 million shares of common stock for issuance under the ESIP. The ESIP is open to substantially all employees of U.S. subsidiaries and some employees of non-U.S. subsidiaries. At September 30, 2003, approximately 1,651,000 shares had been purchased on a cumulative basis under the ESIP at a weighted-average price of $31.61. In connection with the ESIP, we may, at our election, provide matching grants to participants in the ESIP of whole or partial shares of common stock. While reserving the right to change this determination, we have indicated that we will provide one half-share for each share held by a participant for a minimum period of 18 months. We made our first matching grant in fiscal 2000. During fiscal 2003, 2002, and 2001, we issued approximately 104,000, 85,000 and 81,000 shares at an average market price of $39.47, $35.47 and $45.04. NOTE 17 - OTHER COMPENSATION AND BENEFIT PLANS Fiduciary Trust has a noncontributory retirement plan (the "retirement plan") covering substantially all its employees who were hired before our acquisition of Fiduciary Trust, have attained age 21 and completed one year of service. Fiduciary Trust also maintains a nonqualified supplementary executive retirement plan ("SERP") to pay defined benefits that are in excess of limits imposed by Federal tax law, to participants in the retirement plan who attain age 55 and 10 years of service. In addition to these pension retirement plans, Fiduciary Trust sponsors a defined benefit healthcare plan that provides post-retirement medical benefits to 72 full-time employees who have worked 10 years and attained age 55 while in service of Fiduciary Trust. As of the date of acquisition, the defined benefit healthcare plan was closed to new entrants. The following table shows the funded status of the plans, accrued benefit liability we recognized for amounts not yet funded, and assumptions used as of September 30, 2003 and 2002: PENSION BENEFITS NON-PENSION BENEFITS (IN THOUSANDS, EXCEPT ASSUMPTIONS) 2003 2002 2003 2002 - --------------------------------------------- ------------- ------------ --------------- ----------- Benefit obligation $29,515 $31,635 $6,968 $5,094 Fair value of plan assets 15,091 16,592 -- -- Funded status at year end (14,424) (15,043) (6,968) (5,094) Unrecognized actuarial losses (gains) 1,140 6,861 2,170 300 Unrecognized prior service (credit) cost -- (128) (150) -- - ---------------------------------------------------------------------------------------------------- NET AMOUNT RECOGNIZED $(13,284) $(8,310) $(4,948) $(4,794) - ---------------------------------------------------------------------------------------------------- AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS Accrued benefit cost recognized $(14,424) $(14,090) $(4,948) $(4,794) Intangible asset -- -- -- -- Accumulated other comprehensive income 1,140 5,780 -- -- - ---------------------------------------------------------------------------------------------------- NET AMOUNT RECOGNIZED $(13,284) $(8,310) $(4,948) $(4,794) - ---------------------------------------------------------------------------------------------------- WEIGHTED-AVERAGE ASSUMPTIONS Discount rate 5.50% 6.50% 6.00% 6.50% Expected return on plan assets 5.31% 8.00% N/A N/A Increase in compensation rate 8.00% 4.50% 4.50% 4.50%
Following the acquisition of Fiduciary Trust, we established an $85 million retention pool aimed at retaining key Fiduciary Trust employees, under which employees will receive both cash payments and options. Salaried employees who remain continuously employed through the applicable dates are eligible for compensation under the program. Excluding the value of options granted, the value of the retention plan is $68 million, and is being expensed over a period ranging from one to five years. We expensed $10.2 million, $25.5 million and $24.4 million in fiscal 2003, 2002 and 2001, including the acceleration of retention payments related to the September 11, 2001 events as described in Note 19. NOTE 18 - SEGMENT INFORMATION We have two operating segments: investment management and banking/finance. We based our operating segment selection process primarily on services offered. The investment management segment derives substantially all its revenues and net income from providing investment advisory, administration, distribution and related services to the Franklin, Templeton, Mutual Series, Bissett and Fiduciary Trust funds, and institutional, high net-worth and private accounts and other investment products. The banking/finance segment offers selected retail-banking services to high net-worth individuals, foundations and institutions, and consumer lending services. Our consumer lending activities include automotive lending related to the purchase, securitization, and servicing of retail installment sales contracts originated by independent automobile dealerships, consumer credit and debit cards, real estate equity lines, and home equity/mortgage loans. 73 Financial information for our two operating segments for the years ended September 30, 2003, 2002, and 2001 is presented in the table below. Operating revenues of the banking/finance segment are reported net of interest expense and provision for loan losses. (IN THOUSANDS) INVESTMENT BANKING/ AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 2003 MANAGEMENT FINANCE TOTALS - ---------------------------------------------------------- ------------- --------------- ----------- Assets $6,052,324 $918,425 $6,970,749 Operating revenues 2,563,577 60,871 2,624,448 Interest revenue - inter-segment 2,501 -- 2,501 September 11, 2001 recovery, net (4,401) -- (4,401) Interest expense 19,910 N/A 19,910 Income before taxes 658,571 41,632 700,203 - ---------------------------------------------------------- ------------- --------------- ----------- AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 2002 - ---------------------------------------------------------- ------------- --------------- ----------- Assets $5,370,766 $1,051,972 $6,422,738 Operating revenues 2,463,086 55,446 2,518,532 Interest revenue - inter-segment 5,415 -- 5,415 Interest expense 12,302 N/A 12,302 Income before taxes 546,396 31,879 578,275 - ---------------------------------------------------------- ------------- --------------- ----------- AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 2001 - ---------------------------------------------------------- ------------- --------------- ----------- Assets $5,036,406 $1,229,244 $6,265,650 Operating revenues 2,323,085 31,758 2,354,843 Interest revenue - inter-segment 9,778 -- 9,778 September 11, 2001 expense, net 7,649 -- 7,649 Interest expense 10,556 N/A 10,556 Income before taxes 629,908 7,882 637,790 - ---------------------------------------------------------- ------------- --------------- -----------
Operating revenues of the banking/finance segment included above were as follows: (IN THOUSANDS) FOR THE YEARS ENDED SEPTEMBER 30, 2003 2002 2001 - ---------------------------------------------------------- ------------- --------------- ----------- Interest and fees on loans $31,134 $33,523 $34,296 Interest and dividends on investment securities 18,595 19,804 11,430 - ---------------------------------------------------------- ------------- --------------- ----------- Total interest income 49,729 53,327 45,726 Interest on deposits 6,119 9,812 10,768 Interest on short-term debt 436 392 1,003 Interest expense - inter-segment 2,501 5,415 9,778 - ---------------------------------------------------------- ------------- --------------- ----------- Total interest expense 9,056 15,619 21,549 Net interest income 40,673 37,708 24,177 Other income 33,621 31,628 17,166 Provision for loan losses (13,423) (13,890) (9,585) - ---------------------------------------------------------- ------------- --------------- ----------- TOTAL OPERATING REVENUES $60,871 $55,446 $31,758 - ---------------------------------------------------------- ------------- --------------- -----------
Inter-segment interest payments from the banking/finance segment to the investment management segment are based on market rates prevailing at the inception of each loan. As further described in Note 1, inter-segment interest income and expense are not eliminated in our consolidated statements of income. The investment management segment incurs substantially all of our depreciation and amortization costs and expenditures on long-lived assets. 74 We conduct operations in the following principal geographic areas of the world: the United States, Canada, the Bahamas, Europe, Asia, South America, Africa and Australia. For segment reporting purposes, we have combined Asia, South America, Africa and Australia into one category - Other. Revenues by geographic area include fees and commissions charged to customers and fees charged to affiliates. Information by geographic area is summarized below: (IN THOUSANDS) FOR THE YEARS ENDED SEPTEMBER 30, 2003 2002 2001 - ---------------------------------------------------------- ------------- -------------- ------------ OPERATING REVENUES: United States $1,883,563 $1,846,867 $1,685,108 Canada 222,782 206,287 267,007 Bahamas 327,029 258,745 294,922 Europe 98,801 134,252 129,090 Other 164,869 167,457 144,200 Eliminations (72,596) (95,076) (165,484) - ---------------------------------------------------------- ------------- -------------- ------------ TOTAL $2,624,448 $2,518,532 $2,354,843 - ---------------------------------------------------------- ------------- -------------- ------------ PROPERTY AND EQUIPMENT, NET: United States $303,457 $338,763 $394,082 Canada 4,007 5,151 7,246 Bahamas 6,861 7,299 7,916 Europe 6,045 6,371 7,159 Other 36,402 36,588 33,223 - ---------------------------------------------------------- ------------- -------------- ------------ TOTAL $356,772 $394,172 $449,626 - ---------------------------------------------------------- ------------- -------------- ------------
NOTE 19 - SEPTEMBER 11, 2001 EVENT On September 11, 2001, the headquarters of our subsidiary company, Fiduciary Trust, at Two World Trade Center was destroyed in the terrorist attacks on New York City (the "September 11, 2001 Event"). We have since leased office space for Fiduciary Trust in midtown Manhattan, to resume permanent operations. The following table shows the financial impact of the event recognized at September 30, 2003, 2002 and 2001: (IN THOUSANDS) 2003 2002 2001 - ----------------------------------------------------------------- ------------ ----------- --------- Cumulative September 11, 2001 costs recognized as of end of year $68,945 $64,853 $50,185 September 11, 2001 (recovery) expense, net (4,401) -- 7,649 - ----------------------------------------------------------------- ------------ ----------- ---------
Approximately $19.9 million of the cumulative estimated costs recognized as of September 30, 2003 pertain to the write-off of an intangible asset related to leased office space and to the write-off of property and equipment lost in the September 11, 2001 Event. In addition, as of September 30, 2003 we had recognized a $16.7 million charge related to employee benefit expenses. These expenses include the acceleration of payments under the employee retention bonus plan related to the acquisition of Fiduciary Trust, and other payments made in respect of victims of the tragedy. Cumulative insurance proceeds received through September 30, 2003 were $67.4 million and included $57.2 million related to property and equipment. At September 30, 2003, we were in the process of pursuing a number of additional claims with our insurance carriers. 75 NOTE 20 - INVESTMENT AND OTHER INCOME (IN THOUSANDS) FOR THE YEARS ENDED SEPTEMBER 30, 2003 2002 2001 - ---------------------------------------------------------- ------------- ------------- ------------- Dividends $13,328 $12,934 $24,369 Interest 27,688 37,796 63,455 Realized gains on sale of assets, net 8,798 3,957 54,869 Other-than-temporary decline in investments value -- (60,068) -- Foreign exchange gains, net 10,069 (6,149) (3,629) Other 10,509 16,605 (2,713) - ---------------------------------------------------------- ------------- ------------- ------------- TOTAL INVESTMENT AND OTHER INCOME $70,392 $5,075 $136,351 - ---------------------------------------------------------- ------------- ------------- -------------
During fiscal 2002, we recognized a $60.1 million other-than-temporary decline in value of investments. Substantially all of our dividend income was generated by investments in our sponsored investment products. We realized a gain of $32.9 million on the sale of our former headquarters building in San Mateo in July 2000, which was amortized over 12 months, the period of our leaseback on the building. NOTE 21 - FAIR VALUES OF FINANCIAL INSTRUMENTS The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The methods and assumptions used to estimate fair values of our financial instruments are described below. See Note 1. Due to the short-term nature and liquidity of cash and cash equivalents and receivables, the carrying amounts of these assets in the consolidated balance sheets approximated fair value. Investment securities, trading are carried at fair value with changes in fair value recognized in our consolidated net income. Investment securities, available-for-sale are carried at fair market value as required by generally accepted accounting principles. Loans receivable, net are valued using interest rates that consider the current credit and interest rate risk inherent in the loans and the current economic and lending conditions. The amounts in the consolidated balance sheets approximated fair value. Loans originated and intended for sale are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance included in other, net revenues. Deposits of the banking/finance segment are valued using interest rates offered by comparable institutions on deposits with similar remaining maturities. The amounts in the consolidated balance sheets approximated fair value. Interest-rate swap agreements and foreign exchange contracts are carried at fair value. Debt is valued using publicly-traded debt with similar maturities, credit risk and interest rates. The amounts in the consolidated balance sheets approximate fair values. Guarantees and letters of credit have fair values based on the face value of the underlying instrument. NOTE 22 - BANKING REGULATORY RATIOS Following the acquisition of Fiduciary Trust in April 2001, we became a bank holding company and a financial holding company subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional, discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. We must meet specific capital adequacy guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. 76 Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require us to maintain a minimum Tier 1 capital and Tier 1 leverage ratio (as defined in the regulations), as well as minimum Tier 1 and Total risk-based capital ratios (as defined in the regulations). Based on our calculations as of September 30, 2003 and 2002, we exceeded the capital adequacy requirements applicable to us as listed below. MINIMUM FOR OUR CAPITAL ADEQUACY (IN THOUSANDS) 2003 2002 PURPOSES - ---------------------------------------------------------------------------------------------------- Tier 1 capital $2,122,167 $2,170,328 N/A Total risk-based capital 2,130,717 2,179,363 N/A Tier 1 leverage ratio 40% 45% 4% Tier 1 risk-based capital ratio 64% 65% 4% Total risk-based capital ratio 64% 65% 8% - ----------------------------------------------------------------------------------------------------
77 REPORT OF INDEPENDENT AUDITORS To the Stockholders and Board of Directors of Franklin Resources, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders' equity and comprehensive income and cash flows present fairly, in all material respects, the consolidated financial position of Franklin Resources, Inc. and its subsidiaries at September 30, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP San Francisco, California December 5, 2003 78 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES The Company's management evaluated, with the participation of the Company's principal executive and principal financial officers, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of September 30, 2003. Based on their evaluation, the Company's principal executive and principal financial officers concluded that the Company's disclosure controls and procedures were effective as of September 30, 2003. There has been no change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company's fiscal quarter ended September 30, 2003, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item with respect to our executive officers is contained in Item 1 of Part I of this Form 10-K under the section, "Executive Officers of the Registrant". CODE OF ETHICS. The Company has adopted a Code of Ethics and Business Conduct (the "Code of Ethics") that applies to the Registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, as well as directors, officers and employees of the Company. The Code of Ethics is posted on the Company's website (www.franklintempleton.com) and available in print free of charge to any shareholder who requests a copy. Interested parties may address a written request for a printed copy of the Code of Ethics to: Secretary, Franklin Resources, Inc., One Franklin Parkway, San Mateo, California 94403-1906. We intend to satisfy the disclosure requirement regarding any amendment to, or a waiver of, a provision of the Code of Ethics for the Registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions by posting such information on our website. The information regarding directors of FRI, members of the Audit Committee, the Audit Committee financial expert, and compliance with Section 16(a) of the Exchange Act, is incorporated by reference from the information provided under the section entitled "Proposal 1: Election of Directors" from our Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information in the Proxy Statement under the section entitled "Proposal 1: Election of Directors" is incorporated herein by this reference. 79 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information about equity compensation plans that have been approved by security holders and plans that have not been approved by security holders.
EQUITY COMPENSATION PLAN INFORMATION /1/ NUMBER OF SECURITIES REMAINING NUMBER OF AVAILABLE FOR SECURITIES TO BE FUTURE ISSUANCE ISSUED UPON WEIGHTED-AVERAGE UNDER EQUITY EXERCISE OF EXERCISE PRICE COMPENSATION OUTSTANDING OF OUTSTANDING PLANS (EXCLUDING OPTIONS, OPTIONS, SECURITIES WARRANTS AND WARRANTS AND REFLECTED IN RIGHTS RIGHTS COLUMN (a)) PLAN CATEGORY (a) (b) (c) - ----------------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders /2/ 13,288,991 /3/ $36.11 13,123,108 /4/ Equity compensation plans not approved by security holders 0 0 0 - ----------------------------------------------------------------------------------------------------- Total 13,288,991 $36.11 13,123,108
1 The table includes information for equity compensation plans assumed by the Company in connection with acquisitions of the companies, which originally established those plans. 2 Consists of the 2002 Universal Stock Incentive Plan and the 1998 Employee Stock Investment Plan (the "Purchase Plan"), as Amended. 3 Excludes options to purchase accruing under the Company's Purchase Plan. Under the Purchase Plan each eligible employee is granted a separate option to purchase up to 2,000 shares of Common Stock each semi-annual accrual period on January 31 and July 31 at a purchase price per share equal to 90% of the fair market value of the Common Stock on the enrollment date or the exercise date, whichever is lower. 4 Includes shares available for future issuance under the Purchase Plan. As of September 30, 2003, 2,007,662 of shares of Common Stock were available for issuance under the Purchase Plan. The information required by this Item with respect to Stock Ownership of Certain Beneficial Owners and Management is incorporated by reference from the information provided under the section entitled "Security Ownership of Principal Shareholders" and "Security Ownership of Management" of our Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference from the information provided under the section entitled "Proposal 1: Election of Directors - Certain Relationships and Related Transactions" of our Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Not applicable for the fiscal year ended September 30, 2003. 80 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Please see the index in Item 8 on page 45 of this Annual Report for a list of the financial statements filed as part of this report. (a)(2) Please see the index in Item 8 on page 45 of this Annual Report for a list of the financial statement schedules filed as part of this report. (a)(3) Exhibits: See Index to Exhibits on Pages 83 to 88. (b)(1) Form 8-K filed on August 6, 2003 reporting under Item 5 "Other Events" and Item 7 "Financial Statements and Exhibits", a "press release issued on August 4, 2003 by Registrant and Darby Overseas Investments, Ltd." (c) See Item 15(a)(3) above. (d) No separate financial statements are required; schedules are included in Item 8. 81 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRANKLIN RESOURCES, INC. Date: December 19, 2003 By: /s/ CHARLES B. JOHNSON -------------------------------------------------- Charles B. Johnson, Chairman, Chief Executive Officer, and Member - Office of the Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Date: December 19, 2003 By: /s/ CHARLES B. JOHNSON -------------------------------------------------- Charles B. Johnson, Chairman, Chief Executive Officer, Member - Office of the Chairman, and Director (Principal Executive Officer) Date: December 19, 2003 By: /s/ JAMES R. BAIO -------------------------------------------------- James R. Baio, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: December 19, 2003 By: /s/ HARMON E. BURNS -------------------------------------------------- Harmon E. Burns, Vice Chairman, Member - Office of the Chairman, and Director Date: December 19, 2003 By: /s/ CHARLES CROCKER -------------------------------------------------- Charles Crocker, Director Date: December 19, 2003 By: /s/ MARTIN L. FLANAGAN -------------------------------------------------- Martin L. Flanagan, President Date: December 19, 2003 By: /s/ ROBERT D. JOFFE -------------------------------------------------- Robert D. Joffe, Director Date: December 19, 2003 By: /s/ GREGORY E. JOHNSON -------------------------------------------------- Gregory E. Johnson, President Date: December 19, 2003 By: /s/ RUPERT H. JOHNSON, JR. -------------------------------------------------- Rupert H. Johnson, Jr., Vice Chairman, Member - Office of the Chairman, and Director Date: December 19, 2003 By: /s/ THOMAS H. KEAN -------------------------------------------------- Thomas H. Kean, Director Date: December 19, 2003 By: /s/ JAMES A. MCCARTHY -------------------------------------------------- James A. McCarthy, Director Date: December 19, 2003 By: /s/ CHUTTA RATNATHICAM -------------------------------------------------- Chutta Ratnathicam, Director Date: December 19, 2003 By: /s/ PETER M. SACERDOTE -------------------------------------------------- Peter M. Sacerdote, Director Date: December 19, 2003 By: /s/ ANNE M. TATLOCK -------------------------------------------------- Anne M. Tatlock, Vice Chairman, Member - Office of the Chairman, and Director Date: December 19, 2003 By: /s/ LOUIS E. WOODWORTH -------------------------------------------------- Louis E. Woodworth, Director 82 EXHIBIT INDEX EXHIBIT NO. 3(i)(a) Registrant's Certificate of Incorporation, as filed November 28, 1969, incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (the "1994 Annual Report") 3(i)(b) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed March 1, 1985, incorporated by reference to the 1994 Annual Report 3(i)(c) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed April 1, 1987, incorporated by reference to the 1994 Annual Report 3(i)(d) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed February 2, 1994, incorporated by reference to the 1994 Annual Report 3(ii) Registrant's Amended and Restated By-laws adopted November 12, 2002, incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2002 (the "2002 Annual Report") 4.1 Indenture between the Registrant and The Chase Manhattan Bank (formerly Chemical Bank), as trustee, dated as of May 19, 1994, incorporated by reference to the Company's Registration Statement on Form S-3, filed on April 14, 1994 4.2 Indenture between Franklin Resources, Inc. and The Bank of New York dated May 11, 2001, incorporated by reference to the Registrant's Registration Statement on Form S-3, filed on August 6, 2001 4.3 Form of Liquid Yield Option Note due 2031 (Zero Coupon-Senior) (included in Exhibit 4.2 hereto) 4.4 Registration Rights Agreement between Franklin Resources, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") dated May 11, 2001, incorporated by reference to the Registrant's Registration Statement on Form S-3, filed on August 6, 2001 4.5 Form of 3.7% Senior Notes due 2008, incorporated by reference to Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2003 filed on May 12, 2003 10.1 Representative Distribution Plan between Templeton Growth Fund, Inc. and Franklin/Templeton Investor Services, Inc., incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993 (the "1993 Annual Report") 10.2 Representative Transfer Agent Agreement between Templeton Growth Fund, Inc. and Franklin/Templeton Investor Services, Inc., incorporated by reference to the 1993 Annual Report 10.3 Representative Investment Management Agreement between Templeton Growth Fund, Inc. and Templeton, Galbraith & Hansberger Ltd., incorporated by reference to the 1993 Annual Report 10.4 Representative Management Agreement between Advisers and the Franklin Group of Funds, incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1992 (the "1992 Annual Report") 10.5 Representative Distribution 12b-1 Plan between FTDI and the Franklin Group of Funds, incorporated by reference to the 1992 Annual Report 10.6 Amended Annual Incentive Compensation Plan approved January 24, 1995, incorporated by reference to the Company's Proxy Statement filed under cover of Schedule 14A on December 28, 1994 in connection with its Annual Meeting of Stockholders held on January 24, 1995* 10.7 Universal Stock Plan approved January 19, 1994, incorporated by reference to the Company's 1995 Proxy Statement filed under cover of Schedule 14A on December 29, 1993 in connection with its Annual Meeting of Stockholders held on January 19, 1994* 83 10.8 Representative Amended and Restated Distribution Agreement between Franklin/Templeton Distributors, Inc. and Franklin Federal Tax-Free Income Fund, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 (the "June 1995 Quarterly Report") 10.9 Distribution 12b-1 Plan for Class II shares between Franklin/Templeton Distributors, Inc. and Franklin Federal Tax-Free Income Fund, incorporated by reference to the June 1995 Quarterly Report 10.10 Representative Investment Management Agreement between Templeton Global Strategy SICAV and Templeton Investment Management Limited, incorporated by reference to the June 1995 Quarterly Report 10.11 Representative Sub-Distribution Agreement between Templeton, Galbraith & Hansberger Ltd. and BAC Corp. Securities, incorporated by reference to the June 1995 Quarterly Report 10.12 Representative Dealer Agreement between Franklin/Templeton Distributors, Inc. and Dealer, incorporated by reference to the June 1995 Quarterly Report 10.13 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (ERISA), incorporated by reference to the June 1995 Quarterly Report 10.14 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (non-ERISA), incorporated by reference to the June 1995 Quarterly Report 10.15 Representative Amended and Restated Transfer Agent and Shareholder Services Agreement between Franklin/Templeton Investor Services, Inc. and Franklin Custodian Funds, Inc., dated July 1, 1995, incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 (the "1995 Annual Report") 10.16 Representative Amended and Restated Distribution Agreement between Franklin/Templeton Distributors, Inc. and Franklin Custodian Funds, Inc., incorporated by reference to the 1995 Annual Report 10.17 Representative Class II Distribution Plan between Franklin/Templeton Distributors, Inc. and Franklin Custodian Funds, Inc., on behalf of its Growth Series, incorporated by reference to the 1995 Annual Report 10.18 Representative Dealer Agreement between Franklin/Templeton Distributors, Inc. and Dealer, incorporated by reference to the 1995 Annual Report 10.19 Representative Mutual Fund Purchase and Sales Agreement for Accounts of Bank and Trust Company Customers, effective July 1, 1995, incorporated by reference to the 1995 Annual Report 10.20 Representative Management Agreement between Franklin Value Investors Trust, on behalf of Franklin MicroCap Value Fund and Franklin Advisers, Inc., incorporated by reference to the 1995 Annual Report 10.21 Representative Sub-Distribution Agreement between Templeton, Galbraith & Hansberger Ltd. and Sub-Distributor, incorporated by reference to the 1995 Annual Report 10.22 Representative Non-Exclusive Underwriting Agreement between Templeton Growth Fund, Inc. and Templeton/Franklin Investments Services (Asia) Limited, dated September 18, 1995, incorporated by reference to the 1995 Annual Report 10.23 Representative Shareholder Services Agreement between Franklin/Templeton Investor Services, Inc. and Templeton/Franklin Investments Services (Asia) Limited, dated September 18, 1995, incorporated by reference to the 1995 Annual Report 10.24 Agreement to Merge the Businesses of Heine Securities Corporation, Elmore Securities Corporation, and Franklin Resources, Inc., dated June 25, 1996, incorporated by reference to the Company's Report on Form 8-K dated June 25, 1996 84 10.25 Subcontract for Transfer Agency and Shareholder Services dated November 1, 1996 by and between Franklin/Templeton Investor Services, Inc. and PFPC Inc., incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996 (the "1996 Annual Report") 10.26 Representative Sample of Franklin/Templeton Investor Services, Inc. Transfer Agent and Shareholder Services Agreement, incorporated by reference to the 1996 Annual Report 10.27 Representative Administration Agreement between Templeton Growth Fund, Inc. and Franklin Templeton Services, Inc., incorporated by reference to the 1996 Annual Report 10.28 Representative Sample of Fund Administration Agreement with Franklin Templeton Services, Inc., incorporated by reference to the 1996 Annual Report 10.29 Representative Subcontract for Fund Administrative Services between Franklin Advisers, Inc. and Franklin Templeton Services, Inc., incorporated by reference to the 1996 Annual Report 10.30 Representative Investment Advisory Agreement between Franklin Mutual Series Fund, Inc. and Franklin Mutual Advisers, Inc., incorporated by reference to the 1996 Annual Report 10.31 Representative Management Agreement between Franklin Valuemark Funds and Franklin Mutual Advisers, Inc., incorporated by reference to the 1996 Annual Report 10.32 Representative Investment Advisory and Asset Allocation Agreement between Franklin Templeton Fund Allocator Series and Franklin Advisers, Inc., incorporated by reference to the 1996 Annual Report 10.33 Representative Management Agreement between Franklin New York Tax-Free Income Fund, Inc. and Franklin Investment Advisory Services, Inc., incorporated by reference to the 1996 Annual Report 10.34 1998 Employee Stock Investment Plan approved January 20, 1998, incorporated by reference to the Company's Proxy Statement filed under cover of Schedule 14A on December 17, 1997 in connection with its Annual Meeting of Stockholders held on January 20, 1998 10.35 System Development and Services Agreement dated as of August 29, 1997 by and between Franklin/Templeton Investor Services, Inc. and Sungard Shareholder Systems, Inc., incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 10.36 1998 Universal Stock Incentive Plan approved October 16, 1998 by the Board of Directors, incorporated by reference to the Company's Proxy Statement filed under cover of Schedule 14A on December 23, 1998 in connection with its Annual Meeting of Stockholders held on January 28, 1999* 10.37 Amendment No. 3 to the Agreement to Merge the Businesses of Heine Securities Corporation, Elmore Securities Corporation, and Franklin Resources, Inc., dated December 17, 1997, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1997 10.38 Representative Agreement for the Supply of Investment Management and Administration Services, dated February 16, 1998, by and between Templeton Funds and Templeton Investment Management Limited, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998 10.39 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (ERISA), as amended, incorporated by reference to the Company's Annual Report on Form 10-K/A for the fiscal year ended September 30, 1998 (the "1998 Annual Report") 10.40 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (non-ERISA), as amended, incorporated by reference to the 1998 Annual Report 10.41 Representative Variable Insurance Fund Participation Agreement among Templeton Variable Products Series Fund or Franklin Valuemark Fund, Franklin/Templeton Distributors, Inc. and an insurance company, incorporated by reference on Form 10-Q for the quarter ended December 31, 1998 10.42 Purchase Agreement between Mariners Island Co-Tenancy and Keynote Systems, Inc. dated April 25, 2000, incorporated by reference to the Company's Report on Form 10-Q for the quarterly period ended June 30, 2000 85 10.43 Acquisition Agreement dated July 26, 2000 among Franklin Resources, Inc., FTI Acquisition and Bissett & Associates Investment Management, Ltd., incorporated by reference to the Company's Report on Form 8-K dated August 1, 2000 10.44 Agreement and Plan of Share Acquisition between Franklin Resources, Inc. and Fiduciary Trust Company International dated October 25, 2000, incorporated by reference to the Company's Report on Form 8-K/A (Amendment No. 1) dated October 25, 2000 and filed on October 26, 2000 10.45 Representative Amended and Restated Distribution Agreement among Templeton Emerging Markets Fund, Templeton Canadian Bond Fund, Templeton International Stock Fund, Templeton Canadian Stock Fund, Templeton Global Smaller Companies Fund, Templeton Global Bond Fund, Templeton Treasury Bill Fund, Templeton Global Balanced Fund, Templeton International Balanced Fund, Templeton Canadian Asset Allocation Fund, Mutual Beacon Fund, Franklin U.S. Small Cap Growth Fund, Templeton Balanced Fund, Templeton Growth Fund, Ltd., Templeton Management Limited, and FEP Capital, L.P. dated December 31, 1998, incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000 (the "2000 Annual Report") 10.46 Representative Purchase and Sales Agreement by and among Franklin/Templeton Distributors, Inc., Franklin Resources, Inc., and Lightning Finance Company Limited dated August 1, 1999, incorporated by reference to the 2000 Annual Report 10.47 Representative Advisory Agreement between Templeton Global Advisors Limited and Templeton Asset Management Limited dated December 21, 1999, incorporated by reference to the 2000 Annual Report 10.48 Representative Amended and Restated Commission Paying Agreement between Templeton Global Strategy Funds, Templeton Global Advisors Limited, Templeton Global Strategic Services S.A., and Lightning Finance Company Limited dated January 31, 2000, incorporated by reference to the 2000 Annual Report 10.49 Representative Variable Insurance Fund Participation Agreement among Franklin Templeton Variable Insurance Products Trust (formerly Franklin Valuemark Funds), Franklin/Templeton Distributors, Inc., and CUNA Mutual Life Insurance Company dated May 1, 2000, incorporated by reference to the 2000 Annual Report 10.50 Stock Purchase Agreement between Good Morning Securities Co., Ltd. and Templeton Investment Counsel, Inc. dated June 29, 2000, incorporated by reference to the 2000 Annual Report 10.51 Agreement entered into between NEDCOR Investment Bank Holdings Limited, NEDCOR Investment Bank Limited, Templeton International, Inc., Franklin Templeton Asset Management (Proprietary) Limited, and Templeton Global Advisors Limited dated August 1, 2000, incorporated by reference to the 2000 Annual Report 10.52 Representative Amended and Restated Distribution Agreement between Franklin/Templeton Distributors, Inc. and Franklin Growth and Income Fund dated August 10, 2000, incorporated by reference to the 2000 Annual Report 10.53 Employment Agreement entered into on December 22, 2000 by and among Anne M. Tatlock, Fiduciary Trust Company International and Franklin Resources, Inc., incorporated by reference to the Company's Report on Form 10-Q for the quarterly period ended December 31, 2000* 10.54 Amended and Restated 1998 Universal Stock Incentive Plan as approved by the Board of Directors on October 28, 2000 and the Stockholders at the Annual Meeting held on January 25, 2001, incorporated by reference to the Company's Report on Form 10-Q for the quarterly period ended December 31, 2000* 10.55 Representative Sub-Advisory Agreement between FTTrust Company, on behalf of Templeton International Smaller Companies Fund, Templeton Investment Counsel, LLC, and Templeton Asset Management Limited, dated January 23, 2001, incorporated by reference to the Company's Report on Form 10-Q for the quarterly period ended March 31, 2001 86 10.56 Managed Operations Services Agreement between Franklin Templeton Companies, LLC, and International Business Machines Corporation dated February 6, 2001, incorporated by reference to the Company's Report on Form 10-Q for the quarterly period ended March 31, 2001 10.57 Representative Agency Agreement between FTTrust Company and Franklin/Templeton Investor Services, LLC, dated April 1, 2001, incorporated by reference to the Company's Report on Form 10-Q for the quarterly period ended March 31, 2001 10.58 Lease between RCPI Landmark Properties, L.L.C. and Franklin Templeton Companies, LLC dated September 30, 2001, incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2001 (the "2001 Annual Report") 10.59 Synthetic Lease Financing Facility Agreements dated September 27, 1999, incorporated by reference to the 2001 Annual Report 10.60 Representative Amended and Restated Master Management Agreement between Franklin Templeton Investment Corp., as Trustee of mutual funds and Franklin Templeton Investment Corp., as Manager, dated May 31, 2001, incorporated by reference to the 2001 Annual Report 10.61 Representative Master Management Agreement dated May 31, 2001 between Franklin Templeton Tax Class Corp. and Franklin Templeton Investments Corp., incorporated by reference to the 2001 Annual Report 10.62 Deferred Compensation Agreement for Director's Fees, as amended on April 15, 2002, incorporated by reference to the Company's Report on Form 10-Q for the quarterly period ended March 31, 2002 10.63 Franklin Resources, Inc. 1998 Employee Stock Investment Plan as amended by the Board of Directors on October 10, 2002, incorporated by reference to the Company's Report on Form S-8 filed on October 28, 2002 10.64 Amended and Restated Five Year Facility Credit Agreement dated June 5, 2002 between Franklin Resources, Inc. and The Several Banks Parties Thereto, Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas as Co-Documentation Agents and JP Morgan Chase Bank, as Administrative Agent, incorporated by reference to the 2002 Annual Report 10.65 Amended and Restated 364 Day Facility Credit Agreement dated June 5, 2002 between Franklin Resources, Inc. and The Several Banks Parties Thereto, Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas as Co-Documentation Agents and JP Morgan Chase Bank, as Administrative Agent, incorporated by reference to the 2002 Annual Report 10.66 Settlement Agreement and Release of All Claims dated July 7, 2002 between Franklin Resources, Inc. and Allen J. Gula, Jr., incorporated by reference to the 2002 Annual Report 10.67 Stock Purchase Agreements dated July 23, 2002 between Templeton Asset Management (India) Private Limited and Pioneer Investment Management, Inc. and various employee shareholders, incorporated by reference to the 2002 Annual Report 10.68 2002 Universal Stock Incentive Plan as approved by the Board of Directors on October 10, 2002 and the Stockholders at the Annual Meeting held on January 30, 2003, incorporated by reference to the Company's Report on Form 10-Q for the quarterly period ended December 31, 2002 10.69 Amendments dated July 2, 2001, June 10, 2002 and February 3, 2003 to the Managed Operations Services Agreement dated February 6, 2001, between Franklin Templeton Companies, LLC and International Business Machines Corporation, incorporated by reference to the Company's Report on Form 10-Q for the quarterly period ended March 31, 2003 10.70 Representative Form of Franklin Templeton Investor Services, LLC Transfer Agent and Shareholder Services Agreement, incorporated by reference to the Company's Report on Form 10-Q for the quarterly period ended March 31, 2003 10.71 Amendments dated July 1, 2003 and September 1, 2003 to the Managed Operations Service Agreement dated February 6, 2001, between Franklin Templeton Companies, LLC and International Business Machines Corporation 87 10.72 Purchase Agreement by and among Franklin Resources, Inc., Darby Holdings, Inc. and certain other named parties dated as of August 1, 2003 10.73 Amended and Restated 364 Day Facility Credit Agreement dated June 4, 2003 between Franklin Resources, Inc. and The Banks Parties Thereto, Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas, as Co-Documentation Agents, and JP Morgan Chase Bank, as Administrative Agent, incorporated by reference to the 2003 Annual Report 12 Computation of Ratios of Earnings to Fixed Charges 14 Code of Ethics and Business Conduct 21 List of Subsidiaries 23 Consent of Independent Auditors 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Management/Employment Contract or Compensatory Plan or Arrangement 88 EX-10 3 exhibit10-71.txt EXHIBIT 10.71 AMENDMENT NUMBER 4 TO THE MANAGED OPERATIONS SERVICES AGREEMENT - -------------------------------------------------------------------------------- This Amendment Number 4 to the Managed Operations Services Agreement (this "Amendment"), is made by and between Franklin Templeton Companies, LLC, a Delaware Limited Liability Company, having a place of business at One Franklin Parkway, San Mateo, CA, 94403 ("Franklin") and International Business Machines Corporation, having place of business at Route 100, Somers, NY, 10589 ("IBM") (collectively referred to herein as the "Parties"). This Amendment is entered into on this __1st__day of __July__, 2003 (the "Amendment 4 Effective Date"). This Amendment amends the Managed Operations Services Agreement, dated February 6, 2001, between Franklin and IBM as modified or amended prior to the date hereof including any schedules, supplements, exhibits and attachments thereto (the "Agreement"). Capitalized terms used but not defined herein shall have their respective meanings as defined in the Agreement. In the event of any inconsistency between the terms of the Agreement and the terms of this Amendment, the terms of this Amendment shall prevail. All terms and conditions of the Agreement not specifically amended or supplemented herein, shall remain unchanged and in full force and effect. The Term of this Amendment will begin as of the Amendment 4 Effective Date and will run concurrently with the Term, as modified herein. The affected and changed sections and Schedules of the Agreement are as indicated below. I. THE AGREEMENT: -------------- A) ADD THE FOLLOWING AS SECTION 1.bbb: "Amended Commencement Date" means July 1, 2003. B) SECTION 1.g IS HEREBY AMENDED AS FOLLOWS: "Original Commencement Date" shall be synonymous with the term "Commencement Date" as used in the Agreement and means March 1, 2001. C) SECTIONS 5.a AND 5.b (PAYMENTS) ARE HEREBY DELETED IN THEIR ENTIRETY AND REPLACED WITH THE FOLLOWING: a. Franklin shall pay IBM for Services as set forth in Schedule C (Charges). b. Upon the first business day of the each month of the Term, IBM will present Franklin with one invoice in the amount of a monthly pro rata portion of the Annual Services Charge as set forth in Exhibit C-1 (the "ASC Invoice"). Upon or before the tenth day of each month of the Term, IBM will present Franklin with one invoice covering any variable charges, credits or amounts due and owing under the Agreement for the preceding month, including ARCs and RRCs (the "Variable Charge Invoice"). Payment shall be due as follows (in each case, the "Payable Date"): 1. The ASC Invoice shall be due and payable on or before the last working day of the calendar month for which such invoice is applicable. Notwithstanding the forgoing, in the event that Franklin does not receive the ASC invoice from IBM in a timely manner consistent with this Section 5(b), any such invoice shall be due and payable, within 30 calendar days of Franklin's actual receipt of such invoice. 2. The Variable Charge Invoice shall be due and payable within 30 calendar days of Franklin's receipt of such invoice. In the event that the Variable Charge Invoice reflects a net credit to Franklin, IBM shall credit such amount to Franklin within 30 calendar days of the issuance of such invoice. IBM/FRANKLIN CONFIDENTIAL PAGE 1 OF 9 MOSA AMENDMENT-FINAL.DOC AMENDMENT NUMBER 4 3. In the event that the Parties mutually agree upon any additional charges to be made pursuant to this Agreement, in the absence of any contrary agreement between the Parties, any such additional charge shall be due and payable within 30 calendar days of receipt of invoice by Franklin. 4. Franklin shall have the option to make payments due hereunder via wire fund transfer or other commercially similar electronic medium acceptable to IBM. This form of payment shall be made to an IBM account specified by IBM. IBM shall provide all necessary account information to enable Franklin to make such deposit. 5. If any payments or portions thereof are not received by IBM on the Payable Date, Franklin will also pay IBM a late fee for each day after the Payable Date and until the date IBM receives such late payment in full. The amount of the late fee will be invoiced to Franklin and payable in the next monthly invoice. The late fee will be the lesser of 1% or the maximum allowed under the law of any overdue amount per month. 6. Franklin's payment obligations under this Section 5 shall be limited to amounts which are properly due and owing pursuant to the terms of the Agreement. IBM's failure to perform the Services pursuant to the terms of the Agreement shall be deemed a proper basis for Franklin's temporary withholding of payment of such disputed amount. D) SECTION 8.a (SOFTWARE AND EQUIPMENT) IS DELETED IN ITS ENTIRETY AND REPLACED WITH THE FOLLOWING: a. Franklin Provided Software and Equipment. Until Initial Refresh (with respect to each item of software or equipment), except as otherwise set forth in this Agreement, Franklin will have financial responsibility for and will provide all In-Scope Software and In-Scope Equipment required to provide the Services, including leases, license fees, upgrade fees and maintenance fees. Notwithstanding the foregoing, in the event that Initial Refresh has not occurred within eighteen months following the Amended Commencement Date, IBM shall be responsible for maintenance on Sun Microsystems, EMC, and IBM manufactured In-Scope Equipment (excluding any In Scope Equipment purchased after the Original Commencement Date) until Initial Refresh does occur unless such delay is due to Franklin's delay. The foregoing obligations shall not include (i) the S/390 T16 situated in Rancho Cordova, described in Section 8.b. below; (ii) the upgrade to the S/390 T16 to an R56; (iii) all IBM S/390 Systems Software, and (iv) the IBM Systems Software on the AS/400s. With respect to the foregoing items described in (i) through (iv), IBM shall provide and will maintain financial and other responsibility. Franklin hereby grants to IBM during the Term, its Affiliates, and their subcontractors, for use solely in connection with IBM's provision of the Services, the rights to use such Franklin Provided Software and Franklin Provided Hardware that is necessary for IBM's provision of the Services, subject to Section 8.d (Required Consents) of this Agreement. E) SECTION 8.c (IBM PROVIDED SOFTWARE AND IBM PROVIDED EQUIPMENT) IS DELETED IN ITS ENTIRETY AND REPLACED WITH THE FOLLOWING: c. IBM Provided Software and IBM Provided Equipment. At the time of Initial Refresh, with respect to a particular piece of In-Scope Equipment, IBM shall assume all responsibility for such In-Scope Equipment and all System Software running on such In-Scope Equipment (but not including any Third Party OEM Software or application software and DEC/VAX midrange servers listed on Schedule G), including leases, license fees, upgrade fees and maintenance fees. With respect to Third Party OEM Software, IBM will be responsible for the management and procurement of such software and will reasonably cooperate with Franklin and Franklin Affiliates to assess and to maximize efficiencies and volume benefits that Franklin and Franklin Affiliates IBM/FRANKLIN CONFIDENTIAL PAGE 2 OF 9 MOSA AMENDMENT-FINAL.DOC AMENDMENT NUMBER 4 may seek from licensors of such software and will, upon mutual agreement of the Parties, replace Third Party OEM Software with IBM software during refreshes where IBM replacement software with similar functionality exists. Franklin will be financially responsible for all Third Party OEM Software and for IBM replacement software (excluding IBM Systems Software). F) SECTION 8.e (REFRESH) IS DELETED IN ITS ENTIRETY AND REPLACED WITH THE FOLLOWING: e. Refresh. For each item of In-Scope Hardware and In-Scope Software as to which IBM has an obligation under subsection (c) above, Franklin will provide IBM with prior notice of the expiration or termination of the applicable equipment lease agreement or pending expiration of depreciation for such item of hardware. Subject to the terms and conditions of this Agreement, IBM will negotiate and be financially responsible for the renewal or other extension of such hardware and associated IBM Systems Software, or of a similar alternative software or hardware solution proposed by IBM. It is the intention of the parties that IBM shall perform all Initial Refresh (excluding any In-Scope Hardware purchased after the Original Commencement Date) within eighteen (18) months of the Amended Commencement Date. IBM shall not implement or otherwise use any hardware or software with respect to the Services which will unreasonably or adversely affect Franklin's or a Franklin Affiliate's application environment. G) SECTION 8.g (SOFTWARE CURRENCY) IS DELETED IN ITS ENTIRETY AND REPLACED WITH THE FOLLOWING: g. Software Currency. Following Initial Refresh, IBM shall perform all functions required to maintain all In-Scope Software currency. Unless otherwise agreed by the parties, IBM shall maintain In-Scope Software within one generation of current major release levels. H) SECTION 8.h (EQUIPMENT CURRENCY) IS DELETED IN ITS ENTIRETY AND REPLACED WITH THE FOLLOWING: h. Equipment Currency. Following Initial Refresh, IBM shall perform all functions required to maintain all In-Scope Equipment currency (except with respect to the DEC/VAX Servers, Amendment 3 Equipment, and the Canadian Disaster Recovery AS/400 machine in Rancho Cordova). Unless otherwise agreed to by the Parties, IBM shall subsequently refresh the In-Scope Equipment according to Table 8.h.1. below. To avoid all In-Scope Equipment being refreshed at one time, the Parties shall negotiate in good faith using commercially acceptable standards, to develop a mutually agreed upon Annual Technology Refresh Plan which shall be updated by the Parties annually (by December 31st of the expiring year) beginning in 2003. The Annual Technology Refresh Plan will include a schedule to execute the refresh of the In-Scope Equipment for the following year. Additionally, the Parties agree to negotiate in good faith to resolve any refresh schedule mismatches, which may exist due to partial platforms, application development and testing resource constraints or lack of backward compatibility. Such resolution may be by acceleration or slowdown of the refresh cycle. IBM/FRANKLIN CONFIDENTIAL PAGE 3 OF 9 MOSA AMENDMENT-FINAL.DOC AMENDMENT NUMBER 4
Table 8.h.1 --------------------------------------------- -------------------------------- SYSTEM TYPE REFRESH CYCLE --------------------------------------------- -------------------------------- Mainframe System Servers (zSeries class) 60 months --------------------------------------------- -------------------------------- Shared Storage Systems (SAN, NAS) 48 months --------------------------------------------- -------------------------------- Shared storage such as SAN and NAS 48 months --------------------------------------------- -------------------------------- Storage internal to a server Same refresh schedule as server --------------------------------------------- -------------------------------- Standalone storage (not internal to the 48 months server) included in the other storage category --------------------------------------------- -------------------------------- DEC No refresh schedule --------------------------------------------- -------------------------------- iSeries Systems 60 months --------------------------------------------- -------------------------------- UNIX Systems (IBM, non-IBM) less than or 48 months equal to 8 CPU's --------------------------------------------- -------------------------------- UNIX Systems (IBM, non-IBM greater than or 60 months equal to 9 CPUs --------------------------------------------- -------------------------------- Intel Systems (IBM, non-IBM) 36 months --------------------------------------------- -------------------------------- Any other nonspecified equipment 42 months --------------------------------------------- --------------------------------
I) SECTION 10.b (REPLACEMENT OF PROTECTED EMPLOYEES) IS HEREBY DELETED IN ITS ENTIRETY AND REPLACED WITH THE FOLLOWING: b. Replacement or Reassignment of Protected Employees. During the eighteen months from the Commencement Date, IBM shall not reassign or replace any Protected Employee described in (i), (ii), (iii) or (iv) (with (iv) being limited as described above). The restrictions described above shall apply, except for the reasons set forth below: (i) replacement or reassignment of such Protected Employee pursuant to Franklin's written consent to such reassignment; (ii) Protected Employee's voluntary resignation from IBM; (iii) dismissal of a Protected Employee by IBM for misconduct (e.g., fraud, drug abuse, theft) or unsatisfactory performance as determined by IBM; or, (iv) inability of a Protected Employee to work due to sickness or disability, or any relevant labor or employment legislation or following the termination or expiration of the Agreement (each, an "Excused Replacement"). If IBM replaces or reassigns a Protected Employee in violation of this provision, in addition to whatever rights and remedies Franklin may otherwise have, IBM shall be responsible: (i) for replacing such Protected Employee within thirty (30) days of the last day of such Protected Employee's employment with IBM; and (ii) for training such Protected Employee's replacement at IBM's sole expense. The IBM Project Executive may approach the Franklin Project Executive with a request to include a specific personnel reassignment in the category of Excused Replacement based upon IBM's desire to not limit an IBM Key Employee's career development and advancement. The Franklin Project Executive will consider such a request in good faith. J) THE FIRST TWO SENTENCES OF SECTION 15. (BENCHMARKING) ARE AMENDED AS FOLLOWS: Benchmarking. At the end of the 24th, 40th, 56th, 72nd, 88th and 104th months following the Amended Commencement Date, either party may elect to conduct a benchmarking process designed to objectively compare the Services and the rates and charges related thereto to industry standards for comparable services in accordance the procedures set forth herein. K) INTENTIONALLY LEFT BLANK. IBM/FRANKLIN CONFIDENTIAL PAGE 4 OF 9 MOSA AMENDMENT-FINAL.DOC AMENDMENT NUMBER 4 L) ADD THE FOLLOWING AS SECTION 17.f (USE OF FACILITIES: TORONTO): f. The Parties hereby agree that a portion of the Services (specifically remote operations) which are currently provided by IBM hereunder from the United States, may be transitioned over and may be provided by IBM from Franklin's facilities in Toronto Canada. Should IBM decide to make this transition, Franklin shall provide the following facilities for use by IBM in Toronto: Franklin will provide IBM with facilities and general office equipment (including standard office furniture, telephone handsets, fixtures, use of shared office equipment, such as photocopiers) for up to forty (40) IBM personnel at Franklin's facilities in Toronto, Canada that are comparable to which Franklin provides to its own similarly situated employees and contractors at such facility. IBM shall be responsible for providing all personal computers (workstations and laptops) for use by IBM personnel. IBM will successfully complete its transition to Toronto in accordance with its transition plan which shall be commercially reasonable, unless otherwise mutually agreed. M) THE FIRST SENTENCE OF SECTION 20.a (TERM) IS DELETED IN ITS ENTIRETY AND REPLACED WITH THE FOLLOWING: a. As of the Amended Commencement Date, (Except with respect to Schedule M, the term of which shall remain unchanged), the Term of the Agreement is hereby extended as follows: The Term shall extend until 2400 hours, Pacific time, on the later of (i) the tenth anniversary of the Amended Commencement Date or (ii) the last day of the Temporary Extension of Services or the Transition Period (if any), if not terminated earlier pursuant to Section 18 or 21 (the "Term"). N) SECTION 21.a (TERMINATION) IS HEREBY DELETED IN ITS ENTIRETY AND REPLACED WITH THE FOLLOWING: a. Termination for Convenience. At any time after the third anniversary of the Amended Commencement Date, Franklin may terminate this Agreement (but not including Schedule M) for convenience for any reason or no reason upon at least one hundred twenty (120) days written notice, and Franklin shall have no further obligations under this Agreement except for (i) payment for any acceptable Services completed by IBM prior to the effective date of termination; (ii) payment of the Termination for Convenience Charge specified in Revision 2 to Schedule C (iii) payment of the applicable lease buyout charge on all remaining lease obligations, including lease obligations for assets used in the IBM data center exclusively to support Franklin, as set forth in 21 (e) below and (iv) payment of the reasonable costs incurred by IBM except for those costs which fall under Section 21 (a) (iii) above, in winding down the Services to termination that would not have been incurred if the Agreement had not been terminated for convenience, such amounts not to exceed $1,500,000 plus the amount of $50,000 multiplied by every three (3) employees in excess over 100 who are dedicated to providing Services as of the date on which Franklin gives notice of termination. For example, if on the date on which Franklin gives notice of termination, 121 IBM employees are dedicated to providing Services, the cap on the reasonable costs for which Franklin is liable under subsection (iv) above, is $1,850,000. If on the date on which Franklin gives notice of termination, 120 IBM employees are dedicated to providing Services, the cap on the reasonable costs for which Franklin is liable under subsection (iv) above, is $1,800,000. O) THE LAST SENTENCE IN SECTION 21.b (TERMINATION FOR CAUSE) WHICH BEGINS "IN THE EVENT OF A DEFINED DEFAULT SPECIFIED..." IS DELETED IN ITS ENTIRETY. P) SECTION 21.d (TERMINATION) IS DELETED IN ITS ENTIRETY. IBM/FRANKLIN CONFIDENTIAL PAGE 5 OF 9 MOSA AMENDMENT-FINAL.DOC AMENDMENT NUMBER 4 Q) SECTION 21.e (TERMINATION) IS DELETED IN ITS ENTIRETY AND REPLACED WITH THE FOLLOWING: e. Leases at Expiration or Termination. In the event that IBM incurs any actual lease buy out charges due to IBM's termination of equipment leases because of expiration or termination of the Agreement for any reason, Franklin shall pay to IBM the applicable and documentable lease buyout charge on all remaining In Scope Equipment lease obligations including lease obligations for assets used in the IBM data center exclusively to support Franklin. IBM shall provide an itemized accounting of all lease buy out charges pursuant to this Section 21 (e) and any such charges shall be commercially reasonable under the circumstances. The Parties intend that any equipment for which Franklin pays a lease buyout charge become the property of Franklin. R) ADD THE FOLLOWING AS SECTION 28: Mutual Stipulation. IBM and Franklin hereby stipulate that each party has performed it's obligations under the Agreement for the time period beginning on the Effective Date and ending on the Amended Commencement Date. The Parties understand, acknowledge and agree that the stipulation set forth in this Section 28 is under no circumstances intended to be, nor should it be interpreted as a being a release of liability for any actions which may have been taken by either party under the Agreement during this time. S) ADD THE FOLLOWING AS SECTION 29 (INCREMENTAL REVENUE COMMITMENT): Franklin commits to IBM Global Services or its successor an incremental revenue amount for additional services (including any products which are included as part of a service) through the IBM Project Executive under an Amendment or SOW to the Agreement or the IBM/Franklin Customer Agreement for Services dated July 2, 2001 in the relevant calendar year as follows ("Incremental Revenue Commitment"): -------------- --------- --------- --------- --------- --------- -------- --------- 2004 2005 2006 2007 2008 2009 2010 -------------- --------- --------- --------- --------- --------- -------- --------- Total IBM $1.75 $2.75 $3.25 $3.5 $3.5 $3.5 $3.5 Incremental Revenue Commitment (in millions USD) -------------- --------- --------- --------- --------- --------- -------- ---------
The Incremental Revenue Commitment is over and above the Annual Services Charge set forth in Exhibit C-1. The Incremental Revenue Commitment will encompass all invoiced amounts paid by Franklin or its Affiliates globally for additional IT services (including without limitation, ARCs, One-time Incremental Asset Charges and Monthly Incremental Asset Charges under the Agreement and any IBM or non-IBM products which are included as part of a service such as installation, maintenance or managed operations services, and IBM software to be installed on the In-scope Equipment, for Franklin's environment) such as network services, help desk, web hosting services, application development management services, learning services, maintenance services, business consulting services and other strategic outsourcing services performed by IBM Global Services or its successor. If Franklin fails to meet the Incremental Revenue Commitment in any calendar year, IBM, at its option, shall either (i) invoice Franklin in the second month following the applicable calendar year, and Franklin shall pay an amount equal to 15% of the difference between the Incremental Revenue Commitment and the amounts invoiced to Franklin during the applicable calendar IBM/FRANKLIN CONFIDENTIAL PAGE 6 OF 9 MOSA AMENDMENT-FINAL.DOC AMENDMENT NUMBER 4 year (the "IRC Shortfall Fee"). The IRC Shortfall shall not exceed $262,500 for 2004, $412,500 for 2005, $487,500 for 2006 and $525,000 per year for years 2007 through 2010 or (ii) provide Franklin a one year grace period to fulfill its Incremental Revenue Commitment on an aggregate basis for both the prior and current years. The IRC Shortfall Fee shall not count towards the next year's Incremental Revenue Commitment, nor shall any amount paid to IBM during the grace period if such amount is aggregated with the prior year's revenue in order to meet such prior year's Incremental Revenue Commitment. Franklin shall provide reasonable assistance to IBM as required to calculate the amounts paid to IBM over the previous calendar year. If the Agreement terminates for any reason prior to its anticipated expiration date, the Incremental Revenue Commitment will be prorated for the relevant calendar year in which the Agreement is terminated and any amounts owing for the IRC Shortfall Fee are due upon the effective date of Termination. The additional Services may be subject to a Benchmark (as per the Benchmark provisions and schedule defined in the Agreement) against comparable scope and revenue size of similar transactions in the industry (for example, product installation services will be benchmarked against comparable scope, complexity, platforms and volumes). T) ADD THE FOLLOWING AS SECTION 30: Geographic Scope of Services. Unless the Parties otherwise agree in writing, the Services under this Agreement shall be provided only in the United States of America. U) ADD THE FOLLOWING AS SECTION 31: Governance. a. Introduction Franklin and IBM agree that the effective implementation and administration of this Agreement will be facilitated by ongoing management involvement. This involvement will be enhanced by the governance structure and process set forth in this Section. b. Intent The intent of the governance structure and process is to enhance and facilitate: i. the effective implementation of this Agreement including the establishment of a strategy for communicating and planning for major organization changes (i.e., people, processes, functions) associated with this Agreement; ii. the development of organizational relationships through formal tools and techniques to support Franklin's and IBM's: a) IT goals and objectives; and b) business goals, plans and strategies; iii. effective operating protocols and an expeditious process for the resolution of certain disputes; and iv. periodic senior management review of and recommitment to the relationship. c. Objectives The objectives of the governance structure and process are to continually validate that: i. the results and benefits derived from this Agreement are consistent with Franklin's and IBM's expectations and objectives; ii. the goals, objectives, strategies, and plans of Franklin and IBM are fully understood by the other; iii. an effective relationship management process exists including a communication, decision making, and issue resolution process; and IBM/FRANKLIN CONFIDENTIAL PAGE 7 OF 9 MOSA AMENDMENT-FINAL.DOC AMENDMENT NUMBER 4 iv. this Agreement continues to provide a living value proposition to Franklin and IBM throughout the Term. d. Structure Franklin and IBM agree to jointly establish the following governance structure to provide advice and counsel to the Franklin and IBM Project Executives. i. Joint Steering Committee a) Franklin and IBM will jointly create a board consisting of an equal number of employees from Franklin and IBM (the Joint Steering Committee) who will focus on Franklin's and IBM's long-term strategic plans as they relate to the Services so that such plans remain consistent with the goals, objectives, strategies and plans of Franklin and IBM. Within 60 days after the Amended Commencement Date, Franklin and IBM will identify the titles of the initial members of the Joint Steering Committee and will agree upon a process for replacement of the Joint Steering Committee members. b) The Joint Steering Committee will: (1) convene at least semiannually to promote effective relationship management and validate progress towards joint strategic initiatives; (2) conduct annual reviews of the operating and strategic plans prepared by the Project Executives; (3) share global strategies, as appropriate, and jointly develop new or adjust the existing Franklin and IBM IT strategy; (4) consider and recommend amendments to the Agreement necessary to maintain alignment of Franklin's and IBM's expectations and shared goals; (5) upon Franklin's or IBM's request, assist in resolving any disputes or significant issues arising from the interpretation or implementation of this Agreement; and (6) review the overall operational performance of this Agreement as well as issues effecting joint mutual action. ii. Joint Management Committee a) Franklin and IBM will jointly create a council consisting of an equal number of IS managers and representatives from Franklin and IBM (the Joint Management Committee). Within 60 days after the Amended Commencement Date, Franklin and IBM will identify the titles of the initial members of the Joint Management Committee and will agree upon a process for replacement of the Joint Management Committee members. b) The Joint Management Committee will: (1) conduct monthly reviews of operational performance, progress towards project objectives, and organizational linkages required for efficient, interdependent performance where required; (2) prioritize and approve tactical plans; (3) review the operating and strategic plans prepared by the Project Executives prior to presenting such plans to the Joint Steering Committee for review; (4) provide advice on workload forecasting and demand management; (5) provide advice on technology direction and input to the Joint Steering Committee; (6) provide sufficient interface to Franklin's line of business and the IBM organization; and (7) sponsor appropriate working groups as deemed necessary to address operational or technical issues, to address performance concerns of Franklin's application development groups and business units for In- IBM/FRANKLIN CONFIDENTIAL PAGE 8 OF 9 MOSA AMENDMENT-FINAL.DOC AMENDMENT NUMBER 4 Scope Services, whether or not they are specifically listed as SLA's in Schedule B, and to enhance Franklin's and IBM's relationship. V) SECTION 19.a (TEMPORARY EXTENSION OF SERVICES) IS HEREBY AMENDED AS FOLLOWS: Franklin may elect to extend this Agreement under the terms set forth in Section 19 (a) for up to and including nine (9) months. II. THE SCHEDULES: A) SCHEDULE A (SERVICES) IS HEREBY AMENDED AS FOLLOWS: --------------------------------------------------- "Schedule A" including Supplement A-1 to Schedule A is deleted in its entirety and replaced with "Revision 1 to Schedule A" which is attached hereto. B) SCHEDULE B (SERVICE LEVELS) IS HEREBY AMENDED AS FOLLOWS: --------------------------------------------------------- "Revision 1 to Schedule B" including Supplement B-1 to Schedule B is deleted in its entirety and replaced with "Revision 2 to Schedule B" which is attached hereto. C) SCHEDULE C (CHARGES) IS HEREBY AMENDED AS FOLLOWS: -------------------------------------------------- "Revision 1 to Schedule C" is deleted in its entirety and replaced with "Revision 2 to Schedule C" which is attached hereto. D) SCHEDULE E (PROJECTS) IS HEREBY AMENDED AS FOLLOWS: --------------------------------------------------- "Schedule E" including Supplement E-1 to Schedule E is deleted in its entirety and replaced with "Revision 1 to Schedule E" which is attached hereto. THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THIS AMENDMENT, UNDERSTAND IT, AND AGREE TO BE BOUND BY ITS TERMS AND CONDITIONS. FURTHER, THE PARTIES AGREE THAT THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES RELATING TO THIS SUBJECT SHALL CONSIST OF 1) THIS AMENDMENT, 2) THE SCHEDULES AND SUPPLEMENTS TO THE SCHEDULES, AND 3) THE AGREEMENT, DATED FEBRUARY 6, 2001, AS PREVIOUSLY AMENDED. Franklin's approval of this Amendment shall be considered acceptance by Franklin of IBM's provision of the Services for the corresponding charges specified in THE aGREEMENT, AS AMENDED. THIS STATEMENT OF THE AMENDMENT SUPERSEDES ALL PROPOSALS OR OTHER PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER DESCRIBED IN THIS AMENDMENT. Accepted by: Accepted by: International Business Machines Franklin Templeton Companies, LLC Corporation By: /s/ Shirley S. Reilich By: /s/ Jennifer J. Bolt ---------------------- --------------------- Authorized Signature Authorized Signature SHIRLEY S. REILICH Date July 1, 2003 JENNIFER J. BOLT Date July 1, 2003 - ------------------ ------------ ---------------- ------------ Name (Type or Print) Name (Type or Print) IBM/FRANKLIN CONFIDENTIAL PAGE 9 OF 9 MOSA AMENDMENT-FINAL.DOC AMENDMENT NUMBER 4 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AGREEMENT BETWEEN FRANKLIN AND IBM REVISION 1 TO SCHEDULE A SERVICES AND SUPPORT RESPONSIBILITIES I. INTRODUCTION.......................................................2 II. DEFINITIONS.......................................................2 III. SERVICE HOURS.....................................................6 IV. DOCUMENTATION.....................................................6 V. DESCRIPTION OF SERVICES AND SUPPORT ACTIVITIES....................8 1.0 General Responsibilities......................................8 1.1 Reporting.....................................................8 1.2 Meetings......................................................8 2.0 Systems Engineering...........................................9 3.0 Systems Management Controls...................................9 3.1 Systems Management Control Project Office....................10 3.2 Configuration Management.....................................10 3.3 Change Management............................................10 3.4 Performance Management.......................................11 3.5 Problem Management...........................................12 3.6 Capacity Planning............................................13 3.7 Availability Management......................................13 4.0 Systems Operations...........................................14 4.1 General Description of Systems Operations....................14 4.2 Processing Operations........................................14 4.3 Midrange and Intel Systems Operations........................15 5.0 Production Control Services..................................15 5.1 General Description..........................................16 5.2 Mainframe Production Control Services........................17 6.0 Systems and Technical Support................................17 7.0 Storage Management Services..................................18 8.0 Data Base Management Services................................19 8.1 Application and Data Modification............................19 8.2 Modifications to the Server/ Database Configuration..........19 8.3 Database Performance Tuning..................................19 8.4 Software Upgrades and Patch installations....................19 8.5 Establish Temporary User ID's for Franklin Database Administrators:..............................................19 9.0 Tape Management Services.....................................20 9.1 General Description of Tape Management Services..............20 10.0 Output Services..............................................21 11.0 System Testing and Implementation Services...................22 12.0 Maintenance Services.........................................22 13.0 Application Support Services.................................23 13.1 MQ Series Support............................................23 14.0 Security Management..........................................25 14.1 General Responsibilities.....................................25 14.2 Physical Security............................................25 14.3 Logical Access Control.......................................26 14.4 Network Infrastructure Security (in addition to Logical Access above)................................................28 15.0 Monitoring Services..........................................28 15.1 Design, Development, and Deployment of Monitors..............30 15.2 Steady State Monitoring Operations...........................30 16.0 Business Recovery Services...................................31 17.0 Other Services and Responsibilities..........................31 IBM/FRANKLIN CONFIDENTIAL PAGE 1 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: I. INTRODUCTION This Schedule describes the duties and responsibilities of International Business Machines Corporation and Franklin Templeton Companies, LLC (referred to herein as IBM and Franklin, respectively; or as a Party or the Parties) related to IBM's provision of steady state Services. A description of the Services IBM will provide and the responsibilities of the parties with regard to the transition to steady state are described in Schedule D (Transition). II. DEFINITIONS The following terms have the meanings set forth below when used in this Schedule (and in the base Agreement and other Schedules). Capitalized terms not defined in this Section 2.0 have the meanings set forth in the Agreement or other Schedules. a. ABEND means, with respect to computer processing, an abnormal end of task. b. APPLICATIONS SOFTWARE means those programs and programming, including all supporting documentation and media, that perform specific End User related data processing and telecommunications tasks. For purposes of this Schedule, Applications Software also includes database management software in all platforms except the mainframe. c. ARB means Franklin's Architectural Review Board, which includes the IBM PE having full membership rights equal to IT directors on the ARB. d. AVAILABILITY MANAGEMENT means the process for coordinating the appropriate skills, information, tools and procedures required to manage the availability of the Mainframe, Midrange, and Intel server devices, and the supporting hardware and software components that IBM uses to provide Services. e. BATCH MANAGEMENT means the process for controlling production batch work including the scheduling of resources, the processing of data and transactions and the distribution of data output/information between End Users. f. CAPACITY MANAGEMENT means the process for the development and maintenance of tactical and strategic plans to verify that the operating environments accommodate Franklin's growing or changing business requirements. g. CHANGE MANAGEMENT means the process for the planning, testing, coordinating, implementing and monitoring of changes affecting service delivery and the operating environments. The process will not adversely impact Service delivery. h. CONFIGURATION MANAGEMENT means the process for processing and tracking hardware and software configuration changes and maintaining lists and diagrams of system configurations. i. DASD means direct access storage device. j. DATA CENTER means either the IBM Data Center(s) or the Franklin Data Center(s), as identified on Schedule I (Facilities), or both. k. END USERS means users of Services who are employees, Affiliates, and contractors or other designees of Franklin. l. END USER MACHINES means all workstations, terminals, printers, and associated peripheral equipment located at Franklin Facilities. m. FACILITIES means those Franklin locations listed in Schedule I (Facilities). n. FRANKLIN DATA NETWORK means the portions of the network that Franklin is responsible for providing as set forth in Schedule H. IBM/FRANKLIN CONFIDENTIAL PAGE 2 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: o. FOCAL POINT means the individual designated by either Party to act as the single point of contact within a specified set of Services or Facility to whom the other Party may direct all communications related to such set of Services or Facility. p. FRANKLIN MACHINES means machines that are: 1. owned, leased or rented by Franklin Resources, Inc. on or after the Effective Date; and 2. used by IBM to provide the Services. q. GSD331 means the IBM GSD331 document, as mutually modified for the Franklin environment. r. HOLIDAY means the days specified as holidays by Franklin corporate policy, which list of holidays Franklin will provide to IBM annually. s. IBM DATA NETWORK means the network owned, managed and maintained by IBM, IBM partners or IBM vendors. t. IBM MANAGEMENT ENVIRONMENT means IBM's tools, processes and programs which are used by IBM in managing of the System Layer. u. IMPLEMENTATION means the collaborative planning, preparation, physical installation, and post installation validation of changes within the test and production environments in compliance with Change Management procedures set forth in the Procedures Manual. v. INFORMATION SECURITY CONTROLS DOCUMENT means the guidelines to establish security implementation practices and procedures for the protection of Franklin and IBM. w. INTEL SERVER means those servers identified as such and listed in Schedule G (Machines) on the Effective Date and, subsequently, those machines listed in the IBM database of assets. x. INVENTORY MANAGEMENT Control Process means the process for maintaining a record of the IBM and Franklin equipment (including incoming and outgoing) for those environments for which IBM is providing Services. y. LEVEL 1 SUPPORT means the initial request is handled by an individual who takes the incoming request and attempts to fulfill the request. Specific responsibilities include: 1. responding to the incoming request; 2. gathering the appropriate information for the type of request; 3. assessing the severity and priority of requests; 4. attempting to fulfill the request; 5. reassigning requests as needed; 6. contacting the customer for further information, as required; 7. performing escalation as necessary; 8. performing notification as required; and 9. closing requests that are fulfilled, with customer agreement. z. LEVEL 2 SUPPORT means the call is referred to a subject matter expert who handles additional request fulfillment. Specific responsibilities include: 1. fulfilling assigned requests; 2. documenting all actions in the request record; 3. contacting the customer for further information, if required; 4. participating in root cause analysis, when required; 5. requesting escalation; IBM/FRANKLIN CONFIDENTIAL PAGE 3 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: 6. working with vendors as necessary; 7. assisting in the use of supported products; 8. making recommendations for process and tool improvements; 9. contacting other service providers, as required; and 10. interfacing with other systems, networks, and operating system environments. aa. LEVEL 3 SUPPORT means the call is referred to a subject matter expert who handles request fulfillment requiring more in-depth expertise than Level 2. These subject matter experts may be part of external organizations (vendors). Specific responsibilities include: 1. fulfilling assigned requests; 2. documenting all actions in the request record; 3. contacting the customer for further information, if required; 4. participating in root cause analysis, when required; 5. requesting escalation; 6. working with vendors as necessary; 7. assisting in the use of supported products; 8. making recommendations for process and tool improvements; 9. contacting other service providers, as required; and 10. interfacing with other systems, networks, and operating system environments. bb. LOCAL AREA NETWORK or LAN means the configuration (hardware components, software, and communications devices) used to transmit and receive data signals within a Facility. cc. LOCKED DOWN means In-Scope Equipment for which IBM has completed Production Lock Down. dd. MAINFRAME MACHINE means those machines listed as such in Schedule G (Machines) on the Effective Date and, subsequently, those machines listed in the IBM database of assets. ee. MIDRANGE MACHINE means the UNIX, AS/400, DEC Alpha or DEC Vax system (servers) as listed in Schedule G (Machines) on the Effective Date and, subsequently, those machines listed in the IBM database of assets. ff. MQ SERIES APPLICATION OBJECTS means local, remote or other queues, process definitions, or any other MQ series object required by the application. gg. MQ SERIES INFRASTRUCTURE OBJECTS includes the following infrastructure parameters: MQ Series Q_Manager process, Command Server process, Channel Initiator process, trigger Monitor process, Dead Letter Queue, var mqm Log file space (thresholds alerts 75/95%), and condition: Channel w/ Retry Status. hh. OTHER SITE means a location identified as "other site" and listed in Schedule I (Facilities). ii. PERFORMANCE MANAGEMENT means the process for monitoring, measuring, analyzing and reporting systems performance as compared to the Service Levels. jj. POST PRINT OPERATIONS means processes that occur after the printed output is removed from the printer and placed in the mutually agreed upon designated area, and includes, but is not limited to, bursting, trimming, stuffing/insertion, addressing, sorting, mailing and courier services. kk. PRIME SITE means a location identified as a "prime site" and listed in Schedule I (Facilities). ll. PROBLEM MANAGEMENT means the process for identifying, recording, tracking, and correcting issues impacting service delivery, recognizing recurring problems, addressing procedural issues and containing or minimizing the impact of problems that occur for the levels of support (i.e. Level 2 and Level 3) described in this Schedule A. IBM/FRANKLIN CONFIDENTIAL PAGE 4 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: mm. PRODUCTION CONTROL means the management of production related processes and implementations, including batch application scheduling and control, production promotion, adherence to process and escalation of production problems according to agreed to problem management process. nn. PTF is a Program Temporary Fix or repair patch provided by the software vendor. oo. PRODUCTION LOCK DOWN means UserID administration including the creation, modification, deletion and revalidation of UserIDs as described in Section 14.3 of this Schedule. IBM will provide the number of resources specified in Exhibit C-1 of Schedule C (the "Production Lock Down Baseline") to perform IBM's Production Lock Down responsibilities. pp. RECOVERY MANAGEMENT means the process for planning, establishing and testing the recovery procedures required to reestablish the functionality of systems included in the Services in the event of a failure. The intent of this process is to anticipate and minimize the impact of systems resource failure through the development of predefined, documented procedures and software/hardware recovery capabilities. qq. REMOTE SITE means a location identified as "remote site" and listed in Schedule I (Facilities). rr. SERVICES MACHINES means those machines that are listed as "Services Machines" in Schedule G (Machines) on the Effective Date and, subsequently, those machines listed in the IBM database of assets. ss. STANDARD REPORTS means those reports IBM provides to Franklin, as agreed by the Parties and listed in the Procedures Manual. tt. SUPPORT TIER means the level of support provided by IBM to the Image(s) on a Server as selected by Franklin and certified by IBM as described in the Procedures Manual. Service Tiers are specified below and the Services applicable to each Support Tier are described throughout this Schedule: 1. Critical Images; 2. Standard Images; 3. Prime-Time Standard Images; 4. Prime-Time Basic Images; 5. EMEA Prime-Time Standard Images; 6. EMEA Prime-Time Basic Images; 7. Asia Prime-Time Standard Images; and 8. Asia Prime-Time Basic Images. uu. SYSTEM LAYER is the combination of the Hardware and Systems Software that provides access to resources required by the Application Software. vv. SYSTEMS SOFTWARE means those programs and programming, including all supporting documentation and media, that perform tasks basic to the functioning of the hardware and which are required to operate the Applications Software or otherwise support the provision of Services by IBM. ww. SYSTEM UTILITIES means utilities (e.g., print queues, backup, storage, networking and file access utilities), data movement services (e.g., MQ Series, MQSI, ETL, FTP), job scheduling and monitoring utilities (e.g., NDM, Tivoli), high availability services (e.g., mirroring software). xx. TCP/IP means transmission control protocol/internet protocol. yy. TESTING means the combined effort of exercising data processing subsystems/systems (including software and hardware) and production procedures, in an environment which progressively simulates operational processes and conditions to allow for verification and validation of system readiness to support business functions, workflow, data integrity, operational support and rerun/restart/recovery. zz. USER IDENTIFICATION or USER ID means a string of characters (i.e., a user name or a password) that uniquely identifies a user to a system and enables access to a system or specific data residing on a system. IBM/FRANKLIN CONFIDENTIAL PAGE 5 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: III. SERVICE HOURS IBM will provide the Services pursuant to the following table: - --------------------------------------------------------------------------- SERVICE HOURS - --------------------------------------------------------------------------- Critical Images and Standard Images Twenty-four (24) hours/day, seven (7) days/week, 365 days/year - --------------------------------------------------------------------------- Prime-Time Standard Images Twelve (12) hours/day (6am-6pm US Mountain Time), Monday-Friday, including Holidays. - --------------------------------------------------------------------------- Prime-Time Basic Images Twelve (12) hours/day (6am-6pm US Mountain Time), Monday-Friday, excluding Holidays. - --------------------------------------------------------------------------- EMEA Prime-Time Standard Images Twelve (12) hours/day, (one mutually agreed 12 hour block for all EMEA regions applicable to EMEA Prime-Time Standard Images and EMEA Prime-Time Basic Images), Monday-Friday, including Holidays - --------------------------------------------------------------------------- EMEA Prime-Time Basic Images Twelve (12) hours/day, (one mutually agreed 12 hour block for all EMEA regions applicable to EMEA Prime-Time Standard Images and EMEA Prime-Time Basic Images), Monday-Friday, excluding Holidays - --------------------------------------------------------------------------- Asia Prime-Time Standard Images Twelve (12) hours/day, (one mutually agreed 12 hour block for all Asia regions applicable to Asia Prime-Time Standard Images and Asia Prime-Time Basic Images), Monday-Friday, including Holidays - --------------------------------------------------------------------------- Asia Prime-Time Basic Images Twelve (12) hours/day, (one mutually agreed 12 hour block for all Asia regions applicable to Asia Prime-Time Standard Images and Asia Prime-Time Basic Images), Monday-Friday, excluding Holidays - --------------------------------------------------------------------------- Change Management, and backup Twenty-four (24) hours/day, seven and recovery services (for all (7) days/week, 365 days/year tiers) - --------------------------------------------------------------------------- all other Services Twelve (12) hours/day (6am-6pm US Mountain Time), Monday-Friday, excluding Holidays. - --------------------------------------------------------------------------- 1.0 CHANGES TO SERVICE TIERS a. Franklin will use the Change Management procedures to reclassify Images among the Service Tiers (an Image may only be classified as a single Service Tier at one time). b. The promotion of an Image may not be for a period of less than thirty-one (31) days or for such longer period as mutually agreed and set forth in the Procedures Manual. c. If a change to a Service Tier is required outside of the normal Change Management window, the change will be handled via the Emergency Change Management process described in the Procedures Manual. If either Party deems that the Emergency Change Managemetn process is invoked too frequently or not receiving adequate response, the issue will be addressed in the monthly joint management committee meeting. d. Franklin will provide IBM with a Service classification Tier support plan as part of the standard application development lifecycle. IV. DOCUMENTATION Franklin and IBM agree that the Procedures Manual will incorporate appropriate implementation details and procedures for the Services. a. IBM is responsible for: 1. creating, updating and maintaining the Procedures Manual in consultation with Franklin. IBM will obtain Franklin's prior approval of any Franklin obligations and any proposed changes to any IBM/FRANKLIN CONFIDENTIAL PAGE 6 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: Franklin obligations before inclusion in the Procedures Manual and IBM will not reduce its obligations under the Agreement and will not make changes which would materially alter performance of Services without Franklin's prior written approval; 2. reviewing operations documentation for adherence to operational procedures and standards; 3. periodically distributing to appropriate Franklin employees, information bulletins regarding new or changed operations and procedures; 4. developing operations documentation for all Systems Software; 5. developing, implementing and maintaining a common electronic, web-accessible document repository through which Franklin may authorize IBM to provide Franklin employees with access to read, download and print documents relating to activities which could reasonably be expected to affect business operations, including but not limited to Project Change Requests ("PCR's"), project plans and schedules and the Procedures Manual; and 6. maintaining procedural documentation necessary to the currency of the disaster recovery plan. b. Franklin will: 1. provide IBM with existing documentation for operations procedures and processes relating to the Applications Software and Franklin Machines as well as any new documentation for operations procedures and processes related to new Applications Software and new Franklin Machines for inclusion in the Procedures Manual to the extent required for IBM to perform the Services; 2. assist IBM in IBM's development of documentation of Franklin's operations and procedures existing prior to the Effective Date of this Agreement, for which documentation is not current and available for transmittal to IBM on or before the Effective date; and 3. assist IBM in development and implementation of the electronic document repository. IBM/FRANKLIN CONFIDENTIAL PAGE 7 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: V. DESCRIPTION OF SERVICES AND SUPPORT ACTIVITIES The Services described in this Section V will be provided for the application development and maintenance, testing, and production environments unless otherwise noted. 1.0 GENERAL RESPONSIBILITIES IBM will provide the Services in accordance with the descriptions contained in this Schedule and the Procedures Manual. Franklin will support IBM's provision of the Services in accordance with the descriptions contained in this Schedule and the Procedures Manual. During the Term, IBM will continue to investigate new technologies, look for areas of improvement of Services described herein, and recommend initiatives required to implement those improvements that would be beneficial to Franklin's business operations and to make effective use of IT resources. At a minimum, IBM will work with Franklin during the annual planning session to prioritize improvement activities. 1.1 REPORTING IBM will provide Franklin with Standard Reports for which a representative sample is referred to in Schedule N, which will reflect the statistics related to IBM's operational responsibilities and performance as defined within this Schedule A (Services and Support Responsibilities). Specifically, within the first 90 -days following the Original Commencement Date, IBM will provide Franklin with the periodic reports that Franklin was generating immediately prior to the Effective Date. Included within these reports will be the information necessary to support creation of Franklin's Executive Level Business Review (ELBR) report, which IBM will continue to provide to Franklin throughout the Term. Beginning no later than 90 days following the Original Commencement Date, IBM will also provide Franklin with drafts of the format for the periodic standard reports that IBM will provide Franklin during the Term. In the event that Franklin desires additional reporting or modifications to the standard report formats provided, requests for changes will be considered pursuant to Change Management procedures set forth in the Procedures Manual. 1.2 MEETINGS The Parties agree that frequent and ongoing communication is required to support the working relationship set forth in this Agreement. Within the first 90 days after the Effective Date, Franklin and IBM will mutually determine a schedule of periodic operations and contract management meetings between the Parties and define the participation from each company. IBM will publish an agenda for each meeting sufficiently in advance to allow meeting participants a reasonable opportunity to prepare. Additionally, meeting minutes will be recorded and distributed to appropriate Franklin and IBM management. Actions as appropriate will be recorded and tracked through closure in the respective meetings. The periodic meetings will include, but not be limited to: a. Operations Management 1. a daily operations review meeting to discuss operations and events, plan immediate steps required to support operational priorities, and assign appropriate resources to perform actions; 2. bi-weekly problem management meetings to discuss status of open problems and problem resolution trends and problematic areas; 3. weekly change management meetings to review and assess production and test environment recommended changes; 4. a weekly operations meeting to discuss the week's operational trends and the results of daily performance and planning meetings and activities; and 5. a monthly operations performance meeting to review monthly service level attainment reports, recurring issues and actions to solution, operational trends and recommendations, and other matters, as appropriate; and 6. participate in service review meetings with vendors and service providers under contract with Franklin who interact with IBM relative to the Services, as Franklin reasonably requests. b. Relationship Management 1. A quarterly senior management meeting to review appropriate contractual, business, planning or performance issues; and IBM/FRANKLIN CONFIDENTIAL PAGE 8 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: 2. An annual planning session to coincide with Franklin's budgeting process to outline the next 12-15 month operational view, including strategic investments, growth and project related work. 2.0 SYSTEMS ENGINEERING IBM will provide systems engineering support for the Mainframe, Midrange and Intel server environments, as described below. a. IBM will: 1. perform infrastructure architecture, engineering and design for In-Scope Hardware and In-Scope Software and prepare and present documentation relating to any material changes in the infrastructure to the Franklin Architectural Review Board and any such material changes must be approved by the Franklin Architectural Review Board, provided that an infrastructure change shall not require approval if the change is made in accordance with Franklin's strategic infrastructure standards developed under Section 2.0 b. 1. below; 2. perform requirements analysis for hardware and systems software and provide that information to Franklin in a schedule and format to be agreed upon by the parties; 3. perform periodic review of software for determination of currency and necessity to working environment; 4. perform project management of change and upgrade activities to the infrastructure through design phase; 5. FRI/IBM will mutually define scope, document roles and responsibilities and will develop an implementation plan for the Test Engineering Lab within 180 days of the Amended Commencement Date, provided that Franklin will be responsible for hardware, facilities, software, tools, network architecture and will provide joint engineering resource support, and IBM will be responsible for scheduling, fit up and tear down, and managing of environment with 3 FTEs beginning January 1, 2004. 6. perform review and analysis of major trends in Level 1 and Level 2 support and facilitate transfer of information and knowledge to Level 1 and Level 2 support personnel; 7. provide management and oversight of the design/engineering lab; 8. document and monitor adherence to standards; and 9. coordinate with third party vendors as they relate to the In-Scope Hardware and In-Scope Software and to IBM's responsibilities continuously to seek improved technologies and efficiencies. b. Franklin will: 1. in cooperation with IBM, establish strategic infrastructure standards and communicate those standards to IBM in a schedule and format to be agreed to by the parties; 2. retain responsibility for systems engineering for the distributed Windows/Intel desktop environment; 3. establish the design and engineering lab; 4. coordinate with IBM new and developing technology research; and 5. assist with IBM in review and analysis of trends in Level 1 and Level 2 support. 3.0 SYSTEMS MANAGEMENT CONTROLS IBM will provide to Franklin, and IBM and Franklin will mutually agree on and use, the System Management Controls (SMC) procedures as the standard set of disciplines for managing information systems included within the Services. The SMC procedures, in some combination, apply to all the Services provided, and they will be implemented, as described in this Schedule, to each Service being provided. The Procedures Manual will contain the SMC procedures. IBM's SMC responsibilities will consist of Configuration Management, Change Management, Performance Management, Problem Management; Capacity Planning; and Availability Management, as described herein. IBM/FRANKLIN CONFIDENTIAL PAGE 9 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: 3.1 SYSTEMS MANAGEMENT CONTROL PROJECT OFFICE IBM will create a dedicated project office to coordinate and provide direction to the overall development and implementation of Systems Management Controls. 3.2 CONFIGURATION MANAGEMENT a. IBM will maintain and provide documentation for the following: 1. operating systems configuration; 2. backup and restore processes; 3. IBM will maintain an inventory of the In-Scope Hardware and In-Scope Software, and will maintain the data elements used for calculating Resource Units to within 5% accuracy to be validated and reviewed through a mutually agreed upon process for monthly and quarterly invoices as described in the Procedures Manual to be agreed up within 60 days of the Amended Commencement Date. 4. hardware configuration reports. b. Franklin will provide IBM with existing documentation and future requirements for the following: 1. operating systems configuration; 2. network operating systems configuration; 3. backup and restore processes; and 4. hardware configuration reports. 3.3 CHANGE MANAGEMENT a. IBM will: 1. work with Franklin to develop procedures for handling all planned and emergency changes with the potential to impact the Franklin production environment , including review, approval, communication and documentation; 2. document, maintain and amend as necessary, the Change Management process and Emergency Change process as specified in the Procedures Manual; 3. document and communicate changes made in accordance with the change management procedures contained in the Procedures Manual; 4. track approved change requests; 5. schedule or manage testing and implementation of approved changes, including communication to and coordination with Franklin designated business units' coordinators; 6. evaluate planned changes to the In-Scope Hardware and In-Scope Software and advise Franklin of any requirements to support such changes; 7. verify operations of hardware and Systems Software following changes to the hardware or Systems Software environment, by checking job logs and system messages; 8. upon completion of the Supported Server Lock Down, automate code migration as a Project, where possible as requested by Franklin, for tasks associated with changes; 9. receive and handle notification of related change activity; 10. track change history of managed resources; 11. provide standard change management reports; 12. create and maintain a tactical change calendar; 13. create and maintain a current and accurate database of assets that contains a list of all equipment and Systems Software that IBM is using to provide Services. Among other things, the database will specify which equipment falls into the appropriate Resource Unit categories. IBM will provide IBM/FRANKLIN CONFIDENTIAL PAGE 10 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: Franklin with access to such database and will promptly correct any inaccuracies that Franklin identifies. b. Franklin will: 1. be responsible for providing the Franklin Change Management process to IBM, which may be reviewed and modified by IBM as applicable to provide the Services, as well as promptly notifying IBM of all changes to the Franklin Change Management process; 2. assist IBM in developing procedures for handling all planned and emergency changes affecting the In-Scope Hardware, In-Scope Software, and Services including review, approval, communication and proper documentation; 3. notify IBM of any planned or emergency changes (including Applications changes) to Franklin's environment affecting IBM's provision of the Services and to be provided for the tactical change calendar; 4. verify operation of Application Software following changes to the hardware or Systems Software environment; 5. provide a test environment for the evaluation of applications and tools configurations; and 6. test and evaluate applications and tools configurations before implementing them in the production environment. 7. be responsible for all aspects of Franklin-owned hardware and software not included within the defined Services. Provide IBM with prior notification as defined in the Procedures Manual when adding, deleting, changing or relocating other customer hardware or software which may, directly or indirectly, affect IBM's provision of the Services; 3.4 PERFORMANCE MANAGEMENT a. IBM will: 1. continue to utilize existing Franklin performance indicators, enhance the existing performance indicators and define new performance indicators, where appropriate, and monitor in-scope performance against such indicators; 2. install ARB approved management agents pursuant to Section 15, unless otherwise agreed by the parties (e.g. Novell); 3. take appropriate resolution action (for example, tuning, notifying the Franklin Focal Point) when in-scope system(s) performance is impacted; 4. when an In-Scope performance indicator alert is generated, seek resolution of the problem and, when initial resolution cannot be immediately achieved, escalate such alerts to the appropriate personnel according to the Problem Management process. 5. request Franklin to authorize changes to the hardware and software as needed to enable system performance improvement; 6. work with Franklin to establish a schedule for performing in-scope system(s) maintenance (for example, virus detection, backup, DASD cleanup and testing) modifications and enhancements; 7. advise Franklin of any required system configurations and/or modifications necessary to enable IBM to provide the Services; and 8. provide performance reports as described in the Procedures Manual and Schedule N; such reports will be published on a centralized database available to the Parties on a mutually agreed schedule. b. Franklin will: 1. authorize changes to the hardware and software as reasonably requested by IBM for the purpose of enabling system performance improvement; and 2. assist IBM in establishing a schedule for performing in-scope system(s) maintenance (for example, virus detection, backup, DASD cleanup, and testing) and modifications and enhancements. IBM/FRANKLIN CONFIDENTIAL PAGE 11 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: 3.5 PROBLEM MANAGEMENT A party shall open a problem ticket immediately upon learning of a problem, including automated threshold alerts. Promptly upon opening a ticket, the party opening the ticket will assign the problem ticket to the appropriate queue. The time in which IBM is required to generate notifications and escalations and take other actions is determined by the electronic time stamp indicating when the problem ticket entered IBM's queue. a. IBM will: 1. take calls escalated from Franklin's Level 1 Help Desk for all in-scope environments; 2. for each problem record forwarded to IBM by Franklin and for each problem record originated by IBM, make initial assignments regarding ownership and priority for each problem; 3. for problem records with Severity 1 and 2 codes, generate automatic notification to IBM and Franklin management personnel (a) within fifteen (15) minutes after identification of the problem; (b) within one hour after identification of the problem; (c) hourly thereafter until resolved or until the parties agree on a different notification schedule; and (d) and perform Situation Management through to service restored as defined in the Procedure Manual. 4. take steps identified in the Procedures Manual to notify Franklin within five minutes of Severity 1 problems originally identified by IBM; 5. work with Franklin to: (a) define indicators to monitor, (b) define alert and paging processes and procedures, including escalation procedures for Levels 2 and 3 support; 6. following the Problem Management process documented in the Procedures Manual, manage all Severity 1 and 2 problem records through to service restored status. Manage all in scope problem tickets (all severities) through to resolved status and report on timeframes in which problem records are closed; and 7. perform reporting, logging, tracking, resolution, communication and escalation for problems as defined in the Procedures Manual for Level 2 and Level 3 Support. b. Franklin will: 1. make changes to any assignments regarding priority and ownership of problem records; 2. perform problem management tasks for Level 1 Support; 3. define problem priority levels and associated escalation procedures for Level 1 Support; 4. perform reporting logging, tracking, resolution, communication and escalation for problems as defined in the Procedures Manual for Level 1 Support; 5. provide to IBM the Franklin escalation chain, including any updates as they occur; and 6. use diligent efforts to make available the appropriate Franklin personnel to interface with IBM personnel, as required to isolate or resolve complex network, operational or software problems affecting IBM's ability to provide the Services. 7. assist IBM in: (a) defining problem priority levels and associated escalation procedures; (b) defining indicators to monitor, and (c) defining alert and paging processes and procedures, including escalation procedures. IBM/FRANKLIN CONFIDENTIAL PAGE 12 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: 8. assist IBM and provide necessary Franklin resources for the resolution of technical problems affecting the Services. 3.6 CAPACITY PLANNING a. IBM will: 1. monitor and document Franklin's current workloads on the In-Scope Equipment, unless otherwise agreed by the Parties, and provide the information to Franklin for IBM's and Franklin's use in determining future capacity requirements; 2. report to Franklin on usage of system capacity in a format and content to be agreed upon by the Parties for Franklin's use in budgeting and planning (e.g., preventing outages due to hardware and software resource capacity deficiencies and determining impacts on software licensing requirements); 3. provide capacity planning reports as described in the Procedures Manual and Schedule N; such reports will be published on a centralized database available to the Parties on a mutually agreed schedule. 4. procure adequate capacity for growth and expansion needs communicated to IBM by Franklin in accordance with the Agreement; and 5. conduct periodic capacity planning meetings. b. Franklin will: 1. work with IBM in developing growth planning as it relates to Franklin's capacity needs; 2. project future trends and capacity requirements for new projects and provide such information to IBM not less frequently than annually or when there is a change in Franklin's operations or business planning which would affect IBM's provision of the Services; and 3. participate in periodic capacity planning meetings. 3.7 AVAILABILITY MANAGEMENT a. IBM will: 1. assist Franklin in defining Franklin's availability requirements; 2. establish backup and recovery processes and procedures; 3. develop an availability plan during the Transition Period, to include hours of operation, maintenance windows and related pertinent information; 4. track, analyze and report on availability; 5. provide hardware maintenance in accordance with the equipment manufacturer's specifications or as otherwise mutually agreed; 6. develop and maintain a plan that enables the recovery of data due to unplanned operational types of failures such as equipment malfunction, temporary power disturbances and abnormal termination; 7. provide the Franklin Focal Point with procedures for measuring system availability; 8. review system availability and utilization requirements at status meetings on a mutually agreed schedule; 9. provide the Franklin Focal Point a system availability and utilization report on a mutually agreed schedule including measurements on processor and disk resources; and 10. recommend availability improvements. b. Franklin will: 1. with IBM's assistance, define Franklin's availability requirements; and IBM/FRANKLIN CONFIDENTIAL PAGE 13 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: 2. participate in planning processes for purpose of determining availability needs, as set forth in the Procedures Manual. 4.0 SYSTEMS OPERATIONS 4.1 GENERAL DESCRIPTION OF SYSTEMS OPERATIONS Using the IBM Management Environment, IBM will provide remote operational services for the Machines specified in Schedule G which are located at the Franklin Data Center(s) and at the Franklin dedicated DR site designated in Disaster Recovery Plan. a. IBM will: 1. monitor the hardware; 2. monitor system messages in system operator message queue; 3. perform backups as described in the Procedures Manual; 4. perform file or system restores from incremental or full backups as described in the Procedures Manual; 5. perform reboots, recycles, stops and restarts for in-scope machines; 6. notify Franklin of unsuccessful backups according to problem management procedures; 7. provide system start-up services including shipping, unpacking of hardware, preparation and installation, power-on and related diagnostics and testing; 8. load operating Systems Software on all systems added to the in-scope environment; 9. load Applications software on production systems; 10. provide maintenance services on the IBM In-Scope Hardware listed in Schedule G and the IBM Systems Software listed in Schedule F and manage the maintenance services provided under Franklin's contracts for the OEM server hardware listed in Schedule G and the OEM Systems Software listed in Schedule F until refresh; 11. provide maintenance services on the refreshed OEM In-Scope Hardware listed in Schedule G and the refreshed OEM Midrange and Distributed Systems Software listed in Schedule F after refresh; and 12. set up system logs, allocate disk space, provide user ID admin at the system level and provide file system protection and security. b. Franklin will: 1. provide the existing In-Scope Hardware and In-Scope Software, Franklin Data Network, and associated documentation, if any exists, which is required for the provision of Services; 2. provide the tape library,; 3. provide IBM with required information on file restores and verify integrity of restored files when restored; and 4. provide offsite storage and transportation of backups to offsite facilities as well as retrieving storage media from offsite facilities as required for restores of backed up user/system data; 5. provide the information required to enable IBM to load Applications software on production systems. 4.2 PROCESSING OPERATIONS IBM will make available, monitor and process on-line and batch applications, including scheduled, unscheduled and on-request services and End User initiated processing. a. IBM will: 1. support the environments consistent with the obligations set forth in this Schedule A; 2. provide operations support and perform console monitoring activities; IBM/FRANKLIN CONFIDENTIAL PAGE 14 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: 3. operate and provide system availability for present and future Applications Software and Systems Software to support Franklin's operating schedules; 4. in accordance with the change management process schedule systems maintenance so as to minimize interference with Franklin's business operations; and 5. monitor IBM-scheduled job submissions to verify scheduled completion. b. Franklin will: 1. be responsible for selecting or defining requirements for business Applications Software; and 2. assist in scheduling required system maintenance windows. 4.3 MIDRANGE AND INTEL SYSTEMS OPERATIONS The following services are unique to Midrange Servers and Intel Servers. a. IBM will: 1. support -images based on the applicable Support Tier selected by Franklin for certified images as described in the Procedures Manual; 2. manage production job scheduling, job monitoring and job restarts for Midrange; 3. provide on-site Midrange and Intel server support for the Prime and Remote Sites; 4. operate the Franklin mail application in accordance with the Procedures Manual; and 5. perform the installation of tools for use by IBM pursuant to Section 15 for job scheduling, job monitoring, and job restarts. b. Franklin will: 1. provide IBM with the applicable Support Tier and any changes to Support Tiers following the Change Management Process and as described in the Procedures Manual; 2. manage test and development job scheduling, job monitoring and job restarts; 3. provide on-site Midrange and Intel server support for the Other Sites; 4. provide mail policies, including access, retention and encryption policies and mailbox size policies; and 5. provide IBM with tools for installation for job scheduling, job monitoring, and job restarts. 5.0 PRODUCTION CONTROL SERVICES IBM will provide the number of resources specified in Exhibit C-1 of Schedule C (the "Production Control Baseline") to perform IBM's Production Control responsibilities described in Section 5.1a. Additionally, IBM will perform mutually agreed Projects utilizing the Production Control Baseline resources and not charge Franklin for the additional Project support hours if the work can be performed by the then current staff specified in the Production Control Baseline within normal working hours, assuming there is resource bandwidth and Service Levels are not jeopardized. Franklin and IBM will implement a methodology for managing the workload in the Production Control baseline to include the following: a. submission of Projects via the standard Service Request process; and b. joint (Franklin and IBM) evaluation and prioritization of all Production Control work to be performed. Depending on the urgency of the additional Project work and the existing workload level, existing work may be reprioritized so as to perform the total workload by the then current staff in the Production Control Baseline within normal working hours. In situations where this reprioritization impacts IBM's ability to meet Service Levels, IBM will not be subject to such Service Levels and will be relieved of any associated Service Level Credits. If a determination is made that the additional workload cannot be performed by the then current staff described in the Production Control Baseline within normal working hours, or if IBM performs work with members of the Production Control staff but has to "backfill" those resources with additional resources, Franklin will use Hourly Services to fund the additional resources., and IBM/FRANKLIN CONFIDENTIAL PAGE 15 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: c. a reporting mechanism to track capacity and utilization Franklin may adjust production control staffing levels up or down with ninety (90) days notice using the Contract Change Request process. 5.1 GENERAL DESCRIPTION IBM will maintain production schedules and cooperate with Franklin in responding to special processing requests and new processing requirements for the Machines specified in Schedule G which are located at the sites listed in Schedule I and the IBM Boulder Data Center, and at the Franklin dedicated site designated in the Disaster Recovery Plan as described below during Service Hours applicable to each Machine. Notwithstanding the above, Production Control Services shall not be performed on Prime-Time Basic Images, EMEA Prime-Time basic Images, and Asia Prime-Time Basic Images. a. IBM will: 1. review and make recommendations on Franklin's current batch job procedures, including mainframe and distributed Servers; 2. prioritize, schedule, control and monitor running of production jobs using scheduling and quality control procedures specified in the Procedures Manual; 3. monitor scheduler related incidents, and develop and recommend refinements and revisions and implement such refinements and revisions to the scheduler database; 4. manage on-request schedules and ad-hoc processing; 5. coordinate and modify schedules for special requests, follow Franklin priorities and notify Franklin if special requirements will affect the timely completion of other tasks to allow Franklin to adjust priorities; 6. to the extent reasonably possible, process all special request activities within the requested time frames and in the sequence Franklin defines; 7. obtain Franklin approval for and distribute major production schedules before implementation; 8. for jobs initiated by IBM, use Franklin's documented recovery procedures to attempt recovery of Franklin's batch applications in the event of Abends; 9. in instances where batch jobs complete abnormally, due to Applications Software, notify appropriate personnel as specified in the runbooks and/or the Procedures Manual.; 10. notify appropriate personnel of non-batch failures as specified in the runbooks and/or the Procedure Manual.; 11. schedule mutually agreeable system downtime in order to facilitate upgrades, perform maintenance and implement other system management tasks; and 12. perform manual pre-existing activities relating to Franklin's Applications Software. b. Franklin will: 1. verify that an Applications Software version/release/maintenance level for all new Application Software versions/releases/maintenance levels added after the Commencement Date is consistent with and will operate with the Systems Software; 2. provide IBM with all existing run books/sheets including batch job names and descriptions, batch job schedules, job-specific parameters and estimated time of completion, by job 3. for new Applications Software provide schedules, manual and batch processes, recovery procedures and instructions for input into IBM Management Environment; 4. monitor Franklin-scheduled and initiated manual or batch processes, including all notifications; 5. initiate on-request and ad- hoc processing consistent with IBM processes; 6. assist IBM in the scheduling of mutually agreeable system downtime in order to facilitate new releases and version upgrades of software and implementation of hardware changes and upgrades and implement other system management tasks; IBM/FRANKLIN CONFIDENTIAL PAGE 16 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: 7. review and approve schedules for batch job submission; 8. provide requirements for job Abend restart instructions; 9. provide change requirements to the batch schedule in accordance with the change management process contained in the Procedures Manual; and 10. assist IBM in scheduling and coordinating End User test time. 11. maintain runbooks as application or support requirements change. 5.2 MAINFRAME PRODUCTION CONTROL SERVICES a. IBM will: 1. schedule and report on batch jobs consistent with Franklin's scheduling parameters; 2. distribute reports based on report distribution requirements that Franklin provides; and 3. maintain scheduler database definitions to reflect changes in production environment and monitor scheduler incidents so as to develop and recommend refinements and revisions for Franklin's implementation. b. Franklin will: 1. assist IBM in implementing reasonably requested refinements and revisions to improve operating environment; and 2. provide existing and new scheduling parameters and other direction, as needed, to allow IBM time to provide outputs as scheduled. 6.0 SYSTEMS AND TECHNICAL SUPPORT a. IBM will: 1. provide technical personnel to provide the Services; 2. support the operating systems and subsystems, compilers, programming languages, products and operational tools; 3. evaluate, recommend, install, maintain and provide support for In-Scope Hardware and Systems Software; 4. configure device descriptions based on Franklin's naming conventions in support of day to day operations. If Franklin desires to modify its overall naming convention the parties agree to treat as a Project; 5. plan, test and install not more than two version or release upgrade per System Software product listed in Schedule F (Software) in each contract year. Upon Franklin request, IBM will plan, test and install more than two version or release upgrades per System Software product listed in Schedule F in a contract year so long as the total number of version or release upgrades during the year does not exceed two such upgrades per the number of Systems Software products listed in Schedule F; 6. selectively test and install PTF tapes for System Software. The parties agree to jointly plan and schedule the application of PTFs as mutually agreed. Neither party will unreasonably withhold its agreement to support the application of PTFs; 7. notify Franklin of all implementations of PTFs installed on an emergency basis; 8. initiate change requests in accordance with Change Management Procedures for all PTFs which IBM determines should be implemented on a non-emergency basis; 9. for the Systems Software, apply (a) emergency fixes as required; and (b) selected high impact and security PTFs monthly. IBM/FRANKLIN CONFIDENTIAL PAGE 17 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: 10. verify Systems Software version/release maintenance level is consistent with and will operate with the Applications Software; 11. plan and configure host table entries (e.g. DNS entries) and associated addresses based on Franklin's naming conventions; 12. provide printer queue configuration support for attached printers; and 13. provide TCP/IP address documentation to Franklin for IBM network segments. b. Franklin will: 1. assist IBM in the planning, testing and implementation of all system upgrades and repair patches; 2. provide IBM, on a timely basis, with all information received from the respective System Software manufacturers regarding repair patches and version upgrades; and 3. retain financial responsibility for obtaining licenses to all third party Application Software and third party System Software, excluding SAS, upgrades and PTFs. 7.0 STORAGE MANAGEMENT SERVICES IBM will provide Storage Management Service that include storage device preparation, space and utilization management and reporting, recovery management, performance monitoring, capacity planning and backup and restore management which includes planning, establishing and testing recovery procedures required to re-establish the functionality of in-scope systems in the event of a failure. a. IBM will: 1. keep files under IBM's control, current and available during scheduled access times; 2. initiate and complete required data processing activities concerning data integrity (for example, handling line transmission errors) of all processed files, according to the procedures specified in the Procedures Manual; 3. verify, using tools and procedures specified in the Procedures Manual, the receipt of incoming files and the processing and transmission of outgoing files; 4. document, maintain and, as appropriate, update and execute mutually approved file backup and recovery procedures; 5. as described in the runbooks, provide a recovery procedure for restoring the data image to a previous level within a mutually agreed time frame; 6. conduct regularly scheduled backup and recovery procedures as specified in the Procedures Manual and as prioritized by Franklin (for example, data set restore), so as to avoid impacting scheduled operations; ; 7. conduct routine monitoring and corrective action according to procedures IBM prepares and Franklin approves for intermediate files used for on-line and batch processing; 8. perform an annual formal review of storage management policy and ongoing tactical reviews of capacity, performance and load balancing and provide recommendations to Franklin regarding backup and recovery considerations such as improved levels of protection, efficiencies and cost reductions; 9. verify availability of adequate file space for processing, subject to the provisions of Schedule C (Charges); 10. report to Franklin on Franklin's disk space utilization and requirements for Franklin's capacity planning purposes; and 11. lay out and configure disk subsystems according to Franklin's documented requirements; and 12. provide Franklin with reasonable assistance for random audits of backups. b. Franklin will: 1. define the requirements for allocation of file system space for Applications Software; and IBM/FRANKLIN CONFIDENTIAL PAGE 18 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: 2. conduct random audits of backups. 8.0 DATA BASE MANAGEMENT SERVICES 8.1 APPLICATION AND DATA MODIFICATION a. IBM will: 1. collaborate with Franklin on investigation and analysis of Application Software and data modification related issues. b. Franklin will: 1. be responsible for resolution of data and Application Software related issues; 2. develop and test the required scripts; 3. notify IBM of intended modifications as part of Change Management and Problem Management process; and 4. modify application or database data and enforce data integrity and data quality. 8.2 MODIFICATIONS TO THE SERVER/ DATABASE CONFIGURATION a. IBM will: 1. collaborate with Franklin regarding investigation and analysis; and 2. approve all modifications to the database configurations and parameters as part of Change Management and Problem Management. b. Franklin will: 1. be responsible for solution and implementation of all database configuration changes 2. be responsible to define database backup strategy and solution 3. install backup tools, create backup scripts and utilities; and 4. notify IBM of the result of changes. 8.3 DATABASE PERFORMANCE TUNING a. IBM will: 1. collaborate with Franklin regarding investigation and analysis; 2. approve intended performance-tuning modifications to the database as part of Change Management and Problem Management process; and 3. monitor the database from the system perspective. b. Franklin will: 1. develop required scripts; 2. prepare the tuning plan; 3. modify the database objects (tables, indexes, portions, views, etc) and notify IBM of status; and 4. monitor the databases from a database administration ("DBA") perspective. 8.4 SOFTWARE UPGRADES AND PATCH INSTALLATIONS a. IBM will: 1. Run the modified system; 2. Support Franklin during the upgrade process; and 3. monitor the database from the system perspective. b. Franklin will: 1. test In-Scope Software upgrades and patches in the development and test environments; 2. notify Application Software development of the completion status; 3. be responsible for software upgrades and patch installations; and 4. monitor the databases from DBA perspective c. Joint Responsibilities: 1. IBM and Franklin will approve any In-Scope Software upgrades and patch installations through formal Change Management and Problem Management process; and 2. IBM and Franklin will create a detailed plan of In-Scope Software upgrades in the production environment based on the test results. 8.5 ESTABLISH TEMPORARY USER ID'S FOR FRANKLIN DATABASE ADMINISTRATORS: a. IBM will: 1. establish temporary ID's with adequate access rights to allow all required DBA production level work. These ID's will be temporarily assigned to Franklin DBA's working in the production environment. Once finished, the access will be deleted. Appropriate procedures will be established for the assignment and required documentation as part of the approved Change Management and Problem Management process; and 2. use the standard tools (Tivoli, BMC, or other tools approved by the ARB) for monitoring system and database alerts for the In-Scope Equipment pursuant to Section 15. IBM/FRANKLIN CONFIDENTIAL PAGE 19 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: b. Franklin will: 1. contact IBM operations for access to the production environment. 9.0 TAPE MANAGEMENT SERVICES 9.1 GENERAL DESCRIPTION OF TAPE MANAGEMENT SERVICES a. IBM will: 1. make recommendations for improvements to efficiency of tape management; 2. complete tape mounts in sufficient time to meet application development, testing and production processing as reasonably specified by Franklin; 3. maintain adequate inventories of Franklin-supplied tapes for the tape environment, including a sufficient scratch tape pool to service required processing needs, and notify Franklin when additional tapes and other supplies are required; 4. retain tapes for a mutually agreed upon retention period for auditing purposes; 5. rotate tapes, as required, for off-site storage; 6. log and track physical tapes that are checked in and out by Franklin or a Third Party in accordance with the procedures specified in the Procedures Manual; 7. prepare output tape cartridges or tape reels for shipment and deliver to designated staging area for pickup and transport; 8. upon return of output tape cartridges or tape reels to the designated staging area for pickup, put such cartridges and reels back into operation; 9. provide tapes and paper documentation, as appropriate, for storage consistent with provisions in Procedures Manual; 10. report tape utilization to Franklin on a mutually agreed upon frequency; 11. notify the Franklin-designated storage services provider when it is time to scratch or return a tape in accordance with the procedures specified in the Procedures Manual; 12. retrieve and restore files and data sets from archived tapes within mutually agreed time frames; and 13. allow Franklin to review tape management operations, including mailing and receipt; upon a mutually agreed upon schedule; 14. conduct an initial inventory of portable storage media and provide documentation of initial inventory to Franklin; 15. monitor and manage tape pool resources and provide for availability of adequate media to meet peak load, planned growth and anticipated tape volume fluctuations; 16. manage off-site storage of In-Scope tape media for vital records and backup and recovery; 17. perform an annual inventory of portable storage media under IBM's control and provide documentation of annual inventory to Franklin, including the following information: (a) beginning inventory; (b) media received into inventory during the reporting period (year); (c) media sent out to other locations during the year; (d) new media added to library; (e) discarded media; (f) current inventory. 18. report and account for discrepancies in inventory; and 19. retain inventory reconciliation documentation in accordance with procedures outlined in the Procedures Manual. IBM/FRANKLIN CONFIDENTIAL PAGE 20 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: 20. separate, package, label, validate label content to job log for accuracy, scan and track all tape output and distribute to the mutually agreed distribution drop point; b. Franklin will: 1. define requirements for off-site tape storage and archiving; 2. provide required off-site storage facilities and services; 3. provide tapes as IBM requests that meet the IBM-supplied tape specifications; 4. be responsible for the costs associated with the transportation of tapes between the Data Center and an off-site storage facility; 5. assist IBM in conducting the initial inventory; and 6. assist IBM in maintaining the inventory and in reviewing and reconciling the annual inventory reports. 10.0 OUTPUT SERVICES IBM will provide output device processing and operational support necessary to accomplish processing, production and delivery of files and printed output as listed below. a. IBM will: 1. produce and deliver output (for example, files, tapes, printed matter) in accordance with schedules reasonably requested by Franklin; 2. track, manage, communicate and resolve problems related to output production and delivery; 3. verify that all files are on the queue and available for transmission to the applicable Franklin output and production control locations within the mutually agreed time frames and monitor file transmissions and network messages regarding network connectivity; 4. operate the Xerox system printers or comparable printers identified in Schedule G and up to a maximum of four additional Xerox system printers or comparable printers as reasonably requested by Franklin. Requests to support more than the Xerox system printers or comparable printers identified in Schedule G plus the four additional Xerox system printers or comparable printers will subject to an adjustment in the ASC; 5. operate the printers directly attached to the Midrange Machines and the Intel Servers located at the Prime Sites and Remote Sites; 6. deliver hard copy output to the designated drop location(s) within the Facility; 7. work with appropriate Franklin personnel to trace and attempt to find missing output items; 8. execute reruns of output Franklin requests and notify Franklin if rerunning any output will impact scheduled on-line or batch production processing; and 9. provide on-line viewing administration for the Mobius application as defined herein and as detailed in the procedures manual (a) add and delete reports, as requested and in accordance with security guidelines; (b) create indexing; and (c) track and report usage and output volume. b. Franklin will: 1. provide output distribution from the designated drop location(s) within a Facility; 2. with IBM's assistance, trace and attempt to locate missing output items; 3. notify IBM of any required reruns of output; 4. operate all printers except those set forth in Section 10.0 (a) (5) above; 5. be responsible for all Post Print Operations as defined in the Procedures Manual; IBM/FRANKLIN CONFIDENTIAL PAGE 21 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: 6. maintain responsibility for output devices that are located within the Other Sites defined in Schedule I (Facilities) (e.g., operation, paper loading, service maintenance, output distribution, purchase of consumables); 7. be responsible for all distribution services (for example, mail, messenger, postage, courier); 8. support the Mobius application as follows: (a) set up user profiles and user group access; and (b) coordinate Mobius vendor management; 9. perform all end user workstation printer connectivity, maintenance and print output/distribution services for print operations. 11.0 SYSTEM TESTING AND IMPLEMENTATION SERVICES a. IBM will: 1. assist Franklin in the definition, design, and construction of the testing environments; 2. assist in the physical establishment of test data originating from the production environment; 3. participate in planning and preparation meetings for all changes; 4. provide physical installation support for all changes; 5. validate physical completion criteria for all changes; 6. work with Franklin to validate operational and functional completeness of a change; 7. report to Franklin on the post-installation status and quality of changes; 8. comply with the change management procedures set forth in the Procedures; and 9. with Franklin assistance, test High Availability Image failover up to twice each Contract Year. b. Franklin will: 1. manage, with IBM's assistance, the definition, design, and construction of testing environments; 2. plan and construct test cases; 3. define and coordinate establishment of test data originating from production environment; 4. create and establish test data not yet in production; 5. conduct application interactive test scripts as planned within test cases; 6. validate test results; 7. comply with problem follow-up and resolution procedures as set forth in the Procedures Manual; 8. comply with change procedures as set forth in the Procedures Manual; 9. participate in planning and preparation meetings for changes; 10. comply with change management procedures set forth in the Procedures Manual; 11. participate and coordinate in post installation validation testing; and 12. assist IBM in physical installations, as appropriate; and 13. assist IBM with testing of the High Availability Image failover by: (i) documenting test plans and expected results; and (ii) resolving deviations from expected results through the Problem Management Process.. 12.0 MAINTENANCE SERVICES a. IBM will: 1. provide maintenance for IBM Services Machines and Systems Software; IBM/FRANKLIN CONFIDENTIAL PAGE 22 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: 2. dispatch maintenance requests for In-Scope Hardware; 3. refer Franklin's non-IBM third-party vendor performance problems in support of Systems Software, Application Software and In-Scope Hardware to Franklin for resolution; b. Franklin will provide warranty or maintenance coverage, as applicable, for Franklin Machines, Franklin Software and the Franklin Data Network equipment; 13.0 APPLICATION SUPPORT SERVICES a. IBM will: 1. provide the IBM Systems Software products listed in Schedule F (Software), to support the development of Applications Software. IBM will not discontinue support of such software products without Franklin's approval; provided, that Franklin will assume support expenses for Systems Software products that Franklin requires IBM to retain after current support is no longer reasonably commercially available; 2. recommend and implement hardware and software architectural changes consistent with and supportive of the strategic and technical standards agreed upon by the parties; 3. verify that changes to the in-scope environment will not adversely impact the application environment; 4. if Franklin requests additional application development support products (such as an application development library management tool, specialized compilers, rapid development tool, etc) , such request will be considered as a Request for New Services. b. Franklin will: 1. select, or define the requirements for all Applications Software; 2. designate and document application information requirements, including report design and content, frequency of reports, and accessibility; 3. retain responsibility for maintenance, support and all licenses and related charges for all Applications Software; 4. have the right to audit, control and approve new Applications Software before its promotion into production; 5. verify the results of Application Software on-line and batch system support processing; 6. provide Applications Software program problem determination and resolution, including providing support for application Abends and job recovery; 7. use commercially reasonable efforts to minimize outages caused by application program failures; 8. follow the existing change management process for all application changes, before submission or installation into the system; 9. follow the problem management process, according to published problem resolution criteria the Procedures Manual contains and document problem resolution and closure; 10. certify, in cooperation with IBM, that existing applications function correctly when IBM installs new Systems Software or upgrades to or new releases of current Systems Software; and 11. define requirements for application recovery management to include such activities as job recovery management and backup and recovery procedures. 13.1 MQ SERIES SUPPORT IBM will provide the following Services for MQ Series Services for all current supported platforms (excluding DEC/VAX) in the production environment and for test and staging Servers where IBM owns the MQM ID. a. IBM will: 1. install product code or support packs as necessary with Franklin approval; 2. install patches or vendor provided fixes; IBM/FRANKLIN CONFIDENTIAL PAGE 23 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: 3. install upgrades and maintenance (patches, support packs, etc.) per Franklin's request; 4. install standard IBM MQ administrative support tools (Example: MQMaint); 5. build and configure the MQ Series infrastructure, provide definition of MQ Series infrastructure as defined in SRM doc, use examples ; such as: (channels, dead letter queues, system queues, transmit queues) 6. with Franklin assistance, create queue managers, channels and other MQ Series application specific objects such as local, remote or other queues, process definitions, or any other MQ series object required by the application.; 7. build and configure MQ Series clusters; 8. at Franklin's request, create/alter/delete application objects such as local, remote or other queues, process definitions, or any other MQ series object required by the application; 9. administer MQ series to identify, describe and define infrastructure objects such as: (channels, dead letter queues, system queues, transmit queues); 10. own, manage and support MQM ID and MQM Group as authorized by Franklin; 11. request Franklin to define/alter/delete security profiles for groups and individuals; 12. configure base MQ infrastructure monitoring parameters including: MQ Series Q_Manager process, Command Server process, Channel Initiator process, trigger Monitor process, Dead Letter Queue, var mqm Log file space (thresholds alerts 75/95%), and condition: Channel w/ Retry Status; 13. receive, acknowledge, and provide support for base infrastructure and application monitoring alerts; 14. respond to problem records related to MQ Series system/infrastructure components, including engaging the IBM MQ Series support center if necessary and through a Franklin procured vendor support contract; 15. open issue with vendors for support of infrastructure issues as necessary; 16. request Franklin open change records to define/alter/delete application objects, components, or procedures; 17. open change records to define/alter/delete system/infrastructure objects, components, or procedures; 18. back up the system/infrastructure and all application definitions with the regular operating system/subsystem backups and restore MQ Series as necessary; b. FRANKLIN WILL: 1. provide necessary approval to IBM for the installation of product code and support packs; 2. provide necessary approval to IBM for the installation of patches or vendor provided fixes; 3. provide necessary approval for upgrades and maintenance (patches, support packs, etc.) 4. design, document, and request IBM to create queue managers, channels and other Application specific objects; 5. design and Document MQ Series cluster configurations; 6. identify, describe and define application objects such as local, remote or other queues, process definitions, or any other MQ series object required by the application. 7. document/script application objects such as local, remote or other queues, process definitions, or any other MQ series object required by the application 8. request IBM to create/alter/delete application objects such as local, remote or other queues, process definitions, or any other MQ series object required by the application. 9. provide IBM the MQM ID and MQM Group ID's (Franklin will relinquish these ID's to IBM, and remove their support personnel from the ID groups); IBM/FRANKLIN CONFIDENTIAL PAGE 24 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: 10. register approved individuals for access to the MQ Series resources and environment; 11. identify and request ID's needed by users and applications to access MQ Series resources; 12. define/alter/delete security profiles for groups & individuals; 13. open problem records to document and notify support of deviations from normal expected behavior; 14. respond to and resolve problems related to application code including: local, remote or other queues, process definitions, or any other MQ series object required by the application; 15. open issue with vendor for support of vendor application issues; 16. open change records to define/alter/delete application objects, components, or procedures; 17. request IBM open change records to define/alter/delete system/infrastructure objects, components, or procedures; 18. respond to change records related to MQ Series application objects, components, or procedures in the MQ Series environments; 19. provide and maintain run books for each application, adapter, connector, and system architecture (per Franklin run book standards); and 20. provide and maintain troubleshooting guides for each application, adapter and connector. 14.0 SECURITY MANAGEMENT The responsibilities of IBM and Franklin for each security area/task are indicated in the following responsibilities matrices. "Perform" shall mean to have responsibility to execute. "Assist" shall mean to provide reasonable support to the Performing Party. ================================================================================================================== 14.1 GENERAL RESPONSIBILITIES IBM Franklin ================================================================================================================== 1a. Provide an interface for day-to-day security management Perform ================================================================================================================== 1b. Provide an interface for day-to-day security management Perform ================================================================================================================== 2. Provide IBM with Franklin audit history (both internal and external) and most recent security standards and practices, including updates as they occur Perform ================================================================================================================== 3a. Review security policies and procedures for effectiveness and recommend improvements in conjunction with Franklin Perform ================================================================================================================== 3b. Review security policies and procedures for effectiveness and Assist Perform recommend improvements in conjunction with IBM ================================================================================================================== 4. Communicate the security procedures to Franklin users that are Assist Perform affected by this service, such as login procedures, password use, use of antivirus programs and security for data and equipment ================================================================================================================== 5. Review amendments made to Franklin security policies and standards and advise Franklin whether or not such changes can be implemented and if Perform Assist implemented, will be considered a New Service ================================================================================================================== 6. During the Transition Period develop the detailed "Information Security Controls" document (GSD331) Perform Assist ================================================================================================================== 7. Maintain the "Information Security Controls" document (GSD331) Perform Assist ================================================================================================================== 8. During the Transition Period perform a review of system accesses for all employees transferring to IBM to confirm that same access is required Assist Perform and advise IBM of any change. ================================================================================================================== 9. Notify IBM of changes Franklin plans to make to its security policies Perform and standards before implementation. ================================================================================================================== 14.2 PHYSICAL SECURITY IBM Franklin ================================================================================================================== 1. Provide physical security controls at Franklin facilities Perform ================================================================================================================== 2. Provide physical security controls at IBM facilities Perform ================================================================================================================== 3a. Restrict access to all data processing areas at Franklin facilities, Assist Perform for which IBM has security responsibility to authorized personnel only. ==================================================================================================================
IBM/FRANKLIN CONFIDENTIAL PAGE 25 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: ================================================================================================================== 14.2 PHYSICAL SECURITY IBM Franklin ================================================================================================================== 3b. Restrict access to all data processing areas at IBM facilities, for which Perform IBM has security responsibility to authorized personnel only. ================================================================================================================== 4. Conduct periodic reviews of the data processing areas for which IBM has Perform security responsibility including reviews of access logs for unusual occurrences and perform follow-up activities in accordance with the procedures specified in this document ================================================================================================================== 5. Protect LAN Servers and infrastructure devices as defined in Schedule G at Franklin facilities and provide access to authorized personnel Perform ================================================================================================================== 6. Protect LAN Servers and infrastructure devices at IBM facilities to authorized personnel only Perform ================================================================================================================== 7. Implement controls which protect printed output from unauthorized access while under IBM's control Perform ================================================================================================================== 8a. Provide secure storage for portable storage media under IBM's control (tape drives and backup media) at Franklin locations Assist Perform ================================================================================================================== 8b. Provide secure storage for portable storage media under IBM's control (tape drives and backup media) at IBM locations Perform ================================================================================================================== 9. During the Transition Period, with the assistance of Franklin, perform a baseline inventory of all portable storage media (e.g. Tapes, disks) for which Perform Assist IBM has security responsibility ================================================================================================================== 10. Perform an annual audit/reconciliation of tape under IBM's control and promptly notify Franklin and IBM management when errors are detected Perform ================================================================================================================== 11. Resolve discrepancies discovered during the annual tape audit and inform Franklin of the resolution Perform ================================================================================================================== 12. Implement controls and provide effective elimination of residual information Perform on removable storage media before disposal or reuse outside of Franklin ================================================================================================================== 14.3 LOGICAL ACCESS CONTROL IBM Franklin ================================================================================================================== 1. Install, maintain and upgrade new or existing data access control software Perform Assist as deemed necessary by IBM to provide the Service. This is viewed as a product support role, i.e. software maintenance for RACF. This does NOT include the creation or maintenance of security rules in RACF or similar maintenance of security rules for Supported Servers. ================================================================================================================== 2. Implement the functions and features of the access control software that will satisfy Franklin security standards as stated on the Franklin corporate intranet Assist Perform for all platforms as defined in GSD331. ================================================================================================================== 3. Implement the security system values and features of the supported operating systems that will satisfy Franklin security practices as defined in GSD331. Perform Assist ================================================================================================================== 4. Identify the protection requirements for operating system resources Assist Perform ================================================================================================================== 5. Implement the identified protection as specified in GSD331 for operating system resources via the access control software for all security changes being Assist Perform made through the Change Management process. ================================================================================================================== 6. Define and provide to IBM: a. Data classification and control criteria, b. Data protection and handling requirements, c. Data protection and handling requirements in event of security breach; and d. Data encryption requirements. Perform ================================================================================================================== 7. Define the protection requirements for application resources via the access Perform control software. ================================================================================================================== 8. Define and implement the protection requirements for End User data via the access control software Perform ================================================================================================================== 9a. Provide encryption products (i.e., hardware and/or software) as described in Perform GSD331. ================================================================================================================== 9b. Support/implement encryption products (i.e., hardware and/or software) as Perform Assist ==================================================================================================================
IBM/FRANKLIN CONFIDENTIAL PAGE 26 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: ================================================================================================================== 14.3 LOGICAL ACCESS CONTROL IBM Franklin ================================================================================================================== defined in this document ================================================================================================================== 10. Maintain security for and distribute encryption keys Perform ================================================================================================================== ================================================================================================================== 12. Establish, change, deactivate and remove logon IDs and associated access authorities for Franklin employees Perform ================================================================================================================== 13. Establish, change, deactivate and remove logon IDs and associated access authorities for IBM employees as performed by the Franklin GSS Help Desk. Assist Perform ================================================================================================================== 14. Review and verify annually the system logon IDs for Franklin personnel (i.e., reverification) and delete the IDs of those individuals who no longer Perform have a business need and/or are no longer authorized by management to access the system ================================================================================================================== 15. Annually perform a continued business need (reverification) review of all IBM logon ID's supporting the service, and notify Franklin to remove access for those which are no longer authorized by management Perform Assist ================================================================================================================== 16. Establish the process criteria for resetting user's passwords and disclosing them to authorized personnel Assist Perform ================================================================================================================== 17. Reset IBM logon ID passwords and disclose passwords to authorized personnel Assist Perform ================================================================================================================== 18. Reset Franklin logon ID passwords and disclose passwords to authorized Perform personnel ================================================================================================================== 19. Review, approve and grant requests for privileged user authorities. Assist Perform ================================================================================================================== Intentionally Left Blank ================================================================================================================== 20. Periodically review privileged user authorities and remove those for which management authorization no longer exists Assist Perform ================================================================================================================== 21. Control and be responsible for the Security Officer/Administrator user profiles on all systems (e.g., NT-Admin, Unix-Root, AIX-Root, RACF-Special, Perform AS400-QSECOFR). Develop Process for immediate access for IBM ================================================================================================================== Intentionally Left Blank ================================================================================================================== 22. Schedule through the Change Control Process, security/integrity fixes that must be applied to the in-scope systems Perform ================================================================================================================== Intentionally Left Blank ================================================================================================================== 23. Periodically perform system security health checks consisting of: Assist Perform a. access control settings, b. authorized privileged users, c. operating system resources protection, and d. installation and operation of virus control programs on the appropriate platforms. ================================================================================================================== 24. Correct discrepancies, as described in GSD331, identified during system security health checks (Section 14.3.24) for Locked Down In-Scope Equipment. Perform ================================================================================================================== 25. Capture and maintain platform-specific audit records for the retention period specified in GSD331, and provide record retention reports to the Franklin Perform Project Executive upon reasonable request for In-Scope Equipment. ================================================================================================================== 26. Promptly inform Franklin of any security issues of which IBM is aware and suggest possible remedial action. Perform ================================================================================================================== 27. Promptly acknowledge receipt of security exposures notified to Franklin by IBM and inform IBM of Franklin acceptance or rejection of IBM's recommended Perform remedial action or other remedial action Franklin implements. ================================================================================================================== 28. Take appropriate corrective action to remedy security violations notified to Franklin by IBM. Assist Perform ================================================================================================================== 29. Develop and run scripts on Supported Servers for which IBM provides Server support administration to identify Franklin User IDs and Application IDs. Should Franklin increase the estimated Production Lock Down schedule of - 130 Servers per Contract Year through 2004, and 100 per Contract Year through 2007 (the Perform Assist Parties will mutually agree on the estimated schedule beginning 2008 on a yearly basis., additional resources will be provided as Hourly Services. This estimated schedule is dependent on Franklin's internal scheduling processes. ==================================================================================================================
IBM/FRANKLIN CONFIDENTIAL PAGE 27 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: ================================================================================================================== 14.3 LOGICAL ACCESS CONTROL IBM Franklin ================================================================================================================== 30. Develop and implement a script on the Servers for which IBM provides Server support administration to verify that the Franklin accounts existing on the Perform Server are consistent with a list of IDs that Franklin's approved criteria provided to IBM. ================================================================================================================== 31. provide and approve privileged Franklin User ID and application ID criteria, including the defined privilege access to accomplish the following; a. perform the revalidation of OS privileged Franklin User IDs on Servers as prioritized by Franklin for the defined privileged access; Perform b. ensure each Franklin User ID and Franklin application ID on the Server can be identified; and c. ensure access to the resource can be allowed at the appropriate levels for authorized users; and that access can be denied for unauthorized users; ================================================================================================================== 32. Communicate the Production Lock Down schedule, process, procedures, dependencies, and expectation to the impacted Franklin groups. Assist Perform ================================================================================================================== 33. Participate in the development and approve criteria for privileged access for revalidation for each application OS as necessary, to include group memberships, directory access, file mounts, file read, write, execute Perform permissions and other like rights, accesses, permissions and memberships for privileged Franklin accounts; ================================================================================================================== 34. provide IBM with a prioritized list of application Server groups to be Perform revalidated; ================================================================================================================== 35. execute revalidation on Servers for which Franklin owns User ID Perform administration; ================================================================================================================== 14.4 NETWORK INFRASTRUCTURE SECURITY (IN IBM Franklin ADDITION TO LOGICAL ACCESS ABOVE) ================================================================================================================== 1. Control the Network Operating System (NOS) security/administrative user id's, Perform which run on any LAN or WAN. ================================================================================================================== 2a. Provide virus avoidance, detection, and elimination software for servers Assist Perform ================================================================================================================== 2b. Maintain virus avoidance, detection, and elimination software for Supported Perform Assist Servers ================================================================================================================== 3. Identify and implement protection requirements for resources residing on End Perform User Machines ================================================================================================================== 4. Keep virus avoidance signature files current for End User Machines Perform ================================================================================================================== 5. Maintain virus protection software on all End User Machines and perform Perform post-incident clean-up and integrity checks. ================================================================================================================== 6. Respond to virus attacks and initiate corrective action to eliminate Perform at Perform at end detected viruses - see process for immediate access for IBM. server level user level ==================================================================================================================
15.0 MONITORING SERVICES 15.1 NETWORK MONITORING DEFINITION AND SCOPE Pursuant to Sections 15.5 and 15.6 below, the responsible Party will: a. measure up/down availability of in-scope network devices, including routers, hubs and switches. 15.2 HARDWARE/OS MONITORING DEFINITION AND SCOPE Pursuant to Sections 15.5 and 15.6 below, the responsible Party will: a. for the In-Scope Equipment, detect OS parameters that impact hardware and OS availability, performance, and capacity; b. for the In-Scope Equipment, monitor OS measurable parameters including parameters for: server, CPU, OS, file systems, memory, directories, network connectivity, blocked queue length (Unix only) and other components as mutually agreed; and c. for High Availability Images and replicating systems, monitor all systems in the cluster for hardware and OS availability. IBM/FRANKLIN CONFIDENTIAL PAGE 28 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: 15.3 BUSINESS APPLICATIONS, DATABASE, AND SYSTEM UTILITIES MONITORING DEFINITION AND SCOPE Pursuant to Sections 15.5 and 15.6 below, the responsible Party will: a. For database applications and Systems Utilities, provide monitoring functions to determine the status of application services, processes or daemons in the executing program list; b. For individual business applications, database applications, and Systems Utilities, detect thresholds and error conditions based on alerts included or implemented in automation software, or by other mutually agreed means to provide depth of view sufficient to respond to problems within the application 1. for batch applications, measure parameters that impact throughput, performance and expected operation; 2. for on-line applications, measure parameters that impact application availability, performance, expected operation; 3. for database applications, measure parameters that impact availability, performance, capacity and utilization; and 4. for business applications, database applications, and Systems Utilities, monitor for expected events (e.g., file transfers) and abnormal events or conditions (e.g., parsed error log, application exceptions) which impact proper application execution. c. as mutually agreed, monitor adjunct elements running on In-Scope Equipment (e.g., file transfer dependencies) required by in-scope applications; d. for High Availability Images, monitor components necessary to provide fail-over, including mirroring, heartbeat, availability of high availability software, and availability of storage and network back-up links; 15.4 IBM AND FRANKLIN MONITORING RESPONSIBILITIES The responsibilities of IBM and Franklin for monitoring are indicated in the following responsibilities matrices, which are in addition to those specified throughout this Schedule. IN the event of a conflict between the matrix and the schedule, this matrix shall prevail. * "P" shall mean to have responsibility to execute. * "A" shall mean to provide reasonable support to the Performing Party. * "PP" shall mean to have responsibility to execute only if authorized under a mutually agreed Project. IBM support will be provided via Hourly Services. * "AP" shall mean to provide reasonable support to the Performing Party only if authorized under a mutually agreed Project. IBM support will be provided via Hourly Services. * "NA" shall mean not applicable. IBM/FRANKLIN CONFIDENTIAL PAGE 29 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: - -------------------------------------------------------------------------------
15.5 DESIGN, DEVELOPMENT, AND DEPLOYMENT OF MONITORS - ----------------------------------------- ------------- -------------- ------------- ------------- ---------------- The following activities applicable to NETWORK EQUIPMENT/OS SYSTEMS DATABASE BUSINESS each monitored item on applicable UTILITIES APPLICATIONS In-Scope Equipment must be completed prior to commencement of steady state monitoring specified in Section 15.6. - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- -------- IBM FRK IBM FRK IBM FRK IBM FRK IBM FRK - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- -------- a. Identify parameters and NA P PP PP PP functions that affect functionality and performance. - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- -------- b. Determine monitor polling A P P PP AP PP AP PP frequency - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- -------- c. Select threshholds for NA P A PP AP AP PP PP identified parameters - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- -------- d. Create scripts and monitoring NA P PP AP PP AP PP within applications. - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- -------- e. Define operator procedures and A P P A PP AP AP PP AP PP automated notifications - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- -------- f. Perform unit testing P A P PP AP PP AP PP - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- -------- g. Install monitors and scripts P PP PP PP within monitoring tools to provide A P alerts when a threshhold has been exceeded or an error condition has occurred. - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- -------- h. Deploy monitors, scripts, and P PP PP PP automated notifications A P - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- -------- i. Perform system testing and P A P PP AP PP AP PP AP post implementation testing and validation - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- --------
- ------------------------------------------------------------------------------------------------------------------- 15.6 STEADY STATE MONITORING OPERATIONS - ------------------------------------------------------------------------------------------------------------------- The following steady state monitoring NETWORK EQUIPMENT/OS SYSTEMS DATABASE BUSINESS activities for applicable In-Scope UTILITIES APPLICATIONS Equipment will occur following those activities specified in Section 15.1, exclusive of Prime-Time Basic Images, EMEA Prime-Time Basic Images, and Asia Prime-Time Basic Images: - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- -------- IBM FRK IBM FRK IBM FRK IBM FRK IBM FRK - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- -------- a. Monitor applications and print P P P P P queues* with installed tools, monitors and scripts - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- -------- b. Respond to warning or error P P P P P conditions as described in the Procedures Manual - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- -------- c. Maintain application monitors NA NA P P P and scripts - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- -------- d. Update monitoring tools and P P P P IBM/FRANKLIN CONFIDENTIAL PAGE 30 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: installed monitors and keep in A P sync with upgrades to hardware, OS, and applications. - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- -------- e. Analyze and trend monitoring A P P P P P output data, report on results, and make recommendations for improvement. - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- -------- f. Retire monitors when no longer A P P P A P P required. - ----------------------------------------- ------ ------ ------ ------- ----- ------- ------ ------ ------- --------
*Provide print queue monitoring for those applications where print queues have had monitors and scripts developed and deployed 16.0 BUSINESS RECOVERY SERVICES During the Term, Franklin will receive Business Recovery Services ("BR Services") from IBM's Business Continuity and Recovery Services unit. Those Services are described in Schedule M. 17.0 OTHER SERVICES AND RESPONSIBILITIES a. IBM will: 1. provide Franklin with technical and quality specifications for supplies, if any, required by IBM to perform the services; 2. maintain contact with vendors providing data processing, telecommunications and end user Services or products related to IBM's provision of the Services in order for IBM to keep abreast of technological product developments that may be of value to Franklin; 3. assist Franklin in the review of vendor proposals affecting IBM's provision of the Services, including telecommunications and data processing proposals, so as to facilitate existing and future systems compatibility with changing industry standards. IBM/FRANKLIN CONFIDENTIAL PAGE 31 OF 31 SCHEDULE A-FINAL.DOC IBM Initials: Franklin Initials: AMENDMENT NUMBER 5 TO THE MANAGED OPERATIONS SERVICES AGREEMENT - -------------------------------------------------------------------------------- This Amendment Number 5 to the Managed Operations Services Agreement (this "Amendment"), is made by and between Franklin Templeton Companies, LLC, a Delaware Limited Liability Company, having a place of business at One Franklin Parkway, San Mateo, CA, 94403 ("Franklin") and International Business Machines Corporation, having place of business at Route 100, Somers, NY, 10589 ("IBM") (collectively referred to herein as the "Parties"). This Amendment is entered into on this 1st day of September, 2003 (the "Amendment Number 5 Effective Date"). This Amendment amends the Managed Operations Services Agreement, dated February 6, 2001, between Franklin and IBM as modified or amended prior to the date hereof including any schedules, supplements, exhibits and attachments thereto (the "Agreement"). Capitalized terms used but not defined herein shall have their respective meanings as defined in the Agreement. In the event of any inconsistency between the terms of the Agreement and the terms of this Amendment, the terms of this Amendment shall prevail. All terms and conditions of the Agreement not specifically amended or supplemented herein, shall remain unchanged and in full force and effect. The Term of this Amendment will begin as of the Amendment Number 5 Effective Date and will run concurrently with the Agreement. This Amendment modifies the Agreement for purposes of clarification and change in scope of work regarding Business Recovery Services, which were precipitated by the destruction of the World Trade Center, and the Fiduciary Trust Company International Data Center, which was located therein. The affected and changed sections and Schedules of the Agreement are as indicated below. I. THE SCHEDULES: A) REVISION 2 TO SCHEDULE C (CHARGES) IS HEREBY AMENDED AS FOLLOWS: 1. ADD THE FOLLOWING AS SECTION 2.0bbb: EXTERNAL PARTNER PHYSICAL NETWORK CONNECTION means a discrete physical network circuit that is used for data transmission to and/or from a non-Franklin facility. 2. ADD THE FOLLOWING AS SECTION 2.0ccc: INITIAL RECOVERY CHARGE OR INITIAL USAGE CHARGE means the one time charge incurred upon declaration of a Disaster and covers the first 48 hours following such Disaster declaration subject to Section 3.7a of this Revision 2 to Schedule C. 3. ADD THE FOLLOWING AS SECTION 2.0ddd: SERVICED APPLICATION EFFECTIVE DATE means the effective date for a Major Change as specified in a Service Authorization. 4. ADD THE FOLLOWING AS SECTION 2.0eee: SERVICE REQUEST PROCESS means the method used by IBM and Franklin to formally initiate changes to BR Services as described in the Procedures Manual. IBM/FRANKLIN CONFIDENTIAL PAGE 1 OF 9 FRANKLIN AMENDMENT FINAL.DOC AMENDMENT NUMBER 5 5. ADD THE FOLLOWING AS SECTION 2.0fff: TRANSITION CHARGE means the one-time charge as described in a Service Authorization for BR Services Transition for a Serviced Application. 6. ADD THE FOLLOWING TO SECTION 3.5a.2: The BR Services resources described in this Section 3.5 may utilize the Hours Pool only as described in Section 8.0b of Revision 1 to Schedule E. 7. ADD THE FOLLOWING AS SECTION 3.5c.6: A BR Services Project Manager is an experienced individual who is responsible for the success of a defined scope of work, typically the services described in Revision 1 to Schedule M Section 3.0 "BR Services Transition for New & Changed Serviced Applications". The BR Services Project Manager provides leadership and coordinates all activity of a technical team, organizes the effort required, and manages the staff and budget. A BR Services Project Manager typically has 5 to 10 years of practical experience in the technical field. 8. ADD THE FOLLOWING AS SECTION 3.5c.7: A BR Services Senior Consultant or IT Architect provides the capability to design, implement, and manage cost-effective, enterprise-wide recovery programs. Capabilities span all facets of disaster recovery planning, from identifying vital business processes and applications to determining financial impacts of disasters, identifying potential risks, defining critical technology and resources, and refining recovery procedures. A BR Services Consultant or IT Architect typically has more than 5 years of experience in the required field. 9. ADD THE FOLLOWING AS SECTION 3.5c.8: A BR Services Consultant or IT Architect assists in the design, implementation, and management of cost-effective, enterprise-wide recovery programs. A BR Services Consultant or IT Architect typically has up to 5 years of experience in the required field. 10. ADD THE FOLLOWING AS SECTION 3.5c.9: A BR Services Senior Systems Support Specialist provides systems support for one or more computing environments including IBM mainframe, IBM AS/400, RS/6000, SUN, DEC, EMC, HP and networking technologies. A BR Services Systems Support Specialists typically has more than 5 years of experience in the required field. 11. ADD THE FOLLOWING AS SECTION 3.5c.10: BR Services Systems Support Specialist provides systems support assistance for one or more computing environments including IBM mainframe, IBM AS/400, RS/6000, SUN, DEC, EMC, HP and networking technologies. A BR Services Systems Support Specialist typically has up to 5 years of experience in the required field. 12. SECTION 3.7 (BUSINESS RECOVERY USAGE CHARGES) IS HEREBY DELETED IN ITS ENTIRETY AND REPLACED WITH THE FOLLOWING: 3.7 BUSINESS RECOVERY CHARGES Franklin agrees to pay the following Business Recovery charges based on work described in Schedule M and charges described in this Section 3.7 and Exhibit C-3, as applicable: IBM and Franklin acknowledge that Exhibit C-2 was deleted in its entirety as a result of Amendment Number 4 to the Agreement. IBM/FRANKLIN CONFIDENTIAL PAGE 2 OF 9 FRANKLIN AMENDMENT FINAL.DOC AMENDMENT NUMBER 5 a. An Initial Recovery Charge for the first 48 hours post Component or Full Site Disaster and a Daily Usage Charge as described in Exhibit C-3 for each additional day or part thereof: 1. for the duration of each Component Disaster or Full Site Disaster; or 2. from the date IBM ships a Shared Recovery Configuration to another location Franklin designates until the date Franklin returns it to IBM. Franklin may not credit unused Test Time against the Initial Recovery Charge or Daily Usage Charge. Notwithstanding the above, commencing upon the Amendment Number 5 Effective Date and continuing for the Business Recovery Services Term, for all Full Site Disasters and up to three (3) Component Disasters per calendar year, IBM will not charge Franklin the Initial Recovery Charge (as indicated in Exhibit C-3 of this Schedule C) for any Serviced Applications using Dedicated Recovery Configurations (as specified in Exhibit M-1 of Revision 1 to Schedule M). This exclusion does not apply to Serviced Applications utilizing Shared Recovery Configurations, nor shall any unused Component Disaster exclusions be carried over to subsequent calendar years. Notwithstanding anything contained in this Section 3.7 (a) (2), in the event that Franklin makes a Componant Disaster declaration as a result of external factors or events beyond the reasonable control of Franklin, Franklin shall not be charged the Initial Recovery Charge for Serviced Application(s) utilizing Dedicated Recovery Configurations. b. Actual travel and living expenses incurred by IBM personnel when non-local travel is required to provide Business Recovery Services. Franklin will not be responsible for travel and living expenses incurred by IBM personnel in excess of ten percent (10%) of the Business Recovery ASC for such travel and living expenses unless prior written authorization is provided by Franklin. c. Additional Test Time or Test Time support hours pursuant to Section 5.2 "Additional Test Time" of Revision 1 to Schedule M. d. IBM will provide Franklin with a Service Authorization, which will detail the BR Services charges or reduction to the BR Services Charges, if any as a result of any Change to the original or added Serviced Applications, prior to implementing any changes, as described in Section 3.1 of Revision 1 to Schedule M, for Franklin's authorized signature. 1. The addition of Serviced Applications may result in a one-time Transition Charge and a recurring monthly increase to the BR Services charges as set forth in the Service Authorization. 2. The removal of Serviced Applications may result in a recurring mutually agreed monthly reduction to the BR Services charges. Both Parties agree to negotiate in good faith the reduction to the BR Services charges and acknowledge that the original Serviced Applications and those for added Serviced Applications (as specified in Exhibit C-3) were priced utilizing separate methodologies which will be taken into account by both Parties should such Serviced Applications be removed. Additionally, calculation of the applicable reduction shall include if applicable, any IBM prior investment and reasonable expenses related to the displacement of BRS Supplement equipment, interdependencies of other Serviced Applications, and the minimum revenue commitment described in Section 3.7e. 3. A Major Change to a Serviced Application will result in a one-time Transition Charge and a recurring additional or reduced monthly charge, as applicable. A Minor Change to a Serviced Application may result in a one-time Transition Charge and a recurring additional or reduced monthly charge, as applicable. Both a Major and a Minor Change shall be by mutual agreement and shall be pursuant to the terms of the Agreement. IBM/FRANKLIN CONFIDENTIAL PAGE 3 OF 9 FRANKLIN AMENDMENT FINAL.DOC AMENDMENT NUMBER 5 4. In the event that changes to Equipment are necessary, the Parties shall address any such change in a Service Authorization or a Project Change Request. e. In no event will the Business Recovery Services ASC as described in Exhiblit C-1 be reduced to an amount less than $1,212,000 ($101,000 per month). f. If IBM temporarily transfers a Shared Recovery Configuration or a Temporary Transfer machine to a location Franklin chooses, Franklin agrees to pay: 1. all shipping charges, taxes, tariffs, and insurance charges incurred for shipment to such location and return to IBM; and 2. any other charges, including Daily Usage Charges and Initial Usage Charges specified Exhibit C-3 which Franklin incurs while using such Configuration or Machines. g. Amendment Number 5 One Time Charges 1. As a result of the change in scope of work regarding Business Recovery Services as described in this Amendment Number 5, the parties hereby agree to the following: IBM will invoice Franklin a one time charge of $525,176, which will be invoiced at a rate of $318,794 in September 2003, and $68,794 per month in October, November, and December 2003. Franklin will pay the one time charge pursuant to the payment terms of Section 5 of the Agreement. In the event that Franklin has paid any amount in excess of that which is required as a result of this Amendment Number 5, IBM shall credit such amount toward the next monthly invoice under the Agreement. h. Addition of Charles River application Charles River is hereby added to the list of Serviced Applications as part of this Amendment Number 5. The Parties agree that the solution was determined based on the proposal (Charles River-Proposal 082803.doc) presented to Franklin on September 30, 2003 (the "Proposal"). Should additional or reduced scope be required to the solution outlined in the Proposal, the Parties agree to negotiate in good faith incremental changes, increases and or reductions, to the one time and recurring monthly Charges applicable for support of the Charles River application. i. Franklin Vendor Charges and Fees Franklin will: 1. be responsible for charges and fees from Franklin's vendors, contractors, and carriers when their services are requested and/or authorized by Franklin or Franklin's designee in association with the BR Services; and 2. to the extent that responsibility for management of Franklin's third party vendor relationships relating to BR Services have not been assumed by IBM in this Agreement, be responsible for any failure and/or performance problems by Franklin's vendors (other than IBM), contractors or carriers contracted by Franklin or its designee which affect IBM's performance of the BR Services. j. SRDF Transition Services 1. IBM will provide BR Services Transition to modify the currently implemented Rapid Recovery Solution to accommodate EMC's Symmetrix Remote Data Facility (the "SRDF Transition Services") for up to seven (7) of the Serviced Applications listed in Table 3.7(j) below at a discounted one-time Transition Charge calculated as follows: IBM will discount the one-time Transition Charge for such elected Serviced Applications by twenty (20) percent however, should IBM and Franklin mutually agree to perform the SRDF Transition Services for three (3) or more Serviced Applications simultaneously, the one-time Transition Charge for the applicable IBM/FRANKLIN CONFIDENTIAL PAGE 4 OF 9 FRANKLIN AMENDMENT FINAL.DOC AMENDMENT NUMBER 5 Serviced Applications will be discounted an additional three (3) percent. Applicable discounts will be mutually agreed pursuant to the Service Request Process and documented in a Service Authorization. This discount will be applied against the one-time Transition Charges. IBM represents that the scope of effort estimated shall be reasonable under the circumstances and shall be consistent in fees with similar projects for IBM clients requesting similar services. IBM shall certify, if requested by Franklin, via its Vice President of Business Recovery and Continuity Services that it has met this requirement. Franklin shall have no additional audit rights under this Section 3.7(j)(1). The methodology used for calculation of the Transition Charges specified in this section 3.7(j)(1) shall be based upon the Hourly Rates set forth in Exhibit C-1 blended to give an average of all hours purchased, minus the discounts set forth in this section 3.7(j)(1). There will be no adjustment to the recurring monthly charges for the applications in Table 3.7j that receive SRDF Transition Services unless such a change is mutually agreed upon in a Service Authorization as a result of additional changes other than SRDF Transition Services (i.e. hardware configurations, complexity, other new requirements, etc.). 2. Franklin accepts that the BR Services Transition is complete for the Serviced Applications listed in Table 3.7j below and any subsequent requirements to modify Rapid Recovery Solutions will be handled via the Service Request Process and will be priced at the time of the request pursuant to Section 3.7(d) and Section 3.7(j) (1), as applicable. For the discounts set forth in Section 3.7(j) (1) to apply, Franklin must initiate a Service Request for each elected Serviced Application requesting such change for each elected Serviced Application by December 31, 2004 or at such date which is mutually agreeable by the Parties. Additionally, the Parties must mutually agree and execute the Service Authorization for such Service Request by the expiration date of the Service Authorization, which shall not be unreasonably withheld by IBM. 3. Any changes to hardware configurations or complexity of the applications are not subject to the discount set forth in Section 3.7(j) (1). Table 3.7j --------------------------------------- SERVICED APPLICATION --------------------------------------- TAAS --------------------------------------- WAS32 --------------------------------------- CFW --------------------------------------- Global Max --------------------------------------- Pega Central/Pega Satellite --------------------------------------- MBS Expert --------------------------------------- Global Plus --------------------------------------- Cache --------------------------------------- MINT --------------------------------------- IBM/FRANKLIN CONFIDENTIAL PAGE 5 OF 9 FRANKLIN AMENDMENT FINAL.DOC AMENDMENT NUMBER 5 13. CERTAIN PARTS OF EXHIBIT C-1 AS APPLICABLE TO BR SERVICES ARE MODIFIED AS FOLLOWS: See Amendment Number 5 Exhibits to Schedule C ***************************End of Page*************************** IBM/FRANKLIN CONFIDENTIAL PAGE 6 OF 9 FRANKLIN AMENDMENT FINAL.DOC AMENDMENT NUMBER 5 PAGE 7 IS INTENTIONALLY LEFT BLANK IBM/FRANKLIN CONFIDENTIAL PAGE 7 OF 9 FRANKLIN AMENDMENT FINAL.DOC AMENDMENT NUMBER 5 14. ADD THE FOLLOWING AS EXHIBIT C-3: See Amendment Number 5 Exhibits to Schedule C ***************************End of Page*************************** IBM/FRANKLIN CONFIDENTIAL PAGE 8 OF 9 FRANKLIN AMENDMENT FINAL.DOC AMENDMENT NUMBER 5 B) SCHEDULE M (BUSINESS RECOVERY SERVICES) IS HEREBY AMENDED AS FOLLOWS: "Schedule M" as amended, including "Supplement M-1 to Schedule M" is deleted in its entirety and replaced with "Revision 2 to Schedule M" which is attached hereto. THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THIS AMENDMENT, UNDERSTAND IT, AND AGREE TO BE BOUND BY ITS TERMS AND CONDITIONS. FURTHER, THE PARTIES AGREE THAT THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES RELATING TO THIS SUBJECT SHALL CONSIST OF 1) THIS AMENDMENT, 2) THE SCHEDULES AND SUPPLEMENTS TO THE SCHEDULES, AND 3) THE AGREEMENT, DATED FEBRUARY 6, 2001, AS PREVIOUSLY AMENDED. FRANKLIN'S APPROVAL OF THIS AMENDMENT SHALL BE CONSIDERED ACCEPTANCE BY FRANKLIN OF IBM'S PROVISION OF THE SERVICES FOR THE CORRESPONDING CHARGES SPECIFIED IN THE AGREEMENT, AS AMENDED. THIS STATEMENT OF THE AMENDMENT SUPERSEDES ALL PROPOSALS OR OTHER PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER DESCRIBED IN THIS AMENDMENT. Accepted by: Accepted by: INTERNATIONAL BUSINESS MACHINES FRANKLIN TEMPLETON COMPANIES, LLC CORPORATION By: /s/ Shirley S. Reilich By: /s/ Jennifer J. Bolt ---------------------------- ------------------------ Authorized Signature Authorized Signature Shirley S. Reilich Date: 9/1/03 Jennifer J. Bolt Date: 9/1/03 - ------------------ ------ ---------------- ------- Name (Type or Print) Name (Type or Print) IBM/FRANKLIN CONFIDENTIAL PAGE 9 OF 9 FRANKLIN AMENDMENT FINAL.DOC AMENDMENT NUMBER 5 EX-10 4 exhibit10-72.txt EXHIBIT 10.72 EXECUTION COPY PURCHASE AGREEMENT BY AND AMONG FRANKLIN RESOURCES, INC., DARBY HOLDINGS, INC. AND THE DARBY PARTIES NAMED HEREIN --------------- Dated as of August 1, 2003 TABLE OF CONTENTS Article I DEFINITIONS......................................................1 1.1 Certain Definitions..............................................1 Article II SALE AND PURCHASE OF SHARES AND INTERESTS; CONSIDERATION....................................................9 2.1 Sale and Purchase of Shares and Interests........................9 2.2 Consideration....................................................9 2.3 Payment of Purchase Price........................................9 Article III CLOSING.........................................................10 3.1 Closing Date....................................................10 Article IV TERMINATION.....................................................10 4.1 Termination of Agreement........................................10 4.2 Procedure Upon Termination......................................11 4.3 Effect of Termination...........................................11 Article V REPRESENTATIONS AND WARRANTIES OF DOIL AND DOP REGARDING THE DARBY COMPANIES...................................11 5.1 Organization and Good Standing..................................11 5.2 Authorization of Agreement......................................12 5.3 Conflicts; Consents of Third Parties............................12 5.4 Capitalization..................................................13 5.5 Subsidiaries....................................................14 5.6 Records.........................................................14 5.7 Intentionally Omitted...........................................14 5.8 Financial Statements............................................15 5.9 No Undisclosed Liabilities......................................15 5.10 Absence of Certain Developments.................................15 5.11 Taxes...........................................................15 5.12 Real Property...................................................18 5.13 Tangible Personal Property......................................18 5.14 Intellectual Property...........................................18 5.15 Material Contracts..............................................19 5.16 Employee Matters................................................20 i 5.17 Litigation......................................................22 5.18 Compliance with Laws; Permits...................................23 5.19 Insurance.......................................................23 5.20 Related Party Transactions......................................24 5.21 Financial Advisors..............................................24 5.22 Compliance......................................................24 5.23 Darby Funds.....................................................25 5.24 Termination of Relationships....................................28 5.25 Absence of Certain Payments.....................................28 5.26 Privacy Rules...................................................28 5.27 Patriot Act.....................................................28 Article VI REPRESENTATIONS AND WARRANTIES OF THE SELLERS...................29 6.1 Organization and Good Standing..................................29 6.2 Authorization of Agreement......................................29 6.3 Conflicts; Consents of Third Parties............................29 6.4 Ownership and Transfer of DOIL Shares and DOP Interests.........30 6.5 Litigation......................................................30 6.6 Financial Advisors..............................................30 6.7 Related Party Transactions......................................30 Article VII REPRESENTATIONS AND WARRANTIES OF FRI AND PURCHASER.......................................................31 7.1 Organization and Good Standing..................................31 7.2 Authorization of Agreement......................................31 7.3 Conflicts; Consents of Third Parties............................31 7.4 Litigation......................................................32 7.5 Investment Intention............................................32 7.6 Financial Advisors..............................................32 Article VIII COVENANTS......................................................32 8.1 Access to Information...........................................32 8.2 Conduct of the Business Pending the Closing.....................33 8.3 Consents........................................................36 8.4 Regulatory Approvals............................................36 8.5 Further Assurances..............................................37 ii 8.6 Confidentiality.................................................37 8.7 Publicity.......................................................39 8.8 Use of Name.....................................................39 8.9 Employee Matters................................................39 8.10 Director and Officer Indemnification; Insurance.................40 8.11 Waivers, Consents and Agreements Related to Transfers; Releases and Waivers............................................41 Article IX CONDITIONS TO CLOSING...........................................43 9.1 Conditions Precedent to Obligations of FRI and Purchaser........43 9.2 Conditions Precedent to Obligations of the Sellers..............46 Article X INDEMNIFICATION.................................................47 10.1 Survival of Representations and Warranties......................47 10.2 Indemnification.................................................47 10.3 Indemnification Procedures......................................48 10.4 Limitations on Indemnification..................................50 10.5 Tax Matters.....................................................52 10.6 Tax Treatment of Indemnity Payments.............................57 Article XI MISCELLANEOUS...................................................57 11.1 Payment of Sales, Use or Similar Taxes..........................57 11.2 Expenses........................................................57 11.3 Seller Representative...........................................57 11.4 Submission to Jurisdiction; Consent to Service of Process.......58 11.5 Entire Agreement; Amendments and Waivers........................59 11.6 Governing Law...................................................59 11.7 Notices.........................................................59 11.8 Severability....................................................60 11.9 Binding Effect; Assignment......................................60 11.10 Non-Recourse....................................................61 11.11 Counterparts....................................................61 iii SCHEDULES Schedule 5.3 Conflicts; Consents of Third Parties Schedule 5.4 Capitalization Schedule 5.5 Subsidiaries Schedule 5.9 No Undisclosed Liabilities Schedule 5.10 Absence of Certain Developments Schedule 5.11 Taxes Schedule 5.12 Real Property Leases Schedule 5.13 Personal Property Leases Schedule 5.14 Intellectual Property Schedule 5.15 Material Contracts Schedule 5.16 Employee Benefit Plans Schedule 5.17 Litigation Schedule 5.18 Permits Schedule 5.19 Insurance Schedule 5.20 Related Party Transactions Schedule 5.23 The Darby Funds Schedule 5.27 Patriot Act Schedule 6.3 Conflicts; Consents of Third Parties Schedule 6.6 Financial Advisors of Sellers Schedule 6.7 Related Party Transactions Schedule 7.3 No Conflicts Schedule 7.6 Financial Advisors of FRI and Purchaser Schedule 8.2 Conduct of the Business Pending the Closing Schedule 8.8 Use of Name Schedule 10.2 Materiality Qualifications Not to be Disregarded EXHIBITS Exhibit A Advised Darby Funds Exhibit B Sponsored Darby Funds Exhibit C Seller Information Exhibit D Allocation of Purchase Price to Assets (Tax Basis) Exhibit E Forms of Officer's Certificates Exhibit F Terms of Offer Letters Exhibit G Individuals to Deliver Offer Letters, Receive Restricted Stock, Deliver Non-Compete Agreements and/or Deliver Carried Interest Letters Exhibit H Form of Instrument of Assignment and Transfer Exhibit I Form of Waiver Agreement Exhibit J Forms of Non-Compete Agreements Exhibit K Terms of Carried Interest Letters iv EXECUTION COPY PURCHASE AGREEMENT PURCHASE AGREEMENT, dated as of August 1, 2003 (this "AGREEMENT"), by and among Franklin Resources, Inc., a corporation existing under the laws of Delaware ("FRI"), Darby Holdings, Inc., a corporation existing under the laws of Delaware ("PURCHASER"), Darby Overseas Investments, Ltd., a corporation existing under the laws of Delaware ("DOIL"), Darby Overseas Partners, L.P., a limited partnership existing under the laws of Delaware ("DOP"), the stockholders of DOIL listed on the signature pages hereto (collectively, the "DOIL SELLERS") and the limited partners of DOP listed on the signature pages hereto (collectively, the "DOP SELLERS", and together with the DOIL Sellers, the "SELLERS", and the Sellers and DOIL and DOP being hereinafter referred to as the "DARBY PARTIES"). W I T N E S S E T H: WHEREAS, the DOIL Sellers own an aggregate of 1,666.67 shares of the common stock, $1.00 par value per share (the "DOIL SHARES"), of DOIL, which constitute all of the issued and outstanding shares of capital stock of DOIL; WHEREAS, DOIL is the sole general partner of DOP, and the DOP Sellers own all of the limited partner interests in DOP (other than those owned by Affiliates of Purchaser) (the "DOP INTERESTS"); WHEREAS, the DOIL Sellers desire to sell to Purchaser, and Purchaser desires to purchase from the DOIL Sellers, the DOIL Shares for the purchase price and upon the terms and conditions hereinafter set forth; WHEREAS, the DOP Sellers desire to sell to Purchaser, and Purchaser desires to purchase from the DOP Sellers, the DOP Interests for the purchase price and upon the terms and conditions hereinafter set forth; and WHEREAS, certain terms used in this Agreement are defined in SECTION 1.1; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter contained, the parties hereby agree as follows: ARTICLE I DEFINITIONS 1.1 CERTAIN DEFINITIONS. (a) For purposes of this Agreement, the following terms shall have the meanings specified in this SECTION 1.1: "ADVISERS ACT" means the Investment Advisers Act of 1940, as amended, and the rules and regulations promulgated thereunder by the SEC. "ADVISORY AGREEMENT" means, with respect to any Person, each contract, agreement or arrangement relating to its rendering of investment management or investment advisory services, including any sub-advisory or similar contract, agreement or arrangement. "ADVISED DARBY FUNDS" means the Funds listed on EXHIBIT A hereto. "AFFILIATE" means, with respect to any Person, any other Person that, directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person, and the term "control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through ownership of voting securities, by contract or otherwise. "AFFILIATED GROUP" means any affiliated group within the meaning of Section 1504 of the Code or any comparable or analogous group under state, local or foreign Law. "AIMCMC" means Asian Infrastructure Mezzanine Capital Management Co., Ltd., a Cayman Islands corporation. "BUSINESS DAY" means any day of the year on which national banking institutions in New York are open to the public for conducting business and are not required or authorized by Law to close. "CARRIED INTEREST" means, with respect to a Fund, a Person's right to share, directly or indirectly, in profits, income, gains or distributions of such Fund, that is disproportionate to such Person's capital investment, directly or indirectly, in such Fund. "CODE" shall mean the Internal Revenue Code of 1986, as amended. "CONTRACT" means any contract, agreement, indenture, note, bond, loan, instrument, lease, commitment or other arrangement or agreement, whether written or oral, under which any party thereto by the express terms thereof has an on-going or continuing Liability or right or entitlement after the date hereof. "DAI" means Darby Asia Investors, Ltd., a company incorporated in the British Virgin Islands. "DAI SHARES" means an aggregate of 800,000 shares, $.01 par value per share, of DAI. "DAI-HK" means Darby Asia Investors (HK), Ltd., a Hong Kong limited liability company. "DAI-HK SHARE" means that one share of the capital stock of DAI-HK owned by DOP. "DARBY COMPANIES" means DOIL and the Subsidiaries. 2 "DARBY FUNDS" means the Sponsored Darby Funds and the Advised Darby Funds. "DARBY INCOME FUNDS" means Darby Emerging Markets Income Fund, L.P., Darby Emerging Markets Income Fund, Ltd. and Darby Emerging Markets Income Fund (Master), L.P. "DOIL SHAREHOLDERS AGREEMENT" means that certain Shareholders Agreement dated as of February 4, 1994, by and among the DOIL Sellers and DOIL. "DOP LP AGREEMENT" means that certain limited partnership agreement of DOP, dated February 9, 1994. "DOP PARTNER DOCUMENTS" means the DOP LP Agreement and the First Amended and Restated Take-Along Agreement dated as of December 30, 1994 by and among DOIL and certain DOP Sellers signatory thereto. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder by the SEC. "FUND" means a vehicle or other arrangement for collective investment. "GAAP" means generally accepted accounting principles in the United States as in effect at the time any applicable financial statements were prepared or any act requiring the application of GAAP was performed. "GBA" means the Gramm-Leach-Bliley Act. "GOVERNMENTAL BODY" means any government or governmental or regulatory body thereof, or political subdivision thereof, whether federal, state, local or foreign, or any agency, instrumentality or authority thereof, or any court or arbitrator (public or private). "INDEBTEDNESS" of any Person means the indebtedness of such Person, including without limitation or duplication, (i) the principal of and premium (if any) in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable; (ii) all obligations of such Person under leases required to be capitalized in accordance with GAAP; (iii) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction; (iv) all obligations of the type referred to in clauses (i) through (iii) of any Persons for the payment of which such Person is responsible or liable, directly or indirectly, as obligor, guarantor, surety or otherwise, including guarantees of such obligations; and (v) all obligations of the type referred to in clauses (i) through (iv) of other Persons secured by any Lien on any property or asset of such Person (whether or not such obligation is assumed by such Person). "INDIVIDUAL SELLERS" means the Sellers other than the Institutional Sellers. 3 "INSTITUTIONAL SELLERS" means Bechtel DOP Enterprises, Inc., Massachusetts Mutual Life Insurance Company, Lubar Nominees, Wiegers & Co., Shultz 1989 Family Trust and BEn Direct Investments, LLC. "INTELLECTUAL PROPERTY" means all intellectual property rights used by the Darby Companies and the Sponsored Darby Funds arising from or in respect of the following, whether protected, created or arising under the laws of the United States or any other jurisdiction: (i) all patents and applications therefor, including continuations, divisionals, continuations-in-part, or reissues of patent applications and patents issuing thereon (collectively, "PATENTS"), (ii) all trademarks, service marks, trade names, service names, brand names, logos, Internet domain names and corporate names and general intangibles of a like nature, together with the goodwill associated with any of the foregoing, and all applications, registrations and renewals thereof (collectively, "Marks"), (iii) copyrights and registrations and applications therefor, and works of authorship (collectively, "COPYRIGHTS"), (iv) proprietary or confidential discoveries, concepts, ideas, research and development, know-how, formulae, inventions, compositions, technical data, procedures, designs, drawings, databases, and other proprietary and confidential information, including investor lists, performance data, trading strategies and business and marketing plans and proposals of the Darby Companies and the Sponsored Darby Funds, in each case excluding any rights in respect of any of the foregoing that comprise or are protected by Copyrights or Patents (collectively, "TRADE SECRETS"), and (v) all Software of the Darby Companies and the Sponsored Darby Funds. "INTELLECTUAL PROPERTY LICENSES" means (i) any grant to a third Person by any Darby Company or Sponsored Darby Fund of any right to use any of the Intellectual Property, and (ii) any grant to any Darby Company or Sponsored Darby Fund of a right to use a third Person's intellectual property rights which is necessary for the use of any Intellectual Property. "INVESTMENT COMPANY" has the meaning set forth in the Investment Company Act. "INVESTMENT COMPANY ACT" means the Investment Company Act of 1940, as amended, and the rules and regulations promulgated thereunder by the SEC. "IRS" means the Internal Revenue Service. "KNOWLEDGE" means, with respect to (i) the Darby Companies, the actual knowledge after due inquiry of Nicholas F. Brady, Richard H. Frank, Scott Beatty, Clark Nielsen, Nelson Oliveira, Meredith B. Oliver, Julio Lastres, Peter Jones, Alejandro Schwedhelm, Robert Graffam, Pedro Batalla, Simon Sham or John Yonemoto, (ii) any individual, the actual knowledge after due inquiry of such individual or (iii) any other Person, the actual knowledge after due inquiry of the officers and directors of such Person. "LAW" means any foreign, federal, state or local law (including common law), statute, code, ordinance, rule, regulation or other requirement of a Governmental Body. "LEGAL PROCEEDING" means any judicial, administrative or arbitral actions, suits, proceedings (public or private) or claims or proceedings by or before a Governmental Body. 4 "LIABILITY" means any Indebtedness, loss, damage or liability (whether direct or indirect, asserted or unasserted, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, or due or to become due, and whether in contract, tort, strict liability or otherwise), including all costs and expenses relating thereto. "LIEN" means a ny lien, pledge, mortgage, deed of trust, security interest, claim, lease, charge, option, right of first refusal, easement, servitude, transfer restriction under any shareholder or similar agreement, or encumbrance of any nature whatsoever. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the business, assets, properties, results of operations or financial condition of the Darby Companies, taken as a whole, or (ii) the ability of any Darby Party to consummate the transactions contemplated by this Agreement; PROVIDED, HOWEVER, that a Material Adverse Effect shall not include any effect primarily resulting from general economic conditions; exchange rate fluctuations; changes in prevailing interest rates; political instability; acts of war or terrorism; any adverse developments in the lending, mezzanine capital or private equity markets in the Latin American or Asia/Pacific region generally; and the announcement or implementation of any of the transactions contemplated by this Agreement (except in each case for effects which have a disproportionate adverse effect on the Darby Companies as compared to other privately-owned emerging markets private investment fund managers operating primarily in the same markets as the Darby Companies). "NASD" means the National Association of Securities Dealers, Inc. or any one or more of its subsidiaries, as the context may require, and any successor to any of them. "ORDER" means any order, injunction, judgment, decree, ruling, writ, assessment or arbitration award. "ORDINARY COURSE OF BUSINESS" means with respect to any Person the ordinary and usual course of day-to-day operations of the business of such Person through the date hereof. "PERMITS" means any approvals, authorizations, consents, licenses, permits or certificates. "PERMITTED EXCEPTIONS" means (i) all defects, exceptions, restrictions, easements, rights of way and encumbrances disclosed in policies of title insurance which have been made available to Purchaser; (ii) statutory Liens for current taxes, assessments or other governmental charges not yet delinquent or the amount or validity of which is being contested in good faith by appropriate proceedings, provided an appropriate reserve is established therefor; (iii) mechanics', carriers', workers', repairers' and similar Liens arising or incurred in the Ordinary Course of Business that are not material to the business, operations or financial condition of the Darby Company owning the property subject thereto; (iv) zoning, entitlement and other land use and environmental regulations by any Governmental Body; (v) statutory landlords' Liens; and (vi) such other imperfections in title, easements, restrictions and encumbrances which do not materially detract from the value of the Darby Company owning the property subject thereto or materially interfere with its business or operations. 5 "PERSON" means any individual, corporation, partnership, limited liability company, limited duration company, firm, joint venture, association, joint-stock company, trust, unincorporated organization, Governmental Body or other entity. "PORTFOLIO COMPANY" means any Person of which any outstanding voting securities or other voting equity interests are owned or controlled, directly or indirectly, by a Darby Fund. "SEC" means the Securities and Exchange Commission. "SECURITIES LAWS" means the Securities Act, the Exchange Act, the Investment Company Act, the Advisers Act, the CEA, the securities or "blue sky" laws of any state or territory of the United States and the rules and regulations of the NASD and the comparable laws, rules and regulations in effect in any other country. "SOFTWARE" means any and all (i) computer programs, including any and all software implementations of algorithms, models and methodologies, whether in source code or object code, (ii) databases and compilations, including any and all data and collections of data, whether machine readable or otherwise, (iii) descriptions, flow-charts and other work product used to design, plan, organize and develop any of the foregoing, screens, user interfaces, report formats, firmware, development tools, templates, menus, buttons and icons, and (iv) all documentation including user manuals and other training documentation related to any of the foregoing. "SPONSORED DARBY FUNDS" means the Funds listed on EXHIBIT B hereto. "SUBSIDIARY" means (i) any Person of which a majority of the outstanding voting securities or other voting equity interests are owned or controlled, directly or indirectly, by DOIL, including DOP, but not including the Darby Funds or the Portfolio Companies, and (ii) Darby-BBVA Latin America Investors, Ltd., a Cayman Islands corporation. "TAX RETURN" means all returns, declarations, reports, estimates, information returns and statements required to be filed in respect of any Taxes. "TAXES" means (i) all federal, state, local or foreign taxes, charges, fees, imposts, levies or other assessments, including, without limitation, all net income, gross receipts, capital, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property and estimated taxes, customs duties, fees, assessments and charges of any kind whatsoever, (ii) all interest, penalties, fines, additions to tax or additional amounts imposed by any taxing authority in connection with any item described in clause (i), and (iii) any liability in respect of any items described in clauses (i) and/or (ii) payable by reason of contract, assumption, transferee liability, operation of Law, Treasury Regulation section 1.1502-6(a) (or any predecessor or successor thereof of any analogous or similar provision under Law) or otherwise. "TAXING AUTHORITY" means the IRS and any other Governmental Body responsible for the administration of any Tax. 6 (b) TERMS DEFINED ELSEWHERE IN THIS AGREEMENT. For purposes of this Agreement, the following terms have meanings set forth in the sections indicated: TERM SECTION - ---- ------- Agreement Preamble Approval Items 10.5(b)(i) Balance Sheet 5.8(a) Balance Sheet Date 5.8(a) Basket 10.4(c) CEA 5.22(e) CFTC 5.22(e) Claim 10.3(a) Closing 3.1 Closing Date 3.1 Confidential Information 8.6(a) Copyrights 1.1(a) (in Intellectual Property definition) Darby Employees 8.9 Darby Fund Agreements 5.23(b) Darby Marks 8.8 Darby Parties Preamble Disputes 11.4 DOIL Preamble DOIL Balance Sheet 5.8(a) DOIL Common Stock 5.4(a) DOIL Documents 5.2(a) DOIL Purchase Price 2.2(a) DOIL Sellers Preamble DOIL Shares Recitals DOP Preamble DOP Documents 5.2(b) DOP Interests Recitals DOP Purchase Price 2.2(b) DOP Sellers Preamble Employee Arrangements 5.16(a) ERISA 5.16(a) ERISA Affiliate 5.16(a) ERISA Plans 8.9 Expenses 10.2(a)(iv) Financial Statements 5.8(a) FIRPTA Affidavit 9.1(h) FRI Preamble Losses 10.2(a)(i) Marks 1.1(a) (in Intellectual Property definition) Material Contracts 5.15(a) New York Courts 11.4 NFA 5.22(e) 7 Notified Party 10.5(d)(i) Patents 1.1(a) (in Intellectual Property definition) Patriot Act 5.27 Personal Property Leases 5.13 Privacy Rules 5.26 Pru Sellers 5.23(u) Purchaser Preamble Purchaser Documents 7.2 Purchaser Indemnified Parties 10.2(a) Real Property Lease 5.12 Securities Act 7.5 Seller Documents 6.2 Seller Indemnified Parties 10.2(b) Seller Representative 11.3 Sellers Preamble Straddle Period 10.5(b)(v) Survival Period 10.1 Take Along Agreement 8.11(b)(v) Tax Claim 10.5(d)(i) Trade Secrets 1.1(a) (in Intellectual Property definition) (c) OTHER DEFINITIONAL AND INTERPRETIVE MATTERS. Unless otherwise expressly provided, for purposes of this Agreement, the following rules of interpretation shall apply: CALCULATION OF TIME PERIOD. When calculating the period of time before which, within which or following which any act is to be done or step taken pursuant to this Agreement, the date that is the reference date in calculating such period shall be excluded. If the last day of such period is a non-Business Day, the period in question shall end on the next succeeding Business Day. DOLLARS. Any reference in this Agreement to $ shall mean U.S. dollars. EXHIBITS/SCHEDULES. The Exhibits and Schedules to this Agreement are hereby incorporated and made a part hereof and are an integral part of this Agreement. Any capitalized terms used in any Schedule or Exhibit but not otherwise defined therein shall be defined as set forth in this Agreement. GENDER AND NUMBER. Any reference in this Agreement to gender shall include all genders, and words imparting the singular number only shall include the plural and vice versa. HEADINGS. The provision of a Table of Contents, the division of this Agreement into Articles, Sections and other subdivisions and the insertion of headings are for convenience of reference only and shall not affect or be utilized in construing or interpreting this Agreement. All references in this Agreement to any "Section" are to the corresponding Section of this Agreement unless otherwise specified. 8 HEREIN. The words such as "herein," "hereinafter," "hereof," and "hereunder" refer to this Agreement as a whole and not merely to a subdivision in which such words appear unless the context otherwise requires. INCLUDING. The word "including" or any variation thereof means "including, without limitation" and shall not be construed to limit any general statement that it follows to the specific or similar items or matters immediately following it. (d) AGREEMENT DRAFTED JOINTLY. The parties hereto have participated jointly in the negotiation and drafting of this Agreement and, in the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as jointly drafted by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provision of this Agreement. ARTICLE II SALE AND PURCHASE OF SHARES AND INTERESTS; CONSIDERATION 2.1 SALE AND PURCHASE OF SHARES AND INTERESTS. (a) Upon the terms and subject to the conditions contained herein, on the Closing Date, each DOIL Seller agrees to sell to Purchaser, and Purchaser agrees to purchase, and FRI shall cause Purchaser to purchase, from each DOIL Seller, the DOIL Shares owned by such DOIL Seller set forth opposite such DOIL Seller's name on EXHIBIT C hereto. (b) Upon the terms and subject to the conditions contained herein, on the Closing Date, each DOP Seller agrees to sell to Purchaser, and Purchaser agrees to purchase, and FRI shall cause Purchaser to purchase, from each DOP Seller, the DOP Interests owned by such DOP Seller set forth opposite such DOP Seller's name on EXHIBIT C hereto. 2.2 CONSIDERATION. (a) The aggregate consideration for the DOIL Shares shall be an amount in cash equal to $762,751 (the "DOIL PURCHASE PRICE"). (b) The aggregate consideration for the DOP Interests shall be an amount in cash equal to $75,115,821 (the "DOP PURCHASE PRICE"). 2.3 PAYMENT OF PURCHASE PRICE. (a) On the Closing Date, Purchaser shall pay, and FRI shall cause Purchaser to pay, the DOIL Purchase Price to the DOIL Sellers, as set forth on EXHIBIT C. (b) On the Closing Date, Purchaser shall pay, and FRI shall cause Purchaser to pay, the DOP Purchase Price to the DOP Sellers, as set forth on EXHIBIT C. 9 (c) Purchaser shall pay the DOIL Purchase Price and the DOP Purchase Price by wire transfers of immediately available funds into such account or accounts specified by DOIL in writing at least two Business Days prior to Closing. ARTICLE III CLOSING 3.1 CLOSING DATE. Subject to the satisfaction of the conditions set forth in SECTIONS 9.1 and 9.2 hereof (or the waiver thereof by the party entitled to waive that condition), the closing of the sale and purchase of the DOIL Shares and the DOP Interests provided for in SECTION 2.1 hereof (the "CLOSING") shall take place at the offices of Weil, Gotshal & Manges LLP located at 767 Fifth Avenue, New York, New York 10153 (or at such other place as the parties may designate in writing) at 10:00 a.m. (New York City time) on October 10, 2003, provided that on or prior to such date all of the conditions set forth in ARTICLE IX (other than conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of such conditions) shall have been satisfied or waived. Notwithstanding the preceding sentence, FRI shall have the right, upon at least three Business Days prior written notice to DOIL, to establish a closing date prior to October 10, 2003, provided that on or prior to such closing date all of the conditions set forth in ARTICLE IX (other than conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of such conditions) shall have been satisfied or waived. The date on which the Closing shall be held is referred to in this Agreement as the "CLOSING DATE". ARTICLE IV TERMINATION 4.1 TERMINATION OF AGREEMENT. This Agreement may be terminated prior to the Closing as follows: (a) At the election of DOIL or Purchaser on or after October 10, 2003 (unless such date is extended by mutual agreement of DOIL and Purchaser), if the Closing shall not have occurred by the close of business on such date, provided that (i) DOIL may not so terminate this Agreement if any Darby Party is in material default of any of its obligations hereunder and (ii) Purchaser may not so terminate this Agreement if either Purchaser or FRI is in material default of any of its obligations hereunder; (b) by mutual written consent of DOIL and Purchaser; (c) by DOIL or Purchaser if there shall be in effect a final nonappealable Order of a Governmental Body of competent jurisdiction restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated hereby; it being agreed that the parties hereto shall promptly appeal any adverse determination which is not nonappealable (and pursue such appeal with reasonable diligence); (d) by Purchaser if there shall have been a material breach of any representation, warranty, covenant or agreement of any Darby Party set forth in this Agreement, 10 which breach would give rise to a failure of a condition set forth in SECTION 9.1(a), 9.1(b), 9.1(c) or 9.1(d) and is incapable of being cured or, if capable of being cured, shall not have been cured within twenty (20) Business Days following receipt by DOIL of written notice of such breach from Purchaser; or (e) by DOIL if there shall have been a material breach of any representation, warranty, covenant or agreement of Purchaser or FRI set forth in this Agreement, which breach would give rise to a failure of a condition set forth in SECTION 9.2(a) or 9.2(b) and is incapable of being cured or, if capable of being cured, shall not have been cured within twenty (20) Business Days following receipt by Purchaser of written notice of such breach from DOIL. 4.2 PROCEDURE UPON TERMINATION. In the event of a termination by Purchaser or DOIL, or both, pursuant to SECTION 4.1 hereof, written notice thereof shall forthwith be given to the other, and this Agreement shall terminate, and the purchase of the DOIL Shares and the DOP Interests hereunder shall be abandoned, without further action by Purchaser or FRI or any Darby Party. 4.3 EFFECT OF TERMINATION. If this Agreement is validly terminated as provided herein, then each of the parties hereto shall be relieved of its duties and obligations arising under this Agreement after the date of such termination and such termination shall be without liability to any party hereto; PROVIDED, HOWEVER, that the provisions of SECTIONS 8.6 and 8.7 and ARTICLE XI hereof shall survive any such termination and shall be enforceable hereunder; PROVIDED, FURTHER, that nothing in this SECTION 4.3 shall relieve any party hereto of any liability for a breach of this Agreement prior to the effective date of termination. ARTICLE V REPRESENTATIONS AND WARRANTIES OF DOIL AND DOP REGARDING THE DARBY COMPANIES Each of DOIL and DOP hereby represents and warrants jointly and severally to Purchaser and FRI that: 5.1 ORGANIZATION AND GOOD STANDING. (a) DOIL is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now conducted. DOIL is duly qualified or authorized to do business as a foreign corporation and is in good standing under the laws of each jurisdiction in which the conduct of its business or the ownership of its properties requires such qualification or authorization. (b) DOP is a limited partnership duly formed, having a legal existence and in good standing under the laws of the State of Delaware and has all requisite limited partnership power and authority to own, lease and operate its properties and to carry on its business as now conducted. DOP is duly qualified or authorized to do business as a foreign limited partnership and is in good standing under the laws of each jurisdiction in which the conduct of its business or the ownership of its properties requires such qualification or authorization. 11 5.2 AUTHORIZATION OF AGREEMENT. (a) DOIL has all requisite corporate power and authority to execute and deliver this Agreement and each other agreement, document, instrument or certificate, if any, contemplated by this Agreement to be executed by DOIL in connection with the consummation of the transactions contemplated by this Agreement (together with this Agreement, the "DOIL DOCUMENTS"), and to consummate the transactions contemplated hereby and thereby to be consummated by DOIL. The execution and delivery by DOIL of this Agreement and each of the other DOIL Documents and the consummation of the transactions contemplated hereby and thereby to be consummated by DOIL have been duly authorized by all required corporate action on the part of DOIL. This Agreement has been, and each of the other DOIL Documents will be at or prior to the Closing, duly and validly executed and delivered by DOIL and (assuming the due authorization, execution and delivery by the other parties hereto and thereto) this Agreement constitutes, and each of the other DOIL Documents when so executed and delivered will constitute, legal, valid and binding obligations of DOIL, enforceable against DOIL in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). (b) DOP has all requisite partnership power and authority to execute and deliver this Agreement and each other agreement, document, instrument or certificate, if any, contemplated by this Agreement to be executed by DOP in connection with the consummation of the transactions contemplated by this Agreement (together with this Agreement, the "DOP DOCUMENTS"), and to consummate the transactions contemplated hereby and thereby to be consummated by DOP. The execution and delivery by DOP of this Agreement and each of the other DOP Documents and the consummation of the transactions contemplated hereby and thereby to be consummated by DOP have been duly authorized by all required partnership action on the part of DOP. This Agreement has been, and each of the other DOP Documents will be at or prior to the Closing, duly and validly executed and delivered by DOP and (assuming the due authorization, execution and delivery by the other parties hereto and thereto) this Agreement constitutes, and each of the other DOP Documents when so executed and delivered will constitute, legal, valid and binding obligations of DOP, enforceable against DOP in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). 5.3 CONFLICTS; CONSENTS OF THIRD PARTIES. (a) None of the execution and delivery by DOIL of this Agreement and the other DOIL Documents and by DOP of this Agreement and the other DOP Documents, the consummation by DOIL or DOP of the transactions contemplated to be consummated by either of them hereby or thereby or compliance by DOIL or DOP with any of the provisions hereof or thereof applicable to either of them will (i) violate the certificate of incorporation or by-laws or 12 comparable organizational documents of any Darby Company or Sponsored Darby Fund or (ii) except as set forth on SCHEDULE 5.3(a), and assuming that the consents, waivers, approvals, authorizations, declarations, filings and notifications referred to in SECTIONS 5.3(b) and 6.3(b) are duly obtained and made, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit under, or give rise to any obligation of any Darby Company to make any payment under, or to the increased, additional, accelerated or guaranteed rights or entitlements of any Person under, or result in the creation of any Liens upon any of the properties or assets of any Darby Company under, (w) any Contract or Darby Fund Agreement to which any Darby Company or Sponsored Darby Fund is a party or by which any of the properties or assets of any Darby Company or Sponsored Darby Fund are bound; (x) any Permit of any Darby Company or Sponsored Darby Fund; (y) any Order of any Governmental Body applicable to any Darby Company or Sponsored Darby Fund or any of the properties or assets of any Darby Company or Sponsored Darby Fund as of the date hereof; or (z) any Law applicable to any Darby Company or Sponsored Darby Fund. (b) Except as set forth on SCHEDULE 5.3(b), no consent, waiver, approval, license, permit, ruling or authorization of, or declaration or filing with, or notification to, any Person or Governmental Body is required on the part of any Darby Company in connection with (i) the execution and delivery by DOIL and DOP of this Agreement and the other DOIL Documents and DOP Documents, the compliance by DOIL and DOP with any of the provisions hereof or thereof, or the consummation of the transactions contemplated hereby or thereby, or (ii) the continuing validity and effectiveness immediately following the Closing of any Permit or Contract of any Darby Company, except for approval of the Cayman Islands Monetary Authority. 5.4 CAPITALIZATION. (a) The authorized capital stock of DOIL consists of 10,000 shares of common stock, $1.00 par value per share (the "DOIL COMMON STOCK"). As of the date hereof, there are 1,666.67 shares of DOIL Common Stock issued and outstanding and no shares of DOIL Common Stock are held by DOIL as treasury stock. All of the issued and outstanding shares of DOIL Common Stock were duly authorized for issuance and are validly issued, fully paid and non-assessable. Except for the DOP Interests, interests of Affiliates of Purchaser in DOP and DOIL's interest in DOP as its sole general partner, and except as set forth on SCHEDULE 5.4(a)(i), there are no equity interests in DOP, including without limitation any rights to profits, income, gains, distributions, capital, equity or similar rights or interests, or any rights to any payments measured in whole or in part by any of the foregoing. All of the DOP Interests were duly authorized for issuance and are validly issued. (b) Except as set forth on SCHEDULE 5.4(b)(i), there is no existing option, warrant, call, right or Contract of any character requiring, and there are no securities of DOIL or DOP outstanding which upon conversion or exchange would require, the issuance, sale or transfer of any additional shares of capital stock or other equity securities of or interests in DOIL or DOP or other securities convertible into, exchangeable for or evidencing the right to subscribe for or purchase shares of capital stock or other equity securities of or interests in DOIL or DOP. Except as set forth on SCHEDULE 5.4(b)(ii), none of the Darby Companies is a party to any voting 13 trust or other Contract with respect to the voting, redemption, sale, transfer or other disposition of the capital stock of DOIL or the partner interests of DOP. 5.5 SUBSIDIARIES. SCHEDULE 5.5(a) sets forth the name of each Subsidiary (other than DOP), and, with respect to each such Subsidiary, the jurisdiction in which it is incorporated or organized, the jurisdictions, if any, in which it is qualified to do business, the number of shares of its authorized capital stock, the names of all stockholders or other equity owners and the number of shares of stock owned by each stockholder or the amount or percentage, if applicable, of equity owned by each equity owner. Each such Subsidiary is a duly organized and validly existing corporation or other entity in good standing under the laws of the jurisdiction of its incorporation or organization and is duly qualified or authorized to do business as a foreign corporation or entity and is in good standing under the laws of each jurisdiction in which the conduct of its business or the ownership of its properties requires such qualification or authorization, except where the failure to be qualified or authorized to do business as a foreign corporation would not constitute a Material Adverse Effect. Each such Subsidiary has all requisite corporate or entity power and authority to own its properties and carry on its business as presently conducted. No shares of capital stock are held by any such Subsidiary as treasury stock. The outstanding shares of capital stock or equity interests of each such Subsidiary are validly issued, fully paid and non-assessable, and all such shares or other equity interests represented as being owned by any Darby Company are owned by it free and clear of any and all Liens, except as set forth in SCHEDULE 5.5(b) and in the respective organizational documents of such Subsidiaries and in the Darby Fund Agreements and subject to applicable Securities Laws. There is no existing option, warrant, call, right or Contract to which any such Subsidiary is a party requiring, and there are no convertible securities of any such Subsidiary outstanding which upon conversion would require, such Subsidiary to issue any additional shares of capital stock or other equity interests of any such Subsidiary or other securities convertible into shares of capital stock or other equity interests of any such Subsidiary. 5.6 RECORDS. (a) DOP and DOIL have delivered or made available to Purchaser true, correct and complete copies of the certificates of incorporation (each certified by the Secretary of State or other appropriate official of the applicable jurisdiction of organization) and by-laws or comparable organizational documents of each Darby Company and each Sponsored Darby Fund. (b) The minute books of each Darby Company previously made available to Purchaser contain, in all material respects, true and correct records of all meetings and accurately reflect all other corporate action of the stockholders (or other equity holders) and boards of directors (or analogous bodies) (including investment and other committees and advisory boards thereof) of the Darby Companies. The stock certificate books and stock transfer ledgers (or comparable record books) of the Darby Companies previously made available to Purchaser are true, correct and complete. All stock transfer taxes levied or payable with respect to all transfers of shares of the Darby Companies and the Sponsored Darby Funds prior to the date hereof have been paid and appropriate transfer tax stamps affixed. 5.7 INTENTIONALLY OMITTED. 14 5.8 FINANCIAL STATEMENTS. (a) DOP and DOIL have delivered to Purchaser copies of (i) the audited consolidated balance sheets of DOP and the audited balance sheets of DOIL as at December 31, 2002, 2001 and 2000 and the related audited consolidated statements of income and of cash flows of DOP and the related audited statements of income and cash flow of DOIL for the years then ended and (ii) the unaudited consolidated balance sheet of DOP and the unaudited balance sheet of DOIL as at June 30, 2003 and the related unaudited consolidated statements of income and cash flows of DOP and DOIL for the six month period then ended (such audited and unaudited statements, including the related notes and schedules thereto, are referred to herein as the "FINANCIAL STATEMENTS"). Each of the Financial Statements has been prepared in accordance with GAAP consistently applied by DOP and DOIL throughout the periods presented and presents fairly in all material respects the financial position, results of operations and cash flows of DOP on a consolidated basis and DOIL as at the dates and for the periods indicated. For the purposes hereof, the audited consolidated balance sheet of DOP as at December 31, 2002 is referred to as the "BALANCE SHEET" and the audited balance sheet of DOIL as of December 31, 2002, is referred to as the "DOIL BALANCE SHEET" and December 31, 2002, is referred to as the "BALANCE SHEET DATE". (b) The Darby Companies make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of their respective assets. The Darby Companies maintain systems of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization; and (ii) transactions are recorded as necessary to permit the preparation of financial statements in conformity with GAAP. 5.9 NO UNDISCLOSED LIABILITIES. Except as set forth on SCHEDULE 5.9, no Darby Company has any Liabilities of any kind other than those (i) fully reflected in, reserved against or otherwise described in the Balance Sheet or the DOIL Balance Sheet or the notes thereto or (ii) not material to the Darby Companies or incurred in the Ordinary Course of Business. 5.10 ABSENCE OF CERTAIN DEVELOPMENTS. Except as expressly contemplated by this Agreement or as set forth on SCHEDULE 5.10, since the Balance Sheet Date (i) the Darby Companies have conducted their respective businesses only in the Ordinary Course of Business and (ii) there has not been any event, change, occurrence or circumstance that has had or could reasonably be expected to have a Material Adverse Effect. Except as set forth in SCHEDULE 5.10, since the Balance Sheet Date, none of the Darby Companies has taken any action, that if taken after the date of this Agreement, would have constituted a breach of SECTION 8.2. 5.11 TAXES. (a) All material Tax Returns required to be filed by or on behalf of any Darby Company or any Affiliated Group of which any Darby Company is or was a member have been duly and timely filed with the appropriate Taxing Authority in all jurisdictions in which such Tax Returns are required to be filed (after giving effect to any valid extensions of time in which to make such filings), and all such Tax Returns are true, complete and correct in all material 15 respects. All material Taxes payable by or on behalf of any Darby Company or any Affiliated Group of which any Darby Company is or was a member have been fully and timely paid. With respect to any period for which material Tax Returns have not yet been filed or for which Taxes are not yet due or owing, DOIL and/or DOP has established adequate reserves for the payment of such Taxes in the Financial Statements for the year ended December 31, 2002, and the six-month period ended June 30, 2003. All material required estimated Tax payments have been fully and timely made by or on behalf of each Darby Company. (b) Each Darby Company has complied in all material respects with all applicable Laws relating to the payment and withholding of material Taxes and has duly and timely withheld and paid over to the appropriate Taxing Authority all material amounts required to be so withheld and paid under all applicable Laws. (c) Except with respect to all Tax Returns of AIMCMC and DAI-HK for tax periods ended on or before March 1, 2002, DOP and DOIL have made available to Purchaser complete copies of (i) all federal, state, local and foreign income or franchise Tax Returns of each Darby Company relating to all taxable periods ended after December 31, 1999, and (ii) any audit report issued within the last three years relating to any Taxes due from or with respect to any Darby Company. Except as set forth on SCHEDULE 5.11(c), all income and franchise Tax Returns filed by or on behalf of any Darby Company have been examined by the relevant Taxing Authority or the statute of limitations with respect to such Tax Returns has expired. (d) No written or otherwise binding claim has been made by a Taxing Authority in a jurisdiction where any Darby Company does not file Tax Returns such that it is or may be subject to taxation by that jurisdiction. (e) All deficiencies asserted or assessments made in writing as a result of any examinations by any Taxing Authority of the Tax Returns of, or including, any Darby Company have been fully paid, and there are no other audits or investigations by any Taxing Authority for which any Darby Company has been notified in writing, in progress, nor has any Seller or Darby Company received any written notice from any Taxing Authority that it intends to conduct such an audit or investigation. To the Knowledge of the Darby Companies, no issue has been raised in writing by a Taxing Authority in any prior examination of any Darby Company which, by application of the same or similar principles, could reasonably be expected to result in a proposed deficiency for any subsequent taxable period. (f) Except as set forth on SCHEDULE 5.11(f), no Darby Company nor any other Person on their behalf has (i) filed a consent pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by any Darby Company, (ii) agreed to, nor are they required to, make any adjustments pursuant to Section 481(a) of the Code or any similar provision of Law or has any knowledge that any Taxing Authority has proposed any such adjustment, or has any application pending with any Taxing Authority requesting permission for any changes in accounting methods that relate to any Darby Company, (iii) executed or entered into a closing agreement pursuant to Section 7121 of the Code or any similar provision of Law with respect to any Darby Company, (iv) requested any extension of time within which to file any Tax Return, which Tax Return has since not been filed, (v) granted any extension for the 16 assessment or collection of Taxes, which Taxes have not since been paid, or (vi) granted to any Person any power of attorney that is currently in force with respect to any Tax matter. (g) Except with respect to property used outside the United States, no property owned by any Darby Company is (i) property required to be treated as being owned by another Person pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect immediately prior to the enactment of the Tax Reform Act of 1986, (ii) "tax-exempt use property" within the meaning of Section 168(h)(1) of the Code, (iii) "tax-exempt bond financed property" within the meaning of Section 168(g) of the Code, (iv) "limited use property" within the meaning of Rev. Proc. 2001-28, 2001-1 C.B. 1156, (v) subject to Section 168(g)(1)(A) of the Code, or (vi) subject to any provision of state, local or foreign Law comparable to any of the preceding provisions. (h) Except as set forth on SCHEDULE 5.11(h), no Seller is a foreign person within the meaning of Section 1445 of the Code. (i) No Darby Company is a party to any tax sharing, allocation, indemnity or similar agreement or arrangement (whether or not written) pursuant to which it will have any obligation to make any Tax payments after the Closing except with respect to payments required under a partnership agreement (or limited liability company operating agreement or other similar agreement) as a distribution to a partner (or member) in respect of Taxes of such partner (or member). (j) There is no contract, agreement, plan or arrangement covering any Person that, individually or collectively, could give rise to the payment of any amount by reason of the transactions contemplated by this Agreement (whether alone or in combination with any other event) that would not be deductible by Purchaser or any Darby Company by reason of Section 280G of the Code. (k) Except as set forth on SCHEDULE 5.11(k), no Darby Company is subject to any private letter ruling of the IRS or comparable rulings of any Taxing Authority. (l) No Darby Company has constituted either a "distributing corporation" or a "controlled corporation" (within the meaning of Section 355(a)(1)(A) of the Code) in a distribution of stock qualifying for tax-free treatment under Section 355 of the Code (A) in the two (2) years prior to the date of this Agreement or (B) in a distribution which could otherwise constitute part of a "plan" or "series of related transactions" (within the meaning of Section 355(e) of the Code) in conjunction with the transactions contemplated by this Agreement. (m) No Darby Company has (i) engaged in any "intercompany transactions" in respect of which gain was and continues to be deferred pursuant to Treasury Regulations Section 1.1502-13 or any analogous or similar provision of Law, or (ii) has any "excess loss accounts" in respect of the stock of any Subsidiary pursuant to Treasury Regulations Section 1.1502-19, or any analogous or similar provision of Law. (n) To the Knowledge of the Darby Companies, there is no taxable income of any Darby Company that will be required under applicable Tax Law to be reported by Purchaser 17 or any of its Affiliates for a taxable period beginning after the Closing Date which taxable income was realized (and reflects economic income) arising prior to the Closing Date. (o) SCHEDULE 5.11(o) lists each jurisdiction in which, to the Knowledge of the Darby Companies, any Darby Company has, or has ever had, a permanent establishment (other than the United States), or has engaged in a trade or business in any country (other than the United States) that subjected it to tax in such country. (p) SCHEDULE 5.11(p) lists each Subsidiary and each Sponsored Darby Fund that is treated for federal income tax purposes as a partnership. DOP and each other Subsidiary and each Sponsored Darby Fund that is treated as a partnership for federal income tax purposes either have an election in effect under Section 754 of the Code or such election may be procured, and be effective, for the sale of the DOP Interests pursuant hereto. (q) Neither DOP nor any other Subsidiary that is treated as a partnership for federal income tax purposes owns any property that is subject to Section 704(c) of the Code, excluding for this purpose property that has been revalued pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(f). (r) DAI-HK does not have any accumulated earnings and profits as determined under Section 1248 of the Code. (s) DAI-HK has not generated material amounts of foreign base company income under Section 954 of the Code and has no investments in United States property within the meaning of Section 956 of the Code. 5.12 REAL PROPERTY. The Darby Companies do not own any real property or interests in real property in fee. SCHEDULE 5.12 sets forth a complete list of all real property and interests in real property leased by the Darby Companies (individually, a "REAL PROPERTY LEASE" and collectively, the "REAL PROPERTY LEASES"). The Real Property Leases constitute all interests in real property currently used or currently held for use in connection with the business of the Darby Companies and which are necessary for the continued operation of the business of the Darby Companies as the business is currently conducted. 5.13 TANGIBLE PERSONAL PROPERTY. SCHEDULE 5.13 sets forth all leases of personal property ("PERSONAL PROPERTY LEASES") involving annual payments in excess of $25,000 to which any Darby Company is a party or by which the properties or assets of any Darby Company is bound. All of the items of personal property under the Personal Property Leases are in good condition and repair (ordinary wear and tear excepted) and are suitable for the purposes used, and such property is in all material respects in the condition required of such property by the terms of the lease applicable thereto during the term of the lease. 5.14 INTELLECTUAL PROPERTY. (a) SCHEDULE 5.14 sets forth an accurate and complete list of all Patents, registered Marks, pending applications for registrations of any Marks, registered Copyrights, and pending applications for registration of Copyrights, owned or filed by any Darby Company. SCHEDULE 5.14 lists the jurisdictions in which each such item of Intellectual Property has been 18 issued or registered or in which any such application for such issuance and registration has been filed. (b) The Darby Companies have ownership or valid and legally enforceable rights to use all Intellectual Property necessary for the conduct of the business of the Darby Companies as currently conducted. No Darby Company has received in the prior three years any written notice from any Person that any use by any Darby Company of any such Intellectual Property infringes or otherwise violates the rights of any such Person. (c) No Darby Company or, to the Knowledge of the Darby Companies, any other Person, is in default (or with notice or lapse of time or both would be in default) in any material respect under any Intellectual Property Licenses. No Intellectual Property owned by any Darby Company and necessary for the conduct of the business of the Darby Companies as currently conducted, is subject to any outstanding claim, Order, stipulation or settlement agreement restricting the use thereof by any Darby Company or restricting the licensing thereof by any Darby Company to any Person. (d) To the Knowledge of the Darby Companies, no Person is infringing or otherwise violating any Intellectual Property of any Darby Company. 5.15 MATERIAL CONTRACTS. (a) SCHEDULE 5.15(a) sets forth all of the following Contracts to which (except with respect to clause (xv) below) any Darby Company is a party or by which any of them is bound (collectively, the "MATERIAL CONTRACTS"): (i) Contracts with any Seller or any current or former officer, director, stockholder or Affiliate (other than DOP, DOIL and the Sponsored Darby Funds) of any Darby Company; (ii) Contracts for the sale of any of the assets of any Darby Company other than in the Ordinary Course of Business or for the grant to any Person of any preferential rights to purchase any of its assets; (iii) Contracts for joint ventures, strategic alliances or partnerships; (iv) Contracts containing covenants of any Darby Company not to compete in any line of business or with any Person in any geographical area or covenants of any other Person not to compete with any Darby Company in any line of business or in any geographical area; (v) Contracts relating to the acquisition by any Darby Company of any operating business or the capital stock of any other Person other than a Sponsored Fund; (vi) Contracts relating to the incurrence, assumption or guarantee of any Indebtedness by any Darby Company or imposing a Lien on any of its assets; 19 (vii) Contracts under which any Darby Company has made advances or loans to any other Person; (viii) Contracts under which any Darby Company is required to make severance, retention, change in control or other similar payments to any other Person; (ix) Contracts for the employment of any individual on a full-time, part-time or consulting or other basis except as contemplated by this Agreement; (x) outstanding agreements of guaranty, surety or indemnification, direct or indirect, by any Darby Company; (xi) Contracts (or group of related contracts) which involve the expenditure by any Darby Company of more than $25,000 annually or $100,000 in the aggregate over the term of the Contract; (xii) Advisory Agreements; (xiii) Real Property Leases and Personal Property Leases; (xiv) Contracts providing for finder's fees or fees for introducing investments not otherwise included in the Darby Fund Agreements; (xv) the Darby Fund Agreements (whether or not any Darby Company is a party thereto); and (xvi) Contracts (other than Contracts related to the direct or indirect acquisition by the Darby Funds of any Portfolio Company) that are otherwise material to the Darby Companies. (b) Each of the Material Contracts is in full force and effect and is the legal, valid and binding obligation of the applicable Darby Companies party thereto or bound thereby, enforceable against them in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). Except as set forth on SCHEDULE 5.15(b), no Darby Company is in default (or with notice or the passage of time or both would be in default) in any material respect under any material provision of any Material Contract, and, to the Knowledge of the Darby Companies, no other party to any Material Contract is in default thereunder (or with notice or the passage of time or both would be in default thereunder). No party to any of the Material Contracts has exercised any termination rights with respect thereto. DOP and DOIL have delivered or otherwise made available to Purchaser true, correct and complete copies of all of the Material Contracts, together with all amendments, modifications or supplements thereto. 5.16 EMPLOYEE MATTERS. (a) SCHEDULE 5.16 sets forth a complete and correct list of: 20 (i) all "employee benefit plans", as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and all bonus or other incentive compensation, deferred compensation, employee loan, salary continuation, severance, sick days, stock award, stock option, stock purchase, tuition assistance, vacation pay, service award, company car, club or other membership agreements, policies or arrangements (collectively, "Benefit Plans") maintained or with respect to which contributions or benefit payments would be made for the benefit of any current or former employee or director of any Darby Company by DOIL or by any other Person that, together with DOIL, would be treated as a single employer for purposes of Section 414 of the Code (an "ERISA AFFILIATE"); and (ii) all employment, consulting, individual compensation or termination of service agreements ("EMPLOYEE ARRANGEMENTS") between DOIL or any of its ERISA Affiliates on the one hand, and any of their respective current or former employees, directors or other individuals, on the other hand, as to which any Darby Company has any Liability. (b) With respect to each Benefit Plan and Employee Arrangement, a complete and correct copy of each of the following documents (if applicable) has been provided or made available to Purchaser: (i) the most recent plan, agreement, policy or other document constituting the Benefit Plan or Employee Arrangement, and related trust documents, and all amendments thereto; (ii) the most recent summary plan description, and all related summaries of material modifications; (iii) the most recent Form 5500 (including schedules); (iv) the most recent IRS determination letter; and (v) the most recent actuarial reports (including for purposes of Financial Accounting Standards Board report no. 87, 106 and 112). (c) No Benefit Plan constitutes a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) or is subject to Title IV of ERISA. (d) The Benefit Plans intended to qualify under Section 401 of the Code are so qualified, and the trusts maintained pursuant thereto are exempt from federal income taxation under Section 501(a) of the Code. Nothing has occurred with respect to the operation of the Benefit Plans which could cause the loss of such qualification or exemption, or the imposition of any Liability, penalty or Tax under ERISA or the Code. (e) The Benefit Plans and Employee Arrangements comply and have complied in all material respects with all applicable provisions of ERISA and other Laws. There are no pending or, to the Knowledge of any Darby Company, threatened Legal Proceedings relating to or in connection with the Benefit Plans or Employee Arrangements, or the assets of any Benefit Plan (other than routine claims for benefits), nor does any Darby Company have Knowledge of facts which could reasonably be expected to form the basis for any such Legal Proceeding. (f) No Benefit Plan provides retiree life or retiree health benefits coverage beyond the last day of the month in which a participant's termination of employment with a Darby Company occurs except as may be required under Part 6 of Title I of ERISA and at the sole expense of the participant or the participant's beneficiary. 21 (g) Except as otherwise expressly set forth in this Agreement, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment becoming due to any employee of any Darby Company; (ii) increase any benefits otherwise payable under any Benefit Plan or Employee Arrangement or (iii) result in the acceleration of the time of payment or vesting of any such benefits. (h) All contributions required by Law or the terms of the Benefit Plans have been fully and timely made. (i) No Darby Company is a party to any labor or collective bargaining agreement and there are no labor or collective bargaining agreements which pertain to employees of any Darby Company. No employees of the Darby Companies are represented by any labor organization. No labor organization or group of employees of any Darby Company has made a pending demand for recognition or certification, and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or, to the Knowledge of any Darby Company, threatened in writing to be brought or filed with the National Labor Relations Board or any other labor relations tribunal or authority. There are no organizing activities involving any Darby Company pending with any labor organization or group of employees of any Darby Company. (j) There are no material strikes, work stoppages, slowdowns, lockouts, material arbitrations or material grievances or other material labor disputes pending or, to the Knowledge of any Darby Company, threatened in writing against or involving any Darby Company. There are no unfair labor practice charges, grievances or complaints pending or, to the Knowledge of any Darby Company, threatened in writing by or on behalf of any employee or group of employees of any Darby Company. (k) There are no complaints, charges or claims against any Darby Company pending or, to the Knowledge of any Darby Company, threatened in writing to be brought or filed, with any Governmental Body based on, arising out of, in connection with, or otherwise relating to the employment or termination of employment by any Darby Company, of any individual. (l) Each Darby Company is in compliance with all Laws and Orders relating to the employment of labor, including all such Laws and Orders relating to wages, hours, collective bargaining, discrimination, civil rights, safety and health workers' compensation and the collection and payment of withholding and/or Social Security Taxes and similar Taxes. 5.17 LITIGATION. Except as set forth in SCHEDULE 5.17(A), there is no Legal Proceeding pending or, to the Knowledge of the Darby Companies, threatened against any Darby Company or Sponsored Darby Fund (or to the Knowledge of the Darby Companies, pending or threatened, against any of the officers, directors or employees of any Darby Company or Sponsored Darby Fund with respect to their business activities on behalf of the Darby Companies or Darby Funds), or to which any Darby Company or Sponsored Darby Fund is otherwise a party before any Governmental Body; nor to the Knowledge of the Darby Companies is there any reasonable basis for any such Legal Proceeding. Except as set forth in SCHEDULE 5.17(A), to the Knowledge of the Darby Companies, there is no Legal Proceeding 22 pending or threatened against any Advised Darby Fund that would reasonably be expected to have an adverse effect on the compensation to be received by any Darby Company from such Advised Darby Fund. Except as set forth on SCHEDULE 5.17(b), no Darby Company or Sponsored Darby Fund is subject to any Order. Except as set forth on SCHEDULE 5.17(c), no Darby Company or Sponsored Darby Fund is engaged in any legal action to recover monies due it or for damages sustained by it. 5.18 COMPLIANCE WITH LAWS; PERMITS. (a) Except as set forth on SCHEDULE 5.18(a)(i), each Darby Company and each Sponsored Darby Fund is in compliance in all material respects with all Laws of any Governmental Body applicable to its business, operations or assets. Except as set forth on SCHEDULE 5.18(a)(ii), no Darby Company or Sponsored Darby Fund has received any written notice of or been charged with the violation of any Laws. To the Knowledge of the Darby Companies, no Darby Company or Sponsored Darby Fund is under investigation with respect to the violation of any Laws. (b) SCHEDULE 5.18(b) contains a list of all material Permits which are required for the operation of the business of the Darby Companies and the Sponsored Darby Funds as presently conducted and as presently intended to be conducted. The Darby Companies and the Sponsored Darby Funds currently have all material Permits which are required for the operation of their respective businesses as presently conducted. No Darby Company or Sponsored Darby Fund is in default or violation, and no event has occurred which, with notice or the lapse of time or both, would constitute a default or violation, in any material respect of any term, condition or provision of any material Permit to which it is a party, to which its business is subject or by which its properties or assets are bound. All such Permits are valid and in full force and effect and are not subject to any suspension, modification or revocation proceedings relating thereto. 5.19 INSURANCE. Set forth in SCHEDULE 5.19(a) is a list of all insurance policies and all fidelity bonds held by or applicable to any Darby Company setting forth, in respect of each such policy, the policy name, policy number, carrier, term, type and annual premium. Except as set forth on SCHEDULE 5.19(b), none of the Darby Companies has taken any action or failed to take any action which could reasonably be expected to result in a retroactive upward adjustment in premiums under any such insurance policies or which could reasonably be expected to result in a prospective upward adjustment in such premiums. Excluding insurance policies that have expired and been replaced in the Ordinary Course of Business consistent with past practice and excluding insurance policies under which DAI, DAI-HK and their officers, directors, employees and Affiliates were insured that were terminated upon the acquisition of the DAI Shares and the DAI-HK Share by DOP, no insurance policy applicable to any Darby Company (other than DAI, DAI-HK and AIMCMC) has been cancelled within the last two (2) years and, to the Knowledge of the Darby Companies, (i) no insurance policy applicable to DAI, DAI-HK or AIMCMC has been cancelled since March 31, 2002 and (ii) no threat has been made to cancel any insurance policy of any Darby Company during such period. Except as set forth on SCHEDULE 5.19(c), none of such insurance policies will terminate, by its own terms, as a result of the consummation of the transactions contemplated hereby. None of the Darby Companies has taken any action or failed to take any action, including, without limitation, the failure by any Darby Company to give any notice or information or any Darby Company giving any inaccurate 23 or erroneous notice or information, which limits or impairs the rights of any Darby Company under any such insurance policies. 5.20 RELATED PARTY TRANSACTIONS. SCHEDULE 5.20(a) is a true and correct list of each Contract between any Darby Company, Sponsored Darby Fund or Portfolio Company on the one hand, and any officer, director or employee of any Darby Company (other than in his or her capacity as such) on the other hand, and, except as set forth on SCHEDULE 5.20(b), each such Contract is on commercially reasonable terms no more favorable to such officer, director or employee than what a third party negotiating on an arms-length basis would expect. 5.21 FINANCIAL ADVISORS. No Person has acted, directly or indirectly, as a broker, finder or financial advisor for any Darby Company in connection with the transactions contemplated by this Agreement and no Person is entitled to any fee or commission or like payment in respect thereof. 5.22 COMPLIANCE. (a) Except as set forth on SCHEDULE 5.18(a), since January 1, 2000, no Darby Company has received any notice that any Governmental Body has initiated any administrative proceeding or investigation into the business or operations of any Darby Company or any principal employees of any of them. There is no unresolved violation or exception by any Governmental Body with respect to any report or statement by any Governmental Body relating to any examination of any Darby Company. (b) No Darby Company is ineligible pursuant to Section 203 of the Advisers Act or Section 15(b) of the Exchange Act to serve as a registered investment adviser or broker-dealer. (c) No Darby Company is registered as, or is required to be registered as, an Investment Company. None of the Funds to whom any Darby Company renders investment management or investment advisory services is registered as an Investment Company. (d) No Darby Company is an "investment adviser" required to be registered, licensed or qualified as an investment adviser under the Advisers Act or other applicable Law or subject to any material Liability or disability by reason of any failure to be so registered, licensed or qualified. (e) No Darby Company is a "commodity pool operator" or "commodity trading advisor" required to be registered, licensed or qualified as such under the Commodity Exchange Act, as amended, and the rules and regulations promulgated thereunder by the Commodity Futures Trading Commission (such act, the "CEA", and such commission, the "CFTC"), or other applicable Law or to be a member of the National Futures Association (the "NFA") or subject to any material Liability or disability by reason of any failure to be so registered, licensed or qualified. 24 5.23 DARBY FUNDS. (a) SCHEDULE 5.23(a) sets forth a true, correct and complete list of each Darby Fund, including each Darby Fund's name, its jurisdiction of organization and, with respect to the Sponsored Darby Funds, the jurisdictions in which each of them is licensed or qualified or registered to do business. (b) True, correct and complete copies of all subscription agreements, advisory agreements, "side letters," administration agreements, distribution or placement agency agreements, solicitation agreements, custody agreements, agreements providing for finder's fees or fees for introducing investments or any similar agreements, in each case pertaining to the Sponsored Darby Funds, and any other agreements between any Sponsored Darby Fund and any investor therein or advisor thereto, and all of the organizational or constituent documents of the Sponsored Darby Funds, including limited partnership agreements, operating agreements, shareholders agreements to which any Sponsored Darby Fund or general partner thereof is a party (other than with Portfolio Companies) and articles of association and memorandum of association, as applicable (all of the foregoing, collectively, the "DARBY FUND AGREEMENTS"), and all offering documents pertaining to the Sponsored Darby Funds, have been made available to Purchaser. Such offering documents did not, at any time such offering documents were made available to investors or prospective investors in the Sponsored Darby Funds, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (c) True, correct and complete copies of the audited balance sheet and other financial statements of each of the Sponsored Darby Funds for the fiscal years completed on or after December 31, 1999 or its inception, whichever is later, through its most recent fiscal year ended on or prior to the date hereof have been made available to Purchaser. Each of such financial statements presents fairly, in all material respects, the consolidated financial position of such Sponsored Darby Fund in accordance with GAAP applied on a consistent basis (except as otherwise noted therein) at the respective dates of such financial statements (or in the case of the Asian Mezzanine Fund, in accordance with International Accounting Standards). No Sponsored Darby Fund has any Liabilities of any kind other than those (i) fully reflected in, reserved against or otherwise described in their respective balance sheets for the period ended December 31, 2002 (or the notes thereto) or (ii) immaterial to such Sponsored Darby Fund or incurred in the ordinary course of business of such Sponsored Darby Fund since the date of the foregoing balance sheet of such Sponsored Darby Fund. Except as expressly contemplated by this Agreement or as set forth on SCHEDULE 5.23(c), since December 31, 2002 (i) the Sponsored Darby Funds have conducted their respective businesses only in the Ordinary Course of Business and (ii) there has not been any event, change, occurrence or circumstance that has had or could reasonably be expected to have a material adverse effect on the assets, properties, or financial condition of any Sponsored Darby Fund; provided, however, that a material adverse effect shall not include any effect primarily resulting from general economic conditions; exchange rate fluctuations; changes in prevailing interest rates; political instability; acts of war or terrorism; any adverse developments in the lending, mezzanine capital or private equity markets in the Latin American or Asia/Pacific region generally; and the announcement or implementation of any of the transactions contemplated by this Agreement (except in each case for effects which have a 25 disproportionate adverse effect on such Sponsored Darby Fund as compared to other private Funds with substantially similar investment strategies and of a similar size). (d) All securities of which any of the Sponsored Darby Funds is the issuer were sold pursuant to a valid exemption from the registration requirements of the Securities Act and other applicable Securities Laws and in compliance with applicable Law. (e) Except as set forth on SCHEDULE 5.23(e), since its inception, each Sponsored Darby Fund has been operated and is currently operating in compliance in all material respects with its respective investment objectives and policies and its constituent documents (or waivers thereof) and applicable Law. Since its inception, each of the Sponsored Darby Funds that has been (i) offered to United States investors or (ii) organized in any jurisdiction within the United States, has been excluded from the definition of an "investment company" under the Investment Company Act by virtue of Section 3(c)(1) or Section 3(c)(7) thereof. (f) None of the Darby Companies, nor, to the Knowledge of the Darby Companies, any employee thereof has been enjoined, indicted, convicted or made the subject of disciplinary proceedings, consent decrees or administrative orders on account of any violation of the Securities Laws. (g) With respect to each Darby Fund, each Darby Company otherwise entitled to indemnification under the Darby Fund Agreements of such Darby Fund is not excepted from coverage under the indemnification provisions thereof for failure to satisfy the applicable standard of care required to be adhered to in order to obtain indemnification under the relevant Darby Fund Agreement. (h) Set forth on SCHEDULE 5.23(h) are the amounts of the undrawn commitments with respect to each of the Sponsored Darby Funds and, to the Knowledge of the Darby Companies, the amounts of undrawn commitments with respect to each of the Advised Darby Funds. (i) Set forth on SCHEDULE 5.23(i) is a list of each investment that any Darby Company has in any Darby Fund. (j) Except as set forth on SCHEDULE 5.23(j), no investor in any Darby Fund is in default of, or, to the Knowledge of the Darby Companies, has threatened to be in default of, any of its obligations to such Darby Fund, and, to the Knowledge of the Darby Companies, no event has occurred that with the lapse of time or the giving of notice or both would constitute such a default. (k) Except as set forth on SCHEDULE 5.23(k), no Sponsored Darby Fund has outstanding any guarantees of any obligation of any Portfolio Company. (l) As of the date hereof, the Sponsored Darby Funds and Mass Mutual/Darby CBO, LLC are the only Funds in which the Darby Companies have any ownership interest. There is no Person to which any Darby Company provides investment advice other than the Darby Funds. 26 (m) All investor reports prepared by the Sponsored Darby Funds or by any Darby Company on their behalf and submitted to their investors were, when submitted, to the Knowledge of the Darby Companies, accurate in all material respects. All investor reports prepared by any Darby Company on behalf of any Advised Darby Fund and submitted to the investors in such Advised Darby Fund were, when submitted, to the Knowledge of the Darby Companies, accurate in all material respects. (n) Except pursuant to the Darby Fund Agreements and the Advisory Agreements, no Person other than the Darby Companies has any right to any fees relating to investment advice payable by any Sponsored Darby Fund, including without limitation advisory, monitoring and management fees. (o) Except as set forth on SCHEDULE 5.23(o) and other than the Darby Fund Agreements, no investor in any Sponsored Darby Fund has any Contract with any Sponsored Darby Fund. (p) DOIL has delivered a letter to Purchaser setting forth a true and complete list of (x) all Persons (other than the Darby Companies) that have a Carried Interest in any Sponsored Darby Fund, (y) the amount of Carried Interests that such Persons have, and (z) the percentage of such Persons' Carried Interests that have vested as of the date hereof, and, other than the Carried Interests reflected in such letter and the letters referred to in SECTION 9.1(s), such Persons have no other Carried Interests in any Sponsored Darby Fund. (q) Set forth on SCHEDULE 5.23(q)(i) is a true and complete list of all investors in the Sponsored Darby Funds other than the Darby Income Funds, and their respective equity ownership interest therein (by percentage), and set forth on SCHEDULE 5.23(q)(ii) is a true and complete list of all investors in the Darby Income Funds, and their respective equity ownership interest therein (by percentage) as of June 30, 2003. (r) Except as set forth in Darby Fund Agreements, the Advisory Agreements and on SCHEDULE 5.23(r), no Darby Company is restricted by Contract from sponsoring, organizing, participating in or advising any Fund. (s) Except as set forth on SCHEDULE 5.23(s), no Darby Company has any direct or indirect investment in any Portfolio Company other than through a Darby Fund and disclosed to Purchaser. (t) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not result in any increased, additional or accelerated rights or entitlements to any investor in any Sponsored Darby Fund. (u) None of the Darby Companies has delivered to or received from Prumerica Financial Asia Limited or Prudential Investment Management, Inc. (the "PRU SELLERS") any assertion of a breach of the Stock Purchase Agreement, dated as of February 19, 2002 among DOP and the Pru Sellers, pursuant to which DOP acquired the DAI Shares and the DAI-HK Share and none of the Darby Companies has Knowledge of any breach of a representation or warranty made by the Pru Sellers in such Stock Purchase Agreement (or any occurrence that with notice or the passage of time or both would constitute such a breach). 27 5.24 TERMINATION OF RELATIONSHIPS. As of the date hereof, no Darby Company or Sponsored Darby Fund has received any notice that any Fund to whom any Darby Company currently renders investment management or investment advisory services is terminating or is planning to terminate its relationship with any Darby Company or will reduce materially its use of the services of any Darby Company. As of the date hereof, the Darby Companies have no Knowledge that any Darby Fund plans to terminate its relationship with any Darby Company or plans to reduce materially its use of the services of any Darby Company. 5.25 ABSENCE OF CERTAIN PAYMENTS. No Darby Company or any Person acting on behalf of any Darby Company has made any payment to, or conferred any benefit, directly or indirectly, on suppliers, clients, employees or agents of suppliers or clients, or officials or employees of any Governmental Body or any political parties or candidates for office, that was unlawful in the place where, and at the time when, such payment or benefit was given or received, or, in the case of payments to or benefits conferred upon representatives of a Governmental Body referred to above, would have been unlawful under the laws of the United States if such laws were applicable to such payment or benefit and to such officials or employees. 5.26 PRIVACY RULES. The Darby Companies, to the extent each is a "financial institution" (as defined in the GBA), have complied in all material respects, to the extent required, with the GBA and the rules and regulations promulgated pursuant thereto, including, without limitation, Regulation S-P issued by the SEC and the privacy rules issued by the Federal Trade Commission (collectively, the "PRIVACY RULES"), and each such financial institution has provided the privacy notices, in the form and to the extent required by the GBA and the Privacy Rules, and has taken such other actions as may be required thereunder. 5.27 PATRIOT ACT. (a) Each of the Darby Companies and the Sponsored Darby Funds has complied in all material respects with the Laws of any Governmental Body concerning anti-money laundering, including the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, which comprises Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "PATRIOT Act") and the regulations promulgated thereunder, and the rules and regulations administered by the U.S. Treasury Department's Office of Foreign Assets Control, to the extent such Laws are applicable to them. (b) Except as set forth on SCHEDULE 5.27(B), none of the Darby Companies nor the Sponsored Darby Funds nor any of the equity owners of the Sponsored Darby Funds is resident in, or organized or chartered under the laws of, (a) a jurisdiction that has been designated by the U.S. Secretary of the Treasury under Section 311 or 312 of the Patriot Act as warranting special measures due to money laundering concerns or (b) any foreign country that has been designated as non-cooperative with international anti-money laundering principles or procedures by an intergovernmental group or organization, such as the Financial Action Task Force on Money Laundering, of which the United States is a member and with which designation the United States representative to the group or organization continues to concur. 28 ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE SELLERS Each Seller, as to itself only and not as to the other Sellers, hereby represents and warrants severally, and not jointly, to FRI and Purchaser that: 6.1 ORGANIZATION AND GOOD STANDING. In the case of Institutional Sellers only, such Seller is duly organized, validly existing and in good standing (if applicable) under the laws of its jurisdiction of organization and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now conducted. 6.2 AUTHORIZATION OF AGREEMENT. Such Seller has all requisite corporate, company, partnership or trust power and authority (in the case of Institutional Sellers) or legal capacity (in the case of Individual Sellers) to execute and deliver this Agreement and each other agreement, document, instrument or certificate contemplated by this Agreement to be executed by such Seller in connection with the consummation of the transactions contemplated by this Agreement (together with this Agreement, as to such Seller, the "SELLER DOCUMENTS"), and to consummate the transactions contemplated hereby and thereby to be performed by it. In the case of Institutional Sellers only, the execution and delivery of this Agreement and each of the other Seller Documents and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate, company, partnership or trust action on the part of such Seller. This Agreement has been, and each of the other Seller Documents will be at or prior to the Closing, duly and validly executed and delivered by such Seller and (assuming the due authorization, execution and delivery by the other parties hereto and thereto) this Agreement constitutes, and each of the other Seller Documents when so executed and delivered will constitute, legal, valid and binding obligations of such Seller, enforceable against such Seller in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). 6.3 CONFLICTS; CONSENTS OF THIRD PARTIES. (a) None of the execution and delivery by such Seller of this Agreement or the other Seller Documents, the consummation of the transactions contemplated hereby or thereby, or compliance by such Seller with any of the provisions hereof or thereof applicable to it will (i) violate in the case of Institutional Sellers only, the certificate of incorporation and by-laws or comparable organizational documents of such Seller; or (ii) conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination or cancellation under any provision of any Contract to which such Seller is a party or by which any of the properties or assets of such Seller are bound, any Order of any Governmental Body applicable to such Seller or any of its properties or assets or any applicable Law. 29 (b) Except as set forth on SCHEDULE 6.3(b), no consent, waiver, approval, license, permit, ruling or authorization of, or declaration or filing with, or notification to, any Person or Governmental Body is required on the part of such Seller in connection with the execution and delivery by such Seller of this Agreement or the other Seller Documents, the compliance by such Seller with any of the provisions hereof or thereof applicable to it, or the consummation by it of the transactions contemplated hereby or thereby. 6.4 OWNERSHIP AND TRANSFER OF DOIL SHARES AND DOP INTERESTS. (a) Such Seller is the record and beneficial owner of the DOIL Shares indicated as being owned by such Seller on EXHIBIT C, free and clear of any and all Liens (other than restrictions imposed by Securities Laws and by the DOIL Shareholders Agreement). Such Seller has the power and authority to sell, transfer, assign and deliver such DOIL Shares as provided in this Agreement, and such delivery will convey to Purchaser good and marketable title to such DOIL Shares, free and clear of any and all Liens (other than restrictions imposed by Securities Laws). (b) Such Seller is the record and beneficial owner of the DOP Interests indicated as being owned by such Seller on EXHIBIT C, free and clear of any and all Liens (other than restrictions imposed by Securities Laws and by the DOP Partner Documents). Such Seller has the power and authority to sell, transfer, assign and deliver such DOP Interests as provided in this Agreement, and such delivery will convey to Purchaser good and marketable title to such DOP Interests, free and clear of any and all Liens (other than restrictions imposed by Securities Laws). (c) Such Seller is not a party to any voting trust or other Contract with respect to the voting, redemption, sale, transfer or other disposition of the capital stock of DOIL or the partner interests of DOP other than the DOIL Shareholder Agreement and/or the DOP Partner Documents, as applicable. (d) Such Seller has no direct or indirect investment in any Portfolio Company other than through a Darby Fund and disclosed to Purchaser. 6.5 LITIGATION. There are no Legal Proceedings pending or, to the Knowledge of such Seller, threatened against such Seller that are reasonably likely to prohibit or restrain the ability of such Seller to enter into this Agreement or consummate the transactions contemplated hereby. 6.6 FINANCIAL ADVISORS. Except as set forth on SCHEDULE 6.6, no Person has acted, directly or indirectly, as a broker, finder or financial advisor for such Seller in connection with the transactions contemplated by this Agreement and no Person is entitled to any fee or commission or like payment in respect thereof. 6.7 RELATED PARTY TRANSACTIONS. Other than with respect to the Institutional Sellers, SCHEDULE 6.7 is a true and correct list of each Contract (other than the Darby Fund Agreements) between any Darby Company, Sponsored Darby Fund or Portfolio Company on the one hand, and such Seller on the other hand, and each such Contract is on commercially 30 reasonable terms no more favorable to such Seller than what a third party negotiating on an arms-length basis would expect. ARTICLE VII REPRESENTATIONS AND WARRANTIES OF FRI AND PURCHASER Each of FRI and Purchaser hereby jointly and severally represents and warrants to each of the Darby Parties that: 7.1 ORGANIZATION AND GOOD STANDING. Each of FRI and Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 7.2 AUTHORIZATION OF AGREEMENT. Each of FRI and Purchaser has full corporate power and authority to execute and deliver this Agreement and each other agreement, document, instrument or certificate, if any, contemplated by this Agreement to be executed by FRI or Purchaser in connection with the consummation of the transactions contemplated by this Agreement (the "PURCHASER DOCUMENTS"), and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by FRI and Purchaser of this Agreement and each of the other Purchaser Documents and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on behalf of FRI and Purchaser. This Agreement has been, and each of the other Purchaser Documents will be at or prior to the Closing, duly and validly executed and delivered by FRI and Purchaser (as applicable), and (assuming the due authorization, execution and delivery by the other parties hereto and thereto) this Agreement constitutes, and each other Purchaser Document when so executed and delivered will constitute, valid and binding obligations of FRI and Purchaser (as applicable), enforceable against FRI and Purchaser (as applicable) in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). 7.3 CONFLICTS; CONSENTS OF THIRD PARTIES. (a) Except as set forth on SCHEDULE 7.3 hereto, none of the execution and delivery by FRI and Purchaser of this Agreement and the other Purchaser Documents, the consummation of the transactions contemplated hereby or thereby, or compliance by FRI or Purchaser with any of the provisions hereof or thereof applicable to such entity will, (i) violate the certificate of incorporation or by-laws or comparable organizational documents of FRI or Purchaser or (ii) assuming that the consents, waivers, approvals, authorizations, declarations, filings and notifications referred to in SECTION 7.3(b) are duly obtained and made, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under (x) any Contract or Permit to which FRI or Purchaser is a party or by which any of the properties or assets of any FRI or Purchaser are bound; (y) any Order of any Governmental Body applicable to FRI or Purchaser or any of the properties or assets of FRI or Purchaser; or (z) any Law 31 applicable to FRI or Purchaser, except, in the case of clauses (x), (y) and (z), for such violations, breaches or defaults as would not, individually or in the aggregate, have a material adverse effect on the ability of FRI or Purchaser to consummate the transactions contemplated by this Agreement. (b) No consent, waiver, approval, license, permit, ruling or authorization of, or declaration or filing with, or notification to, any Person or Governmental Body is required on the part of Purchaser or FRI in connection with (i) the execution and delivery of this Agreement or the other Purchaser Documents or the compliance by Purchaser or FRI with any of the provisions hereof or thereof, or the consummation of the transactions contemplated hereby or thereby or (ii) the ownership and operation of the Darby Companies following the Closing, except for approval of the Cayman Islands Monetary Authority and the Securities and Futures Commission of Hong Kong. 7.4 LITIGATION. There are no Legal Proceedings pending or, to the Knowledge of Purchaser or FRI, threatened seeking to prohibit or restrain the ability of Purchaser or FRI to enter into this Agreement or consummate the transactions contemplated hereby. 7.5 INVESTMENT INTENTION. Purchaser is acquiring the DOIL Shares and the DOP Interests for its own account, for investment purposes only and not with a view to the distribution (as such term is used in Section 2(11) of the Securities Act of 1933, as amended (the "SECURITIES ACT") thereof. Purchaser understands that the DOIL Shares and the DOP Interests have not been registered under the Securities Act and cannot be sold unless subsequently registered under the Securities Act or an exemption from such registration is available. 7.6 FINANCIAL ADVISORS. Except as set forth on SCHEDULE 7.6, no Person has acted, directly or indirectly, as a broker, finder or financial advisor for Purchaser or FRI or any of their respective Affiliates in connection with the transactions contemplated by this Agreement and no Person is entitled to any fee or commission or like payment in respect thereof. ARTICLE VIII COVENANTS 8.1 ACCESS TO INFORMATION. DOIL and DOP agree that, prior to the Closing Date, Purchaser shall be entitled, through its officers, employees and representatives (including, without limitation, its legal advisors and accountants), to make such investigation of the properties, businesses and operations of the Darby Companies and such examination of the books, records and financial condition of the Darby Companies as it reasonably requests and to make extracts and copies of such books and records, subject to Purchaser's adhering to any confidentiality provisions by which DOP, DOIL and the Darby Funds are bound in respect of the Portfolio Companies and, in the case of information pertaining to the Portfolio Companies, to the extent the Darby Companies or Sponsored Darby Funds have such information. Any such investigation and examination shall be conducted during regular business hours and under reasonable circumstances so as not to interfere in any material respect with the Darby Companies' normal operations, and DOP and DOIL shall cooperate, and shall cause the other Darby Companies to cooperate, fully therein. No investigation by Purchaser prior to or after the 32 date of this Agreement shall diminish or obviate any of the representations, warranties, covenants or agreements of the Sellers contained in this Agreement or the other Seller Documents. In order that Purchaser may have full opportunity to make such physical, business, accounting and legal review, examination or investigation as it may reasonably request of the affairs of the Darby Companies, DOIL and DOP shall cause the officers, employees, consultants, agents, accountants, attorneys and other representatives of the Darby Companies to cooperate fully with such representatives in connection with such review and examination. 8.2 CONDUCT OF THE BUSINESS PENDING THE CLOSING. (a) Except as otherwise expressly provided in this Agreement, on SCHEDULE 8.2(A) or 8.2(b) or with the prior written consent of Purchaser, DOIL and DOP shall, and shall cause the Darby Companies and (unless a provision below explicitly applies only to the Darby Companies) the Sponsored Darby Funds to: (i) conduct the respective businesses of the Darby Companies and the Sponsored Darby Funds only in the Ordinary Course of Business; (ii) use its best efforts to (A) preserve the present business operations, organization (including, without limitation, management) and goodwill of the Darby Companies and the Sponsored Darby Funds and (B) preserve the present relationship with investors of the Sponsored Darby Funds and other Persons having business dealings with the Darby Companies or the Sponsored Darby Funds; (iii) maintain all of the assets and properties of the Darby Companies in their current condition, ordinary wear and tear excepted; and (iv) (A) maintain the books, accounts and records of the Darby Companies and the Sponsored Darby Funds in the Ordinary Course of Business consistent with past practice, (B) continue to collect accounts receivable and pay accounts payable of the Darby Companies utilizing normal procedures and without discounting or accelerating payment of such accounts, and (C) comply in all material respects with all Contracts applicable to the operation of the Darby Companies or the Sponsored Darby Funds. (b) Except as otherwise expressly provided in this Agreement, on SCHEDULE 8.2(A) or Schedule 8.2(B) or with the prior written consent of Purchaser, DOIL and DOP shall not, and shall cause the other Darby Companies and (unless a provision below explicitly applies only to the Darby Companies) the Sponsored Darby Funds not to (and the Sellers agree, to the extent that they have the right under the organizational documents of DOP or DOIL or by Law to vote on any of the following matters, not to vote to approve the taking of any of the following actions): (i) declare, set aside, make or pay any dividend or other distribution in respect of the capital stock of DOIL or the partnership interests in DOP, or repurchase, redeem or otherwise acquire any outstanding shares of the capital stock or other securities of, or other ownership interests in, any Darby Company (except as required under the organizational documents of the Darby Companies); 33 (ii) transfer, issue, sell or dispose of any shares of capital stock or other securities of any Darby Company or grant options, warrants, calls or other rights to purchase or otherwise acquire shares of the capital stock or other securities of any Darby Company; (iii) effect any recapitalization, reclassification, stock split or like change in the capitalization of any Darby Company; (iv) amend the certificate of incorporation or by-laws (or other organizational documents) of any Darby Company or, except as requested by Purchaser, any Sponsored Darby Fund (except to permit the distributions contemplated by SECTION 2.1(A)); (v) (A) increase the annual level of compensation payable or to become payable by any Darby Company to any of its employees or officers, (B) grant any unusual or extraordinary bonus (including any Carried Interest in any Darby Company or any Darby Fund, including any amounts measured in whole or in part by any such Carried Interest), benefit or other direct or indirect compensation to, or make any loan to, any employee, director or consultant, (C) increase the coverage or benefits available under any (or create any new) severance pay, termination pay, vacation pay, company awards, salary continuation for disability, sick leave, deferred compensation, bonus or other incentive compensation, insurance, pension or other employee benefit plan or arrangement made to, for, or with any of the directors, officers, employees, agents or representatives of any Darby Company or otherwise modify or amend or terminate any such plan or arrangement or (D) enter into any employment, deferred compensation, severance, consulting, non-competition or similar agreement (or amend any such agreement) to which any Darby Company is a party or involving a director, officer or employee of any Darby Company in his or her capacity as a director, officer or employee of any Darby Company; (vi) issue, create, incur, assume or guarantee any Indebtedness (other than expenses in the Ordinary Course of Business consistent with past practice); (vii) subject to any Lien or otherwise encumber or, except for Permitted Exceptions, permit, allow or suffer to be encumbered, any of the properties or assets (whether tangible or intangible) of any Darby Company, other than as provided in the Darby Fund Agreements; (viii) acquire any material properties or assets or sell, assign, transfer, convey, lease or otherwise dispose of any of the material properties or assets of the Darby Companies; (ix) cancel or compromise any debt or claim or waive or release any material right of any Darby Company or Sponsored Darby Fund except in the Ordinary Course of Business and which, in the aggregate, would not be material to the Darby Companies taken as a whole or any Sponsored Darby Fund taken individually; (x) make or enter into any commitment to make capital expenditures of the Darby Companies; 34 (xi) enter into, modify or terminate any labor or collective bargaining agreement of any Darby Company or, through negotiation or otherwise, make any commitment or incur any Liability to any labor organization with respect to any Darby Company; (xii) introduce any material change with respect to the operation of any Darby Company or Sponsored Darby Fund, including any material change in the types or nature of its services or its investment policy or strategy; (xiii) permit any Darby Company or Sponsored Darby Fund to enter into any transaction or to enter into, modify or renew any Contract which by reason of its size, nature or otherwise is not in the Ordinary Course of Business; (xiv) permit any Darby Company to enter into or agree to enter into any merger or consolidation with, any corporation or other entity, or engage in any new business or invest in, make a loan, advance or capital contribution to, or otherwise acquire the securities of any other Person (other than in or to the Darby Funds pursuant to contractual obligations); (xv) except for payments made in the Ordinary Course of Business consistent with past practice or payments under an existing Contract, permit any Darby Company to pay any fees or expenses to, or enter into or modify any Contract with any Affiliate (other than any Darby Fund) of any Darby Company, or any director, officer or employee of any Darby Company; (xvi) make or rescind any election relating to Taxes (other than to make an election under Section 754 of the Code pursuant hereto), settle or compromise any claim, action, suit, litigation, proceeding, arbitration, investigation, audit controversy relating to Taxes, or except as required by applicable Law or GAAP (or International Accounting Standards in respect of DAI, DAI-HK, the Asian Mezzanine Fund or their subsidiaries), make any material change to any of its methods of accounting or methods of reporting income or deductions for Tax or accounting practice or policy from those employed in the preparation of its most recent Tax Return; (xvii) enter into any contract or agreement or commitment which restrains, restricts, limits or impedes the ability of any Darby Company or Sponsored Darby Fund to compete with or conduct any business or line of business in any geographic area; (xviii) sponsor a new Fund or liquidate or dissolve a Sponsored Darby Fund (other than as required by the terms of the agreements relating thereto); (xix) fail to pay and discharge current liabilities as and when due; (xx) discharge or satisfy any Lien, or pay any Liability (fixed or contingent), except in the Ordinary Course of Business; 35 (xxi) grant any license or sublicense of any rights under or with respect to any Intellectual Property other than in the Ordinary Course of Business consistent with past practice; (xxii) institute or settle any material Legal Proceeding; (xxiii) enter into any partnership, profit-sharing or royalty agreement or other similar arrangement whereby any Darby Company's income or profits are, or might be, shared with any other Person; (xxiv) amend or grant any waiver in respect of any provision of any Advisory Agreement to which DOP is a party except for such waivers that are immaterial in nature or amount or, except in accordance with the terms thereof, terminate any such agreement; or (xxv) agree, commit, arrange or enter into any understanding to do anything prohibited by this SECTION 8.2. 8.3 CONSENTS. The Darby Parties shall use their commercially reasonable efforts, and FRI and Purchaser shall cooperate with the Darby Parties, to obtain at the earliest practicable date all consents and approvals required to be obtained by the Darby Parties and the Darby Companies to consummate the transactions contemplated by this Agreement, including, without limitation, the consents and approvals referred to in SECTIONS 5.3(b) and 6.3(c) hereof. FRI and Purchaser shall use their commercially reasonable efforts, and the Darby Parties shall cooperate with FRI and Purchaser, to obtain at the earliest practicable date all consents and approvals required to be obtained by FRI and Purchaser to consummate the transactions contemplated by this Agreement, including, without limitation, the consents and approvals referred to in SECTION 7.3 hereof. 8.4 REGULATORY APPROVALS. (a) FRI, Purchaser and the Darby Parties shall (i) make all filings required of each of them or any of their respective subsidiaries or Affiliates under applicable Law with respect to the transactions contemplated hereby as promptly as practicable and, in any event, within ten (10) Business Days after the date of this Agreement, (ii) comply at the earliest practicable date with any request under applicable Law for additional information, documents, or other materials received by each of them or any of their respective subsidiaries from any Governmental Body in respect of such filings or such transactions, and (iii) cooperate with each other in connection with any such filing (including, to the extent permitted by applicable Law, providing copies of all such documents to the non-filing parties prior to filing and considering all reasonable additions, deletions or changes suggested in connection therewith) and in connection with resolving any investigation or other inquiry of any Governmental Body under any applicable Law with respect to any such filing or any such transaction. Each such party shall use commercially reasonable efforts to furnish to each other all information required for any application or other filing to be made pursuant to any applicable Law in connection with the transactions contemplated by this Agreement. Each such party shall promptly inform the other parties hereto of any oral communication with, and provide copies of written communications 36 with, any Governmental Body regarding any such filings or any such transaction. No party hereto shall independently participate in any formal meeting with any Governmental Body in respect of any such filings, investigation, or other inquiry without giving the other parties hereto prior notice of the meeting and, to the extent permitted by such Governmental Body, the opportunity to attend and/or participate. Subject to applicable Law, the parties hereto will consult and cooperate with one another in connection with any analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted by or on behalf of any party hereto relating to proceedings under applicable Law. The Darby Parties, on the one hand, and FRI and Purchaser, on the other hand, may, as each deems advisable and necessary, reasonably designate any competitively sensitive material provided to the other under this SECTION 8.4 as "outside counsel only." Such materials and the information contained therein shall be given only to the outside legal counsel of the recipient and will not be disclosed by such outside counsel to employees, officers, or directors of the recipient, unless express written permission is obtained in advance from the source of the materials (the Darby Parties or FRI and Purchaser, as the case may be). (b) Each of FRI, Purchaser and the Darby Parties shall use commercially reasonable efforts to resolve such objections, if any, as may be asserted by any Governmental Body with respect to the transactions contemplated by this Agreement under applicable Law. In connection therewith, if any Legal Proceeding is instituted (or threatened to be instituted) challenging any transaction contemplated by this Agreement as in violation of any applicable Law, the parties shall use commercially reasonable efforts and cooperate with one another to contest and resist any such Legal Proceeding, and to have vacated, lifted, reversed, or overturned any decree, judgment, injunction or other order whether temporary, preliminary or permanent, that is in effect and that prohibits, prevents or restricts consummation of the transactions contemplated by this Agreement, including by pursuing all available avenues of administrative and judicial appeal and all available legislative action, unless, by mutual agreement, FRI, Purchaser and the Darby Parties decide that litigation is not in their respective best interests. (c) Notwithstanding anything to the contrary in this Agreement, neither FRI, Purchaser nor any of their Affiliates shall be required (i) to hold separate (including by trust or otherwise) or divest any of their respective businesses or assets, (ii) to agree to any limitation on the operation or conduct of their respective businesses or (iii) to waive any of the conditions set forth in ARTICLE IX of this Agreement. 8.5 FURTHER ASSURANCES. Subject to SECTION 8.4, each of the Darby Parties, FRI and Purchaser shall use its commercially reasonable efforts to (i) take all actions necessary or appropriate to consummate the transactions contemplated by this Agreement at the earliest practicable date after the date hereof and (ii) cause the fulfillment at the earliest practicable date of all of the conditions to the obligations of the other parties to consummate the transactions contemplated by this Agreement. 8.6 CONFIDENTIALITY. (a) From and after the date hereof until the Closing, FRI and Purchaser shall not, and shall cause their Affiliates and their respective officers, directors and employees not to, directly or indirectly, disclose, reveal, divulge or communicate to any Person other than 37 authorized officers, directors and employees of FRI and Purchaser, and advisors of FRI and Purchaser on a need-to-know basis, in connection with consummating the transactions contemplated hereby, or use or otherwise exploit for its own benefit or for the benefit of any other Person, any Confidential Information (as defined below). FRI and Purchaser shall not have any obligation to keep confidential (or cause their Affiliates, officers, directors, employees or advisors to keep confidential) any Confidential Information if and to the extent disclosure thereof is specifically required by Law; provided, however, that in the event disclosure is required by applicable Law, FRI and Purchaser shall, to the extent reasonably possible, provide DOIL with prompt notice of such requirement prior to making any disclosure so that DOIL may seek an appropriate protective order. (b) From and after the Closing, each Seller agrees severally and not jointly that it shall not, and it shall cause its Affiliates and its respective officers, directors and employees not to, directly or indirectly, disclose, reveal, divulge or communicate to any Person other than to authorized officers, directors and employees of such Seller, and advisors of such Seller on a need-to-know basis, or use or otherwise exploit for its own benefit or for the benefit of any other Person, any Confidential Information (as defined below). Each Seller shall not have any obligation to keep confidential (or cause its Affiliates, officers, directors, employees or advisors to keep confidential) any Confidential Information if and to the extent disclosure thereof is specifically required by Law; provided, however, that in the event disclosure is required by applicable Law, such Seller shall, to the extent reasonably possible, provide DOIL with prompt notice of such requirement prior to making any disclosure so that DOIL may seek an appropriate protective order. (c) For purposes of this SECTION 8.6, "CONFIDENTIAL INFORMATION" shall mean any confidential information with respect to any Darby Company or any Darby Fund or their respective operations and business, including investors, investor lists, products, prices, fees, costs, inventions, Trade Secrets, know-how, Software, Contracts, marketing methods, plans, personnel, suppliers, competitors, markets performance data, trading strategies, information relating to Portfolio Companies or other specialized information or proprietary matters. "CONFIDENTIAL INFORMATION" does not include, and there shall be no obligation hereunder with respect to, information that (i) is generally available to the public on the date of this Agreement or (ii) becomes generally available to the public other than as a result of a disclosure not otherwise permissible thereunder. (d) The covenants and undertakings contained in this SECTION 8.6 relate to matters which are of a special, unique and extraordinary character and a violation of any of the terms of this SECTION 8.6 will cause irreparable injury, the amount of which will be impossible to estimate or determine and which cannot be adequately compensated. Therefore, the Darby Parties will be entitled to an injunction, restraining order or other equitable relief from any court of competent jurisdiction in the event of any breach of this SECTION 8.6. The rights and remedies provided by this SECTION 8.6 are cumulative and in addition to any other rights and remedies which the Darby Parties may have hereunder or at law or in equity. (e) Notwithstanding anything to the contrary set forth herein or in any other agreement to which the parties hereto are parties or by which they are bound, the obligations of confidentiality contained herein and therein, as they relate to the transactions described in this 38 Agreement, shall not apply to the Tax structure or Tax treatment of the transactions described in this Agreement, and each party hereto (and any employee, representative, or agent of any party hereto) may disclose to any and all Persons, without limitation of any kind, the Tax structure and Tax treatment of the transactions described in this Agreement and all materials of any kind (including opinions or other tax analysis) that are provided to such party relating to such Tax treatment and Tax structure; PROVIDED, HOWEVER, that such disclosure shall not include the name (or other identifying information not relevant to the Tax structure or Tax treatment) of any Person and shall not include information for which nondisclosure is reasonably necessary in order to comply with applicable Securities Laws. 8.7 PUBLICITY. (a) No Darby Party, on the one hand, nor FRI or Purchaser, on the other, shall issue any press release or public announcement concerning this Agreement or the transactions contemplated hereby without obtaining the prior written approval of Purchaser or DOIL, prior to the Closing and the Seller Representative, after the Closing (as applicable), which approval will not be unreasonably withheld or delayed, unless, in the sole judgment of the Person seeking to make such disclosure or public announcement, disclosure is otherwise required by applicable Law or by the applicable rules of any stock exchange on which such Person (or its Affiliates) lists securities, provided that, to the extent required by applicable Law or by the applicable rules of any stock exchange on which such Person (or its Affiliates) lists securities, the party intending to make such release shall use its best efforts consistent with such applicable Law to consult with Purchaser or DOIL, prior to the Closing and the Seller Representative, after the Closing (as applicable) with respect to the text thereof. (b) The Darby Parties, FRI and Purchaser agree that the terms of this Agreement shall not be disclosed or otherwise made available to the public and that copies of this Agreement shall not be publicly filed or otherwise made available to the public, except where such disclosure, availability or filing is required by applicable Law and only to the extent required by such Law. 8.8 USE OF NAME. Except as provided on SCHEDULE 8.8, the Sellers hereby agree that upon the consummation of the transactions contemplated hereby, the Sellers shall not, and shall cause their respective Affiliates not to, use the name "Darby" or any service marks, trademarks, trade names, identifying symbols, logos, emblems, signs or insignia containing or comprising the foregoing, including any name or mark confusingly similar thereto (collectively, the "DARBY MARKS"), except for historical, descriptive use. 8.9 EMPLOYEE MATTERS. (a) For a period of at least five years after the Closing Date, Purchaser shall provide each person who is an employee of a Darby Company immediately before the Closing Date (a "DARBY EMPLOYEE") with coverage under employee benefit plans within the meaning of Section 3(3) of ERISA (and without regard to the exclusions under Section 4 of ERISA) ("ERISA Plans") that either (i) is not substantially less favorable in the aggregate than that provided to similarly situated employees of FRI or (ii) is substantially similar to that provided 39 under those ERISA Plans applicable to such Darby Employee immediately before the Closing Date. (b) Purchaser and its Affiliates who employ any Darby Employee shall credit such Darby Employee with service with DOIL or its ERISA Affiliates prior to the Closing Date for purposes of eligibility, vesting, determination of the level of benefit accrual and benefit accrual under any benefit plan, program or arrangement maintained by Purchaser or any such Affiliate, except (i) with respect to determination of the level of benefit accruals and benefit accruals under any defined benefit pension plan, or (ii) to the extent that such recognition of service would result in a duplication of benefits or cause any Darby Employee to have a retroactive accrual of vacation. (c) FRI shall cause any preexisting condition, restrictions or waiting periods under the applicable ERISA Plans maintained by FRI or its ERISA Affiliates and applicable to a Darby Employee ("PURCHASER ERISA PLANS") to be waived to the extent necessary to provide no gap in medical or dental benefit coverage on such basis for each Darby Employee who was covered as of the Closing Date under a Benefit Plan that provides medical or dental benefits, as the case may be. FRI shall cause any Purchaser ERISA Plan which is a welfare benefit plan to apply any amounts paid under a Benefit Plan that is a welfare benefit plan by a Darby Employee as deductibles and coinsurance during any plan year in which the Darby Employee ceases to participate in the Benefit Plan toward deductible, coinsurance and out-of-pocket limits under such Purchaser ERISA Plan for such plan year (with appropriate adjustments for any differences in plan years). (d) To the extent that FRI transfers coverage of any Darby Employee from the Darby Companies' ERISA Plans to Purchaser's ERISA Plans and the Darby Companies' ERISA Plans would have provided better benefits in the aggregate than Purchaser's ERISA Plans applicable to such Darby Employee, FRI shall cause Purchaser to make a one-time adjustment to the base salary of the affected Darby Employee in an amount that FRI reasonably believes is appropriate and equitable. 8.10 DIRECTOR AND OFFICER INDEMNIFICATION; INSURANCE. (a) Without limiting the rights that any indemnified person may have under applicable Law, FRI and Purchaser agree that all rights of indemnification existing as of the date hereof in favor of Persons who are or were prior to the Closing Date officers, directors, employees, members of advisory committees or investment committees of the Darby Companies or the Darby Funds or who is serving or has served, at the request of a Darby Company or a Darby Fund, on the board of directors, or similar governing body, advisory committee or investment committee of another Person as provided in the respective charter, bylaws, other organizational document or Contracts of the Darby Companies and the Sponsored Darby Funds shall continue in full force and effect in accordance with their terms and none of FRI or its Affiliates shall take any action to terminate or reduce the rights of such Persons to indemnification under such documents and Contracts. (b) For a period of three years following the Closing Date, FRI shall make payments to each of those Persons who are or at any time prior to the Closing Date were 40 covered by the directors' and officers' liability insurance policies and errors and omissions liability insurance policies of any of the Darby Companies or the Sponsored Darby Funds in effect on the date hereof, to the extent such payments otherwise would have been made under such insurance policies had such insurance policies remained in effect following the Closing Date, with respect to claims arising from facts or events that occurred on or prior to the Closing Date. (c) This SECTION 8.10 is intended to be for the benefit of, and shall be enforceable by, the Persons having rights to indemnification or to insurance coverage as provided in SECTIONS 8.10(a) and (b), their heirs and personal representatives, and shall be binding on FRI and the Darby Companies and their respective successors and assigns. In the event that, after the Closing Date, FRI or any of the Darby Companies or the Sponsored Darby Funds or any of their respective successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity in such consolidation or merger or (ii) transfers all or substantially all its properties and assets to any Person, then, and in each case, proper provision shall be made so that the successors and assigns of FRI, the Darby Companies or the Sponsored Darby Funds, as the case may be, honor the indemnification obligations set forth in this SECTION 8.10. 8.11 WAIVERS, CONSENTS AND AGREEMENTS RELATED TO TRANSFERS; RELEASES AND WAIVERS. The DOIL Sellers and the DOP Sellers hereby acknowledge that they have entered into certain agreements in connection with the organization of and their respective investments in DOIL and DOP, respectively, and that, in connection with the consummation of the transactions contemplated hereby, such agreements and the organizational documents of DOIL and DOP contain provisions that require certain consents and waivers to be obtained and other actions to be taken in order to comply therewith. Accordingly, the Darby Parties agree among themselves as follows: (a) with respect to DOIL: (i) the execution of this Agreement by DOIL and each of the DOIL Sellers constitutes delivery of the written notice required to be given by the DOIL Sellers pursuant to Section 4.3 of the DOIL Shareholders Agreement and a waiver of the right of first refusal to purchase DOIL Shares that any of DOIL or the DOIL Sellers have or might have under Section 4.3 of the DOIL Shareholders Agreement as a result of the purchase of the DOIL Shares by Purchaser and the consummation of the transactions contemplated hereby; (ii) the execution of this Agreement by each of the DOIL Sellers constitutes such party's written consent, as required pursuant to Section 4.5 of the DOIL Shareholders Agreement, to the transfer by each of the other DOIL Sellers of their respective DOIL Shares as contemplated hereby; (iii) DOIL and the DOIL Sellers agree, that upon consummation of the sale by the DOIL Sellers of their DOIL Shares, the DOIL Shareholders Agreement shall automatically terminate and be null and void from and after the Closing Date with no 41 further act or action required on the part of DOIL or the DOIL Sellers to effect such termination; and (iv) the DOIL Sellers hereby ratify all of the past actions of the board of directors of DOIL. (b) with respect to DOP: (i) the execution of this Agreement by DOIL constitutes the written consent of DOIL, as the general partner of DOP, pursuant to Section 7.01 of the DOP LP Agreement, to the transfer by the DOP Sellers who are limited partners of DOP of their respective limited partner interests in DOP pursuant to and in accordance with the terms of this Agreement and to the admission of Purchaser as a Substitute Limited Partner (as such term is defined in the DOP LP Agreement) of DOP; (ii) the execution of this Agreement by DOIL, DOP and each DOP Seller constitutes delivery of the written notice required to be given by the DOP Sellers pursuant to Section 7.6 of the DOP LP Agreement and each DOP Seller who is designated as an "Option Partner" in the DOP LP Agreement hereby waives any and all rights of first refusal under Section 7.6 of the DOP LP Agreement that such Person has or might have as a result of the offer to purchase the DOP Interests by Purchaser and the consummation of the transactions contemplated hereby; (iii) DOP, DOIL and the DOP Sellers acknowledge and agree, that upon the occurrence of the Closing and effective as of the Closing, the power of attorney given by each DOP Seller to DOIL, as general partner of DOP, shall be cancelled and revoked and shall have no further force and effect without any further act or action required on the part of any such Persons; (iv) the execution of this Agreement by each DOP Seller constitutes delivery of the written notice required pursuant to Section 2 of the First Amended and Restated Take Along Agreement, dated as of December 30, 1994 by and among DOIL and certain other DOP Sellers signatory thereto (the "TAKE ALONG AGREEMENT") from the "Selling Group" members to the "Offer Group" (as such terms are defined therein) and a waiver by each DOP Seller who is a member of the Offer Group of any rights such Person has or might have under the Take Along Agreement as a result of the purchase of the DOP Interests by Purchaser and consummation of the transactions contemplated hereby; (v) DOP and the DOP Sellers agree, that upon consummation of the sale by the DOP Sellers of their DOP Interests, the DOP Take Along Agreement shall automatically terminate and be null and void from and after the Closing Date with no further act or action required on the part of the DOP Sellers to effect such termination; (vi) the execution of this Agreement by DOP and each DOP Seller constitutes a waiver of the provision in each Employee Limited Partner Agreement, as amended, executed by DOP and each of Messrs. Frank, Cutler, Nielsen and Beatty and Ms. Oliver prohibiting a sale by such Persons of their limited partner interests in DOP (and the related provision in the DOP LP Agreement) as such may be necessary or required to 42 permit the sale of such DOP Interests to Purchaser and consummation of the transactions contemplated hereby; and (vii) DOP and Messrs. Frank, Cutler, Nielsen and Beatty and Ms. Oliver agree, that upon consummation of the sale by such individuals of their DOP Interests to Purchaser, the Employee Limited Partner Agreements shall automatically terminate and be null and void from and after the Closing Date with no further act or action required on the part of such Persons to effect such termination. (c) As of the Closing Date, each Seller hereby (i) other than as provided in clause (ii) below, releases DOIL and DOP and their Affiliates, and their respective officers, directors, employees, agents and representatives, from any and all claims that such Seller had, has or may have against any of them, of any nature whatsoever, whether known or unknown, in such Seller's capacity as a limited partner of DOP, and (ii) waives all rights which such Seller may have under the DOP LP Agreement (other than future rights to indemnification). ARTICLE IX CONDITIONS TO CLOSING 9.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF FRI AND PURCHASER. The obligations of FRI and Purchaser to consummate the transactions contemplated by this Agreement are subject to the fulfillment, on or prior to the Closing Date, of each of the following conditions (any or all of which may be waived by Purchaser in whole or in part to the extent permitted by applicable Law): (a) the representations and warranties of DOIL and DOP in ARTICLE V qualified as to materiality shall be true and correct, and those not so qualified shall be true and correct in all material respects, as of the date of this Agreement and as of the Closing as though made at and as of the Closing, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties qualified as to materiality shall be true and correct, and those not so qualified shall be true and correct in all material respects, on and as of such earlier date); (b) each of DOIL and DOP shall have performed and complied in all material respects with all obligations and agreements required in this Agreement to be performed or complied with by it prior to the Closing Date; (c) the representations and warranties of the Sellers in ARTICLE VI qualified as to materiality shall be true and correct, and those not so qualified shall be true and correct in all material respects, as of the date of this Agreement and as of the Closing as though made at and as of the Closing, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties qualified as to materiality shall be true and correct, and those not so qualified shall be true and correct in all material respects, on and as of such earlier date); 43 (d) each Seller shall have performed and complied in all material respects with all obligations and agreements required in this Agreement to be performed or complied with by it prior to the Closing Date; (e) Purchaser shall have received (i) a certificate signed by each of the Chief Executive Officer and Chief Financial Officer of each of DOIL and DOP, in the form attached hereto as EXHIBIT E-1, dated the Closing Date, to the effect that the conditions specified above in SECTIONS 9.1(a) AND (b) have been satisfied in all respects and (ii) a certificate from each Seller signed by such Seller, in the form attached hereto as EXHIBIT E-2 for the Individual Sellers or EXHIBIT E-3 for the Institutional Sellers, dated the Closing Date, to the effect that the conditions specified above in SECTIONS 9.1(c) AND (d) relating to such Seller have been satisfied in all respects; (f) no Legal Proceedings shall have been instituted or threatened or claim or demand made against any Seller, any Darby Company, FRI or Purchaser seeking to restrain or prohibit or to obtain substantial damages with respect to the consummation of the transactions contemplated hereby (and in each case remains pending or outstanding), and there shall not be in effect any Order by a Governmental Body of competent jurisdiction restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated hereby; (g) the Sellers shall have obtained or made (i) each consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Body required to be obtained or made by any of such parties in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, and (ii) those consents, waivers, approvals, filings and notices referred to in SECTION 5.3(b) or 6.3(c) hereof, except to the extent any such consent, waiver, approval, filing or notice is not required to consummate the transactions contemplated hereby; (h) except for the Sellers listed on SCHEDULE 5.11(h), each of the Sellers shall have provided Purchaser with an affidavit of non-foreign status that complies with Section 1445 of the Code (a "FIRPTA AFFIDAVIT"); (i) DOIL shall have provided Purchaser with a certificate complying with Treasury Regulations Section 1.897-2(g)(1)(ii) that states that DOIL is not a U.S. real property holding company; (j) DOP shall have provided a statement to Purchaser complying with Temporary Treasury Regulation Section 1.1445-11T(d)(2)(i) that states that fifty percent or more of the value of DOP's gross assets does not consist of U.S. real property interests and/or that ninety percent or more of the value of DOP's gross assets does not consist of U.S. real property interests plus cash or cash equivalents; (k) Purchaser shall have received the written resignations of each of the directors of DOIL, except as otherwise requested by Purchaser; (l) an offer letter containing the terms set forth on EXHIBIT F hereto and otherwise mutually agreeable to Purchaser and DOIL shall have been executed and delivered to Purchaser by each of the individuals designated to deliver such a letter on EXHIBIT G hereto, with 44 an allocation of FRI restricted stock to such individuals (where applicable) as set forth in a letter agreed to by DOIL and Purchaser as of the date hereof; (m) each of the DOIL Sellers shall have delivered, or caused to be delivered, to Purchaser stock certificates representing the DOIL Shares owned by such DOIL Seller, duly endorsed in blank or accompanied by stock transfer powers and with all requisite stock transfer tax stamps attached; (n) each of the DOP Sellers shall have delivered, or caused to be delivered, to Purchaser an instrument of assignment and transfer with respect the DOP Interests owned by such DOP Seller in the form of EXHIBIT H hereto; (o) the Sellers shall have irrevocably appointed the Seller Representative, in accordance with SECTION 11.3 of this Agreement, which such Person or committee of Persons shall be reasonably acceptable to Purchaser; (p) the Sellers shall have delivered, or caused to be delivered, to Purchaser certificates of good standing as of a recent date with respect to DOIL and DOP issued by the Secretary of State of the State of Delaware and for each state in which DOIL or DOP is qualified to do business as a foreign corporation; (q) a waiver shall have been executed and delivered by three-fourths in interest of the limited partners of Darby-BBVA Latin American Private Equity Fund, L.P. and Darby-BBVA Latin American Private Equity Fund (Ontario), L.P., of Section 2.01(c) of the limited partnership agreements of such entities, and Section 6 of the First Amended and Restated Investment Advisory Agreement dated as of January 17, 2003, substantially in the form attached hereto as EXHIBIT I; (r) each of the individuals designated on EXHIBIT G to deliver a non-compete agreement shall have executed and delivered such an agreement substantially in the form of EXHIBIT J-1, J-2, J-3 or J-4 (as indicated on EXHIBIT G), containing the terms for each such individual set forth on EXHIBIT G, with an allocation of FRI restricted stock to such individuals (where applicable) as set forth in a letter agreed to by DOIL and Purchaser as of the date hereof; (s) each of the individuals designated on EXHIBIT G to deliver one or more letters relating to such individual's Carried Interests in the Darby Funds shall have executed and delivered such letters containing the general terms set forth in EXHIBITS K-1 through K-4 hereto (or, for those Darby Funds not covered by such Exhibits, in the standard Carried Interest documentation for such Darby Funds) (as applicable), and containing the specific terms for each such individual as set forth in the letter referred to in SECTION 5.23(p); (t) the Sellers shall have delivered to Purchaser a waiver providing that the restrictions set forth in Section 2.9 of the Amended and Restated Shareholders' Agreement by and among Citicorp International Finance Corporation, Latin America Capital Partners II L.P., AIG-GE Capital Latin American Infrastructure Fund L.P., Darby Latin American Holdings, Ltd., Motorola Inc., Invercel (Delaware) LLC, Telcom-Invercel Investors, L.L.C., Tempora S.A., Casa Editorial El Tiempo, S.A., Promision Celular S.A. - Promicel S.A. and Avantel Holdings, Ltd., shall not apply to FRI and its Affiliates (other than Purchaser and its subsidiaries); and 45 (u) each of the Sellers shall have delivered, or caused to be delivered, to Purchaser such other documents as Purchaser shall reasonably request to more effectively consummate the sale of its DOIL Shares or DOP Interests, as applicable. 9.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLERS. The obligations of the Sellers to consummate the transactions contemplated by this Agreement are subject to the fulfillment, prior to or on the Closing Date, of each of the following conditions (any or all of which may be waived by DOIL in whole or in part to the extent permitted by applicable Law): (a) the representations and warranties of FRI and Purchaser set forth in this Agreement qualified as to materiality shall be true and correct, and those not so qualified shall be true and correct in all material respects, as of the date of this Agreement and as of the Closing as though made at and as of the Closing, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties qualified as to materially shall be true and correct, and those not so qualified shall be true and correct in all material respects, on and as of such earlier date); (b) FRI and Purchaser shall have performed and complied in all material respects with all obligations and agreements required by this Agreement to be performed or complied with by each of them on or prior to the Closing Date; (c) Sellers shall have received (i) a certificate signed by each of the Chief Executive Officer and Chief Financial Officer of each of FRI and Purchaser, in the form attached hereto as EXHIBIT E-1, dated the Closing Date, to the effect that the conditions specified above in SECTIONS 9.2(A) and (B) have been satisfied in all respects; (d) no Legal Proceedings shall have been instituted by any Governmental Body against any Seller, any Darby Company, FRI or Purchaser seeking to restrain or prohibit the consummation of the transactions contemplated hereby (and in each case remains pending or outstanding), and there shall not be in effect any Order by a Governmental Body of competent jurisdiction restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated hereby; (e) FRI and Purchaser shall have obtained or made each consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Body or other Person required to be obtained or made by any of such parties in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby; (f) Purchaser shall have delivered, or caused to be delivered, to the Sellers evidence of the wire transfers referred to in SECTION 2.3 hereof; (g) an offer letter containing the terms set forth on EXHIBIT F hereto and otherwise mutually agreeable to Purchaser and DOIL shall have been executed and delivered to Purchaser by each of the individuals designated to deliver such a letter on EXHIBIT G hereto, with an allocation of FRI restricted stock to such individuals (where applicable) as set forth in a letter agreed to by DOIL and Purchaser as of the date hereof; 46 (h) each of the individuals designated on EXHIBIT G to deliver one or more letters relating to such individual's Carried Interests in the Darby Funds shall have executed and delivered such letters containing the general terms set forth in EXHIBITS K-1 through K-4 hereto (or, for those Darby Funds not covered by such Exhibits, in the standard Carried Interest documentation for such Darby Funds) (as applicable), and containing the specific terms for each such individual as set forth in the letter referred to in SECTION 5.23(P); (i) Purchaser shall have executed and delivered to Seller a counterpart of the DOP LP Agreement; and (j) each of FRI and Purchaser shall have delivered, or caused to be delivered, to each Seller such other documents as such Seller shall reasonably request to more effectively consummate the transactions contemplated hereby. ARTICLE X INDEMNIFICATION 10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of the parties contained in ARTICLES V, VI and VII of this Agreement shall survive the Closing until December 31, 2004; provided, however, that the representations and warranties set forth in SECTIONS 5.21, 6.6 and 7.6 shall survive the Closing until the third (3rd) anniversary of the Closing Date; the representations and warranties set forth in SECTIONS 5.4, 5.5 (but only the final two sentences thereof) and 6.4 shall survive the Closing until thirty (30) days following the expiration of the applicable statute of limitations with respect to the particular matter that is the subject matter thereof; and the representations and warranties set forth in SECTION 5.11 shall survive the Closing as set forth in SECTION 10.5(h) hereof (in each case, the "SURVIVAL PERIOD"); provided, however, that any obligations to indemnify and hold harmless shall not terminate with respect to any Losses as to which the Person to be indemnified shall have given notice (stating in reasonable detail the basis of the claim for indemnification) to the indemnifying party in accordance with SECTION 10.3(a) before the termination of the applicable Survival Period. 10.2 INDEMNIFICATION. (a) Subject to SECTIONS 10.1, 10.4 and 10.5 hereof, each Seller hereby agrees severally and not jointly to indemnify and hold FRI, Purchaser, DOIL, DOP and their respective directors, officers, employees, Affiliates, agents, attorneys, representatives, successors and assigns (collectively, the "PURCHASER INDEMNIFIED PARTIES") harmless from and against: (i) any and all losses, liabilities, obligations, damages (excluding punitive damages), costs and expenses (individually, a "LOSS" and, collectively, "LOSSES") based upon, attributable to or resulting from the failure of any representation or warranty set forth in ARTICLE V of this Agreement to be true and correct in all respects at the date hereof and at the Closing Date (disregarding for this purpose any materiality qualifications contained therein and the word "material" contained in the definition of Material Adverse Effect, except as set forth on SCHEDULE 10.2); 47 (ii) any and all Losses based upon, attributable to or resulting from the failure of any representation or warranty made by such Seller set forth in ARTICLE VI of this Agreement to be true and correct in all respects at the date hereof and at the Closing Date (disregarding for this purpose any materiality qualifications contained therein and the word "material" contained in the definition of Material Adverse Effect); (iii) any and all Losses based upon, attributable to or resulting from the breach of any covenant or other agreement on the part of any Darby Party under this Agreement or any other Seller Document; and (iv) any and all notices, actions, suits, proceedings, claims, demands, assessments, judgments, costs, penalties and expenses, including reasonable attorneys' and other professionals' fees and disbursements (collectively, "EXPENSES") incident to any and all Losses with respect to which indemnification is provided hereunder. (b) Subject to SECTIONS 10.1 and 10.4, FRI and Purchaser hereby agree jointly and severally to indemnify and hold the Sellers and their respective directors, officers, employees, Affiliates, agents, attorneys, representatives, successors and assigns (collectively, the "SELLER INDEMNIFIED PARTIES") harmless from and against: (i) any and all Losses based upon, attributable to or resulting from the failure of any representation or warranty of FRI or Purchaser set forth in this Agreement or any other Purchaser Document, to be true and correct at the date hereof and at the Closing Date (disregarding for this purpose any materiality qualifications contained therein and the word "material" contained in the definition of Material Adverse Effect); (ii) any and all Losses based upon, attributable to or resulting from the breach of any covenant or other agreement on the part of FRI or Purchaser under this Agreement or any other Purchaser Document; and (iii) any and all Expenses incident to any and all Losses with respect to which indemnification is provided hereunder. 10.3 INDEMNIFICATION PROCEDURES. (a) In the event that any Legal Proceedings shall be instituted or that any claim or demand shall be asserted by any third party in respect of which payment may be sought under SECTION 10.2 hereof ("CLAIM") (regardless of the limitations set forth in SECTION 10.4), the indemnified party shall promptly cause written notice (the "CLAIM NOTICE") of the assertion of any Claim of which it has Knowledge which is covered by this indemnity to be forwarded to the indemnifying party, specifying in reasonable detail the nature of the Claim and, to the extent practicable, the amount or the estimated amount thereof and the source of the Loss under SECTION 10.2. The indemnifying party shall have the right, at its sole expense, to be represented by counsel of its choice, which must be reasonably satisfactory to the indemnified party, and to defend against, negotiate, settle or otherwise deal with any Claim which relates to any Losses indemnified against hereunder; provided that the indemnifying party shall have acknowledged in writing to the indemnified party its unqualified obligation to indemnify the indemnified party as provided hereunder. If the indemnifying party elects to defend against, negotiate, settle or 48 otherwise deal with any Claim which relates to any Losses indemnified against hereunder, it shall within fifteen (15) days (or sooner, if the nature of the Claim so requires) from the date of personal delivery or mailing of the Claim Notice notify the indemnified party of its intent to do so, whereupon it shall have the sole power to direct and control such defense except as provided below. If the indemnifying party elects not to defend against, negotiate, settle or otherwise deal with any Claim which relates to any Losses indemnified against hereunder, fails to notify the indemnified party of its election as herein provided or contests its obligation to indemnify the indemnified party for such Losses under this Agreement, the indemnified party may defend against, negotiate, settle or otherwise deal with such Claim. If the indemnified party defends any Claim, then the indemnifying party shall reimburse the indemnified party for the Expenses of defending such Claim upon submission of periodic bills. If the indemnifying party shall assume the defense of any Claim, the indemnified party may participate, at his or its own expense, in the defense of such Claim; PROVIDED, HOWEVER, that such indemnified party shall be entitled to participate in any such defense with separate counsel at the expense of the indemnifying party if (i) so requested by the indemnifying party to participate or (ii) in the reasonable written opinion of counsel to the indemnified party, a conflict or potential conflict exists between the indemnified party and the indemnifying party in the conduct of the defense of such Claim; and PROVIDED, FURTHER, that the indemnifying party shall not be required to pay for more than one such counsel for all indemnified parties in connection with any Claim. The parties hereto agree to cooperate fully with each other in connection with the defense, negotiation or settlement of any such Claim. Notwithstanding anything in this SECTION 10.3 to the contrary, neither the indemnifying party nor the indemnified party shall, without the written consent of the other party, settle or compromise any indemnifiable Claim or permit a default or consent to entry of any judgment unless the claimant and such party provide to such other party an unqualified release from all liability in respect of the indemnifiable Claim. Notwithstanding the foregoing, if a settlement offer solely for money damages is made by the applicable third party claimant, and the indemnifying party notifies the indemnified party in writing of the indemnifying party's willingness to accept the settlement offer and, subject to the applicable limitations of SECTION 10.4, pay the amount called for by such offer, and the indemnified party declines to accept such offer, the indemnified party may continue to contest such indemnifiable Claim, free of any participation by the indemnifying party, and the amount of any ultimate liability with respect to such indemnifiable Claim that the indemnifying party has an obligation to pay hereunder shall be limited to the lesser of (A) the amount of the settlement offer that the indemnified party declined to accept plus the Expenses of the indemnified party relating to such indemnifiable Claim through the date of its rejection of the settlement offer or (B) the aggregate Losses of the indemnified party with respect to such indemnifiable Claim. If the indemnifying party makes any payment on any indemnifiable Claim, the indemnifying party shall be subrogated, to the extent of such payment, to all rights and remedies of the indemnified party to any Claims (other than insurance Claims, which are covered by SECTION 10.4(b)) of the indemnified party with respect to such indemnifiable Claim. (b) After any final judgment or award shall have been rendered by a Governmental Body of competent jurisdiction and the expiration of the time in which to appeal therefrom, or a settlement shall have been consummated in accordance with the requirements of this SECTION 10.3, or the indemnified party and the indemnifying party shall have arrived at a mutually binding agreement with respect to a Claim hereunder, the indemnified party shall forward to the indemnifying party notice of any sums due and owing by the indemnifying party 49 pursuant to this Agreement with respect to such matter and the indemnifying party shall be required to pay all of the sums so due and owing to the indemnified party by wire transfer of immediately available funds within ten (10) Business Days after the date of such notice. (c) The failure of the indemnified party to give reasonably prompt notice of any Claim shall not release, waive or otherwise affect the indemnifying party's obligations with respect thereto except to the extent that the indemnifying party actually incurs an incremental out-of-pocket expense or otherwise has been materially damaged or prejudiced as a result of such delay. (d) With respect to any Claim for which any Purchaser Indemnified Person seeks indemnification hereunder, except with respect to breaches of the representations and warranties set forth in ARTICLE VI, the Seller Representative shall act on behalf of all of the indemnifying parties, the Purchaser Indemnified Persons may deal exclusively with the Seller Representative with respect thereto and any actions or decisions of the Seller Representative shall be binding on all of the indemnifying parties. 10.4 LIMITATIONS ON INDEMNIFICATION. (a) The amount of any Losses and Expenses shall be reduced by the net amount of the tax benefits actually realized by the indemnified party by reason of such Losses and Expenses, as certified by the Seller Representative or the Chief Financial Officer of FRI, as applicable. No indemnifying party will have the right to make any examination of or to obtain any indemnified party's Tax Returns or supporting work papers or other documents in connection with any indemnification claim hereunder, and no indemnified party shall be required to take any position on a Tax Return in connection therewith. (b) The amount which any indemnifying party is or may be required to pay any indemnified party pursuant to SECTION 10.2(a), 10.2(b) or 10.5 hereof shall be reduced (including without limitation, retroactively) by any insurance proceeds actually recovered by or on behalf of such indemnified party in reduction of the related Loss and Expenses. If an indemnified party shall have received the payment required by this Agreement from an indemnifying party in respect of a Loss and Expenses and shall subsequently actually receive insurance proceeds in respect of such Loss and Expenses, then such indemnified party shall pay to such indemnifying party a sum equal to the amount of such insurance proceeds actually received (net of any expenses, other than the cost of carrying such insurance, in obtaining the same). Nothing in this SECTION 10.4(b) shall obligate an indemnified party to seek insurance recoveries in respect of a Loss. (c) The Sellers shall not have any liability under SECTION 10.2(a)(i) or SECTION 10.2(a)(ii) (or SECTION 10.2(a)(iv) in respect of Claims arising under such Sections) unless the aggregate amount of Losses and Expenses finally determined to be indemnifiable under SECTION 10.2(a)(i), SECTION 10.2(a)(ii) and/or SECTION 10.2(a)(iv), other than in respect of the representations and warranties set forth in SECTIONS 5.4, 5.5 (but only the final two sentences thereof), 5.11, 5.21, 6.4 and 6.6 hereof, exceeds an amount equal to $758,786 (the "BASKET") and, in such event, the Sellers shall be required to pay the entire amount of all such Losses and Expenses, subject to the other limitations in this SECTION 10.4 and in SECTION 10.3. FRI and 50 Purchaser shall not have any liability under SECTION 10.2(b)(i) (or SECTION 10.2(b)(iii) in respect of Claims arising under such Section) unless the aggregate amount of Losses and Expenses finally determined to be indemnifiable by such Persons under SECTION 10.2(b)(i) or SECTION 10.2(b)(iii) other than in respect of the representations and warranties set forth in SECTION 7.6 hereof exceeds the Basket and, in such event, FRI and Purchaser shall be required to pay the entire amount of all such Losses and Expenses, subject to the other limitations in this SECTION 10.4 and in SECTION 10.3. (d) No Seller shall have any further obligation to indemnify any Person under SECTION 10.2(a)(i) or SECTION 10.2(a)(ii) (or SECTION 10.2(a)(iv) in respect of Claims arising under such Sections) once the aggregate amount of Losses and Expenses for which such Seller has provided indemnification under any Section of this ARTICLE X to any one or more Persons included within the Purchaser Indemnified Parties equals the amount set forth opposite such Seller's name on the applicable column of EXHIBIT C, other than for the breach of any representation or warranty contained in SECTIONS 5.4, 5.5 (but only the final two sentences thereof), 5.11, 5.21, 6.4 and 6.6 of this Agreement. No Seller shall have any further obligation to indemnify any Person under SECTION 10.2 or SECTION 10.5 once the aggregate amount of Losses and Expenses for which such Seller has provided indemnification under any Section of this ARTICLE X to any one or more Persons included within the Purchaser Indemnified Parties equals the "Total Consideration Received" by such Seller as set forth on EXHIBIT C. Neither FRI nor Purchaser shall have any further obligation to indemnify any Person under SECTION 10.2(b)(i) or SECTION 10.2(b)(ii) once the aggregate amount of Losses and Expenses for which FRI and/or Purchaser has provided indemnification under any Section of this ARTICLE X to any one or more Persons included within the Seller Indemnified Parties equals $50,000,000, other than for the breach of any representation or warranty contained in SECTION 7.6 of this Agreement. Neither FRI nor Purchaser shall have any further obligation to indemnify any Person under SECTION 10.2 or SECTION 10.5 once the aggregate amount of Losses and Expenses for which FRI and/or Purchaser has provided indemnification under any Section of this ARTICLE X to any one or more Persons included within the Seller Indemnified Parties equals the sum of the DOIL Purchase Price and the DOP Purchase Price. (e) Except with respect to breaches of the representations and warranties set forth in ARTICLE VI and breaches of covenants by any Seller (as to which each Seller shall only be liable for Losses to the Purchaser Indemnified Parties arising out of its own breach of such representations or covenants) and subject to the caps in SECTION 10.4(d) and the other limitations in this SECTION 10.4 and in SECTION 10.3, the liability of any Seller with respect to any Loss for which indemnification is provided hereunder shall be equal to the product of such Loss and the percentage set forth opposite such Seller's name on the applicable column of EXHIBIT C hereto. (f) The Sellers shall have no recourse against DOIL, DOP or the other Subsidiaries or their respective directors, officers, employees, Affiliates (other than FRI or Purchaser in respect of counterclaims related to or arising out of any such Claim), agents, attorneys, representatives, assigns or successors for any Claims asserted by Purchaser Indemnified Parties. (g) A claim for indemnification for breach of representation or warranty may not be sought under this ARTICLE X if the Losses in respect of such claim (aggregated with all 51 other Losses relating to the same event or circumstances in respect of such claim) are less than $15,000. (h) For the avoidance of doubt, in no event shall any Seller have any liability for indemnification under this Agreement in excess of the "Total Consideration Received" by such Seller as set forth on EXHIBIT C. 10.5 TAX MATTERS. (a) TAX INDEMNIFICATION. (i) Each Seller agrees to be responsible for and to indemnify and hold the Purchaser Indemnified Parties harmless from and against any and all Losses and Expenses resulting from, arising out of or based on the following: (A) any and all Taxes imposed on DOIL or any Subsidiary (or any predecessor thereof), or for which DOIL or any Subsidiary (or any predecessor thereof) may otherwise be liable by reason of transferee liability, assumption, contract, operation of law or otherwise: (1) for any taxable year or period that ends on or before the Closing Date; and (2) for any Taxes allocated to the Sellers pursuant to SECTION 10.5(b)(v); (B) any breach or inaccuracy of any of the representations contained in SECTION 5.11, determined for this purpose without regard to any materiality qualifier, or the failure to perform the covenants contained in SECTION 8.2(b)(xvi); and (C) any failure by the Sellers to timely pay any and all Taxes required to be borne by the Sellers pursuant to SECTION 11.1. (ii) Purchaser agrees to indemnify and hold harmless the Seller Indemnified Parties from and against any and all Losses and Expenses resulting from, arising out of or based on Taxes imposed on DOIL or any Subsidiary: (A) for any taxable year or period that begins after the Closing Date, (B) for the period allocated to Purchaser pursuant to SECTION 10.5(b)(v), and (C) for any failure by Purchaser to timely pay any and all Taxes required to be borne by Purchaser pursuant to SECTION 11.1. For purposes of SECTION 10.5 as and to the extent it relates to a particular indemnifiable Tax, the Sellers will be credited for any estimated Tax payments made on or before the Closing Date towards the satisfaction of such Tax. (b) PREPARATION OF TAX RETURNS; PAYMENT OF TAXES. (i) The Sellers shall cause PricewaterhouseCoopers LLP to prepare and to file all the federal, state, local and foreign Tax Returns required to be filed by the Darby Companies 52 with respect to tax periods (excluding any portions thereof) ended on or prior to the Closing Date and shall pay or cause to be paid any and all Taxes due with respect to such Returns. All Tax Returns described in this SECTION 10.5(b)(i) shall be prepared in a manner consistent with prior practice unless a past practice has been finally determined to be incorrect by the applicable Taxing Authority or a contrary treatment is required by applicable Tax Law (or judicial or administrative interpretations thereof). The Sellers shall cause PricewaterhouseCoopers LLP to provide Purchaser with copies of such completed Tax Returns at least 20 days prior to the filing date, and Purchaser shall be provided an opportunity to review such Tax Returns and supporting work papers and schedules prior to the filing of such Tax Returns. Purchaser shall have the right to approve only those portions of such Tax Returns that involve items that (i) recur in the Tax Returns of DOIL or any Subsidiary for any period after the Closing Date or (ii) otherwise could adversely affect Purchaser or such entities (such issues referred to as "Approval Items"). The failure of Purchaser to propose any changes to Approval Items on any such Tax Return within 10 days shall be deemed to be an indication of its approval thereof. The Sellers and Purchaser shall attempt in good faith mutually to resolve any disagreements regarding such Approval Items on Tax Returns prior to the due date for filing thereof. In the event that the Sellers and Purchaser are unable to resolve any dispute with respect to such Approval Items on a Tax Return at least 10 days prior to the due date for the filing of such Tax Return, such dispute shall be resolved pursuant to SECTION 10.5(f). (ii) Following the Closing, FRI shall cause Purchaser to prepare or have prepared all federal, foreign, state and local Tax Returns required to be filed by DOIL or any Subsidiary with respect to tax periods ending after the Closing Date. Purchaser shall file or cause to be filed all such Tax Returns and shall, subject to receiving the payments from the Sellers referred to in Section 10.5(b)(iv), pay or cause to be paid the Taxes shown due thereon. (iii) To the extent any Taxes shown due on any Tax Return described in Section 10.5(b)(ii) are indemnifiable by the Sellers, (A) such Tax Return shall be prepared in a manner consistent with prior practice unless otherwise required by applicable tax laws; (B) Purchaser shall provide the Sellers with copies of such Tax Return or the portion thereof relating to amounts indemnifiable by the Sellers, and supporting work papers and schedules at least 20 days prior to the due date for filing such return; and (C) the Sellers shall have the right to review and approve (which approval shall not be unreasonably withheld) such Tax Returns or such portion for 10 days following receipt thereof. The failure of the Sellers to propose any changes to any such Tax Return or portion thereof within such 10 days shall be deemed to be an indication of its approval thereof. The Sellers and Purchaser shall attempt in good faith mutually to resolve any disagreements regarding such Tax Returns or portion thereof prior to the due date for filing thereof. In the event that the Sellers and Purchaser are unable to resolve any dispute with respect to such Tax Return or portion thereof at least 10 days prior to the due date for the filing of such Tax Return, such dispute shall be resolved pursuant to SECTION 10.5(f). (iv) Not later than 5 days before the due date for payment of Taxes with respect to any Tax Returns which Purchaser has the responsibility to file, the Sellers shall pay to 53 Purchaser an amount equal to that portion of the Taxes shown on such return for which the Sellers have an obligation to indemnify the Purchaser Indemnified Parties pursuant to the provisions of SECTION 10.5(a). No payment pursuant to this SECTION 10.5(b)(iv) shall excuse the Sellers from its indemnification obligations pursuant to SECTION 10.5(a) if the amount of Taxes as ultimately determined (on audit or otherwise) for the periods covered by such Tax Returns that are the responsibility of the Sellers exceeds the amount of the Seller's payment under this Section 10.5(b)(iv). If a dispute arises with respect to the underlying Tax Return or the amount of Taxes for which the Sellers are responsible and is not resolved 5 days prior to the due date of the underlying Tax Return, the Sellers shall pay to Purchaser the amount that Purchaser deems to be due and owing; PROVIDED, HOWEVER, that if the independent accounting firm shall determine that the amount of Taxes as being the responsibility of the Sellers differs from the amount paid to Purchaser, the Sellers shall pay to Purchaser, or Purchaser shall pay to the Sellers, the amount necessary to reflect the independent accounting firm's determination. (v) With respect to all Taxes, the Sellers and Purchaser will, unless prohibited by applicable law, close the taxable period of the Darby Companies as of the close of the Closing Date. Neither the Sellers nor Purchaser shall take any position inconsistent with the preceding sentence on any Tax Return. In any case where applicable law does not permit any Darby Company to close its taxable year on the Closing Date or in any case in which a Tax is assessed with respect to a taxable period which includes the Closing Date (but does not begin or end on that day) (a "STRADDLE PERIOD"), then Taxes, if any, attributable to a Straddle Period shall be allocated (i) to the Sellers for the period up to and including the Closing Date, and (ii) to Purchaser for the period subsequent to the Closing Date. Any allocation of income or deductions required to determine any Taxes attributable to a Straddle Period shall be made by means of a closing of the books and records of the Darby Companies as of the close of the Closing Date, provided that exemptions, allowances or deductions that are calculated on an annual basis (including, but not limited to, depreciation and amortization deductions) shall be allocated between the period ending on the Closing Date and the period after the Closing Date in proportion to the number of days in each such period. (vi) The Purchaser shall not, and shall not cause or direct any other Person to, file an election under Section 338 of the Code (or any similar provision under any other Law) with respect to any interest purchased under this Agreement. (vii) The Sellers shall cause Pricewaterhouse Coopers LLP to prepare and file with the IRS on behalf of DOIL the notice described in Treasury Regulations Section 1.897-2(h)(2) within 30 days of the Closing Date. (c) COOPERATION WITH RESPECT TO TAX RETURNS. Purchaser and the Sellers agree to furnish or cause to be furnished to each other, and each at their own expense, as promptly as practicable, such information (including access to books and records) and assistance, including making employees available on a mutually convenient basis to provide additional information and explanations of any material provided, relating to DOIL or any Subsidiary as is reasonably necessary for the filing of any Tax Return, for the preparation for any audit, and for the prosecution or defense of any claim, suit or proceeding relating to any adjustment or proposed 54 adjustment with respect to Taxes. Purchaser shall (or shall cause DOIL or the applicable Subsidiary to) retain, and shall provide the Sellers reasonable access to (including the right to make copies of), such supporting books and records and any other materials that the Sellers may specify with respect to Tax matters relating to any taxable period ending on or prior to the Closing Date until the relevant statute of limitations has expired. After such time, such material may be disposed, provided that prior to such disposition Purchaser, DOIL or the applicable Subsidiary shall give the Sellers a reasonable opportunity to take possession of such materials. (d) TAX AUDITS. (i) If a notice of deficiency, proposed adjustment, assessment, audit, examination or other administrative or court proceeding, suit, dispute or other claim (a "TAX Claim") with respect to DOIL or any Subsidiary shall be received by the Sellers, Purchaser, DOIL, or their respective Affiliates (a "NOTIFIED PARTY") by any Taxing Authority with respect to Taxes for which another party would be liable pursuant to SECTION 10.5(a), the Notified Party shall notify such other party in writing of such Tax Claim; PROVIDED, HOWEVER, that the failure of a party to give the other party prompt notice as provided herein shall not relieve such failing party of its obligations under this SECTION 10.5 except to the extent that the other party is actually and materially prejudiced thereby. (ii) The Sellers shall have the sole right and obligation to represent the interests of DOIL or any Subsidiary in any Tax Claim relating exclusively to taxable periods ending on or before the Closing Date and to employ counsel of its choice at its expense; provided, however, that if the results of such Tax Claim involve an issue that recurs in taxable periods of DOIL or such Subsidiary ending after the Closing Date or otherwise could adversely affect Purchaser, DOIL, or any of their respective Affiliates for any taxable period ending after the Closing Date, then (A) Sellers and Purchaser shall jointly control the defense and settlement of any such Tax Claim at each party's own expense, and (B) there shall be no settlement with respect thereto without the consent of the other party, which consent shall not be unreasonably withheld or delayed. (iii) The Sellers and Purchaser jointly shall represent the interests of DOIL or any Subsidiary with respect to any Tax Claim relating to a Straddle Period. Any disputes regarding the conduct or resolution of any Tax Claim shall be resolved pursuant to SECTION 10.5(f). All costs, fees and expenses paid to third parties in the course of such proceeding shall be borne by the Sellers and Purchaser in the same ratio as the ratio in which, pursuant to the terms of this Agreement, Sellers and Purchaser would share the responsibility for payment of the Taxes subject to such Tax Claim. (iv) Purchaser shall have the sole right to represent the interests of DOIL or any Subsidiary with respect to all other Tax Claims; PROVIDED, HOWEVER, that if the results of any such other Tax Claim involves an issue that occurs in taxable periods (or portions thereof) of DOIL or such Subsidiary ending on or before the Closing Date or otherwise could adversely affect the Sellers, or any of their respective Affiliates for any taxable period (or portions thereof) ending on or before the Closing Date, then (A) Seller Representative and Purchaser shall jointly control the defense and settlement of any such Tax Claim solely as it relates to such issue at each party's own expense, and (B) there 55 shall be no settlement with respect to such issue without the consent of the other party, which consent shall not be unreasonably withheld or delayed. (e) REFUND CLAIMS. To the extent any determination of Tax liability of DOIL or any Subsidiary, whether as the result of an audit or examination, a claim for refund, the filing of an amended return or otherwise, results in any refund of Taxes paid attributable to (i) any period which ends on or before the Closing Date or (ii) any Straddle Period, any such refund shall belong to the Sellers, provided that in the case of any Tax refund described in clause (ii) of this SECTION 10.5(e), the portion of such Tax refund which shall belong to the Sellers shall be that portion that is attributable to the portion of that period which ends on the Closing Date (determined on the basis of an interim closing of the books as of the Closing Date), and Purchaser shall promptly pay any such refund, and the interest actually received thereon, to the Sellers upon receipt thereof by Purchaser. Any and all other refunds shall belong to Purchaser. Any payments made under this SECTION 10.5(e) shall be net of any Taxes payable with respect to such refund or interest thereon (taking into account any actual reduction in Tax liability realized upon the payment pursuant to this SECTION 10.5(e)). (f) DISPUTES. Any dispute as to any matter covered hereby shall be resolved by an independent accounting firm mutually acceptable to the Sellers and Purchaser. The fees and expenses of such accounting firm shall be borne equally by the Sellers and Purchaser. If any dispute with respect to a Tax Return is not resolved prior to the due date of such Tax Return, such Tax Return shall be filed in the manner which the party responsible for preparing such Tax Return deems correct. Notwithstanding the filing of such Tax Return, the selected accounting firm shall resolve the dispute, and such Tax Return shall be amended if permitted under applicable Law. (g) EXCLUSIVITY. The indemnification provided for in this SECTION 10.5 shall be the sole remedy for any claim in respect of Taxes and the provisions of SECTIONS 10.2, 10.3 and 10.4 (except SECTIONS 10.4(a), (b) and (d)) hereof shall not apply to such claims. (h) TIME LIMITS. Any claim for indemnity under this SECTION 10.5 must be made at any time prior to 60 days after the expiration of the applicable Tax statute of limitations with respect to the relevant taxable period (including all periods of extension, whether automatic of permissive). (i) TAX BASIS. Purchaser's adjustment to its tax basis under Section 743(b) of the Code shall be allocated as set forth in EXHIBIT D hereto (subject to adjustments, mutually agreed upon by Purchaser and Sellers, for changes from January 1, 2003 through the Closing Date, which adjustments would be made consistent with the principles underlying Exhibit D), which has been arrived at by arm's length negotiation, in compliance with Section 755 of the Code and the regulations promulgated thereunder. Each of the Sellers and Purchaser shall, unless otherwise required by Law, (i) timely file all forms and Tax Returns required to be filed in connection with such allocation, (ii) be bound by such allocation for purposes of determining Taxes, (iii) prepare and file, and cause its Affiliates to prepare and file, its Tax Returns on a basis consistent with such allocation and (iv) take no position, and cause its Affiliates to take no position, inconsistent with such allocation on any applicable Tax Return, in any audit or proceeding before any taxing authority, in any report made for Tax, financial accounting or any 56 other purposes, or otherwise. In the event that the Allocation set forth on EXHIBIT D hereto (as adjusted) is disputed by a Tax Authority, the party receiving notice of such dispute shall promptly notify the other party hereto concerning the existence and resolution of such dispute. (j) LIMITATION OF LIABILITY. Subject to SECTIONS 10.4(a), (b) and (d), the liability of any Seller with respect to any Loss for which indemnification is provided under this SECTION 10.5 shall be equal to the product of such Loss and the percentage set forth opposite such Seller's name on the applicable column of EXHIBIT C hereto. 10.6 TAX TREATMENT OF INDEMNITY PAYMENTS. Sellers and Purchaser agree to treat any indemnity payment made pursuant to this ARTICLE X as an adjustment to the Purchase Price for federal, state, local and foreign income tax purposes. ARTICLE XI MISCELLANEOUS 11.1 PAYMENT OF SALES, USE OR SIMILAR TAXES. All sales, use, transfer, intangible, recordation, documentary stamp or similar Taxes or charges, of any nature whatsoever, applicable to, or resulting from, the transactions contemplated by this Agreement shall be borne fifty percent by Purchaser and fifty percent by the Sellers. 11.2 EXPENSES. Except as otherwise provided in this Agreement, FRI and the Purchaser shall bear their own expenses incurred in connection with the negotiation and execution of this Agreement and each other agreement, document and instrument contemplated by this Agreement and the consummation of the transactions contemplated hereby and thereby. The Sellers shall bear the following expenses incurred in connection with the negotiation and execution of this Agreement and each other agreement, document and instrument contemplated by this Agreement and the consummation of the transactions contemplated hereby and thereby, for which DOP is liable but which the Sellers have agreed to pay: (i) the fees and expenses of Skadden, Arps, Slate, Meagher & Flom LLP (the "SKADDEN EXPENSES"); and (ii) the expenses of PriceWaterhouseCoopers LLP (the "PWC EXPENSES"), provided, however, that, Sellers shall only be obligated to bear such PWC Expenses as follows: (x) in the event that the Skadden Expenses are equal to or exceed $500,000, DOP and DOIL will bear all PWC Expenses incurred by the Sellers, and (y) in the event that the Skadden Expenses are less than $500,000, the Sellers will only bear that portion of the PWC Expenses, or all, as the case may be, such that when the PWC Expenses borne by the Sellers and the Skadden Expenses are aggregated, the combined expenses to the Sellers shall not exceed $500,000, and DOP and DOIL shall pay any remaining portion of the PWC Expenses. 11.3 SELLER REPRESENTATIVE. The Sellers shall, at or prior to Closing, irrevocably appoint a Person or a committee of Persons acting by majority (the "SELLER REPRESENTATIVE") as each such Seller's representative, attorney-in-fact and agent, with full power of substitution to act in the name, place and stead of such Seller with respect to the transfer of the DOIL Shares and the DOP Interests, as applicable, in accordance with the terms and provisions of this Agreement (including ARTICLE X) and to act on behalf of such Seller in any amendment of or litigation or arbitration involving this Agreement (and FRI and Purchaser may deal exclusively 57 with the Seller Representative in this regard) and to do or refrain from doing all such further acts and things, and to execute all such documents, as such Seller Representative shall deem necessary or appropriate in conjunction with any of the transactions contemplated by this Agreement, including, without limitation, the power: (a) to take all action necessary or desirable in connection with the waiver of any condition to the obligations of the Sellers to consummate the transactions contemplated by this Agreement; (b) to negotiate, execute and deliver all ancillary agreements, statements, certificates, statements, notices, approvals, extensions, waivers, undertakings, amendments and other documents required or permitted to given in connection with the consummation of the transactions contemplated by this Agreement (it being understood that such Seller shall execute and deliver any such documents which the Seller Representative agrees to execute); (c) to terminate this Agreement if the Sellers are entitled to do so; (d) to give and receive all notices and communications to be given or received under this Agreement and to receive service of process in connection with the any claims under this Agreement, including service of process in connection with arbitration; and (e) to take all actions which under this Agreement may be taken by the Sellers and to do or refrain from doing any further act or deed on behalf of the Seller which the Seller Representative deems necessary or appropriate in his sole discretion relating to the subject matter of this Agreement as fully and completely as such Seller could do if personally present. If a Person or committee of Persons serving as Seller Representative ceases to serve as Seller Representative for any reason, such other Person or committee of Persons as may be designated by a majority of the Sellers shall succeed as the Seller Representative, and Purchaser shall be notified of the identity of such successor Seller Representative promptly following the designation thereof. 11.4 SUBMISSION TO JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a) Except for disputes to be resolved in accordance with SECTION 10.5(f) hereof, the parties hereto hereby irrevocably submit to the non-exclusive jurisdiction of any federal or state court located within the State of New York (the "NEW YORK COURTS") with regard to any dispute arising out of or relating to this Agreement or any of the transactions contemplated hereby (a "DISPUTE"), and not as a general submission to such jurisdiction or with respect to any other dispute, matter or claim whatsoever, and each party hereby irrevocably agrees that all claims in respect of such Dispute or any suit, action proceeding related thereto may be heard and determined in such courts. The parties hereby irrevocably waive, to the fullest extent permitted by applicable law, any objection which they may now or hereafter have to the laying of venue of any such Dispute brought in a New York Court or any defense of inconvenient forum for the maintenance of such suit. Each of the parties hereto agrees that a judgment in any such Dispute may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. With regard to disputes to be resolved in accordance with Section 10.5(f) hereof, the 58 parties submit to the non-exclusive jurisdiction of the New York Courts with regard to actions to compel arbitration, in aid of arbitration or for enforcement of an arbitral award. (b) Each of the parties hereto hereby consents to process being served by any party to this Agreement in any suit, action or proceeding by delivery of a copy thereof in accordance with the provisions of SECTION 11.7. 11.5 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement (including the schedules and exhibits hereto) represents the entire understanding and agreement between the parties hereto with respect to the subject matter hereof and can be amended, supplemented or changed, and any provision hereof can be waived, only by written instrument making specific reference to this Agreement signed by the party against whom enforcement of any such amendment, supplement, modification or waiver is sought. No action taken pursuant to this Agreement, including without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representation, warranty, covenant or agreement contained herein. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a further or continuing waiver of such breach or as a waiver of any other or subsequent breach. No failure on the part of any party to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or remedy by such party preclude any other or further exercise thereof or the exercise of any other right, power or remedy. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law. 11.6 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and performed in such state, without regard to its conflicts of laws provisions (other than New York General Obligations Law Section 5-1401). 11.7 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given (i) when delivered personally by hand (with written confirmation of receipt), (ii) when sent by facsimile (with written confirmation of transmission) or (iii) one business day following the day sent by overnight courier (with written confirmation of receipt), in each case at the following addresses and facsimile numbers (or to such other address or facsimile number as a party may have specified by notice given to the other party pursuant to this provision): If to any Darby Party, to: Darby Overseas Investors, Ltd. 1133 Connecticut Avenue, N.W. 4th Floor Washington, D.C. 20036 Attention: Clark H. Nielsen 59 With a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 1440 New York Avenue, N.W. Washington, D.C. 20005 Facsimile: (202) 393-5760 Attention: Marcia R. Nirenstein, Esq. and Jim Alpi, Esq. If to FRI or Purchaser, to: Franklin Resources, Inc. One Franklin Parkway San Mateo, California 94403-1906 Attention: Martin Flanagan Facsimile: (650) 312-3528, and Attention: Leslie M. Kratter Facsimile: (650) 312-2804 With a copy to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, NY 10153 Facsimile: (212) 310-8007 Attention: Raymond O. Gietz, Esq. and Jeffrey E. Tabak, Esq. 11.8 SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal, or incapable of being enforced by any law or public policy, all other terms or provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal, or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible. 11.9 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. Nothing in this Agreement shall create or be deemed to create any third party beneficiary rights in any person or entity not a party to this Agreement except as provided below. No assignment of this Agreement or of any rights or obligations hereunder may be made by either the Darby Parties or FRI or Purchaser (by operation of law or otherwise) without the prior written consent of the other parties hereto and any attempted assignment without the required consents shall be void; PROVIDED, HOWEVER, that Purchaser may assign this Agreement and any or all rights or obligations hereunder (including, without limitation, Purchaser's rights to purchase the DOIL Shares and the DOP Interests and Purchaser's rights to seek indemnification hereunder) to any Affiliate of FRI. 60 Upon any such permitted assignment, the references in this Agreement to Purchaser shall also apply to any such assignee unless the context otherwise requires. 11.10 NON-RECOURSE. No past, present or future director, officer, employee, incorporator, member, partner, stockholder, Affiliate, agent, attorney or representative of Purchaser (other than FRI) shall have any liability for any obligations or liabilities of Purchaser under this Agreement of or for any claim based on, in respect of, or by reason of, the transactions contemplated hereby and thereby. 11.11 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. ** REMAINDER OF PAGE INTENTIONALLY LEFT BLANK** 61 IN WITNESS WHEREOF, the parties hereto have duly executed this Purchase Agreement as of the date first written above. FRANKLIN RESOURCES, INC. By: /s/ Martin L. Flanagan -------------------------------- Name: Martin L. Flanagan Title: President DARBY HOLDINGS, INC. By: /s/ Leslie M. Kratter -------------------------------- Name: LESLIE M. KRATTER Title: SENIOR VICE PRESIDENT DARBY OVERSEAS INVESTMENTS, LTD. By: /s/ Richard H. Frank -------------------------------- Name: Richard H. Frank Title: Chief Executive Officer DARBY OVERSEAS PARTNERS, L.P. By: DARBY OVERSEAS INVESTMENTS, LTD., its Sole General Partner By: /s/ Richard H. Frank ---------------------------- Name: Richard H. Frank Title: Chief Executive Officer DOP SELLERS: BECHTEL DOP ENTERPRISES, INC. By: /s/ Timothy D. Statton --------------------------------- Name: TIMOTHY D. STATTON Title: PRESIDENT MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: David L. Babson & Company, Inc. as investment advisor By: /s/ Richard B. McGauley --------------------------------- Name: Richard B. McGauley Title: Managing Director /s/ Nicholas F. Brady -------------------------------- Nicholas F. Brady LUBAR NOMINEES By: /s/ Sheldon B. Lubar ------------------------------ Sheldon B. Lubar, General Partner WIEGERS & CO. By: /s/ George A. Wiegers -------------------------------- George A. Wiegers, General Partner /s/ John P. Birkelund -------------------------------- John P. Birkelund SHULTZ 1989 FAMILY TRUST By: /s/ George Shultz, Trustee ------------------------------- George Shultz /s/ Richard H. Frank ------------------------------- Richard H. Frank /s/ Nicholas B. Cutler ------------------------------- Nicholas B. Cutler /s/ Clark H. Nielsen ------------------------------- Clark H. Nielsen /s/ Lloyd L. Beatty, Jr. ------------------------------- Lloyd L. Beatty, Jr. /s/ Meredith B. Oliver ------------------------------- Meredith B. Oliver /s/ Reuben F. Richards ------------------------------- Reuben F. Richards /s/ Cordell W. Hull ------------------------------- Cordell W. Hull /s/ Daniel S. Gregory ------------------------------- Daniel S. Gregory /s/ Robert M.. Teeter ------------------------------- Robert M. Teeter /s/ Charles H. Dallara ------------------------------- Charles H. Dallara /s/ Gerrit Tammes ------------------------------- Gerrit Tammes DOIL SELLERS: BEn DIRECT INVESTMENTS, LLC By: /s/ Timothy D. Statton -------------------------------- Name: TIMOTHY D. STATTON Title: PRESIDENT /s/ Nicholas F. Brady ------------------------------- Nicholas F. Brady LUBAR NOMINEES By: /s/ Sheldon B. Lubar --------------------------------- Sheldon B. Lubar, General Partner WIEGERS & CO. By: /s/ George A. Wiegers --------------------------------- George A. Wiegers, General Partner /s/ John P. Birkelund ------------------------------- John P. Birkelund EXHIBIT A ADVISED DARBY FUNDS ProBa, L.P. Mass Mutual - Darby CBO Etra Emerging Income Fund Moneda Latin American Debt Fund EXHIBIT B SPONSORED DARBY FUNDS Darby Emerging Markets Fund, L.P. Darby-BBVA Latin American Private Equity Fund, L.P. Darby-BBVA Latin American Private Equity Fund (Ontario), L.P. Darby Latin American Mezzanine Fund, L.P. Darby Emerging Markets Income Funds Asian Infrastructure Mezzanine Capital Fund Darby Technology Ventures Group, LLC EXHIBIT D ALLOCATION OF PURCHASE PRICE TO ASSETS (TAX BASIS) (In thousands) - --------------------------------------------------------------------------- 1. DOIL PURCHASE PRICE: $ 763 - --------------------------------------------------------------------------- 2. ALLOCATION OF DOP PURCHASE PRICE - --------------------------------------------------------------------------- DOP's interest in securities/investments held by Darby Funds $42,750 - --------------------------------------------------------------------------- Goodwill of DOP 28,966 - --------------------------------------------------------------------------- DOP and DOP's affiliate management contracts 3,400 ------- - --------------------------------------------------------------------------- TOTAL DOP PURCHASE PRICE $75,116 ------- - --------------------------------------------------------------------------- AGGREGATE DOP PURCHASE PRICE AND DOIL PURCHASE PRICE $75,879 - --------------------------------------------------------------------------- EXHIBIT E-1 FORM OF OFFICER'S CERTIFICATE The undersigned, pursuant to Section ___ of the Purchase Agreement, dated as of August 1, 2003 (the "Agreement"), by and among Franklin Resources, Inc., a corporation existing under the laws of Delaware, Darby Holdings, Inc., a corporation existing under the laws of Delaware ("Purchaser"), Darby Overseas Investments, Ltd., a corporation existing under the laws of Delaware ("DOIL"), Darby Overseas Partners, L.P., a limited partnership existing under the laws of Delaware ("DOP"), the stockholders of DOIL listed on the signature pages thereto and the limited partners of DOP listed on the signature pages thereto, do hereby certify to __________ as follows: 1. I, ____________________, am the Chief Executive Officer of _________ and, as such, have the power and authority to execute and deliver this Officer's Certificate. 2. I, ____________________, am the [Chief Financial Officer / Treasurer] of __________ and, as such, have the power and authority to execute and deliver this Officer's Certificate. 3. The representations and warranties of ___________ in Article ___ of the Agreement qualified as to materiality are true and correct, and those not so qualified are true and correct in all material respects, as of the date of the Agreement and as of the Closing as though made at and as of the Closing, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties qualified as to materiality are true and correct, and those not so qualified are true and correct in all material respects, on and as of such earlier date). 4. _____________ has performed and complied in all material respects with all obligations and agreements required in the Agreement to be performed or complied with by it prior to the date hereof. IN WITNESS WHEREOF, the undersigned have executed this certificate as of ___________, 2003. --------------------------------- Name: Title: Chief Executive Officer --------------------------------- Name: Title: [Chief Financial Officer / Treasurer] EXHIBIT E-2 FORM OF SELLER'S CERTIFICATE (INDIVIDUAL DARBY SELLERS) The undersigned, pursuant to Section 9.1(e) of the Purchase Agreement, dated as of August 1, 2003 (the "Agreement"), by and among Franklin Resources, Inc., a corporation existing under the laws of Delaware, Darby Holdings, Inc., a corporation existing under the laws of Delaware ("Purchaser"), Darby Overseas Investments, Ltd., a corporation existing under the laws of Delaware ("DOIL"), Darby Overseas Partners, L.P., a limited partnership existing under the laws of Delaware ("DOP"), the stockholders of DOIL listed on the signature pages thereto and the limited partners of DOP listed on the signature pages thereto, does hereby certify to Purchaser as follows: 1. The representations and warranties made by the undersigned in Article VI of the Agreement qualified as to materiality are true and correct, and those not so qualified are true and correct in all material respects, as of the date of the Agreement and as of the Closing as though made at and as of the Closing, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties qualified as to materiality are true and correct, and those not so qualified are true and correct in all material respects, on and as of such earlier date). 2. The undersigned has performed and complied in all material respects with all obligations and agreements required in the Agreement to be performed or complied with by the undersigned prior to the date hereof. IN WITNESS WHEREOF, the undersigned has executed this certificate as of ___________, 2003. --------------------------------- Name: EXHIBIT E-3 FORM OF SELLER'S CERTIFICATE (INSTITUTIONAL DARBY SELLERS) The undersigned, pursuant to Section 9.1(e) of the Purchase Agreement, dated as of August 1, 2003 (the "Agreement"), by and among Franklin Resources, Inc., a corporation existing under the laws of Delaware, Darby Holdings, Inc., a corporation existing under the laws of Delaware ("Purchaser"), Darby Overseas Investments, Ltd., a corporation existing under the laws of Delaware ("DOIL"), Darby Overseas Partners, L.P., a limited partnership existing under the laws of Delaware ("DOP"), the stockholders of DOIL listed on the signature pages thereto and the limited partners of DOP listed on the signature pages thereto, do hereby certify to Purchaser as follows: 1. I, ____________________, am the Chief Executive Officer of _________ and, as such, have the power and authority to execute and deliver this Officer's Certificate. 2. I, ____________________, am the [Chief Financial Officer / Treasurer] of __________ and, as such, have the power and authority to execute and deliver this Officer's Certificate. 3. The representations and warranties of ___________ in Article VI of the Agreement qualified as to materiality are true and correct, and those not so qualified are true and correct in all material respects, as of the date of the Agreement and as of the Closing as though made at and as of the Closing, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties qualified as to materiality are true and correct, and those not so qualified are true and correct in all material respects, on and as of such earlier date). 4. ___________ has performed and complied in all material respects with all obligations and agreements required in the Agreement to be performed or complied with by the undersigned prior to the date hereof. IN WITNESS WHEREOF, the undersigned have executed this certificate as of ___________, 2003. -------------------------------- Name: Title: Chief Executive Officer --------------------------------- Name: Title: [Chief Financial Officer / Treasurer] EXHIBIT F TERMS OF OFFER LETTER 1. Current position and current annual salary. 2. Annual salary will be subject to adjustment each September 30 at the discretion of DOIL's board of directors. 3. Bonus at the discretion of DOIL's board of directors. Bonuses for the period ending September 30, 2003 will be payable in cash. Thereafter, the parties will work towards a goal of transitioning to the FRI bonus plan over a period of time. 4. Initially, coverage to continue under the Darby employee benefit plans or substantially similar plans. Over time, coverage transitioned to FRI's employee benefit plans. If coverage is so transitioned, and is worse in the aggregate than what employee originally had, then FRI will make a one-time adjustment to base salary in an amount that FRI reasonably believes is appropriate and equitable. Employee will generally be credited with service with DOIL prior to the Closing Date for purposes of benefits, subject to the exceptions identified in Section 8.9 of the Purchase Agreement. 5. Where applicable, letter will state that employee will receive a special award of FRI restricted stock (valued as of the business day prior to the Closing Date). The grant will be made pursuant to Franklin's standard agreements, which will be attached to the letter, and the stock will vest in approximately equal installments, 1/4 on September 30, 2004, 1/4 on September 30, 2005, 1/4 on September 29, 2006 and 1/4 on September 28, 2007. 6. For individuals still entitled to a guaranteed bonus - Three-quarters of such guaranteed bonus will be payable on September 30, 2003 and the remaining one-quarter of such bonus on September 30, 2004 (along with any other bonus to which employee may be entitled for the period from January 1, 2004 to September 30, 2004). For individuals hired after January 1, 2003, the amount of such guaranteed bonus will be prorated based on the amount of time they have been employed. 7. Employee waives any and all rights that he or she may have under any other agreement, arrangement or understanding in effect as of the Closing Date relating to employment with DOIL and its affiliates. 8. Letter is not, and will not be construed to create, a contract of employment, express or implied. Employee to be considered an at-will employee. EXHIBIT H FORM OF ASSIGNMENT AND TRANSFER OF DOP LIMITED PARTNER INTEREST This Assignment and Transfer (this "ASSIGNMENT") is made as of the _______ day of _______, 2003, by and between __________ ("ASSIGNOR") and Darby Holdings, Inc. ("ASSIGNEE"). WHEREAS, Assignor had previously executed an Agreement of Limited Partnership of Darby Overseas Partners, L.P., dated as of February 9, 1994 (the "Partnership Agreement"), pursuant to which it was admitted to Darby Overseas Partners, L.P., a Delaware limited partnership ("DOP"), as a Limited Partner; and WHEREAS, Assignor and Assignee are parties to a Purchase Agreement, dated as of August 1, 2003, by and among Assignor, Assignee, DOP and certain other persons signatory thereto, pursuant to which Assignor agreed to sell and assign a ____ percent limited partner interest (the "Partnership Interest") in DOP, constituting its entire limited partner interest in DOP, to Assignee and Assignee agreed to assume all liabilities of Assignor with respect to the Partnership Interest. NOW, THEREFORE, in consideration of the mutual agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Assignor and Assignee hereby agree as follows: 1. Assignor hereby sells, transfers and assigns the Partnership Interest, together with all and singular the rights and privileges in any wise appertaining thereto, to Assignee. 2. Assignee hereby accepts the Partnership Interest, adopts the Partnership Agreement and assumes all of the liabilities of Assignor in respect of the Partnership Interest. From and after the date hereof, Assignor shall be removed from DOP as a Limited Partner and Assignee shall be admitted in its stead as a Substitute Limited Partner and shall have all rights and obligations of a Limited Partner as set forth in the Partnership Agreement. 3. Assignor and Assignee each agree to execute, acknowledge and deliver to the other all such additional instruments, notices, and other documents and to do all such further acts and things as may be necessary or useful to more fully and effectively effect the intent of this Assignment. 4. This Assignment shall be governed by and construed in accordance with the laws of the State of Delaware without regard to its principles of conflicts of law. 5. This Assignment shall bind and inure to the benefit of Assignor and Assignee and their respective successors and assigns. 6. This Assignment may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same instrument. 7. Unless otherwise defined herein, the terms used in the Assignment shall have the meaning set forth in the Partnership Agreement. IN WITNESS WHEREOF, this Assignment has been executed on the date written above. ASSIGNOR: --------- By: ______________________________ Name:____________________________ Title:_____________________________ ASSIGNEE: --------- DARBY HOLDINGS, INC. By: ______________________________ Name:____________________________ Title:_____________________________ EXHIBIT I [Darby Overseas Investments Logo Omitted] July 21, 2003 Limited Partners Darby-BBVA Latin American Private Equity Fund, L.P. Darby-BBVA Latin American Private Equity Fund (Ontario), L.P. RE: LIMITED PARTNERSHIP AGREEMENT SECTION 2.01(c) Dear Fund Limited Partner: We are writing to you in reference to the Second Amended and Restated Limited Partnership Agreement of the Darby-BBVA Latin American Private Equity Fund, L.P. and the Limited Partnership Agreement of the Darby-BBVA Latin American Private Equity Fund (Ontario), L.P. (together, the "Partnership Agreements"). The Darby-BBVA Latin American Private Equity Fund, L.P. and the Darby-BBVA Latin American Private Equity Fund (Ontario), L.P. are referred to collectively as the "Partnership". As we have previously informed you, Darby proposes to enter into an agreement with Franklin Resources, Inc. pursuant to which Franklin will acquire all of the outstanding equity interests of Darby that is does not already own. Consequently, Darby will become a wholly owned subsidiary of Franklin. Franklin is a global investment management organization known as Franklin Templeton Investments. Headquartered in San Mateo, California, Franklin offers investment products under the Franklin, Templeton, Mutual Series, Bissett and Fiduciary brand names. Franklin is one of the largest investment management firms in the world, with over $287 billion in assets under management as of June 30, 2003. Darby has enjoyed a long relationship with Franklin over the past ten years, during which time Franklin has been a significant equity investor in Darby as well as a substantial supporter of Darby's funds - including the Partnership. We are very pleased about the proposed transaction. By becoming part of Franklin Templeton Investments, we believe that the Partnership and Darby's business overall will benefit from the Franklin Templeton organization's outstanding reputation and expertise in global investing. Franklin and its affiliated companies offer an array of investment products to their clients, and we look forward to offering Darby products - including the Partnership - through this distribution network. Consistent with the recent limited partner approval to extend the Partnership's fundraising period, we believe that this expanded distribution network will improve the prospects of creating a larger and therefore more diversified fund. With this in mind, we are writing to request that the Darby Overseas Investments, Ltd. Suite 400 1135 Connecticut Avenue, NW Washington, DC 20036 T 202 872 0500 F 202 872 1816 Partnership investors waive the provision of Section 2.01(c) of the Partnership Agreements (together with the related provisions of the investment advisory agreements relating to the Partnership.) Section 2.01(c) of each of the Partnership Agreements contains the following restriction (with emphasis supplied): Unless approved by three fourths in interest of Limited Partners, until the earlier of (i) such time as the Partnership is Substantially Invested or (ii) the Investment Expiration Date, the General Partner, the Advisor and the Sponsor Advisor shall not, and each shall cause its officers, employees AND AFFILIATES not to, establish (OR SOLICIT FUNDS FROM INVESTORS WITH RESPECT TO) any entity similar to the Partnership ... that meets all of the following criteria: (i) it is organized for the primary purpose of investing in and holding a portfolio of Securities of more than one issuer selected by its portfolio manager, and (ii) the primary purpose of such entity is to make equity investments in Latin America of the nature and type that would qualify as Permanent Investments under this Agreement. As advisers to many high-net-worth individual investors and institutional clients, affiliates of Franklin - which will become "Affiliates" of Darby and, accordingly, off the General Partner and Advisor within the meaning of Section 2.01(c) of the Partnership agreements upon the closing of the proposed transaction - have a fiduciary obligation to offer each client those investment products that are most suitable for that client regardless of any interest that Franklin may have in any particular investment product. In other words, in order to offer any particular product to clients, Franklin and its investment advisory affiliates must be free to offer competing products as well. Accordingly, Franklin has requested that we seek - and we have agreed to seek - a waiver of the provisions of Section 2.01(c) of the Partnership Agreements in order to allow Franklin and its affiliates to solicit funds from investors with respect to investment funds that may compete with the Partnership. Franklin and Darby agree that this waiver is prudent and provides transparency for Partnership investors. If this waiver is acceptable to you, we ask that you please so indicate by signing and returning to us one copy of attached Waiver. In view of our scheduled closing of the Franklin - Darby transaction on July 30, 2003, we respectfully request that you respond by no later than July 29, 2003. If you have any questions, please call me at (202) 872-0500. Sincerely, Richard H. Frank Chief Executive Officer Attachments: 1 DARBY-BBVA LATIN AMERICAN PRIVATE EQUITY FUND, L.P. DARBY-BBVA LATIN AMERICAN PRIVATE EQUITY FUND (ONTARIO), L.P. WAIVER Capitalized terms used herein shall have the same respective meanings provided in the Darby-BBVA Latin American Private Equity Fund, L.P. Second Amended and Restated Limited Partnership Agreement dated as of January 17, 2003 and the Darby-BBVA Latin American Private Equity Fund (Ontario), L.P. Limited Partnership Agreement dated as of March 20, 2003 (together, the "Partnership Agreements"). The undersigned Limited Partner hereby irrevocably and unconditionally waives the provisions of Section 2.01(c) of the Partnership Agreements (together with the provisions of Section 6(a) of the First Amended and Restated Investment Advisory Agreement dated as of January 17, 2003 by and between Darby-BBVA Latin American Private Equity Fund, L.P., the Darby-BBVA Latin American Investors, Ltd. and Darby Overseas Partners, L.P. and the provisions of Section 6(a) of the Investment Advisory Agreement dated as of March 20, 2003 by and between Darby-BBVA Latin American Private Equity Fund (Ontario), L.P., Darby-BBVA Latin American Investors, Ltd. and Darby Overseas Partners, L.P. (together, the "Investment Advisory Agreements") to the extent necessary to permit, and for the sole purpose of allowing, Franklin Resources, Inc. and its Affiliates (other than Darby, the General Partner and their respective subsidiaries, which shall remain subject to Section 2.01(c) of the Partnership Agreements and Section 6(a) of the Investment Advisory Agreements) to solicit funds from investors with respect to any entity similar to the Partnership and that meets all of the following criteria: (i) it is organized for the primary purpose of investing in and holding a portfolio of Securities of more than one issuer selected by its portfolio manager, and (ii) the primary purpose of such entity is to make equity investments in Latin America of the nature and type that would qualify as Permanent Investments under this Agreement. This Waiver shall be effective to waive the provisions of Section 2.01(c) of the Partnership Agreements (and Section 6(a) of the Investment Advisory Agreements) only to the extent specifically set forth herein, and shall be construed neither to alter, amend or affect the rights and obligations of the Darby-BBVA Latin American Private Equity Fund, L.P., the Darby-BBVA Latin American Private Equity Fund (Ontario), L.P. or the Partners thereof under any other provision of the Partnership Agreements (or the Investment Advisory Agreements), nor as a waiver of any other provision of the Partnership Agreements (or the Investment Advisory Agreements) or of any breach of default thereunder. IN WITNESS WHEREOF, the undersigned has executed this Waiver as of the date set forth below. Name of Limited Partner - ------------------------------------ By: ------------------------------ Name: Title: Date: PLEASE RETURN A COPY OF THIS WAIVER NO LATER THAN JULY 29, 2003 BY FAX TO THE ATTENTION OF CLARK NIELSEN AT DARBY OVERSEAS INVESTMENTS, LTD. (202-872-1816), AND RETURN THE ORIGINAL BY MAIL TO DARBY OVERSEAS INVESTMENTS, LTD., 1133 CONNECTICUT AVENUE, N.W., SUITE 400, WASHINGTON, D.C. 20036, ATTN: CLARK NIELSEN. EXHIBIT J-1 [NIELSEN & BEATTY] _________________, 2003 Darby Overseas Investments, Ltd. 1133 Connecticut Avenue, NW Suite 400 Washington, DC 20036 Gentlemen: Reference is made to the Purchase Agreement, dated as of August 1, 2003 (the "PURCHASE AGREEMENT"), by and among Franklin Resources, Inc., a corporation existing under the laws of Delaware ("FRI"), Darby Holdings, Inc., a corporation existing under the laws of Delaware ("PURCHASER"), Darby Overseas Investments, Ltd., a corporation existing under the laws of Delaware ("DOIL"), Darby Overseas Partners, L.P., a limited partnership existing under the laws of Delaware ("DOP"), the stockholders of DOIL listed on the signature pages thereto (collectively, the "DOIL SELLERS") and the limited partners of DOP listed on the signature pages thereto (collectively, the "DOP SELLERS", and together with the DOIL Sellers, the "SELLERS", and the Sellers, DOP and DOIL being hereinafter referred to as the "DARBY PARTIES"). Capitalized terms used herein are used as defined in the Purchase Agreement. Pursuant to the Purchase Agreement, the undersigned is selling his limited partner interests in DOP to the Purchaser in exchange for the purchase price to be paid to the undersigned as set forth in the Purchase Agreement. In connection with the transactions contemplated by the Purchase Agreement, and as further consideration for the purchase price to be paid to the undersigned, the undersigned has agreed to abide by the covenants set forth herein, as follows: 1. NON-COMPETITION. During the term of my employment with DOIL or any Affiliate of DOIL and for a period of [_____] after the termination of such employment for any reason, I shall not, directly or indirectly, manage, operate or control, or participate in the management, operation or control of, or become employed by or render advisory or other services to (other than in a capacity as a lawyer, accountant or consultant working for a law, accounting or nationally recognized consulting firm that has been retained by a Fund), any business, whether in corporate, proprietorship or partnership form or otherwise, engaged in sponsoring, managing or serving as the investment advisor to private Funds that are excluded from the definition of "investment company" under the Investment Company Act and whose primary investment objective is to make private equity investments in or mezzanine loans to companies located in countries that are generally recognized by the financial community to be emerging markets (a "Competitive Fund"). Notwithstanding the foregoing, if my employment with both DOIL and all entities Affiliated with DOIL is terminated by DOIL and the entities Affiliated with DOIL for any reason other than for Cause, the restrictions set forth in this Paragraph 1 shall cease and have no further force and effect, effective with such termination. For purposes hereof, my employment shall be deemed to be terminated for "cause" if my employment is terminated at any time under the following circumstances: (a) I fail to perform any of my material obligations in relation to my employment with DOIL or any Affiliate of DOIL (including, but not limited to, compliance with the terms of this Agreement) and fail to cure such failure within thirty (30) days after receiving written notice from DOIL or any Affiliate of DOIL; (b) DOIL or any Affiliate of DOIL reasonably believes that I have committed an act of fraud, theft or dishonesty against DOIL or any Affiliate of DOIL, including, without limitation, misappropriation of assets of DOIL and its Affiliates; or (c) I am convicted (or plead NOLO CONTENDERE to) any felony or any misdemeanor involving moral turpitude or a violation of any Securities Law or which might, in the reasonable opinion of DOIL or any Affiliate of DOIL, cause financial, reputational or regulatory harm to DOIL or any Affiliate of DOIL. 2. NON-SOLICITATION. During the term of my employment with DOIL and for a period of [_____] thereafter, I shall not: (a) cause, solicit, induce or encourage any employees of the Darby Companies to leave such employment or hire, employ or otherwise engage any such individual, (b) cause, induce or encourage any material existing or prospective investor, client, customer, supplier or licensor of or any other Person who has a material business relationship with any Darby Company at the time my employment with DOIL ceases, to terminate or modify any such existing or prospective relationship, or (c) with respect to any existing or prospective investor of a Darby Fund at the time my employment with DOIL ceases, encourage such investor to make an investment in any Competitive Fund other than a Darby Fund. 3. REMEDIES. If I commit a breach, or threaten to commit a breach of any of the provisions of this Agreement, the Darby Companies and Purchaser shall have the right and remedy to have the provisions of this Agreement specifically enforced by any court of competent jurisdiction without the necessity of proving actual damages or posting any bond whatsoever, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Darby Companies and Purchaser, that money damages will not provide an adequate remedy to such persons and that Purchaser or a Darby Company shall be entitled to appeal to any court of competent jurisdiction for an injunction restraining me from committing or continuing a violation of paragraphs 1 or 2 hereof. Such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available at law or in equity. 4. ACKNOWLEDGEMENT. I represent and acknowledge that, in light of the payments to be made by the Purchaser to me under the Purchase Agreement and for other good and valid reasons, the restrictions stated in Paragraphs 1 and 2 on the activities in which I may engage are reasonable, and the period of time designated above is reasonable. 5. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts executed in and to be performed in that State, without regard to its conflicts of law provisions (other than New York General Obligations Law Section 5-1401). All actions and proceedings arising out of relating to this Agreement shall be heard and determined in any New York state or federal court. 6. AMENDMENT OR WAIVER. Neither this Agreement nor any terms hereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the parties hereto. 7. BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, heirs, successors and assigns. 8. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute a single instrument. 9. SEVERABILITY. If any provision of this Agreement shall be held invalid under the applicable law of any jurisdiction, the remainder of this Agreement shall not be affected thereby. Also if any provision of this Agreement is invalid or unenforceable under any applicable Law, then such provision shall be deemed inoperative only to the extent that it may conflict therewith and shall be deemed modified to conform with such law. Any provision hereof that may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. If the foregoing correctly sets forth our understanding of the subject matter hereof, please so indicate in the space provided below whereupon this Agreement shall be a binding agreement among us. Very truly yours, ------------------------------ [Individual] Accepted and agreed to: DARBY OVERSEAS INVESTMENTS, LTD. By:___________________________________ EXHIBIT J-2 [BRADY, LUBAR, WIEGERS] _____________, 2003 Darby Overseas Investments, Ltd. 1133 Connecticut Avenue, NW Suite 400 Washington, DC 20036 Gentlemen: Reference is made to the Purchase Agreement, dated as of August 1, 2003 (the "PURCHASE AGREEMENT"), by and among Franklin Resources, Inc., a corporation existing under the laws of Delaware ("FRI"), Darby Holdings, Inc., a corporation existing under the laws of Delaware ("PURCHASER"), Darby Overseas Investments, Ltd., a corporation existing under the laws of Delaware ("DOIL"), Darby Overseas Partners, L.P., a limited partnership existing under the laws of Delaware ("DOP"), the stockholders of DOIL listed on the signature pages thereto (collectively, the "DOIL SELLERS") and the limited partners of DOP listed on the signature pages thereto (collectively, the "DOP SELLERS", and together with the DOIL Sellers, the "SELLERS", and the Sellers, DOP and DOIL being hereinafter referred to as the "DARBY PARTIES"). Capitalized terms used herein are used as defined in the Purchase Agreement. Pursuant to the Purchase Agreement, the undersigned is selling his stock in DOIL and limited partner interests in DOP to the Purchaser in exchange for the purchase price to be paid to the undersigned as set forth in the Purchase Agreement. In connection with the transactions contemplated by the Purchase Agreement, and as further consideration for the purchase price to be paid to the undersigned, the undersigned has agreed to abide by the covenants set forth herein, as follows: 1. NON-COMPETITION. For a period from the Closing Date until the [__] anniversary of the Closing Date, I shall not, directly or indirectly, manage, operate or control, or participate in the management, operation or control of, or become employed by or render advisory or other services to (other than in a capacity as a lawyer, accountant or consultant working for a law, accounting or nationally recognized consulting firm that has been retained by a Fund), any business, whether in corporate, proprietorship or partnership form or otherwise, engaged in sponsoring, managing or serving as the investment advisor to private Funds that are excluded from the definition of "investment company" under the Investment Company Act and whose primary investment objective is to make private equity investments in or mezzanine loans to companies located in countries that are generally recognized by the financial community to be emerging markets (a "Competitive Fund"). /1/ 2. NON-SOLICITATION. For a period from the Closing Date until the [__] anniversary of the Closing Date, I shall not: (a) cause, solicit, induce or encourage any employees of the Darby Companies who are or become employees of Purchaser or its Affiliates to leave such employment or hire, employ or otherwise engage any such individual, or (b) cause, solicit, induce or encourage any material existing or prospective investor, client, customer, supplier, licensor of or any other Person who has a material business relationship with any Darby Company known to me to terminate or modify any such existing or prospective relationship, or (c) with respect to any existing or prospective investor of a Darby Fund known to me, encourage such investor to make an investment in any Competitive Fund other than a Darby Fund. 3. REMEDIES. If I commit a breach, or threaten to commit a breach of any of the provisions of this Agreement, the Darby Companies and Purchaser shall have the right and remedy to have the provisions of this Agreement specifically enforced by any court of competent jurisdiction without the necessity of proving actual damages or posting any bond whatsoever, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Darby Companies and Purchaser, that money damages will not provide an adequate remedy to such persons and that Purchaser or a Darby Company shall be entitled to apply to any court of competent jurisdiction for an injunction restraining me from committing or continuing a violation of paragraphs 1 or 2 hereof. Such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available at law or in equity. 4. ACKNOWLEDGEMENT. I represent and acknowledge that, in light of the payments to be made by the Purchaser to me under the Purchase Agreement and for other good and valid reasons, the restrictions stated in paragraphs 1 and 2 on the activities in which I may engage are reasonable, and the period of time designated above is reasonable. 5. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts executed in and to be performed in that State, without regard to its conflicts of law provisions (other than New York General Obligations Law Section 5-1401). All actions and proceedings arising out of relating to this Agreement shall be heard and determined in any New York state or federal court. 6. AMENDMENT OR WAIVER. Neither this Agreement nor any terms hereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the parties hereto. - -------- 1 May include a mutually acceptable proviso that states "except as set forth in Attachment A hereto." 7. BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, heirs, successors and assigns. 8. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute a single instrument. 9. SEVERABILITY. If any provision of this Agreement shall be held invalid under the applicable law of any jurisdiction, the remainder of this Agreement shall not be affected thereby. Also if, any provision of this Agreement is invalid or unenforceable under any applicable law, then such provision shall be deemed inoperative only to the extent that it may conflict therewith and shall be deemed modified to conform with such law. Any provision hereof that may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. If the foregoing correctly sets forth our understanding of the subject matter hereof, please so indicate in the space provided below whereupon this Agreement shall be a binding agreement among us. Very truly yours, ------------------------------ [Individual] Accepted and agreed to: DARBY OVERSEAS INVESTMENTS, LTD. By:___________________________________ EXHIBIT J-3 [GRAFFAM & LASTRES] ______________, 2003 Darby Overseas Investments, Ltd. 1133 Connecticut Avenue, NW Suite 400 Washington, DC 20036 Gentlemen: Reference is made to the Purchase Agreement, dated as of August 1, 2003 (the "PURCHASE AGREEMENT"), by and among Franklin Resources, Inc., a corporation existing under the laws of Delaware ("FRI"), Darby Holdings, Inc., a corporation existing under the laws of Delaware ("PURCHASER"), Darby Overseas Investments, Ltd., a corporation existing under the laws of Delaware ("DOIL"), Darby Overseas Partners, L.P., a limited partnership existing under the laws of Delaware ("DOP"), the stockholders of DOIL listed on the signature pages thereto (collectively, the "DOIL SELLERS") and the limited partners of DOP listed on the signature pages thereto (collectively, the "DOP SELLERS", and together with the DOIL Sellers, the "SELLERS", and the Sellers, DOP and DOIL being hereinafter referred to as the "DARBY PARTIES"). Capitalized terms used herein are used as defined in the Purchase Agreement. In connection with the transactions contemplated by the Purchase Agreement, and in consideration of the grant of FRI restricted stock to the undersigned contemplated by Paragraph 1 hereof, the undersigned agrees to abide by the covenants set forth herein, as follows: 1. GRANT OF RESTRICTED STOCK. On the Closing Date, I will be granted $______ in FRI restricted stock (valued as of the business day prior to the Closing Date). The grant will be made pursuant to the agreement attached to this letter and the stock will vest in approximately equal installments, 1/4 on September 30, 2004, 1/4 September 30, 2005, 1/4 September 29, 2006 and 1/4 on September 28, 2007. 2. NON-COMPETITION. During the term of my employment with DOIL or any Affiliate of DOIL and for a period of [_____] after the termination of such employment for any reason, I shall not, directly or indirectly, manage, operate or control, or participate in the management, operation or control of, or become employed by or render advisory or other services to (other than in a capacity as a lawyer, accountant or consultant working for a law, accounting or nationally recognized consulting firm that has been retained by a Fund), any business, whether in corporate, proprietorship or partnership form or otherwise, engaged in sponsoring, managing or serving as the investment advisor to private Funds that are excluded from the definition of "investment company" under the Investment Company Act and whose primary investment objective is to make private equity investments in or mezzanine loans to companies located in countries that are generally recognized by the financial community to be emerging markets (a "Competitive Fund"). Notwithstanding the foregoing, if my employment with both DOIL and all entities Affiliated with DOIL is terminated by DOIL and the entities Affiliated with DOIL for any reason other than for Cause, the restrictions set forth in this Paragraph 2 shall cease and have no further force and effect, effective with such termination. For purposes hereof, my employment shall be deemed to be terminated for "cause" if my employment is terminated at any time under the following circumstances: (a) I fail to perform any of my material obligations in relation to my employment with DOIL or any Affiliate of DOIL (including, but not limited to, compliance with the terms of this Agreement) and fail to cure such failure within thirty (30) days after receiving written notice from DOIL or any Affiliate of DOIL; (b) DOIL or any Affiliate of DOIL reasonably believes that I have committed an act of fraud, theft or dishonesty against DOIL or any Affiliate of DOIL, including, without limitation, misappropriation of assets of DOIL and its Affiliates; or (c) I am convicted (or plead NOLO CONTENDERE to) any felony or any misdemeanor involving moral turpitude or a violation of any Securities Law or which might, in the reasonable opinion of DOIL or any Affiliate of DOIL, cause financial, reputational or regulatory harm to DOIL or any Affiliate of DOIL. 3. NON-SOLICITATION. During the term of my employment with DOIL and for a period of [_____] thereafter, I shall not: (a) cause, solicit, induce or encourage any employees of the Darby Companies to leave such employment or hire, employ or otherwise engage any such individual, (b) cause, induce or encourage any material existing or prospective investor, client, customer, supplier or licensor of or any other Person who has a material business relationship with any Darby Company at the time my employment with DOIL ceases to terminate or modify any such existing or prospective relationship, or (c) with respect to any existing or prospective investor of a Darby Fund at the time my employment with DOIL ceases, encourage such investor to make an investment in any Competitive Fund other than a Darby Fund. 4. REMEDIES. If I commit a breach, or threaten to commit a breach of any of the provisions of this Agreement, the Darby Companies and Purchaser shall have the right and remedy to have the provisions of this Agreement specifically enforced by any court of competent jurisdiction without the necessity of proving actual damages or posting any bond whatsoever, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Darby Companies and Purchaser, that money damages will not provide an adequate remedy to such persons and that Purchaser or a Darby Company shall be entitled to appeal to any court of competent jurisdiction for an injunction restraining me from committing or continuing a violation of Paragraphs 2 or 3 hereof. Such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available at law or in equity. 5. ACKNOWLEDGEMENT. I represent and acknowledge that, in light of the grant of restricted stock to be made to me pursuant to Paragraph 1 hereof and for other good and valid reasons, the restrictions stated in Paragraphs 2 and 3 hereof on the activities in which I may engage are reasonable, and the period of time designated above is reasonable. 6. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts executed in and to be performed in that State, without regard to its conflicts of law provisions (other than New York General Obligations Law Section 5-1401). All actions and proceedings arising out of relating to this Agreement shall be heard and determined in any New York state or federal court. 7. AMENDMENT OR WAIVER. Neither this Agreement nor any terms hereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the parties hereto. 8. BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, heirs, successors and assigns. 9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute a single instrument. 10. SEVERABILITY. If any provision of this Agreement shall be held invalid under the applicable law of any jurisdiction, the remainder of this Agreement shall not be affected thereby. Also if any provision of this Agreement is invalid or unenforceable under any applicable Law, then such provision shall be deemed inoperative only to the extent that it may conflict therewith and shall be deemed modified to conform with such law. Any provision hereof that may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. If the foregoing correctly sets forth our understanding of the subject matter hereof, please so indicate in the space provided below whereupon this Agreement shall be a binding agreement between us. Very truly yours, ------------------------------ [Individual] Accepted and agreed to: DARBY OVERSEAS INVESTMENTS, LTD. By:___________________________________ EXHIBIT J-4 [FRANK] ___________________, 2003 Darby Overseas Investments, Ltd. 1133 Connecticut Avenue, NW Suite 400 Washington, DC 20036 Gentlemen: Reference is made to the Purchase Agreement, dated as of August 1,2003 (the "Purchase Agreement"), by and among Franklin Resources, Inc., a corporation existing under the laws of Delaware ("FRI"), Darby Holdings, Inc., a corporation existing under the laws of Delaware ("Purchaser"), Darby Overseas Investments, Ltd., a corporation existing under the laws of Delaware ("DOIL"), Darby Overseas Partners, LP., a limited partnership existing under the laws of Delaware ("DOP"), the stockholders of DOIL listed on the signature pages thereto (collectively, the "DOIL Sellers") and the limited partners of DOP listed on the signature pages thereto (collectively, the "DOP Sellers", and together with the DOIL Sellers, the "Sellers", and the Sellers, DOP and DOIL being hereinafter referred to as the "Darby Parties"). Capitalized terms used herein are used as defined in the Purchase Agreement. Pursuant to the Purchase Agreement, the undersigned is selling his limited partner interests in DOP to the Purchaser in exchange for the purchase price to be paid to the undersigned as set forth in the Purchase Agreement. In connection with the transactions contemplated by the Purchase Agreement, and as further consideration for the purchase price to be paid to the undersigned, the undersigned has agreed to abide by the covenants set forth herein, as follows: 1. NON-COMPETITION. During the term of my employment with DOIL or any Affiliate of DOIL and for a period of two (2) years after the termination of such employment for any reason, I shall not, directly or indirectly, manage, operate or control, or participate in the management, operation or control of, or become employed by or render advisory or other services to (other than in a capacity as a lawyer, accountant or consultant working for a law, accounting or nationally recognized consulting firm that has been retained by a Fund), any business, whether in corporate, proprietorship or partnership form or otherwise, engaged in sponsoring, managing or serving as the investment advisor to private Funds that are excluded from the definition of "investment company" under the Investment Company Act and whose primary investment objective is to make private equity investments in or mezzanine loans to companies located in countries that are generally recognized by the financial community to be emerging markets (a "Competitive Fund"). 2. NON-SOLICITATION. During the term of my employment with DOIL or any Affiliate of DOIL and for a period of three (3) years after the termination of such employment for any reason, I shall not: (a) cause, solicit, induce or encourage any employees of the Darby Companies to leave such employment or hire, employ or otherwise engage any such individual, (b) cause, induce or encourage any material existing or prospective investor, client, customer, supplier or licensor of or any other Person who has a material business relationship with any Darby Company at the time my employment with DOIL ceases, to terminate or modify any such existing or prospective relationship, or (c) with respect to any existing or prospective investor of a Darby Fund at the time my employment with DOIL ceases, encourage such investor to make an investment in any Competitive Fund other than a Darby Fund. 3. Notwithstanding the provisions of Paragraphs 1 and 2 above, if my employment with both DOIL and all entities Affiliated with DOIL is terminated by DOIL and the entities Affiliated with DOIL for any reason other than for Cause, the restrictions set forth in Paragraphs 1 and 2 shall cease and have no further force and effect, effective with such termination. For purposes hereof, my employment shall be deemed to be terminated for "cause" if my employment is terminated at any time under the following circumstances: (a) I fail to perform any of my material obligations in relation to my employment with DOIL or any Affiliate of DOIL (including, but not limited to, compliance with the terms of this Agreement) and fail to cure such failure within thirty (30) days after receiving written notice from DOIL or any Affiliate of DOIL; (b) DOIL or any Affiliate of DOIL reasonably believes that I have committed an act of fraud, theft or dishonesty against DOIL or any Affiliate of DOIL, including, without limitation, misappropriation of assets of DOIL and its Affiliates; or ( c) I am convicted (or plead NOLO CONTENDERE to) any felony or any misdemeanor involving moral turpitude or a violation of any Securities Law or which might, in the reasonable opinion of DOIL or any Affiliate of DOIL, cause financial, reputational or regulatory harm to DOIL or any Affiliate of DOIL. 4. REMEDIES. In commit a breach, or threaten to commit a breach of any of the provisions of this Agreement, the Darby Companies and Purchaser shall have the right and remedy to have the provisions of this Agreement specifically enforced by any court of competent jurisdiction without the necessity of proving actual damages or posting any bond whatsoever, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Darby Companies and Purchaser, that money damages will not provide an adequate remedy to such persons and that Purchaser or a Darby Company shall be entitled to appeal to any court of competent jurisdiction for an injunction restraining me from committing or continuing a violation of Paragraphs 1 or 2 hereof. Such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available at law or in equity. 5. ACKNOWLEDGEMENT. I represent and acknowledge that, in light of the payments to be made by the Purchaser to me under the Purchase Agreement and for other good and valid reasons, the restrictions stated in Paragraphs 1 and 2 on the activities in which I may engage are reasonable, and the period of time designated above is reasonable. 6. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts executed in and to be performed in that State, without regard to its conflicts of law provisions (other than New York General Obligations Law Section 5-1401). All actions and proceedings arising out of relating to this Agreement shall be heard and determined in any New York state or federal court. 7. AMENDMENT OR WAIVER. Neither this Agreement nor any terms hereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the parties hereto. 8. BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, heirs, successors and assigns. 9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute a single instrument. 10. SEVERABILITY. If any provision of this Agreement shall be held invalid under the applicable law of any jurisdiction, the remainder of this Agreement shall not be affected thereby. Also if any provision of this Agreement is invalid or unenforceable under any applicable Law, then such provision shall be deemed inoperative only to the extent that it may conflict therewith and shall be deemed modified to conform with such law. Any provision hereof that may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. If the foregoing correctly sets forth our understanding of the subject matter hereof, please so indicate in the space provided below whereupon this Agreement shall be a binding agreement among us. Very truly yours, [Individual] Accepted and agreed to: DARBY OVERSEAS INVETMENTS, LTD. By: --------------------------------- EXHIBIT K-1 DARBY TECHNOLOGY VENTURES GROUP, LLC The following are the principal terms and provisions which would be included in an agreement (the "AGREEMENT") pursuant to which certain employees of Darby Overseas Investments, Ltd. ("DOIL") and its affiliates will be issued a Class B Common Interest (a "CLASS B INTEREST") in, and become admitted as a member of, Darby Technology Ventures Group, LLC, a Delaware limited liability company (the "COMPANY"). The Agreement would be in such form as is determined by Darby Overseas Partners, L.P., a Delaware limited partnership ("DOP") and the Board of Directors of the Company. The Agreement would contain the principal terms set forth herein and such other terms and provisions as generally shall be applicable to recipients of a Class B Interest who are employees of DOIL and its affiliates (the "Recipients"). 1. CLASS B INTEREST. Upon a resolution adopted by the Board of Directors of the Company authorizing the issuance of a Class B Interest to a Recipient pursuant to Section 3.5(a) of the Second Amended Operating Agreement of the Company dated October 1, 2002 (the "OPERATING AGREEMENT"), and such Recipient's execution of the Agreement and the Operating Agreement, such Recipient shall be issued a Class B Interest to which is assigned a Percentage Interest as set forth in the Agreement (which shall be reflected on Schedule A of the Operating Agreement) and become a member of the Company, subject to the terms and conditions of the Agreement and the Operating Agreement, including (without limitation) a vesting schedule. 2. VESTING. Class B Interests shall vest 20% per year (on each anniversary of the initial grant date) over a five year period with the initial grant date as set forth in the letter referred to in Section 5.23(p) of the Purchase Agreement, dated as of August 1, 2003, by and among Franklin Resources, Inc., Darby Holdings, Inc. and the Darby parties named therein. If a Recipient's employment with DOIL and its affiliates is terminated for any reason by the Recipient or by DOIL or any of its affiliates ( any such termination of employment being referred to herein as a "TERMINATION"), the portion of such Recipient's Class B Interest that has not vested as of the date of Termination shall be forfeited and revert to the Company, such Recipient shall have no right or interest therein, and Schedule A of the Operating Agreement shall be amended accordingly; PROVIDED, HOWEVER, that if the Termination is as a result of death or permanent disability, 100% of such Recipient's Class B Interest shall become vested upon Termination. There shall be no partial vesting for periods of time between annual vesting dates. 3. PAYMENTS IN RESPECT OF CARRIED INTEREST. The Agreement shall provide that payments in respect of Class B Interests shall be made as follows: a. UNVESTED PORTION. The entire amount of distributions that otherwise would be paid to a Recipient in respect of the unvested portion of such Recipient's Class B Interest shall be retained by the Company and credited to an account (a "VESTING ACCOUNT") created for such purpose. An amount credited to the Vesting Account shall be released from such account upon the vesting of the portion of the Class B Interest in respect of which such amount was credited. Any amount released from a Vesting Account first shall be applied to repay any outstanding tax advance previously made in respect of such amount and the balance shall be paid to the Recipient. b. VESTED PORTION. Any distribution made by the Company in respect of the vested portion of a Recipient's Class B Interest shall be paid to such Recipient. Upon Termination, after application of the foregoing vesting and payment provisions, Recipients shall forfeit any and all rights to receive the amount then remaining in their respective Vesting Accounts and shall have no further interest in such accounts. 5. TAX ADVANCES. To the extent that amounts are credited to a Recipient 's Vesting Account, non-interest bearing tax advances shall be made to such Recipient; PROVIDED, HOWEVER, that the outstanding amount of such tax advances at no time shall exceed the amount in the Vesting Account. The amount of tax advances shall be an estimate of the amount of income taxes payable by each Recipient attributable to the taxable income allocated to such Recipient in respect of the unvested portion of his or her Class B Interest. Such estimate shall be made by the Company in its reasonable discretion in such manner as is to be determined in the Agreement. Any tax advances outstanding upon Termination shall be payable on demand. After Termination, the Company may apply any amounts otherwise distributable to a Recipient to repay any outstanding tax advances. 6. TAX DISCLOSURE. Appropriate tax disclosure shall be made in the Agreement. 7. LIABILITY FOR TAXES. Each Recipient shall acknowledge in the Agreement that any tax liability relating to receipt of Class B Interests is his or her responsibility and he or she shall indemnify and hold the Company harmless therefrom. 8. TRANSFERABILITY. Class B Interests shall be nontransferable other than as to be provided in the Agreement and the Operating Agreement. 9. EXCLUSIVE RIGHT TO CARRIED INTEREST. Except as provided under the Agreement, Recipients shall acknowledge they have no other right to receive any Class B Interests, or any other interests, in the Company. 10. STRUCTURE. The structure of the interest in the Company will be subject to change by the Company; PROVIDED, HOWEVER, that any such change shall not materially adversely affect the economic benefits (other than tax consequences) provided thereunder without a Recipient's consent. EXHIBIT K-2 PROBA BEHEER, N.V. The following are the principal terms and provisions which would be included in an agreement (the "AGREEMENT") pursuant to which the Carried Interest (as defined below) earned by Proba Beheer, N.V., a Netherlands Antilles limited liability company (the "GENERAL PARTNER") and received by Darby Overseas Partners, L.P., a Delaware limited partnership ("DOP"), if any, would be allocated. The Agreement would be in such form as is determined by DOP and the Carried Interest would be subject to any restrictions, limitations or obligations arising under the agreement, if any, between DOP and the General Partner relating to the Carried Interest. The Agreement would contain the principal terms set forth herein and such other terms and provisions as generally shall be applicable to recipients of a share of the Carried Interest who are employees of Darby Overseas Investments, Ltd. ("DOIL") and its affiliates (the "RECIPIENTS"). 1. CARRIED INTEREST POINTS. The General Partner has the right to receive certain distributions from the Fund (such distributions being referred to herein as the "CARRIED INTEREST") under clause 6.1(a)(3) and 6.1(a)(4) (but only to the extent not made in respect of capital contributions made by the General Partner) of the Limited Partnership Agreement dated January 6, 2000 (the "PARTNERSHIP AGREEMENT") of Proba, L.P., a Cayman Islands limited partnership. (A one-twentieth (1/20) share of the Carried Interest is referred to herein as a "CARRIED INTEREST POINT".) If DOP is successful in negotiating to receive Carried Interest Points from the General Partner, DOP will allocate Carried Interest Points to Recipients pursuant to the terms and conditions of the Agreement. 2. VESTING. Carried Interest Points shall vest 20% per year (on each anniversary of the initial grant date) over a five year period with the initial grant date as set forth in the letter referred to in Section 5.23(p) of the Purchase Agreement, dated as of August 1, 2003, by and among Franklin Resources, Inc., Darby Holdings, Inc. and the Darby parties named therein. If the employment of a Recipient with DOIL and its Affiliates is terminated for any reason by the Recipient or by DOIL or any of its Affiliates (any such termination of employment being referred to herein as a "TERMINATION"), the portion of such Recipient's Carried Interest Points that has not vested as of the date of Termination shall be forfeited and such Recipient shall have no right or interest therein; PROVIDED, HOWEVER, that if the Termination is as a result of death or permanent disability, 100% of such Recipient's Carried Interest Points shall become vested upon Termination. There shall be no partial vesting for periods of time between annual vesting dates. 3. PAYMENTS IN RESPECT OF CARRIED INTEREST. The Agreement shall provide that payments in respect of Carried Interest Points shall be made as follows: a. UNVESTED PORTION. The entire amount of distributions that otherwise would be paid to a Recipient in respect of unvested Carried Interest Points shall be retained by DOP or its designee and credited to an account (a "VESTING ACCOUNT") created for such purpose. An amount credited to a Vesting Account shall be released from such account upon the vesting of the portion of the Recipient's Carried Interest Points in respect of which such amount was credited. Any amount released from a Vesting Account first shall be applied to repay any outstanding tax advance previously made to the Recipient in respect of such amount and the balance shall be paid to such Recipient. b. VESTED PORTION. Any distribution in respect of the vested portion of a Recipient's Carried Interest Points (or released from such Recipient's Vesting Account) shall be paid to such Recipient. Upon Termination, after application of the foregoing vesting and payment provisions, Recipients shall forfeit any and all rights to receive the amount then remaining in their respective Vesting Accounts and shall have no further interest in such accounts. 4. TAX ADVANCES. To the extent that amounts are retained in the Vesting Account, tax advances shall be made to Recipients; PROVIDED, HOWEVER, that the outstanding amount of such tax advances at no time shall exceed the amount in the Vesting Account. The tax advances shall be an estimate of the amount income taxes payable by each Recipient attributable to the taxable income allocated to such Recipient in respect of the unvested portion of his or her Carried Interest Points and shall be repaid on the basis determined in the Agreement. 5. TAX DISCLOSURE. Appropriate tax disclosure shall be made in the Agreement. 6. LIABILITY FOR TAXES. Each Recipient shall acknowledge in the Agreement that any tax liability relating to receipt of Carried Interest Points is his or her responsibility and he or she shall indemnify and hold the Company harmless therefrom. 7. TRANSFERABILITY. Carried Interest Points shall be nontransferable other than as to be provided in the Agreement. 8. EXCLUSIVE RIGHT TO CARRIED INTEREST. Except for the rights provided pursuant to the Agreement, Recipients shall acknowledge they have no other rights to Carried Interest Points (or Carried Interest). 9. STRUCTURE. The structure of the share of Carried Interest, if any, will be subject to change by the Company; PROVIDED, HOWEVER, that any such change shall not materially adversely affect the economic benefits (other than tax consequences) provided thereunder without the Recipient's consent. EXHIBIT K-3 DARBY LATIN AMERICAN MEZZANINE FUND, L.P. The following are the principal terms and provisions which would be included in an agreement (the "AGREEMENT") pursuant to which the Carried Interest (as defined below) received by Darby Latin American Mezzanine Investments, a Cayman Islands company (the "COMPANY") from Darby Latin American Mezzanine Fund, L.P., a Cayman Islands limited partnership (the "Fund"), a private investment fund of which the Company serves as general partner pursuant to the First Amended and Restated Limited Partnership Agreement of the Fund dated as of June 1, 1999 (the "PARTNERSHIP AGREEMENT"), would be allocated. The Agreement would be in such form as is determined by DOP and the Carried Interest would be subject to the vesting schedule to be set forth therein and the obligation to satisfy a portion of the Carried Interest Clawback Obligation (as defined below). The Agreement would contain the principal terms set forth herein and such other terms and provisions as generally shall be applicable to recipients of a share of the Carried Interest who are employees of Darby Overseas Investments, Ltd. ("DOIL") and its affiliates(the "RECIPIENTS"). 1. DEFINED TERMS. The Company, in its capacity as general partner of the Fund, has the right to receive certain distributions pursuant to Section 3.06(a)(ii)(D)(II) and (III) and Section 3.06(a)(iii)(E) and (F) of the Partnership Agreement (such distributions being referred to herein as the "CARRIED INTEREST"). (A one-twentieth (1/20) share of the Carried Interest is referred to herein as a "CARRIED INTEREST POINT".) Under Section 3.01(c)(i) and (ii) of the Partnership Agreement, under certain circumstances, the Company is required to make capital contributions to the Fund relating to the Carried Interest (such obligation being referred to herein as the "CARRIED INTEREST CLAWBACK OBLIGATION"). 2. VESTING. Carried Interest Points shall vest 20% per year (on each anniversary of the initial grant date) over a five year period with the initial grant date as set forth in the letter referred to in Section 5.23(p) of the Purchase Agreement, dated as of August 1, 2003, by and among Franklin Resources, Inc., Darby Holdings, Inc. and the Darby parties named therein. If the employment of a Recipient with DOIL and its Affiliates is terminated for any reason by the Recipient or by DOIL or any of its Affiliates (any such termination of employment being referred to herein as a "TERMINATION"), the portion of such Recipient 's Carried Interest Points that has not vested as of the date of Termination shall be forfeited and revert to the Company and such Recipient shall have no right or interest therein; PROVIDED, HOWEVER, that if the Termination is as a result of death or permanent disability, 100% of such Recipient's Carried Interest Points shall become vested upon Termination. There shall be no partial vesting for periods of time between annual vesting dates. 3. PAYMENTS IN RESPECT OF CARRIED INTEREST. The Agreement shall provide that payments in respect of a Recipient's Carried Interest Points shall be made as follows: a. UNVESTED PORTION. The entire amount of distributions that otherwise would be paid to a Recipient in respect of unvested Carried Interest Points shall be retained by the Company and credited to an account (a "VESTING ACCOUNT") created for such purpose. An amount credited to a Recipient's Vesting Account shall be released from such account upon the vesting of the portion of the Recipient's Carried Interest Points in respect of which such amount was credited. Any amount released from a Vesting Account first shall be applied to repay any outstanding tax advance previously made to the Recipient in respect of such amount and the balance shall be treated as would a distribution in respect of vested Carried Interest Points and shall be applied in accordance with subparagraphs (b)(I) and (II) below. b. VESTED PORTION. I. CLAWBACK ACCOUNT Thirty percent (30%) of the amount of any distribution made to the Company in respect of the then vested portion of a Recipient's Carried Interest Points (or released from such Recipient's Vesting Account) shall be retained by the Company in an account (the "CARRIED INTEREST CLAWBACK ACCOUNT") as security for such Recipient's obligation to satisfy his or her share of the Carried Interest Clawback Obligation. II.. CARRIED INTEREST PAYMENTS. The remaining seventy percent (70%) of any distribution made by the Company in respect of the then vested portion of such Recipient 's Carried Interest Points (or released from his or her Vesting Account) shall be paid to such Recipient. Upon Termination, after application of the foregoing vesting and payment provisions, a Recipient shall forfeit any and all rights to receive the amount then remaining in his or her Vesting Account and shall have no further interest in such account. 4. CLAWBACK. A Recipient's share of the Carried Interest Clawback Obligation shall be determined as provided in the Agreement and shall be based on the relative amount of Carried Interest distributable to such Recipient. In connection with the dissolution of the Fund, the amount in a Recipient's Carried Interest Clawback Account shall be used to satisfy such Recipient's share of the Carried Interest Clawback Obligation. The amount, if any, remaining in a Recipient's Carried Interest Clawback Account after satisfaction of his or her share of the Carried Interest Clawback Obligation shall be paid to such Recipient. To the extent that the amount in a Recipient's Carried Interest Clawback Account is insufficient to satisfy his or her share of the Carried Interest Clawback Obligation, such Recipient shall be personally liable for the deficiency. 5. TAX ADVANCES. To the extent that amounts are credited to a Recipient 's Vesting Account, non-interest bearing tax advances will be made to such Recipient; PROVIDED, HOWEVER, that the outstanding amount of such tax advances at no time shall exceed the amount in the Vesting Account. The amount of tax advances to be made to a Recipient shall be an estimate of the amount of income taxes payable by such Recipient attributable to the taxable income allocated to such Recipient in respect of the unvested portion of his or her Carried Interest Points. Such estimate shall be made by the Company in its reasonable discretion in such manner as is to be determined in the Agreement. Any tax advances outstanding upon Termination shall be payable on demand. After Termination, the Company may apply any amounts otherwise distributable to repay any outstanding tax advances. 6. TAX DISCLOSURE. Appropriate tax disclosure shall be made in the Agreement. 7. LIABILITY FOR TAXES. Each Recipient shall acknowledge in the Agreement that any tax liability relating to receipt of Carried Interest Points is his or her responsibility and he or she shall indemnify and hold the Company harmless therefrom. 8. TRANSFERABILITY. Carried Interest Points shall be nontransferable other than as provided in the Agreement. 9. EXCLUSIVE RIGHT TO CARRIED INTEREST. Except for the rights provided pursuant to the Agreement, Recipients shall acknowledge they have no other rights to Carried Interest Points (or Carried Interest). 10. STRUCTURE. The structure of the share of Carried Interest will be subject to change by the Company; PROVIDED, HOWEVER, that any such change shall not materially adversely affect the economic benefits (other than tax consequences) provided thereunder without the Recipient's consent. EXHIBIT K-4 DARBY-BBVA LATIN AMERICAN PRIVATE EQUITY FUND, L.P. DARBY-BBVA LATIN AMERICAN PRIVATE EQUITY FUND (ONTARIO), L.P. The following are the principal terms and provisions which would be included in an agreement (the "AGREEMENT") pursuant to which certain employees of Darby Overseas Investments, Ltd. ("DOIL") and its affiliates will be issued Management Shares (the "MANAGEMENT SHARES") of Darby-BBVA Latin American Investors, Ltd., a Cayman Islands company (the "COMPANY"). The Company serves as the general partner of both Darby-BBVA Latin American Private Equity Fund, L.P., a Cayman Islands limited partnership (the "CAYMAN FUND"), and Darby-BBVA Latin American Private Equity Fund (Ontario), L.P., an Ontario, Canada limited partnership (the "CANADIAN FUND", and together with the Cayman Fund, the "FUNDS"). The Agreement would be in such form as is determined by Darby Overseas Partners, L.P., a Delaware limited partnership ("DOP") and the Management Shares would be subject to any restrictions, limitations or obligations arising under the Restated Articles of Association of the Company dated June 11, 2002. The Agreement would contain the principal terms set forth herein and such other terms and provisions as generally shall be applicable to recipients of Management Shares who are employees of DOIL and its affiliates (the "RECIPIENTS"). 1. DEFINED TERMS. The Company, in its capacity as general partner of the Cayman Fund, has the right to receive certain distributions pursuant to Section 4.09(a)(iii) and the final clause of Section 4.09(a)(iv) (providing for 20% of the remaining amount) of the Second Amended and Restated Limited Partnership Agreement of the Cayman Fund dated as of January 17, 2003 (the "CAYMAN PARTNERSHIP AGREEMENT"), and in its capacity as general partner of the Canadian Fund, has the right to receive certain distributions pursuant to Section 4.9(a)(iii) and the final clause of Section 4.9(a)(iv) (providing for 20% of the remaining amount) of the Limited Partnership Agreement of the Canadian Fund dated as of March 20, 2003 (the "CANADIAN PARTNERSHIP AGREEMENT" and together with the Cayman Partnership Agreement, the "PARTNERSHIP AGREEMENTS") (the right to such distributions being referred to herein, collectively, as the "CARRIED INTEREST"). (A one-twentieth (1/20) share of the Carried Interest is referred to herein as a "CARRIED INTEREST POINT".) Under Section 4.01(i) of the Cayman Partnership Agreement and Section 4.1(i) of the Canadian Partnership Agreement, under certain circumstances, the Company is required to make capital contributions to each Fund relating to the Carried Interest (such obligation being referred to herein as the "CARRIED INTEREST CLAWBACK OBLIGATION"). 2. VESTING. Management Shares shall vest 20% per year (on each anniversary of the initial grant date) over a five year period with the initial grant date as set forth in the letter referred to in Section 5.23(p) of the Purchase Agreement, dated as of August 1, 2003, by and among Franklin Resources, Inc., Darby Holdings, Inc. and the Darby parties named therein. If the employment of a Recipient with DOIL and its affiliates is terminated for any reason by the Recipient or by DOIL or any of its affiliates ( any such termination of employment being referred to herein as a "TERMINATION"), the portion of such Recipient's Management Shares that has not vested as of the date of Termination shall be forfeited and revert to the Company and such Recipient shall have no right or interest therein; PROVIDED, HOWEVER, that if the Termination is as a result of death or permanent disability, 100% of such Recipient 's Management Shares shall become vested upon Termination. There shall be no partial vesting for periods of time between annual vesting dates. 3. PAYMENTS IN RESPECT OF CARRIED INTEREST. The Agreement shall provide that payments in respect of Management Shares shall be made as follows: a. UNVESTED PORTION. The entire amount of distributions that otherwise would be paid to a Recipient in respect of unvested Management Shares shall be retained by the Company and credited to an account (a "VESTING ACCOUNT") created for such purpose. An amount credited to a Vesting Account shall be released from such account upon the vesting of the Management Shares in respect of which such amount was credited. Any amount released from a Vesting Account first shall be applied to repay any outstanding tax advance previously made in respect of such amount and the balance shall be treated as would a distribution in respect of vested Carried Interest Points and shall be applied in accordance with subparagraphs (b)(I) and (II) below. b. VESTED PORTION. Payments in respect of vested Management Shares shall be made as follows: I. CLAWBACK ACCOUNT Thirty percent (30%) of the amount otherwise payable to a Recipient in respect of vested Management Shares (or released from such Recipient's Vesting Account) shall be retained by the Company in an account (the "CARRIED INTEREST CLAWBACK ACCOUNT") as security for such Recipient's obligation to satisfy his or her share of the Carried Interest Clawback Obligation. II. CARRIED INTEREST PAYMENTS. The remaining seventy percent (70%) of any distribution in respect of vested Management Shares (or released from a Recipient's Vesting Account) shall be paid to such Recipient. Upon Termination, after application of the foregoing vesting and payment provisions, Recipients shall forfeit any and all rights to receive the amount then remaining in their respective Vesting Accounts and shall have no further interest in such accounts. 4. CLAWBACK. A Recipient's share of the Carried Interest Clawback Obligation shall be determined as provided in the Agreement and shall be based on the relative amount of Carried Interest distributable to such Recipient. In connection with the dissolution of the Fund, the amount in a Recipient 's Carried Interest Clawback Account shall be used to satisfy his or her share of the Carried Interest Clawback Obligation. The amount, if any, remaining in a Recipient's Carried Interest Clawback Account after satisfaction of his or her share of the Carried Interest Clawback Obligation shall be paid to such Recipient. To the extent that the amount in a Carried Interest Clawback Account is insufficient to satisfy the Recipient's share of the Carried Interest Clawback Obligation, such Recipient shall be personally liable for the deficiency. 5. TAX ADVANCES. To the extent that amounts are credited to a Recipient 's Vesting Account, the Company shall make non-interest bearing tax advances to such Recipient; PROVIDED, HOWEVER, that the outstanding amount of such tax advances at no time shall exceed the amount in the Vesting Account. The amount of tax advances to be made shall be an estimate of the amount of income taxes payable by a Recipient attributable to the taxable income allocated to such Recipient in respect of unvested Management Shares. Such estimate shall be made by the Company in its reasonable discretion in such manner as is to be determined in the Agreement. Any tax advances outstanding upon Termination shall be payable on demand. After Termination, the Company may apply any amounts otherwise distributable to repay any outstanding tax advances. 6. TAX DISCLOSURE. Appropriate tax disclosure shall be made in the Agreement. 7. LIABILITY FOR TAXES. Each Recipient shall acknowledge in the Agreement that any tax liability relating to receipt of Management Shares is his or her responsibility and he or she shall indemnify and hold the Company harmless therefrom. 8. TRANSFERABILITY. Management Shares shall be nontransferable other than as to be provided in the Management Share Agreement. 9. EXCLUSIVE RIGHT TO CARRIED INTEREST. Except for the rights provided pursuant to the Agreement, Recipients shall acknowledge they have no other rights in respect of Management Shares, Carried Interest Points or Carried Interest. 10. STRUCTURE. The structure of the share of Carried Interest will be subject to change by the Company; PROVIDED, HOWEVER, that any such change shall not materially adversely affect the economic benefits (other than tax consequences) provided thereunder without the Recipient's consent. EX-10 5 exhibit10-73.txt EXHIBIT 10.73 EXECUTION COPY AMENDED AND RESTATED 364 DAY FACILITY CREDIT AGREEMENT dated as of June 4, 2003 among FRANKLIN RESOURCES, INC., THE BANKS PARTIES HERETO, BANK OF AMERICA, N.A. and THE BANK OF NEW YORK, as Co-Syndication Agents, CITICORP USA INC. and BNP PARIBAS, as Co-Documentation Agents, and JPMORGAN CHASE BANK, as Administrative Agent ------------------------------------ J.P. MORGAN SECURITIES INC., as Sole Bookrunner and Sole Lead Arranger TABLE OF CONTENTS SECTION 1. DEFINITIONS............................................1 1.1 Defined Terms..........................................1 1.2 Other Definitional Provisions.........................15 SECTION 2. AMOUNT AND TERMS OF LOANS.............................16 2.1 Revolving Credit Commitments..........................16 2.2 Procedure for Revolving Credit Borrowing..............16 2.3 The Bid Loans.........................................17 2.4 Repayment of Loans; Evidence of Debt..................19 2.5 Optional Termination or Reduction of Commitments......20 2.6 Optional Prepayments..................................21 2.7 Mandatory Prepayments.................................21 2.8 Conversion and Continuation Options...................22 2.9 Minimum Amounts of Tranches...........................22 2.10 Interest Rates and Payment Dates......................22 2.11 Computation of Interest and Fees......................23 2.12 Inability to Determine Interest Rate..................24 2.13 Pro Rata Treatment and Payments.......................24 2.14 Illegality............................................25 2.15 Requirements of Law...................................25 2.16 Taxes.................................................26 2.17 Indemnity.............................................27 2.18 Facility and Utilization Fee..........................28 2.19 Mitigation of Costs...................................28 2.20 New Banks; Exiting Banks..............................29 SECTION 3. REPRESENTATIONS AND WARRANTIES........................29 3.1 Financial Condition...................................29 3.2 No Change.............................................30 3.3 Corporate Existence; Compliance with Law..............30 3.4 Corporate Power; Authorization; Enforceable Obligations...........................................30 3.5 No Legal Bar..........................................30 3.6 No Material Litigation................................30 3.7 Ownership of Property; Liens..........................31 3.8 Intellectual Property.................................31 3.9 Taxes.................................................31 3.10 Federal Regulations...................................31 3.11 ERISA.................................................31 3.12 Investment Company Act; Other Regulations.............32 3.13 Investment Advisory Agreements........................32 3.14 Subsidiaries..........................................33 -i- 3.15 Purpose of Loans......................................33 3.16 Environmental Matters.................................33 3.17 Accuracy and Completeness of Information..............33 SECTION 4. CONDITIONS PRECEDENT..................................34 4.1 Conditions to Execution...............................34 4.2 Conditions to Each Loan...............................35 SECTION 5. AFFIRMATIVE COVENANTS.................................35 5.1 Financial Statements..................................35 5.2 Certificates; Other Information.......................36 5.3 Payment of Obligations................................37 5.4 Conduct of Business and Maintenance of Existence......37 5.5 Maintenance of Property; Insurance....................37 5.6 Inspection of Property; Books and Records; Discussions...........................................37 5.7 Notices...............................................38 5.8 Environmental Laws....................................38 SECTION 6. NEGATIVE COVENANTS....................................39 6.1 Financial Condition Covenants.........................39 6.2 Limitation on Indebtedness............................40 6.3 Limitation on Liens...................................40 6.4 Limitations on Fundamental Changes....................41 6.5 Limitation on Sale of Assets..........................42 6.6 Limitation on Investments, Loans and Advances.........42 6.7 Transactions with Affiliates..........................43 6.8 Fiscal Year...........................................43 6.9 Restrictions Affecting Subsidiaries...................43 SECTION 7. EVENTS OF DEFAULT.....................................44 SECTION 8. THE AGENTS............................................46 8.1 Appointment...........................................46 8.2 Delegation of Duties..................................46 8.3 Exculpatory Provisions................................46 8.4 Reliance by Administrative Agent......................47 8.5 Notice of Default.....................................47 8.6 Non-Reliance on Administrative Agent and Other Banks..47 8.7 Indemnification.......................................48 8.8 The Administrative Agent, the Co-Syndication Agents and the Co-Documentation Agents in their Individual Capacities............................................48 8.9 Successor Administrative Agent........................49 8.10 Co-Syndication Agents and Co-Documentation Agents.....49 -ii- SECTION 9. MISCELLANEOUS.........................................49 9.1 Amendments and Waivers................................49 9.2 Notices...............................................50 9.3 No Waiver; Cumulative Remedies........................52 9.4 Survival of Representations and Warranties............52 9.5 Payment of Expenses and Taxes.........................52 9.6 Successors and Assigns; Participations; Purchasing Banks.................................................53 9.7 Adjustments; Set-off..................................56 9.8 Counterparts..........................................56 9.9 Severability..........................................56 9.10 Integration...........................................57 9.11 GOVERNING LAW.........................................57 9.12 Submission To Jurisdiction; Waivers; Appointment of Process Agent.........................................57 9.13 Acknowledgments.......................................57 9.14 WAIVERS OF JURY TRIAL.................................58 9.15 Confidentiality.......................................58 SCHEDULES Schedule I Commitments Schedule II Sample Computations of Facility and Utilization Fees Schedule III Required Consents Schedule IV Subsidiary Investment Advisers Schedule V Subsidiary Broker-Dealers Schedule VI List of Subsidiaries of the Borrower Schedule VII Outstanding Indebtedness Schedule VIII Existing Liens EXHIBITS Exhibit A Form of Bid Loan Confirmation Exhibit B Form of Bid Loan Offer Exhibit C Form of Bid Loan Request Exhibit D Form of Assignment and Assumption Exhibit E-1 Form of Revolving Credit Note Exhibit E-2 Form of Grid Bid Loan Note Exhibit E-3 Form of Individual Bid Loan Note -iii- AMENDED AND RESTATED 364 DAY FACILITY CREDIT AGREEMENT, dated as of June 4, 2003 (as more fully defined below, this "AGREEMENT"), among Franklin Resources, Inc., a Delaware corporation (the "BORROWER"), the several banks and other financial institutions from time to time parties to this Agreement (the "BANKS"), Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas, as Co-Documentation Agents, and JPMorgan Chase Bank ("JPMCB"), as administrative agent for the Banks hereunder (in such capacity, the "ADMINISTRATIVE AGENT"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, this Agreement amends and restates that certain 364 Day Facility Credit Agreement, dated as of June 5, 2002 (as amended, supplemented or otherwise modified prior to the date hereof and in effect immediately prior to the effectiveness of this Agreement, the "EXISTING CREDIT AGREEMENT") among the Borrower, the several banks and other financial institutions from time to time parties thereto (the "EXISTING BANKS"), Bank of America, N.A., as Co-Syndication Agents, The Bank of New York, as Co-Documentation Agents, and JPMCB, as Administrative Agent; WHEREAS, certain of the Existing Banks are willing to agree to the amendment and restatement requested by the Borrower and have Commitments (as defined herein) hereunder (the "CONTINUING BANKS"), and the other Existing Banks, (individually, an "EXITING BANK", and collectively, the "EXITING BANKS") will cease to be Banks under the Existing Credit Agreement on the Closing Date (as defined herein); and WHEREAS, certain financial institutions that are not now Banks, (individually, a "NEW BANK", and collectively, the "NEW BANKS") will become Banks and have Commitments hereunder on the Closing Date; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereto hereby agree that as of the Closing Date the Existing Credit Agreement shall be amended and restated to read as follows: SECTION 1. DEFINITIONS 1.1 DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: "ABSOLUTE RATE BID LOAN REQUEST": any Bid Loan Request requesting the Bid Loan Banks to offer to make Absolute Rate Bid Loans. "ABSOLUTE RATE BID LOANS": Bid Loans made at an absolute rate (as opposed to a rate composed of the Applicable Index Rate plus (or minus) a margin). "ADMINISTRATIVE AGENT": as defined in the preamble hereto. "ADMINISTRATIVE QUESTIONNAIRE": an administrative questionnaire in a form supplied by the Administrative Agent. 2 "ADVISERS ACT": as defined in subsection 3.12(b). "AFFILIATE": as to any Person, (a) any other Person (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person or (b) any Person who is a director, officer, shareholder or partner (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of any Person described in the preceding clause (a). For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (i) vote 10% or more of the securities having ordinary voting power for the election of directors of such Person or (ii) direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "AGREEMENT": this Amended and Restated 364 Day Facility Credit Agreement, as the same may be amended, supplemented or otherwise modified from time to time. "ALTERNATE BASE RATE": for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1%, and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. "PRIME RATE" shall mean the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City (the Prime Rate not being intended to be the lowest rate of interest charged by JPMCB in connection with extensions of credit to debtors); "BASE CD RATE" shall mean the sum of (a) the product of (i) the Three-Month Secondary CD Rate and (ii) a fraction, the numerator of which is one and the denominator of which is one minus the C/D Reserve Percentage and (b) the C/D Assessment Rate. "THREE-MONTH SECONDARY CD RATE" shall mean, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day shall not be a Business Day, the next preceding Business Day) by the Board of Governors of the Federal Reserve Bank of New York (the "BOARD") through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Administrative Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by it; and "FEDERAL FUNDS EFFECTIVE RATE" shall mean, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective date of such change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate, respectively. 3 "ALTERNATE BASE RATE LOANS": Revolving Credit Loans the rate of interest applicable to which is based upon the Alternate Base Rate. "APPLICABLE INDEX RATE": in respect of any Bid Loan requested pursuant to a LIBOR Bid Loan Request, the LIBOR Adjusted Rate. "APPLICABLE MARGIN": for any day, (a) for each LIBOR Loan 0.375% per annum, and (b) for each Alternate Base Rate Loan, zero; PROVIDED that the Applicable Margin for any day after the Termination Date if the Term-Out Maturity Date has been elected shall be (x) for each LIBOR Loan, 0.625% per annum, and (y) for each Alternate Base Rate Loan, 0.250% per annum. "ASSET DISPOSITION": the sale, sale leaseback, exchange or other disposition (including by means of a merger, consolidation or amalgamation) of any property, business or assets (other than marketable securities (including "margin stock" within the meaning of Regulation U), liquid investments and other financial instruments) of the Borrower or any of its Subsidiaries to any Person or Persons other than the Borrower or any of its Subsidiaries. Notwithstanding the foregoing, the consummation by the Borrower or FTC of any transfers or other transactions in connection with any Lease Financing Arrangement or otherwise involving all or any portion of the Designated Property shall not constitute an Asset Disposition. "ASSIGNMENT AND ASSUMPTION": an assignment and assumption entered into by a Bank and an assignee (with the consent of any party whose consent is required by subsection 9.6), and accepted by the Administrative Agent, substantially in the form of Exhibit D or any other form approved by the Administrative Agent. "AVAILABLE COMMITMENT": as to any Bank at any time, an amount equal to the excess, if any, of (a) the amount of such Bank's Commitment over (b) the aggregate principal amount of all Revolving Credit Loans made by such Bank then outstanding; collectively, as to all the Banks, the "AVAILABLE COMMITMENTS". "BANKING SUBSIDIARY": at any time, Fiduciary Trust Company International, Franklin Templeton Bank and Trust Company, F.S.B. or any other Subsidiary of the Borrower licensed to engage, and principally engaged, at such time in the banking or trust business or any Subsidiary of any such Subsidiary. "BANKS": as defined in the preamble hereto. "BID LOAN": each Bid Loan made pursuant to subsection 2.3; the aggregate amount advanced by a Bid Loan Bank pursuant to subsection 2.3 on each Bid Loan Date shall constitute one or more Bid Loans, as specified by such Bid Loan Bank pursuant to subsection 2.3(b)(vi). "BID LOAN BANKS": Banks from time to time designated as Bid Loan Banks by the Borrower, by written notice to the Administrative Agent (which notice the Administrative Agent shall transmit to each such Bid Loan Bank). 4 "BID LOAN NOTES": the collective reference to the Grid Bid Loan Notes and the Individual Bid Loan Notes. "BID LOAN CONFIRMATION": each confirmation by the Borrower of its acceptance of Bid Loan Offers, which Bid Loan Confirmation shall be substantially in the form of Exhibit B and shall be delivered to the Administrative Agent in writing, by telex or by facsimile transmission. "BID LOAN OFFER": each offer by a Bid Loan Bank to make Bid Loans pursuant to a Bid Loan Request, which Bid Loan Offer shall contain the information specified in Exhibit B and shall be delivered to the Administrative Agent by telephone, immediately confirmed by telex or facsimile transmission. "BID LOAN REQUEST": each request by the Borrower for Bid Loan Banks to submit bids to make Bid Loans, which shall contain the information in respect of such requested Bid Loans specified in Exhibit C and shall be delivered to the Administrative Agent in writing, by telex or facsimile transmission, or by telephone, immediately confirmed by telex or facsimile transmission. "BORROWER": as defined in the preamble hereto. "BORROWING DATE": any Business Day or Working Day, as applicable, specified in a notice pursuant to subsection 2.2 or 2.3 as a date on which the Borrower requests the Banks to make Loans. "BUSINESS DAY": a day other than a Saturday, Sunday or other day on which commercial banks in New York City or San Francisco are authorized or required by law to close. "CAPITALIZATION RATIO": at a particular date, the ratio of (a) Indebtedness of the Borrower and its Included Subsidiaries at such date to (b) the sum of (i) Indebtedness of the Borrower and its Included Subsidiaries at such date and (ii) the Consolidated Net Worth at such date. "CAPITAL STOCK": any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing. "C/D ASSESSMENT RATE": for any day as applied to any C/D Rate Loan, the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund maintained by the Federal Deposit Insurance Corporation ("FDIC") classified as well-capitalized and within supervisory subgroup "B" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. ss. 327.3(d) (or any successor provision) to the FDIC (or such successor's) insuring time deposits at offices of such institution in the United States. "C/D RATE LOANS": Loans the rate of interest applicable to which is based upon the Base C/D Rate. 5 "C/D RESERVE PERCENTAGE": for any day as applied to any C/D Rate Loan, that percentage which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor)(the "Board"), for determining the maximum reserve requirement for a Depository Institution (as defined in Regulation D of the Board) in respect of new non-personal time deposits in Dollars having a maturity comparable to the Interest Period for such C/D Rate Loan. "CHANGE IN CONTROL": any purchase or other acquisition of more than 50% of the shares of the common stock of the Borrower by any Person or "group" of related Persons, within the meaning of Section 13(d)(3) under the Securities and Exchange Act of 1934, as amended, other than Charles B. Johnson and members of his family and Affiliates thereof. "CLOSING DATE": the date on which each of the conditions set forth in subsection 4.1 shall have been satisfied. "CODE": the Internal Revenue Code of 1986, as amended from time to time. "COMMITMENT": as to any Bank, the obligation of such Bank to make Revolving Credit Loans to the Borrower hereunder in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Bank's name on Schedule I, as such amount may be reduced pursuant to the terms hereof. The initial aggregate amount of the Banks' Commitments is $210,000,000. "COMMITMENT PERCENTAGE": as to any Bank at any time, the percentage of the aggregate Commitments then constituted by such Bank's Commitment. "COMMITMENT PERIOD": the period from and including the Closing Date to but excluding the Termination Date or such earlier date as the Commitments shall terminate as provided herein. "COMMONLY CONTROLLED ENTITY": an entity, whether or not incorporated, which is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group which includes the Borrower and which is treated as a single employer under Section 414 of the Code. "CONSOLIDATED CURRENT ASSETS": at a particular date, all cash and marketable securities owned by the Borrower and its Included Subsidiaries and all liquid investments of such Person in the Funds as at such date. "CONSOLIDATED CURRENT LIABILITIES": at a particular date, all amounts which would, in conformity with GAAP, be included under current liabilities on a consolidated balance sheet of the Borrower and its Included Subsidiaries as at such date, excluding, however, the current maturities under the Five Year Facility. "CONSOLIDATED INTEREST EXPENSE": for any period, the aggregate interest expense of the Borrower and its Included Subsidiaries for such period, as determined in accordance with GAAP, including, without limitation, (a) all commissions, discounts and other fees and charges owed with respect to letters of credit allocable to or amortized over such period, (b) net costs 6 under Interest Rate Agreements allocable to or amortized over such period and (c) the portion of any amount payable under Financing Leases that is, in accordance with GAAP, allocable to interest expense. "CONSOLIDATED NET INCOME": for any period, the consolidated net income (or deficit) of the Borrower and its Included Subsidiaries for such period (taken as a cumulative whole), determined in accordance with GAAP, excluding, however: (a) any gains or losses from the sale or other disposition of assets (including any such sale or other disposition of marketable securities, liquid investments or other financial instruments but excluding any such sale of obsolete or worn-out assets in the ordinary course of business consistent with past practice) and any other non-cash extraordinary or non-recurring gains or losses; and (b) the equity interest of the Borrower and its Included Subsidiaries in the net income (or deficit) of any Joint Venture except to the extent of the actual receipt or payment by the Borrower and its Subsidiaries thereof or therefor. "CONSOLIDATED NET WORTH": at a particular date, all amounts which would be included, under stockholders' equity, on a consolidated balance sheet of the Borrower and its Included Subsidiaries determined on a consolidated basis in accordance with GAAP as at such date. "CONSOLIDATED WORKING CAPITAL": at a particular date, the excess, if any, of Consolidated Current Assets over Consolidated Current Liabilities at such date. "CONTINUING BANK": as defined in the recitals hereto. "CONTRACTUAL OBLIGATION": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "DEFAULT": any of the events specified in Section 7, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "DESIGNATED PROPERTY": All right, title and interest of the Borrower or any Affiliate in the real property and related improvements consisting of approximately 32 acres in Phase I of the Bay Meadows development located in the general vicinity of Franklin Parkway and Saratoga Avenue in San Mateo, California, which includes without limitation Borrower's corporate campus and other developed or undeveloped, contiguous or non-contiguous property located thereon. "DOLLARS" and "$": dollars in lawful currency of the United States of America. "EFFECTIVE DATE": shall be June 4, 2003. 7 "ENVIRONMENTAL LAWS": any and all foreign, Federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or requirements of law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time hereafter be in effect. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "EVENT OF DEFAULT": any of the events specified in Section 7, PROVIDED that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "EXCLUDED TAXES": with respect to the Administrative Agent, any Bank or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income, net worth or capital (including taxes based on capital gains, minimum taxes and alternative minimum taxes) by the United States of America or any political subdivision thereof, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Bank, in which its applicable Lending Office is located and, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the Borrower is located and (c) in the case of a Foreign Bank (including for purposes of this definition a Participant claiming the benefits of subsection 2.16 pursuant to subsection 9.6(c)(ii) that would be a Foreign Bank if it were a Bank), any withholding tax that is imposed on amounts payable to such Foreign Bank at the time such Foreign Bank becomes a party to this Agreement (or designates a new lending office other than at the request of the Borrower) or is attributable to such Foreign Bank's failure to comply with subsection 2.16(e), except to the extent that such Foreign Bank (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrower with respect to such withholding tax pursuant to subsection 2.16(a). "EXISTING BANKS": as defined in the recitals hereto. "EXISTING CREDIT AGREEMENT": as defined in the recitals hereto. "EXITING BANKS": as defined in the recitals hereto. "FEDERAL FUNDS EFFECTIVE RATE": as defined in the definition of "ALTERNATE BASE RATE" contained in this subsection 1.1. "FINANCE SUBSIDIARY": Franklin Capital Corporation. "FINANCING LEASE": any lease of property, real or personal, the obligations of the lessee in respect of which are required in accordance with GAAP to be capitalized on a balance sheet of the lessee. "FIVE YEAR FACILITY": the Amended and Restated Five Year Facility Credit Agreement, dated as of June 5, 2002, among the Borrower, the several banks and other financial 8 institutions from time to time parties thereto and JPMCB, as administrative agent, as the same may be amended, supplemented or otherwise modified from time to time. "FOREIGN BANK": any Bank that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction. "FTC": Franklin Templeton Companies, LLC, a Delaware limited liability company (formerly known as Franklin Templeton Corporate Services, Inc., a Delaware Corporation). "FUNDS": the collective reference to all investment companies advised by the Borrower or any of its Subsidiaries. "GAAP": generally accepted accounting principles in the United States of America in effect from time to time. If, at any time, GAAP changes in a manner which will materially affect the calculations determining compliance by the Borrower with any of its covenants in subsection 6.1, either the Borrower or the Majority Banks may request an amendment to such covenant (or the definitions related thereto) and the Majority Banks or the Borrower, as the case may be, shall negotiate in good faith with the requesting party to agree upon such amendment to adjust such covenant to give to each of the parties hereto substantially the same protection and benefits as were contemplated prior to such changes. "GOVERNMENTAL AUTHORITY": any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "GRID BID LOAN NOTE": as defined in subsection 2.4(e). "GUARANTEE OBLIGATION": as to any Person (the "GUARANTEEING PERSON"), any obligation of (a) the guaranteeing person or (b) another Person (including, without limitation, any bank under any letter of credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "PRIMARY OBLIGATIONS") of any other third Person (the "PRIMARY OBLIGOR") in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds for the purchase or payment of any such primary obligation or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; PROVIDED, HOWEVER, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower 9 of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. "INCLUDED SUBSIDIARY": any Subsidiary of the Borrower other than any Banking Subsidiary, Finance Subsidiary, Insurance Subsidiary or Real Estate Subsidiary. "INDEBTEDNESS": of any Person at any date, without duplication, (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices) or which is evidenced by a note, bond, debenture or similar instrument, (b) all obligations of such Person under Financing Leases, (c) all obligations of such Person in respect of acceptances issued or created for the account of such Person, (d) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof, (e) all obligations of such Person, whether absolute or contingent, in respect of letters of credit opened for the account of such Person (other than any such letters of credit opened for the purpose of facilitating the purchase of goods and services in the ordinary course of business and having a term of not more than 360 days) and (f) all Guarantee Obligations of such Person in respect of any indebtedness, obligations or liabilities of any other Person of the type referred to in clauses (a) through (e) of this definition. "INDEMNIFIED TAXES": Taxes other than Excluded Taxes. "INDIVIDUAL BID LOAN NOTE": as defined in subsection 2.4(e). "INSOLVENCY": with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. "INSOLVENT": pertaining to a condition of Insolvency. "INSURANCE SUBSIDIARY": at any time, ILA Financial Services, Inc., or any other Subsidiary of the Borrower licensed to engage, and principally engaged, at such time in the insurance business or any Subsidiary of such Subsidiary. "INTEREST PAYMENT DATE": (a) as to any Alternate Base Rate Loan, the last day of each March, June, September and December, (b) as to any LIBOR Loan or LIBOR Bid Loan having an Interest Period of three months or less or any Absolute Rate Bid Loan having an interest period of 90 days or less, the last day of such Interest Period, and (c) as to any LIBOR Loan or Bid Loan having an Interest Period longer than three months (in the case of LIBOR Loans and LIBOR Bid Loans) or 90 days (otherwise), each day which is three months or 90 days, as the case may be, or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period and, in each case, on the day on which a Loan becomes due and is payable in full and is paid or prepaid in full. 10 "INTEREST PERIOD": (a) with respect to any LIBOR Loans: (i) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such LIBOR Loans and ending one, two, three or six months thereafter, as selected by the Borrower in its notice of borrowing as provided in subsection 2.2 or its notice of conversion as provided in subsection 2.8(a), as the case may be; and (ii) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such LIBOR Loans and ending one, two, three or six months thereafter, as selected by the Borrower by irrevocable notice to the Administrative Agent not less than four Working Days prior to the last day of the then current Interest Period with respect to such LIBOR Loans; (b) with respect to any Bid Loan, the period commencing on the Borrowing Date in respect of such Bid Loan and ending on the scheduled maturity date thereof; PROVIDED that, all of the foregoing provisions relating to Interest Periods are subject to the following: (1) if any Interest Period pertaining to a LIBOR Loan or a LIBOR Bid Loan would otherwise end on a day which is not a Working Day, such Interest Period shall be extended to the next succeeding Working Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Working Day; (2) if any Interest Period pertaining to an Absolute Rate Bid Loan would otherwise end on a day that is not a Business Day such Interest Period shall be extended to the next succeeding Business Day; (3) any Interest Period pertaining to a LIBOR Loan or a LIBOR Bid Loan that begins on the last Working Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Working Day of a calendar month; (4) any Interest Period that would otherwise end after the Termination Date (or, in the case of Revolving Credit Loans, if applicable, the Term-Out Maturity Date) shall end on the Termination Date or the Term-Out Maturity Date, as the case may be; and (5) the Borrower shall use its best efforts to select Interest Periods so as not to require a payment or prepayment of any LIBOR Loan during an Interest Period for such Loan. "INTEREST RATE AGREEMENT": any interest rate protection agreement, interest rate future, interest rate option, interest rate swap, interest rate cap or other interest rate hedge or arrangement under which the Borrower or any of its Subsidiaries is a party or a beneficiary. "INVESTMENT COMPANY ACT": as defined in subsection 3.12(a). 11 "JOINT VENTURE": any corporation, partnership or other entity (other than a Subsidiary of the Borrower) as to which the Borrower, directly or indirectly, owns 33% or more of the shares of any class of its capital stock or of its other ownership interests, whether voting or non-voting, and as to which the Borrower (or any relevant Subsidiary of the Borrower) is not simply a passive investor. "JPMCB": as defined in the preamble hereto. "LEASE FINANCING ARRANGEMENT": any indebtedness, obligation, contingent liability, guaranty, pledge, lien, lease, sublease, ground lease, synthetic lease, financing, re-financing, sale, sale-leaseback, exchange, disposition, acquisition or other transaction incurred, granted or entered into by Borrower or FTC pursuant to (or as a result of the rights or options available to Borrower or FTC under) (i) the Participation Agreement, dated September 27, 1999, entered into by FTC, First Security Bank, National Association, as owner trustee under the FRI Trust 1999-1, Bank of America, N.A., as the agent for certain lenders and holders, and certain banks and other lending institutions, as the same may be amended, supplemented or extended from time to time, (ii) the leases and other documents entered into in connection therewith, in each case as part of the lease financing transaction relating to the Designated Property, as the same may be amended, supplemented or extended from time to time, or (iii) any transaction entered into by Borrower, FTC or any affiliate thereof from time to time to substitute, refinance, replace discharge, reconvey, restructure or release or enter into any other related transactions with respect to any of the foregoing with respect to all or a portion of the Designated Property. "LENDING OFFICE": as defined in subsection 2.1(b). "LIBOR": with respect to each day during each Interest Period pertaining to a LIBOR Loan or a LIBOR Bid Loan, the rate per annum equal to the rate that appears with respect to such Interest Period on Page 3750 of the Dow Jones Market Service (or on any successor or substitute page of such service, or any successor to or substitute for such service, providing rate quotations comparable to those currently provided on such page for such service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) as of 11:00 A.M., London time, two Working Days prior to the beginning of such Interest Period (or, if such rate is not available on any such page, the average (rounded upward to the nearest 1/16th of 1%) of the respective rates notified to the Administrative Agent by each of the Reference Banks as the rate at which such Reference Bank is offered Dollar deposits at or about 11:00 A.M. London time, two Working Days prior to the beginning of such Interest Period in the London interbank eurodollar market for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of its LIBOR Loan to be outstanding during such Interest Period or, in the case of a LIBOR Bid Loan, in an amount approximately equal to such LIBOR Bid Loan). "LIBOR ADJUSTED RATE": with respect to each day during each Interest Period pertaining to a LIBOR Loan or LIBOR Bid Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): 12 LIBOR --------------------------------- 1.00 - LIBOR Reserve Requirements "LIBOR BID LOAN REQUEST": any Bid Loan Request requesting the Bid Loan Banks to offer to make Bid Loans at an interest rate equal to the Applicable Index Rate plus (or minus) a margin. "LIBOR BID LOANS": Bid Loans made at a rate of interest based on the Applicable Index Rate. "LIBOR LOANS": Revolving Credit Loans the rate of interest applicable to which is based upon LIBOR. "LIBOR RESERVE REQUIREMENTS": for any day as applied to a LIBOR Loan or LIBOR Bid Loan, as the case may be, the aggregate (without duplication) of the maximum rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a member bank of such System. As at the Signing Date, there are no such reserve requirements. "LIEN": any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any Financing Lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing). "LOANS": the collective reference to the Revolving Credit Loans and the Bid Loans. "LOAN DOCUMENTS": this Agreement and any Note. "MAJORITY BANKS": at any time, Banks the Commitment Percentages of which aggregate more than 50%. If the Commitments are terminated, Majority Banks shall mean Banks holding more than 50% of the outstanding Loans. "MATERIAL ADVERSE EFFECT": a material adverse effect on (a) the business, operations, property or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole, (b) the ability of the Borrower and its Subsidiaries to perform the obligations of the Borrower under this Agreement or the Notes, or (c) the validity or enforceability of this Agreement, any of the Notes or the rights or remedies of the Administrative Agent or the Banks hereunder or thereunder. 13 "MULTIEMPLOYER PLAN": a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NET PROCEEDS": with respect to any Asset Disposition, the net amount equal to the aggregate amount received in cash (including any cash received by way of deferred payment pursuant to a note receivable, other non-cash consideration or otherwise, but only as and when such cash is so received) in connection with such Asset Disposition MINUS the sum of (a) the reasonable fees, commissions and other out-of-pocket expenses incurred by the Borrower or any Subsidiary, as applicable, in connection with such Asset Disposition (other than amounts payable to Affiliates of the Person making such disposition) and (b) federal, state and local taxes incurred in connection with such Asset Disposition, whether payable at such time or thereafter. "NEW BANK": as defined in the recitals hereto. "NON-MATERIAL SUBSIDIARY": as to any Person at any time of determination, a Subsidiary of such Person in which such Person and its other Subsidiaries have made an aggregate investment of not more than $2,000,000. "NOTES": the collective reference to the Revolving Credit Notes and the Bid Loan Notes. "OBLIGATIONS": the unpaid principal of and interest on (including, without limitation, interest accruing after the maturity of the Loans and interest accruing on or after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Notes and all other obligations and liabilities of the Borrower to the Administrative Agent or to the Banks, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, the Notes, any other Loan Document and any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees and disbursements of counsel, and the allocated cost of internal counsel, to the Administrative Agent or to the Banks that are required to be paid by the Borrower pursuant to the terms of this Agreement) or otherwise. "OTHER TAXES": any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement. "PARTICIPANT": as defined in subsection 9.6(c). "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA. "PERSON": an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. 14 "PLAN": at a particular time, any employee benefit plan which is covered by ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "PROPERTIES": the collective reference to the real and personal property owned, leased or operated by the Borrower or any of its Subsidiaries. "REAL ESTATE SUBSIDIARY": at any time, Franklin Properties, Inc. or any other Subsidiary of the Borrower principally engaged at such time in the real estate investment and property management business or any Subsidiary of any such Subsidiary. "REFERENCE BANKS": JPMCB, Bank of America, N.A., The Bank of New York, Citicorp USA Inc., and BNP Paribas. "REGISTER": as defined in subsection 9.6(b)(iv). "REGULATION U": Regulation U of the Board of Governors of the Federal Reserve System. "REGULATION X": Regulation X of the Board of Governors of the Federal Reserve System. "REORGANIZATION": with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "REPORTABLE EVENT": any of the events set forth in Section 4043(b) of ERISA, other than those events as to which the thirty day notice period is waived under subsections .13, .14, .16, .18, .19 or .20 of PBGC Reg.ss.2615. "REQUIREMENT OF LAW": as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "RESPONSIBLE OFFICER": the chief executive officer, the president, any senior vice president or any vice president of the Borrower or, with respect to financial matters, the chief financial officer, treasurer or controller of the Borrower. "REVOLVING CREDIT LOANS": as defined in subsection 2.1(a). "REVOLVING CREDIT NOTES": as defined in subsection 2.4(e). "SEC": the Securities and Exchange Commission, any successor thereto and any analogous Governmental Authority. "SIGNING DATE": the date hereof. 15 "SINGLE EMPLOYER PLAN": any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "SUBSIDIARY": as to any Person at any time of determination, a corporation, partnership or other entity (other than any Fund or any other investment company or similar investment entity existing under foreign law substantially equivalent to an investment company) of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries or Subsidiaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. "TAXES": any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "TERM-OUT MATURITY DATE": if so selected by the Borrower pursuant to subsection 2.4(a), the first anniversary of the Termination Date. "TERMINATION DATE": the date that is 364 days after the Effective Date. "TRANCHE": the collective reference to LIBOR Loans the Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such LIBOR Loans shall originally have been made on the same day). "TYPE": as to any Revolving Credit Loan, its nature as an Alternate Base Rate Loan or a LIBOR Loan. "WORKING DAY": any Business Day on which dealings in foreign currencies and exchange between banks may be carried on in London, England. 1.2 OTHER DEFINITIONAL PROVISIONS. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the Notes or any certificate or other document made or delivered pursuant hereto. (b) As used herein and in the Notes, and any certificate or other document made or delivered pursuant hereto, accounting terms relating to the Borrower and its Subsidiaries not defined in subsection 1.1 and accounting terms partly defined in subsection 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 16 SECTION 2. AMOUNT AND TERMS OF LOANS 2.1 REVOLVING CREDIT COMMITMENTS. (a) Subject to the terms and conditions hereof, each Bank severally agrees to make revolving credit loans (the "REVOLVING CREDIT LOANS") to the Borrower from time to time during the Commitment Period in an aggregate principal amount not to exceed the amount of such Bank's Commitment, PROVIDED that the aggregate principal amount of Revolving Credit Loans and Bid Loans outstanding at any one time shall not exceed the aggregate amount of the Commitments at such time. During the Commitment Period the Borrower may use the Commitments by borrowing, prepaying the Revolving Credit Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. (b) The Revolving Credit Loans may from time to time be (i) LIBOR Loans, (ii) Alternate Base Rate Loans or (iii) a combination thereof, as determined by the Borrower and notified to the Administrative Agent in accordance with subsections 2.2 and 2.8, PROVIDED that no Revolving Credit Loan shall be made as a LIBOR Loan after the day that is one month prior to the Termination Date unless at the time such Revolving Credit Loan is requested, the Borrower has irrevocably and in writing selected the Term-Out Maturity Date. Each Bank may make or maintain its Revolving Credit Loans to the Borrower by or through any branch or other affiliate as determined by it from time to time and notified to the Administrative Agent (any such branch or affiliate being herein called a "LENDING OFFICE"). 2.2 PROCEDURE FOR REVOLVING CREDIT BORROWING. The Borrower may borrow under the Commitments during the Commitment Period on any Working Day if the borrowing is a LIBOR Loan or on any Business Day if the borrowing is an Alternate Base Rate Loan, PROVIDED that the Borrower shall give the Administrative Agent irrevocable notice (which notice must be received by the Administrative Agent (a) prior to 10:00 A.M., New York City time four Working Days prior to the requested Borrowing Date, if all or any part of the requested Revolving Credit Loans are to be initially LIBOR Loans or (b) prior to 10:30 A.M., New York City time, on the requested Borrowing Date, otherwise), specifying (i) the aggregate amount to be borrowed, (ii) the requested Borrowing Date, (iii) whether the borrowing is to be of LIBOR Loans, Alternate Base Rate Loans or a combination thereof and (iv) if the borrowing is to be entirely or partly of LIBOR Loans, the amounts of such Type of Loan and the lengths of the initial Interest Periods therefor. Each borrowing under the Commitments shall be in an amount equal to (x) in the case of Alternate Base Rate Loans, $5,000,000 or a whole multiple of $1,000,000 in excess thereof (or, if the then Available Commitments are less than $5,000,000, such lesser amount) and (y) in the case of LIBOR Loans, $5,000,000 or a whole multiple of $1,000,000 in excess thereof. Upon receipt of any such notice from the Borrower, the Administrative Agent shall promptly notify each Bank thereof. Each Bank will make the amount of its pro rata share of each borrowing available to the Administrative Agent for the account of the Borrower at the office of the Administrative Agent specified in subsection 9.2 prior to 2:00 P.M., New York City time, on the Borrowing Date requested by the Borrower in funds immediately available to the Administrative Agent. Such amount will then be made available to the relevant Borrower by the Administrative Agent crediting the account of such Borrower on the books of such office with such amount made available to the Administrative Agent by such Bank for such Borrower and in like funds as received by the Administrative Agent. 17 2.3 THE BID LOANS. (a) The Borrower may borrow Bid Loans from time to time on any Business Day (in the case of Bid Loans made pursuant to an Absolute Rate Bid Loan Request) or on any Working Day (in the case of Bid Loans made pursuant to a LIBOR Bid Loan Request) during the period from the Closing Date until the date occurring 7 days prior to the Termination Date in the manner set forth in this subsection 2.3 and in amounts such that the aggregate amount of Loans outstanding at any time shall not exceed the aggregate amount of the Commitments at such time. (b) (i) The Borrower shall request Bid Loans by delivering a Bid Loan Request to the Administrative Agent, not later than 12:00 Noon (New York City time) four Working Days prior to the proposed Borrowing Date (in the case of a LIBOR Bid Loan Request), and not later than 10:00 A.M. (New York City time) one Business Day prior to the requested Borrowing Date (in the case of an Absolute Rate Bid Loan Request). Each Bid Loan Request may solicit bids for Bid Loans in an aggregate principal amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof and for not more than three alternative maturity dates for such Bid Loans. The maturity date for each Bid Loan shall be not less than 7 days nor more than 360 days after the Borrowing Date therefor (and in any event not after the Termination Date). The Administrative Agent shall promptly notify each Bid Loan Bank by telex or facsimile transmission of the contents of each Bid Loan Request received by it. (ii) In the case of a LIBOR Bid Loan Request, upon receipt of notice from the Administrative Agent of the contents of such Bid Loan Request, any Bid Loan Bank that elects, in its sole discretion, to do so, shall irrevocably offer to make one or more Bid Loans at the Applicable Index Rate plus or minus a margin for each such Bid Loan determined by such Bid Loan Bank in its sole discretion. Any such irrevocable offer shall be made by delivering a Bid Loan Offer to the Administrative Agent, before 10:30 A.M. (New York City time) three Working Days before the proposed Borrowing Date, setting forth the maximum amount of Bid Loans for each maturity date, and the aggregate maximum amount for all maturity dates, which such Bid Loan Bank would be willing to make (which amounts may, subject to subsection 2.3(a), exceed such Bid Loan Bank's Commitment) and the margin above or below the Applicable Index Rate at which such Bid Loan Bank is willing to make each such Bid Loan; the Administrative Agent shall advise the Borrower before 11:15 A.M. (New York City time) three Working Days before the proposed Borrowing Date, of the contents of each such Bid Loan Offer received by it. If the Administrative Agent in its capacity as a Bid Loan Bank shall, in its sole discretion, elect to make any such offer, it shall advise the Borrower of the contents of its Bid Loan Offer before 10:15 A.M. (New York City time) three Working Days before the proposed Borrowing Date. (iii) In the case of an Absolute Rate Bid Loan Request, upon receipt of notice from the Administrative Agent of the contents of such Bid Loan Request, any Bid Loan Bank that elects, in its sole discretion, to do so, shall irrevocably offer to make one or more Bid Loans at a rate or rates of interest for each such Bid Loan determined by such Bid Loan Bank in its sole discretion. Any such irrevocable offer shall be made by delivering a Bid Loan Offer to the Administrative Agent, before 9:30 A.M. (New York City time) on the proposed Borrowing Date, setting forth the maximum amount of Bid Loans for each maturity date, and the aggregate maximum amount for all maturity dates, 18 which such Bid Loan Bank would be willing to make (which amounts may, subject to subsection 2.3(a), exceed such Bid Loan Bank's Commitment) and the rate or rates of interest at which such Bid Loan Bank is willing to make such Bid Loan; the Administrative Agent shall advise the Borrower before 10:15 A.M. (New York City time) on the proposed Borrowing Date of the contents of each such Bid Loan Offer received by it. If the Administrative Agent in its capacity as a Bid Loan Bank shall, in its sole discretion, elect to make any such offer, it shall advise the Borrower of the contents of its Bid Loan Offer before 9:15 A.M. (New York City time) on the proposed Borrowing Date. (iv) The Borrower shall before 11:30 A.M. (New York City time) three Working Days before the proposed Borrowing Date (in the case of Bid Loans requested by a LIBOR Bid Loan Request) and before 10:30 A.M. (New York City time) on the proposed Borrowing Date (in the case of Bid Loans requested by an Absolute Rate Bid Loan Request) either, in its absolute discretion: (A) cancel such Bid Loan Request by giving the Administrative Agent telephone notice to that effect; or (B) accept one or more of the offers made by any Bid Loan Bank or Bid Loan Banks pursuant to clause (ii) or clause (iii) above, as the case may be, by giving telephone notice to the Administrative Agent (immediately confirmed by delivery to the Administrative Agent of a Bid Loan Confirmation) of the amount of Bid Loans for each relevant maturity date to be made by each Bid Loan Bank (which amount for each such maturity date shall be equal to or less than the maximum amount for such maturity date specified in the Bid Loan Offer of such Bid Loan Bank, and for all maturity dates included in such Bid Loan Offer shall be equal to or less than the aggregate maximum amount specified in such Bid Loan Offer for all such maturity dates) and reject any remaining offers made by Bid Loan Banks pursuant to clause (ii) or clause (iii) above, as the case may be; PROVIDED, HOWEVER, that (x) the Borrower may not accept offers for Bid Loans for any maturity date in an aggregate principal amount in excess of the maximum principal amount requested in the related Bid Loan Request, (y) if the Borrower accepts any of such offers, it must accept offers strictly based upon pricing for such relevant maturity date and not any other criteria whatsoever and (z) if two or more Bid Loan Banks submit offers for any maturity date at identical pricing and the Borrower accepts any of such offers but does not wish to borrow the total amount offered by such Bid Loan Banks with such identical pricing, the Borrower shall accept offers from all of such Bid Loan Banks in amounts allocated among them PRO RATA as shall be practicable after giving effect to the requirement that Bid Loans made by a Bid Loan Bank on a Borrowing Date for each relevant maturity date shall be in a principal amount of $5,000,000 or a whole multiple of $1,000,000 in excess thereof). (v) If the Borrower notifies the Administrative Agent that a Bid Loan Request is cancelled pursuant to clause (iv) (A) above, the Administrative Agent shall give prompt telephone notice thereof to the Bid Loan Banks, and the Bid Loans requested thereby shall not be made. 19 (vi) If the Borrower accepts pursuant to clause (iv) (B) above one or more of the offers made by any Bid Loan Bank or Bid Loan Banks, the Administrative Agent shall promptly notify each Bid Loan Bank which has made such an offer, of the aggregate amount of such Bid Loans to be made on such Borrowing Date for each maturity date and of the acceptance or rejection of any offers to make such Bid Loans made by such Bid Loan Bank. Each Bid Loan Bank which is to make a Bid Loan shall, before 12:00 Noon (New York City time) on the Borrowing Date specified in the Bid Loan Request applicable thereto, make available to the Administrative Agent at its office set forth in subsection 9.2 the amount of Bid Loans to be made by such Bid Loan Bank, in immediately available funds. The Administrative Agent will make such funds available to the Borrower as soon as practicable on such date at the Administrative Agent's aforesaid address. As soon as practicable after each Borrowing Date, the Administrative Agent shall notify each Bank of the aggregate amount of Bid Loans advanced on such Borrowing Date and the respective maturity dates thereof. (c) Within the limits and on the conditions set forth in this subsection 2.3, the Borrower may from time to time borrow under this subsection 2.3, repay pursuant to subsection 2.4, and reborrow under this subsection 2.3. The Borrower shall not have the right to prepay any principal amount of any Bid Loan. (d) The Borrower shall pay interest on the unpaid principal amount of each Bid Loan made to it from the Borrowing Date to the stated maturity date thereof, at the rate of interest determined pursuant to subsection 2.4 below (calculated on the basis of a 360-day year for actual days elapsed), payable on each Interest Payment Date for such Bid Loan. If all or a portion of the principal amount of any Bid Loan shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue principal amount shall, without limiting any rights of any Bank under this Agreement, bear interest from the date on which such payment was due at a rate per annum which is 2% above the rate which would otherwise be applicable pursuant to such Bid Loan until the scheduled maturity date with respect thereto, and for each day thereafter at a rate per annum which is 2% above the Alternate Base Rate until paid in full (as well after as before judgment). Interest accruing pursuant to the immediately preceding sentence shall be payable on demand. 2.4 REPAYMENT OF LOANS; EVIDENCE OF DEBT. (a) The Borrower hereby unconditionally promises to pay (i) to the Administrative Agent for the account of each Bank the then unpaid principal amount of each Revolving Credit Loan on the Termination Date (or any earlier date on which, subject to the terms and conditions of this Agreement, such payment shall become due and payable, by acceleration or otherwise) and (ii) to the Administrative Agent for the account of each relevant Bid Loan Bank the then unpaid principal amount of each Bid Loan on the maturity date for such Loan (such maturity date being that specified by the Borrower for the repayment of such Bid Loan in the related Bid Loan Request). Notwithstanding clause (i) above, the Borrower may, upon written notice to the Administrative Agent given at least three Business Days prior to the Termination Date, extend the date upon which the principal amount of the Revolving Credit Loans outstanding as of the Termination Date will be due and payable to the Term-Out Maturity Date; PROVIDED that no Default or Event of Default shall have occurred and be continuing on the Termination Date and the representations and warranties set forth in Section 3 shall be true and correct in all material respects on and as of the Termination Date as if 20 made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date. If the Borrower gives notice to the Administrative Agent in accordance with the preceding sentence, the Borrower hereby agrees that the outstanding principal balance of each Revolving Credit Loan outstanding on the Termination Date shall be payable on the Term Out Maturity Date or such earlier date as may be required hereunder, due to accelerations or otherwise. It is understood that, whether or not the Term-Out Maturity Date is selected, (x) the Commitments shall automatically terminate on the Termination Date and (y) no maturity date for any Bid Loan may be extended beyond the Termination Date. (b) Each Bank shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Bank resulting from each Loan made by such Bank, including the amounts of principal and interest payable and paid to such Bank from time to time hereunder. (c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, whether such Loan is a Revolving Credit Loan or a Bid Loan, the Type thereof and the Interest Period or, in the case of Bid Loans, the maturity date applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Bank hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Banks and each Bank's share thereof. (d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be PRIMA FACIE evidence of the existence and amounts of the obligations recorded therein; PROVIDED that the failure of any Bank or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement. The Administrative Agent shall provide such back-up information and supporting documentation that is reasonably requested by the Borrower from time to time to support entries made in said accounts. (e) Any Bank may request that Loans made by it be evidenced by a promissory note. In such event, the Administrative Agent shall prepare and the Borrower shall execute and deliver to such Bank, a promissory note payable to the order of such Bank (or, if requested by such Bank, to such Bank and its registered assigns) substantially in the form of Exhibit E-1, in the case of Revolving Loans (a "REVOLVING CREDIT NOTE"), or Exhibit E-2, in the case of any Bid Loans (a "GRID BID LOAN NOTE"); PROVIDED that any Bid Loan Bank may request that any individual Bid Loan (or portion thereof) made by it in an amount of at least $5,000,000 be evidenced by an individual note in the form of Exhibit E-3 (an "INDIVIDUAL BID LOAN NOTE"). Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to subsection 9.6) be represented by one or more promissory notes in substantially such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns). 2.5 OPTIONAL TERMINATION OR REDUCTION OF COMMITMENTS. The Borrower shall have the right, upon not less than five Business Days' notice to the Administrative Agent, to terminate the Commitments or, from time to time, to reduce the amount of the Commitments, 21 PROVIDED that no such reduction or termination shall be permitted if, after giving effect thereto, and to any prepayment of the Revolving Credit Loans made on the effective date therein, the then outstanding principal amount of Loans (including, without limitation, Bid Loans) would exceed the aggregate amount of the Commitments as so reduced. Any such reduction shall be in an amount equal to $5,000,000 or a whole multiple of $1,000,000 in excess thereof and shall reduce permanently the Commitments then in effect. 2.6 OPTIONAL PREPAYMENTS. Subject to subsection 2.17, the Borrower may, at any time and from time to time, prepay the Revolving Credit Loans, in whole or in part, without premium or penalty, upon at least four Business Days' irrevocable notice from the Borrower to the Administrative Agent, specifying the date and amount of prepayment and whether the prepayment is of LIBOR Loans, Alternate Base Rate Loans or a combination thereof, and, if of a combination thereof, the amount allocable to each. Upon receipt of any such notice from the Borrower, the Administrative Agent shall promptly notify each Bank thereof. If any such notice is given, the amount specified in such notice shall be due and payable by the Borrower on the date specified therein, together with accrued interest to such date on the amount prepaid. Partial prepayments shall be in an aggregate principal amount of $1,000,000 or a whole multiple thereof and may only be made, if after giving effect thereto, subsection 2.9 shall not have been contravened. The Borrower shall not have the right to prepay the principal amount of any Bid Loan. 2.7 MANDATORY PREPAYMENTS. (a) Upon receipt by the Borrower or any of its Subsidiaries of any Net Proceeds with respect to an Asset Disposition, (i) if such Net Proceeds exceed $10,000,000 or (ii) if such Net Proceeds do not exceed $10,000,000 but such Net Proceeds, together with all other Net Proceeds from other, prior Asset Dispositions in the same fiscal year of the Borrower, which, in each case, have not exceeded $10,000,000, exceed $25,000,000, then on the first Business Day after the receipt of Net Proceeds from such Asset Disposition, the Revolving Credit Loans shall be prepaid, without an accompanying reduction of the Commitments, in an amount equal to 100% of such Net Proceeds (or, in the case of Net Proceeds described in clause (ii) of this paragraph (a), if less, the amount by which such Net Proceeds, together with such other Net Proceeds, exceed $25,000,000). To the extent that the Borrower makes mandatory prepayments with such Net Proceeds under subsection 2.7(a) of the Five Year Facility Credit Agreement, no mandatory prepayment shall be due under this subsection 2.7(a). (b) In the event of any Change in Control, if the Majority Banks give the Borrower a notice within 30 days of the announcement of such Change in Control requiring the Borrower to prepay the Loans in full, then the Borrower shall prepay the Loans in full on a date determined by the Borrower and notified by the Borrower pursuant to the procedures of subsection 2.6 which is not more than 90 days after such Change in Control. If the Loans are required to be prepaid in full pursuant to this subsection 2.7(b), such Loans shall not be permitted to be reborrowed and the Commitments shall be deemed to be terminated as of the date of such prepayment. (c) If, after giving effect to any termination or reduction of any Commitments pursuant to subsection 2.5 or this subsection 2.7, the outstanding aggregate principal amount of the Loans exceeds the aggregate amount of such Commitments then in effect, the Borrower shall 22 pay or prepay such Loans (including, without limitation, the Bid Loans) on the date of such termination or reduction in an aggregate principal amount at least equal to such excess, together with interest thereon accrued to the date of such payment or prepayment. All prepayments made pursuant to this subsection 2.7(c) shall be applied first to the Revolving Credit Loans until such Loans are paid in full and second to the Bid Loans. (d) Each prepayment of the Loans pursuant to this subsection 2.7 shall be accompanied by payment in full of all accrued interest thereon to and including the date of such prepayment, together with any additional amounts owing pursuant to subsection 2.17. 2.8 CONVERSION AND CONTINUATION OPTIONS. (a) The Borrower may elect from time to time to convert LIBOR Loans to Alternate Base Rate Loans, by giving the Administrative Agent at least two Business Days' prior irrevocable notice of such election, provided that any such conversion of LIBOR Loans may only be made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert Alternate Base Rate Loans to LIBOR Loans by giving the Administrative Agent at least three Working Days' prior irrevocable notice of such election. Any such notice of conversion to LIBOR Loans shall specify the length of the initial Interest Period or Interest Periods therefor. Upon receipt of any such notice the Administrative Agent shall promptly notify each Bank thereof. All or any part of outstanding LIBOR Loans and Alternate Base Rate Loans may be converted as provided herein, provided that (i) any such conversion may only be made if, after giving effect thereto, subsection 2.9 shall not have been contravened and (ii) no Revolving Credit Loan may be converted into a LIBOR Loan after the date that is one month prior to the Termination Date (or, if applicable, the Term-Out Maturity Date). (b) Any LIBOR Loans may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving notice to the Administrative Agent, in accordance with the applicable provisions of the term "Interest Period" set forth in subsection 1.1, of the length of the next Interest Period to be applicable to such LIBOR Loans, PROVIDED that no LIBOR Loan may be continued as such (i) if, after giving effect thereto, subsection 2.9 would be contravened or (ii) after the date that is one month prior to the Termination Date (or, if applicable, the Term-Out Maturity Date) and PROVIDED, FURTHER, that if the Borrower shall fail to give any required notice as described above in this paragraph or if such continuation is not permitted pursuant to the preceding proviso such Revolving Credit Loans shall be automatically converted to Alternate Base Rate Loans on the last day of such then expiring Interest Period. 2.9 MINIMUM AMOUNTS OF TRANCHES. All borrowings, conversions and continuations of Revolving Credit Loans hereunder and all selections of Interest Periods hereunder shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of the Revolving Credit Loans comprising each Tranche shall be equal to $15,000,000 or a whole multiple of $1,000,000 in excess thereof. 2.10 INTEREST RATES AND PAYMENT DATES. (a) Each LIBOR Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the LIBOR Adjusted Rate determined for such day plus the Applicable Margin. 23 (b) Each Alternate Base Rate Loan shall bear interest at a rate per annum equal to the Alternate Base Rate plus the Applicable Margin. (c) Each Bid Loan shall bear interest as provided in subsection 2.3. (d) If all or a portion of the principal amount of any Revolving Credit Loan or any interest payable on the Loans shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum which is (x) in the case of overdue principal to the last day of any Interest Period then applicable thereto, the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this subsection plus 2% or (y) otherwise, the rate described in paragraph (b) of this subsection plus 2%, in each case from the date of such non-payment until such amount is paid in full (as well after as before judgment). (e) Interest on each LIBOR Loan and Alternate Base Rate Loan shall be payable in arrears on each Interest Payment Date, provided in each case that interest accruing pursuant to paragraph (d) of this subsection shall be payable on demand. 2.11 COMPUTATION OF INTEREST AND FEES. (a) Interest on Alternate Base Rate Loans, facility fees and utilization fees shall be calculated on the basis of a 360-day year for the actual days elapsed, PROVIDED that interest on Alternate Base Rate Loans the rate of interest on which are based on the Prime Rate shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed. Interest on LIBOR Loans and Bid Loans shall be calculated on the basis of a 360-day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Borrower and the Banks of each determination of a LIBOR Adjusted Rate. Any change in the interest rate on a Loan resulting from a change in the Alternate Base Rate or the LIBOR Reserve Requirements shall become effective as of the opening of business on the day on which such change in the Alternate Base Rate is announced or such change in the LIBOR Reserve Requirements becomes effective, as the case may be. The Administrative Agent shall as soon as practicable notify the Borrower and the Banks of the effective date and the amount of each such change in interest rate. (b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Banks in the absence of manifest error. The Administrative Agent shall, at the request of the Borrower, deliver to the Borrower a statement showing the quotations used by the Administrative Agent in determining any interest rate pursuant to subsection 2.10(a) and the calculations made by the Administrative Agent in determining any interest rate pursuant to subsection 2.10(b). (c) If any Reference Bank's Commitment shall terminate or all its Loans shall be assigned for any reason whatsoever, such Reference Bank shall thereupon cease to be a Reference Bank, and if, as a result of the foregoing, there shall only be one Reference Bank remaining, the Administrative Agent (after consultation with the Borrower and the Banks) shall, by notice to the Borrower and the Banks, designate another Bank as a Reference Bank so that there shall at all times be at least two Reference Banks. 24 (d) Each Reference Bank shall use its best efforts to furnish quotations of rates to the Administrative Agent as contemplated hereby. If any of the Reference Banks shall be unable or shall otherwise fail to supply such rates to the Administrative Agent upon its request, the rate of interest shall, subject to the provisions of subsection 2.12, be determined on the basis of the quotations of the remaining Reference Banks or Reference Bank. 2.12 INABILITY TO DETERMINE INTEREST RATE. In the event that prior to the first day of any Interest Period: (a) the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the LIBOR Adjusted Rate for such Interest Period, or (b) the Administrative Agent shall have received notice from the Majority Banks that the LIBOR Adjusted Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Banks (as conclusively certified by such Banks) of making or maintaining their affected Loans during such Interest Period, the Administrative Agent shall give telex, telecopy or telephonic notice thereof to the Borrower and the Banks as soon as practicable thereafter. If such notice is given (x) any LIBOR Loans requested to be made on the first day of such Interest Period shall be made as Alternate Base Rate Loans, (y) any Revolving Credit Loans that were to have been converted on the first day of such Interest Period to LIBOR Loans shall be converted to or continued as Alternate Base Rate Loans and (z) any outstanding LIBOR Loans shall be converted, on the first day of such Interest Period, to Alternate Base Rate Loans. Until such notice has been withdrawn by the Administrative Agent, no further LIBOR Loans shall be made or continued as such, nor shall the Borrower have the right to convert Alternate Base Rate Loans to LIBOR Loans. 2.13 PRO RATA TREATMENT AND PAYMENTS. Each borrowing of Revolving Credit Loans by the Borrower from the Banks hereunder, each payment by the Borrower of any facility, utilization or other fee hereunder, and any reduction of the Commitments of the Banks shall be made pro rata according to the respective Commitment Percentages of the Banks. Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Revolving Credit Loans shall be made pro rata according to the respective outstanding principal amounts of the Revolving Credit Loans then held by the Banks. All payments (including prepayments) to be made by the Borrower hereunder and under the Notes, whether on account of principal, interest, fees or otherwise, shall be made without set off or counterclaim and shall be made prior to 12:00 Noon, New York City time, on the due date thereof to the Administrative Agent, for the account of the appropriate Banks, at the Administrative Agent's office specified in subsection 9.2, in Dollars and in immediately available funds. The Administrative Agent shall distribute such payments to such Banks promptly upon receipt in like funds as received. If any payment hereunder (other than payments on the LIBOR Loans or LIBOR Bid Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. If any payment on a LIBOR Loan or LIBOR Bid Loan becomes due and payable on a day other than a Working Day, the maturity 25 thereof shall be extended to the next succeeding Working Day unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Working Day. 2.14 ILLEGALITY. Notwithstanding any other provision herein, if any change in any Requirement of Law or in the interpretation or application thereof shall make it unlawful for any Bank or Lending Office to make or maintain LIBOR Loans as contemplated by this Agreement, (a) the commitment of such Bank hereunder to make LIBOR Loans, continue LIBOR Loans as such and convert Alternate Base Rate Loans to LIBOR Loans shall forthwith be cancelled and (b) the Loans of such Bank or Lending Office then outstanding as LIBOR Loans, if any, shall be converted automatically to Alternate Base Rate Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If any such conversion of a LIBOR Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Borrower shall pay to such Bank such amounts, if any, as may be required pursuant to subsection 2.17. 2.15 REQUIREMENTS OF LAW. (a) In the event that any change in any Requirement of Law or in the interpretation or application thereof or compliance by any Bank with any request or directive (whether or not having the force of law but, if not having the force of law, generally applicable to and complied with by banks of the same general type as such Bank in the relevant jurisdiction) from any central bank or other Governmental Authority made subsequent to the Effective Date: (i) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Bank or Lending Office which is not otherwise included in the determination of the LIBOR Adjusted Rate hereunder; or (ii) shall impose on such Bank or Lending Office any other condition; and the result of any of the foregoing is to increase the cost to such Bank or Lending Office, by an amount which such Bank deems to be material, of making, converting into, continuing or maintaining LIBOR Loans or Bid Loans or to reduce any amount receivable hereunder in respect thereof then, in any such case, the Borrower shall promptly pay such Bank or Lending Office, upon its demand, any additional amounts necessary to compensate such Bank for such increased cost or reduced amount receivable. If any Bank or any Lending Office becomes entitled to claim any additional amounts pursuant to this subsection, it shall promptly notify the Borrower, through the Administrative Agent, of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable pursuant to this subsection submitted by such Bank or Lending Office, through the Administrative Agent, to the Borrower shall be PRIMA FACIE evidence of the accuracy of the information so recorded. This covenant shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder for one year. (b) If, after the date of this Agreement, the introduction of any applicable law, rule, regulation or guideline regarding capital adequacy, or any change therein or any change in 26 the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, affects the amount of capital required or expected to be maintained by any Bank or any corporation controlling any Bank, and such Bank or such corporation (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy) determines that the amount of capital maintained by such Bank or such corporation which is attributable to or based upon the Loans, the Commitments or this Agreement must be increased as a consequence of such introduction or change, then, upon demand of the Administrative Agent at the request of such Bank, the Borrower shall immediately pay to the Administrative Agent on behalf of such Bank, additional amounts sufficient to compensate such Bank or such corporation for the increased costs to such Bank or corporation of such increased capital. Any such demand shall be accompanied by a certificate of such Bank setting forth in reasonable detail the computation of any such increased costs. This covenant shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder for one year. (c) Each Bank will promptly notify the Borrower, through the Administrative Agent, of any event of which it has knowledge that will entitle such Bank to compensation pursuant to subsection 2.15(a) or (b) above. No failure by any Bank to give (or delay in giving) such notice shall adversely affect such Bank's rights to such compensation, except that the Borrower shall have no obligation to compensate any Bank for any cost or reduction incurred or accrued by it more than one year before such Bank gives notice of the event giving rise to such cost or reduction as required by the preceding sentence. 2.16 TAXES. (a) Any and all payments by or on account of any obligation of the Borrower hereunder or under any Note shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; PROVIDED that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this subsection) the Administrative Agent or Bank receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrower shall indemnify the Administrative Agent and each Bank, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Administrative Agent or such Bank, on or with respect to any payment by or on account of any obligation of the Borrower hereunder (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Bank, or by the Administrative Agent on its own behalf or on behalf of a Bank, shall be conclusive absent manifest error. 27 (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) Each Foreign Bank hereby agrees that it shall deliver to the Administrative Agent and the Borrower: (i) two copies of Internal Revenue Service Form W-8-BEN or Form W-8-ECI (or appropriate successor form), properly completed and duly executed by such Foreign Bank claiming complete exemption from U.S. Federal withholding tax on payments by the Borrower or the Administrative Agent under this Agreement and the other Loan Documents; (ii) any other documentation as may be required under applicable U.S. tax law and regulations to evidence complete exemption from U.S. Federal withholding tax on all payments by the Borrower or the Administrative Agent under this Agreement and the Loan Documents. Such forms and other documentation shall be delivered by each Foreign Bank on or before the Initial Date (as defined below) and on or before the date, if any, such Foreign Bank changes its applicable Lending Office by designating a different Lending Office or selecting an additional office. In addition, each Foreign Bank shall deliver appropriate replacements to such forms previously delivered by it promptly upon the obsolescence or invalidity of any form or other documentation previously delivered by such Foreign Bank unless an event beyond the control of such Foreign Bank (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Foreign Bank from duly completing and delivering any such form with respect to it and such Foreign Bank so advises the Borrower and the Administrative Agent. (f) For purposes of subsection (e), the term "Initial Date" shall mean (i) with respect to each Foreign Bank that is a party hereto on the date hereof, the date hereof, (ii) with respect to each Participant, the effective date of the grant of a participation to such Participant, and (ii) with respect to each transferee, the date of such transfer or assignment of an interest hereunder to such transferee. 2.17 INDEMNITY. The Borrower agrees to indemnify each Bank and to hold each Bank harmless from any loss or expense which such Bank may sustain or incur as a consequence of (a) default by the Borrower in payment when due of the principal amount of or interest on any LIBOR Loan or Bid Loan, (b) default by the Borrower in making a borrowing of, conversion into or continuation of Bid Loans or LIBOR Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement (and, in the case of Bid Loans, so long as the Borrower has accepted a Bid Loan offered in connection with any such notice), (c) default by the Borrower in making any prepayment after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (d) the making by the 28 Borrower of a prepayment of LIBOR Loans or (without prejudice to the last sentence of subsection 2.3(c)) Bid Loans on a day which is not the last day of an Interest Period with respect thereto, including, without limitation, in each case, any such loss or expense arising from the reemployment of funds obtained by it or from fees payable to terminate the deposits from which such funds were obtained. This covenant shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder for one year. 2.18 FACILITY AND UTILIZATION FEE. (a) During the Commitment Period (and, if the Term-Out Maturity Date has been selected, during the period from and including the Termination Date to but excluding the Term-Out Maturity Date), the Borrower agrees to pay to the Administrative Agent for the account of each Bank a facility fee equal to the product of 0.090% per annum and the daily average amount of the Commitment of such Bank during the quarter (or such other period) for which such fee is to be paid (without regard to the principal amount of Loans from time to time made by such Bank) (or, if the Commitments have been terminated (including, without limitation, during any period after the Termination Date if the Term-Out Maturity Date is selected), on the daily average outstanding principal amount of the Loans of such Bank during the quarter (or such other period) for which such fee is to be paid). Such facility fee shall be payable quarterly in arrears on the last day of each March, June, September and December, commencing June 30, 2003, and on the Termination Date and, if applicable, the Term-Out Maturity Date (or, in any case, any earlier date on which all amounts outstanding hereunder shall become due and payable by acceleration or otherwise). (b) During the Commitment Period (and, if the Term-Out Maturity Date has been selected, during the period from and including the Termination Date to but excluding the Term-Out Maturity Date), the Borrower agrees to pay to the Administrative Agent for the account of each Bank a utilization fee computed at the rate of 0.125% per annum on the aggregate average amount of the Revolving Credit Loans under this Agreement and the Five Year Facility outstanding during the quarter for which such fee is to be paid; PROVIDED, that no such fee shall be required to be paid with respect to any quarter in which the aggregate average amount of the Revolving Credit Loans and Bid Loans then outstanding under this Agreement and the Five Year Facility ("TOTAL USAGE") does not exceed 50% of the aggregate Commitments of the Banks under this Agreement and the Five Year Facility (the "UTILIZATION Threshold"); PROVIDED, FURTHER, that if the Borrower shall have selected the Term-Out Maturity Date, Total Usage shall be deemed to exceed the Utilization Threshold during any period after the Termination Date when Loans are outstanding under this Agreement. Such utilization fee, to the extent payable, shall be payable quarterly in arrears on the last day of each March, June, September and December, commencing on June 30, 2003 and on the Termination Date, and, if applicable, the Term-Out Maturity Date (or, in any case, any earlier date on which all amounts outstanding hereunder shall become due and payable by acceleration or otherwise). Sample computations of the facility fee and the utilization fee are given in Schedule II hereto. 2.19 MITIGATION OF COSTS(a) . If any Bank, by changing its Lending Office or taking any other reasonable action, so long as making such change or taking such other action is not, in the reasonable judgment of such Bank, disadvantageous to it in any financial, regulatory 29 or other respect, can mitigate any adverse effect on the Borrower under subsections 2.14, 2.15 or 2.16, such Bank shall take such action. 2.20 NEW BANKS; EXITING BANKS. (a) As of the Closing Date, the New Banks shall become Banks parties to this Agreement, and the terms "Bank" and "Banks" as used in this Agreement shall be deemed to include each New Bank. Each New Bank (i) hereby appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Loan Documents as provided by the terms thereof and in accordance with Section 8 hereof and (ii) agrees that as of the Closing Date it will perform in accordance with their terms all of the obligations which by the terms of this Agreement and the other Loan Documents are required to be performed by it as a Bank. As of the Closing Date, each New Bank shall have all the rights of a Bank under this Agreement. (b) As of the Closing Date, the Commitments of each of the Exiting Banks shall be terminated, and the Exiting Banks shall no longer be parties to this Agreement, PROVIDED that any indemnities or other agreements under this Agreement or any other Loan Document which by their terms survive repayment of amounts payable thereunder shall survive repayment pursuant hereto with respect to the Exiting Banks. SECTION 3. REPRESENTATIONS AND WARRANTIES To induce the Banks to enter into this Agreement, and to make the Loans the Borrower hereby represents and warrants to the Administrative Agent and each Bank that: 3.1 FINANCIAL CONDITION. (a) The consolidated balance sheets of the Borrower and its consolidated Subsidiaries as at September 30, 2001, and September 30, 2002, and the related consolidated statements of income and of cash flows for the fiscal year ended on such date, reported on by PricewaterhouseCoopers LLP, copies of which have heretofore been furnished to each Bank, present fairly the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such dates, and the consolidated results of their operations and their consolidated cash flows for the fiscal year then ended. The unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at March 31, 2003 and the related unaudited consolidated statements of income and of cash flows for the six-month period ended on such date, certified to the best of their knowledge by a Responsible Officer of the Borrower, copies of which have heretofore been furnished to each Bank, present fairly the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the six-month period then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by such accountants or Responsible Officer, as the case may be, and as disclosed therein). Neither the Borrower nor any of its consolidated Subsidiaries had, at the date of the most recent balance sheet referred to above, any material Guarantee Obligation, contingent liability or liability for taxes, or any long-term lease or unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction, which is not reflected in the foregoing statements or in the notes thereto and which is material in relation to the consolidated financial condition of the Borrower and its consolidated Subsidiaries at such date. During the 30 period from March 31, 2003 to and including the Closing Date there has been no sale, transfer or other disposition by the Borrower or any of its consolidated Subsidiaries of any material part of its business or property and no purchase or other acquisition of any business or property (including any capital stock of any other Person) material in relation to the consolidated financial condition of the Borrower and its consolidated Subsidiaries at March 31, 2003. 3.2 NO CHANGE. Since March 31, 2003 there has been no Material Adverse Effect. 3.3 CORPORATE EXISTENCE; COMPLIANCE WITH LAW. Each of the Borrower and its Subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the corporate power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged and in which it proposes to be engaged after the Closing Date, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 3.4 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The Borrower has the corporate power and authority, and the legal right, to make, deliver and perform the Loan Documents and to borrow hereunder and has taken all necessary corporate action to authorize (i) the borrowings on the terms and conditions of this Agreement and the Notes and (ii) the execution, delivery and performance of the Loan Documents. Except as set forth on Schedule III hereto, no consent or authorization of, filing with or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement or the Notes. This Agreement has been and each of the Notes will be duly executed and delivered. This Agreement constitutes, and each of the Notes when executed and delivered will constitute, a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 3.5 NO LEGAL BAR. The execution, delivery and performance of this Agreement and the Notes, the borrowings hereunder and the use of the proceeds thereof will not (a) violate, to the knowledge of the Borrower, any Requirement of Law or Contractual Obligation of the Borrower, any of its Subsidiaries or any of the Funds, or (b) violate any Requirement of Law or Contractual Obligation of the Borrower, any of its Subsidiaries or any of the Funds which could reasonably be expected to have a Material Adverse Effect and will not result in, or require, the creation or imposition of any Lien on any of its or their respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation. 3.6 NO MATERIAL LITIGATION. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the 31 Borrower, threatened by or against the Borrower or any of its Subsidiaries or against any of its or their respective properties or revenues or by or against any "affiliated person" of the Borrower or any of its Subsidiaries, within the meaning of the Investment Company Act, (a) with respect to this Agreement or the Notes or any of the transactions contemplated hereby or thereby, or (b) which could reasonably be expected to have a Material Adverse Effect. 3.7 OWNERSHIP OF PROPERTY; LIENS. Each of the Borrower and its Subsidiaries has good record and marketable title in fee simple to, or a valid leasehold interest in, all its real property, and good title to all its other property which is material to its business, and none of such property, and none of the investment advisory agreements to which the Borrower or any of its Subsidiaries is a party or any of the revenues thereunder, is subject to any Lien except as permitted by subsection 6.3. 3.8 INTELLECTUAL PROPERTY. The Borrower and each of its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, technology, know-how and processes necessary for the conduct of its business as currently conducted except for those the failure to own or license which could not reasonably be expected to have a Material Adverse Effect (the "INTELLECTUAL PROPERTY"). To the knowledge of the Borrower, no claim which could reasonably be expected to have a Material Adverse Effect has been asserted and is pending by any Person challenging or questioning the use of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does the Borrower know of any valid basis for any such claim. To the knowledge of the Borrower, the use of such Intellectual Property by the Borrower and its Subsidiaries does not infringe on the rights of any Person, except for such claims and infringements that, in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 3.9 TAXES. Each of the Borrower and its Subsidiaries has filed or caused to be filed all material tax returns which, to the knowledge of the Borrower, are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrower or its Subsidiaries, as the case may be); to the knowledge of Borrower, no tax Lien has been filed, and no claim is being asserted with respect to any such tax, fee or other charge which could reasonably be expected to have a Material Adverse Effect. 3.10 FEDERAL REGULATIONS. No part of the proceeds of any Loans are intended to be or will be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulations U and X, or for any purpose which violates the provisions of the Regulations of the Board of Governors of the Federal Reserve System. If requested by any Bank or the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Bank a statement to the foregoing effect in conformity with the requirements of FR Form U-1 referred to in said Regulation U. 3.11 ERISA. No Reportable Event has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, 32 and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. The present value of all accrued benefits under each Single Employer Plan maintained by the Borrower or any Commonly Controlled Entity (based on those assumptions used to fund the Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits. There are no Multiemployer Plans. Neither the Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan. The present value (determined using actuarial and other assumptions which are reasonable in respect of the benefits provided and the employees participating) of the liability of the Borrower and each Commonly Controlled Entity for post retirement benefits to be provided to their current and former employees under Plans which are welfare benefit plans (as defined in Section 3(1) of ERISA) does not, in the aggregate, exceed the assets under all such Plans allocable to such benefits by an amount in excess of $0. 3.12 INVESTMENT COMPANY ACT; OTHER REGULATIONS. (a) The Borrower is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended (the "INVESTMENT COMPANY ACT"). (b) Each of the Subsidiaries of the Borrower listed on Schedule IV hereto is duly registered as an investment adviser under the Investment Advisers Act of 1940 (the "ADVISERS ACT"). None of the other Subsidiaries of the Borrower or the Borrower is an "investment adviser" within the meaning of the Advisers Act and the rules and regulations promulgated thereunder. Each entity for which any Subsidiary of the Borrower acts as an investment adviser and which is required to be registered as an "investment company" under the Investment Company Act is duly registered as such thereunder. (c) Except for the Subsidiaries of the Borrower listed on Schedule V hereto, neither the Borrower nor any of its Subsidiaries is required to be duly registered as a broker-dealer under the Securities and Exchange Act of 1934, as amended, and such Subsidiaries so listed are duly registered as such. (d) Each of the Borrower and its Subsidiaries is duly registered, licensed or qualified as an investment adviser or broker-dealer in each State of the United States where the conduct of its business requires such registration, licensing or qualification and is in compliance in all material respects with all Federal and State laws requiring such registration, licensing or qualification, except to the extent where the failure to be so registered, licensed or qualified or to be in such compliance will not have a Material Adverse Effect. 3.13 INVESTMENT ADVISORY AGREEMENTS. Each of the investment advisory agreements, distribution agreements and shareholder servicing contracts to which the Borrower or any of its Subsidiaries is a party is a legal, valid and binding obligation of the parties thereto enforceable against such parties in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law); and neither the Borrower nor any of its Subsidiaries is in breach or violation of or in default under any such agreement or 33 contract in any material respect which would individually or in the aggregate have a Material Adverse Effect. 3.14 SUBSIDIARIES. The Subsidiaries listed on Schedule VI hereto constitute all the Subsidiaries of the Borrower at the Closing Date, other than any Subsidiary having a net worth of less than $5,000,000; PROVIDED, that the aggregate net worth of all Subsidiaries not listed on Schedule VI may not exceed $25,000,000. 3.15 PURPOSE OF LOANS. The proceeds of the Revolving Credit Loans and the Bid Loans, if any, shall be used for general corporate purposes, including commercial paper backup. 3.16 ENVIRONMENTAL MATTERS. To the best knowledge of the Borrower: (a) The Properties and all operations at the Properties are in compliance in all material respects with all applicable Environmental Laws, and there is no contamination at, under or about the Properties, or violation of any Environmental Law with respect to the Properties or the business conducted at the Properties which could materially interfere with the continued operation of the Properties. (b) Neither the Borrower nor any of its Subsidiaries has received any notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Properties or the business conducted at the Properties, nor does the Borrower have knowledge or reason to believe that any such notice will be received or is being threatened except insofar as such notice or threatened notice, or any aggregation thereof, does not involve a matter or matters that is or are reasonably likely to cause a Material Adverse Effect. (c) No judicial proceedings or governmental or administrative action is pending, or, to the knowledge of the Borrower, threatened, under any Environmental Law to which the Borrower or any of its Subsidiaries is or will be named as a party with respect to the Properties or the business conducted at the Properties, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Properties or such business except insofar as such proceeding, action, decree, order or other requirement, or any aggregation thereof, is not reasonably likely to cause a Material Adverse Effect. 3.17 ACCURACY AND COMPLETENESS OF INFORMATION. To the best of the Borrower's knowledge, the documents furnished and the statements made in writing to the Banks by the Borrower in connection with the negotiation, preparation or execution of this Agreement taken as a whole do not contain any untrue statement of fact material to the credit worthiness of the Borrower or omit to state any such material fact necessary in order to make the statements contained therein not misleading, in either case which has not been corrected, supplemented or remedied by subsequent documents furnished or statements made in writing to the Banks prior to the date hereof. 34 SECTION 4. CONDITIONS PRECEDENT 4.1 CONDITIONS TO EXECUTION. The parties acknowledge that the execution, delivery and effectiveness of this Agreement is subject to the satisfaction of the following conditions precedent: (a) CREDIT AGREEMENT. The Administrative Agent shall have received this Agreement, executed and delivered by a Responsible Officer of the Borrower with a counterpart for each Bank, and such officer shall be covered by an incumbency certificate which has been executed and delivered to the Administrative Agent. (b) INCUMBENCY CERTIFICATES. The Administrative Agent shall have received an Incumbency Certificate of the Borrower as of the Closing Date, dated the Closing Date, executed by one of its Responsible Officers and its Secretary or Assistant Secretary. (c) CORPORATE PROCEEDINGS. The Administrative Agent shall have received a copy of the resolutions of the Board of Directors of the Borrower as of the Closing Date authorizing (i) the execution, delivery and performance of this Agreement and (ii) the borrowings contemplated hereunder, certified by the Secretary or an Assistant Secretary as of the Closing Date, which certificate states that the resolutions thereby certified have not been amended, modified, revoked or rescinded. (d) CORPORATE DOCUMENTS. The Administrative Agent shall have received copies of the certificate of incorporation and by-laws of the Borrower as of the Closing Date, certified as of the Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of the Borrower. (e) FEES. The Banks, the Administrative Agent and J.P. Morgan Securities Inc. shall have received all fees required to be paid, and all expenses for which invoices have been presented. (f) LEGAL OPINIONS. The Administrative Agent shall have received the executed legal opinions of (i) Morrison & Foerster, counsel to the Borrower and (ii) Murray L. Simpson, General Counsel to the Borrower, and each such legal opinion shall be satisfactory in form and substance to the Administrative Agent and its counsel. (g) NO DEFAULT. No Default or Event of Default shall have occurred and be continuing as of the Closing Date. (h) REPRESENTATIONS AND WARRANTIES. All representations and warranties contained in Section 3 shall be true and correct in all material respects on the Closing Date as if made on the Closing Date. (i) EXISTING CREDIT AGREEMENT. The Administrative Agent shall have received evidence reasonably satisfactory to it that all amounts outstanding, if any, under the Existing Credit Agreement have been repaid in full as of the Closing Date. 35 (j) REVOLVING CREDIT NOTES. The Administrative Agent shall have received, for the account of each Bank that has requested a Revolving Credit Note pursuant to subsection 2.4(e), a Revolving Credit Note conforming to the requirements of this Agreement, and executed by a duly authorized officer of the Borrower. 4.2 CONDITIONS TO EACH LOAN. The agreement of each Bank to make any Loan requested to be made by it on any date is subject to the satisfaction of the following conditions precedent: (a) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties made by the Borrower in or pursuant to the Loan Documents (or, in the case of any Loan requested to be made hereunder the proceeds of which are solely to be used to repay any then outstanding Loans, solely the representation contained in subsection 3.2), shall be true and correct in all material respects on and as of such date as if made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date in which case, such representations and warranties shall be true and correct in all material respects as of such earlier date. (b) NO DEFAULT. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the Loans requested to be made on such date. (c) BID LOAN CONFIRMATION. With respect to any Bid Loan, a Bid Loan Confirmation shall have been delivered in accordance with subsection 2.3(b)(iv). Each borrowing by the Borrower hereunder shall constitute a representation and warranty by the Borrower as of the date of such Loan that the conditions contained in this subsection 4.2 have been satisfied. SECTION 5. AFFIRMATIVE COVENANTS The Borrower hereby agrees that from and after the Closing Date, so long as the Commitments remain in effect, any Loan remains outstanding or any other amount is owing to any Bank or the Administrative Agent hereunder: 5.1 FINANCIAL STATEMENTS. The Borrower shall furnish to the Administrative Agent (for distribution to each Bank): (a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Borrower, a copy of the consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such year and the related consolidated statements of income and retained earnings and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, reported on without a "going concern" or like qualification or exception, or qualification arising out of the scope of the audit, by PricewaterhouseCoopers LLP or other independent certified public accountants of nationally recognized standing; and (b) as soon as available, but in any event within 10 days after delivery of the financial statements described in paragraph (a) above, the corresponding consolidating balance 36 sheet as at the end of such year and the related consolidating statements of income and retained earnings and of cash flows for such year, all showing separately the principal lines of business conducted by separate Subsidiaries or groups of Subsidiaries to the extent requested by the Administrative Agent, certified by a Responsible Officer of the Borrower as being fairly stated in all material respects when considered in relation to the consolidated financial statements of the Borrower and its consolidated Subsidiaries, taken as a whole; (c) as soon as available, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of the Borrower, the unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such quarter and the related unaudited consolidated statements of income and retained earnings and of cash flows of the Borrower and its consolidated Subsidiaries for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects when considered in relation to the consolidated financial statements of the Borrower and its consolidated Subsidiaries (subject to normal year-end audit adjustments); and (d) as soon as available, but in any event within 10 days after delivery of the financial statements described in paragraph (c) above, the corresponding consolidating balance sheet as at the end of such quarter and the related consolidating statements of income and retained earnings and of cash flows for the portion of the fiscal year through such date, all showing separately the entities described in paragraph (b) above, certified by a Responsible Officer of the Borrower as being fairly stated in all material respects when considered in relation to the consolidated financial statements of the Borrower for such quarter taken as a whole; all such financial statements to be complete and correct in all material respects and to be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein). Any delivery required to be made pursuant to subsections 5.1(a), (b), (c) or (d) shall be deemed to have been made on the date on which the Borrower posts such delivery on the Internet at the website of the Borrower or when such delivery is posted on the SEC's website on the Internet at www.sec.gov; PROVIDED that the Borrower shall have given notice of any such posting to the Banks, which notice shall include a link to the applicable website to which such posting was made; PROVIDED, FURTHER, that the Borrower shall deliver paper copies of any delivery referred to in subsections 5.1(a), (b), (c) or (d) to any Bank that requests the Borrower to deliver such paper copies until notice to cease delivering such paper copies is given by such Bank. 5.2 CERTIFICATES; OTHER INFORMATION. The Borrower shall furnish to the Administrative Agent (for distribution to each Bank): (a) concurrently with the delivery of the financial statements referred to in subsections 5.1(a) and 5.1(c), a certificate of a Responsible Officer of the Borrower (i) stating that, to the best of such officer's knowledge, the Borrower during such period has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in 37 this Agreement to be observed, performed or satisfied by it, and that such officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate and (ii) with respect to the covenants contained in subsection 6.1, setting forth such calculations as are necessary to demonstrate compliance with such covenants; (b) within five days after the same are sent, copies of all financial statements and reports which the Borrower sends to its stockholders, and within five days after the same are filed, copies of all financial statements and reports which the Borrower may make to, or file with, the SEC or any successor or analogous Governmental Authority; and (c) promptly, such additional financial and other information as any Bank may from time to time reasonably request. 5.3 PAYMENT OF OBLIGATIONS. The Borrower shall, and shall cause each of its Subsidiaries to, pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower or its Subsidiaries, as the case may be. 5.4 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The Borrower shall, and shall cause each of its Subsidiaries to, continue to engage in business of the same general type as now conducted by the Borrower and its Subsidiaries and preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, registrations, licenses, privileges and franchises necessary or desirable in the normal conduct of its business (including, without limitation, all such registrations under the Advisers Act and all material investment advisory agreements, distribution agreements and shareholder servicing contracts), except as otherwise permitted pursuant to subsection 6.5; comply, and to the extent reasonably within its control cause each Fund to comply, with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith could not, in the aggregate, have a Material Adverse Effect. 5.5 MAINTENANCE OF PROPERTY; INSURANCE. The Borrower shall, and shall cause each of its Subsidiaries to, keep all property useful and necessary in its business in good working order and condition; maintain with financially sound and reputable insurance companies insurance on all its property in at least such amounts and against at least such risks as are usually insured against in the same general area by companies engaged in the same or a similar business; and furnish to the Administrative Agent, upon written request, full information as to the insurance carried. 5.6 INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS. The Borrower shall, and shall cause each of its Subsidiaries to, keep proper books of records and account in which full, true and correct entries in conformity with GAAP or with respect to foreign Subsidiaries in conformity with appropriate local accounting practices, and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and permit representatives of any Bank to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may 38 reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Borrower and its Subsidiaries with officers and employees of the Borrower and its Subsidiaries and with its independent certified public accountants. 5.7 NOTICES. The Borrower shall promptly give notice to the Administrative Agent, which shall promptly give notice to each Bank, of: (a) the occurrence of any Default or Event of Default; (b) any (i) default or event of default under any Contractual Obligation of the Borrower or any of its Subsidiaries, which default or event of default could reasonably be expected to have a Material Adverse Effect, or (ii) litigation, investigation or proceeding which may exist at any time between the Borrower or any of its Subsidiaries and any Governmental Authority or any Fund, which in either case, if not cured or if adversely determined, as the case may be, would have a Material Adverse Effect; (c) any litigation or proceeding affecting the Borrower or any of its Subsidiaries or any "affiliated person" of the Borrower or any of its Subsidiaries, within the meaning of the Investment Company Act, in which the amount involved is $10,000,000 or more and not covered by insurance or in which injunctive or similar relief is sought or which could reasonably be expected to have a Material Adverse Effect; (d) the following events, as soon as possible and in any event within 30 days after the Borrower knows or has reason to know thereof: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, or any withdrawal from, or the termination, Reorganization or Insolvency of any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or the Borrower or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the terminating, Reorganization or Insolvency of, any Plan; (e) any suspension or termination of the registration of any Subsidiary of the Borrower as an investment adviser under the Advisers Act or any cancellation or expiration without renewal of any investment advisory agreement, distribution agreement or shareholder servicing contract to which the Borrower or any of its Subsidiaries is a party the revenues under which have exceeded in the most recent fiscal year of the Borrower $25,000,000; and (f) a development or event which could reasonably be expected to have a Material Adverse Effect. Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer of the Borrower setting forth details of the occurrence referred to therein and stating what action the Borrower proposes to take with respect thereto. 5.8 ENVIRONMENTAL LAWS. The Borrower shall, and shall cause each of its Subsidiaries to: (a) Comply with, and ensure compliance by all tenants and subtenants, if any, with, all applicable Environmental Laws and obtain and comply in all material respects with and 39 maintain, and ensure that all tenants and subtenants obtain and comply with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws except to the extent that failure to do so could not be reasonably expected to have a Material Adverse Effect; (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws except to the extent that the same are being contested in good faith by appropriate proceedings and the pendency of such proceedings could not be reasonably expected to have a Material Adverse Effect; and (c) Defend, indemnify and hold harmless the Administrative Agent and the Banks, and their respective employees, agents, officers and directors, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to the violation of, noncompliance with or liability under any Environmental Laws applicable to the operations of the Borrower or the Properties, or any orders, requirements or demands of Governmental Authorities related thereto, including, without limitation, attorney's and consultant's fees, investigation and laboratory fees, response costs, court costs and litigation expenses, except to the extent that any of the foregoing arise out of the gross negligence or willful misconduct of the party seeking indemnification therefor. This indemnity shall continue in full force and effect regardless of the termination of this Agreement. SECTION 6. NEGATIVE COVENANTS The Borrower hereby agrees that from and after the Closing Date, so long as the Commitments remain in effect, any Loan remains outstanding or any other amount is owing to any Bank or the Administrative Agent hereunder: 6.1 FINANCIAL CONDITION COVENANTS. The Borrower shall not: (a) INTEREST COVERAGE. Permit for any period of four consecutive fiscal quarters of the Borrower commencing on or after the Closing Date (or for any of the periods of one, two and three consecutive fiscal quarters of the Borrower commencing on or immediately after the Closing Date) the ratio of (i) the sum of Consolidated Net Income for such period plus income taxes deducted in determining such Consolidated Net Income plus Consolidated Interest Expense for such period to (ii) Consolidated Interest Expense for such period to be less than 4.0 to 1. (b) MAINTENANCE OF CONSOLIDATED WORKING CAPITAL. Permit Consolidated Working Capital on any date on or after the Closing Date to be less than $100,000,000. (c) MAXIMUM CAPITALIZATION RATIO. Permit the Capitalization Ratio at any time to be greater than 55%. 40 6.2 LIMITATION ON INDEBTEDNESS. The Borrower shall not create, incur, assume or suffer to exist any secured Indebtedness, and shall not permit any of its Included Subsidiaries to create, incur, assume or suffer to exist any Indebtedness, except for: (a) Indebtedness of the Borrower or any of its Subsidiaries in an aggregate principal amount not exceeding as to the Borrower and its Included Subsidiaries $50,000,000 at any time outstanding; (b) Indebtedness outstanding on the Closing Date and listed on Schedule VII or reflected in the financial statements referred to in subsection 3.1; (c) Indebtedness of a corporation which becomes a Subsidiary after the date hereof, PROVIDED that (i) such Indebtedness existed at the time such corporation became a Subsidiary and was not created in anticipation thereof and (ii) immediately after giving effect to the acquisition of such corporation by the Borrower or any existing Subsidiary no Default or Event of Default shall have occurred and be continuing; (d) unsecured Indebtedness of any Subsidiary owing to the Borrower or any other Subsidiary or secured Indebtedness of any Subsidiary owing to the Borrower; (e) Indebtedness created by this Agreement and by the Five Year Facility; and (f) Indebtedness consisting of the obligations of the Borrower and FTC under any Lease Financing Arrangement. 6.3 LIMITATION ON LIENS. The Borrower shall not, and shall not permit any of its Included Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except for: (a) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, PROVIDED that adequate reserves with respect thereto are maintained on the books of the Borrower or its Subsidiaries, as the case may be, in conformity with GAAP; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 60 days or which are being contested in good faith by appropriate proceedings; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation and deposits securing liability to insurance carriers under insurance or self-insurance arrangements; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and which do not in any case materially detract from the value of the property subject thereto or 41 materially interfere with the ordinary conduct of the business of the Borrower or such Subsidiary; (f) Liens in existence on the Closing Date listed on Schedule VIII or described in the financial statements referred to in subsection 3.1 or in any notes thereto, securing Indebtedness permitted by subsection 6.2(b), PROVIDED that no such Lien is spread to cover any additional property after the Closing Date and that the amount of Indebtedness secured thereby is not increased; (g) Liens securing Indebtedness of the Borrower and its Subsidiaries permitted by subsection 6.2(a) incurred to finance the acquisition of fixed or capital assets, PROVIDED that (i) such Liens shall be created substantially simultaneously with the acquisition of such fixed or capital assets, (ii) such Liens do not at any time encumber any property other than the property financed by such Indebtedness, (iii) the amount of Indebtedness secured thereby is not increased and (iv) the principal amount of Indebtedness secured by any such Lien shall at no time exceed the purchase price of such property; (h) Liens on the property or assets of a corporation which becomes a Subsidiary after the date hereof securing Indebtedness permitted by subsection 6.2(c), PROVIDED that (i) such Liens existed at the time such corporation became a Subsidiary and were not created in anticipation thereof, (ii) any such Lien is not spread to cover any property or assets of such corporation after the time such corporation becomes a Subsidiary, and (iii) the amount of Indebtedness secured thereby is not increased; (i) Liens (not otherwise permitted hereunder) which secure obligations in an aggregate amount at any one time outstanding not exceeding as to the Borrower and its Included Subsidiaries an amount equal to 5% of the Consolidated Net Worth, measured at the time of the creation, incurrence or assumption of any such Lien and based upon the Consolidated Net Worth as at the end of the most recently completed fiscal quarter of the Borrower for which financial statements have been furnished to the Administrative Agent pursuant to subsection 5.1; (j) Liens on "margin stock" within the meaning of Regulation U to the extent that margin stock would, but for this paragraph (j), represent more than 25% of the value of the assets subject to this subsection 6.3; (k) Liens on cash or cash equivalents to secure obligations of the Borrower and its Subsidiaries in respect of any interest rate and currency hedging agreements entered into in the ordinary course of business and not for speculative purposes, and Liens with respect to hedging accounts maintained with dealers of NYMEX or similar contracts which require the maintenance of cash margin account balances; and (l) Liens provided for or required to be granted by the Borrower or FTC under any Lease Financing Arrangement, which Liens shall not limit or apply against the right of the Borrower and its Included Subsidiaries to create, incur, assume or permit to exist Liens that comply with the provisions of paragraphs (a) through (k) of this subsection 6.3. 6.4 LIMITATIONS ON FUNDAMENTAL CHANGES. The Borrower shall not, and shall not permit any of its Subsidiaries to, enter into any merger, consolidation or amalgamation, or 42 liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets, except, so long as no Default or Event of Default has occurred and is continuing or would result therefrom: (a) that the Borrower may enter into any merger, consolidation or amalgamation for the purpose of effecting any corporate or tax reorganization of the Borrower and the Subsidiaries or for the purpose of effecting any investment permitted under subsection 6.6, PROVIDED that such merger, consolidation or amalgamation is not with any Banking Subsidiary, Insurance Subsidiary or Real Estate Subsidiary (or with any other Person which is principally engaged in the banking or trust, insurance or real estate business), that the ownership of the Borrower (or its successor) is not materially different after such transaction from what it was prior thereto, that the Borrower (or its successor) remains the holding company for the Subsidiaries of the Borrower prior thereto, and that, if the Borrower is not the successor corporation in such transaction, such successor corporation is a corporation organized and validly existing under the laws of the United States or any state thereof and, by operation of law or otherwise, assumes the obligations of the Borrower hereunder and such organization and assumption are evidenced by an opinion of counsel to such successor satisfactory in form and substance to the Administrative Agent; and (b) that any Subsidiary of the Borrower may enter into any such transaction for the purpose of effecting any corporate or tax reorganization of the Borrower and its Subsidiaries or for the purpose of effecting any sale or other disposition of any of its property, business or assets permitted under subsection 6.5 or any investment permitted under subsection 6.6, PROVIDED that such merger, consolidation or amalgamation is not with any Banking Subsidiary, Insurance Subsidiary or Real Estate Subsidiary (or with any other Person which is principally engaged in the banking or trust, insurance or real estate business), unless such Subsidiary is also a Banking Subsidiary, Insurance Subsidiary or Real Estate Subsidiary, as the case may be. 6.5 LIMITATION ON SALE OF ASSETS. The Borrower shall not, and shall not permit any of its Included Subsidiaries to, make any Asset Disposition, unless the Revolving Credit Loans are reduced to the extent required pursuant to subsection 2.7 and the Borrower makes the mandatory prepayment, if any, required in connection therewith pursuant to subsection 2.7. 6.6 LIMITATION ON INVESTMENTS, LOANS AND ADVANCES. The Borrower shall not, and shall not permit any of its Included Subsidiaries to, make any advance, loan, extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets constituting a business unit of, or make any other investment in (any of the foregoing, an "INVESTMENT"), any Person, except for: (a) investments in marketable securities, liquid investments and other financial instruments that are acquired for investment purposes and that have a value which may be readily established, including any such investment that may be readily sold or otherwise liquidated in any Fund or in any investment company managed by any Joint Venture pursuant to an investment advisory agreement; 43 (b) any investment in any Included Subsidiary of the Borrower or in any other Person principally engaged in the business of providing investment advisory services and related (including distribution and shareholder servicing) services, PROVIDED that, after giving effect to any such investment in any such other Person, such other Person is a Subsidiary or a Joint Venture; (c) any investment in any Banking Subsidiary or in any other Person which, after giving effect to any such investment, is a Banking Subsidiary; (d) extensions of trade credit in the ordinary course of business; (e) loans to officers of the Borrower or any of its Subsidiaries consistent with past practices of the Borrower and its Subsidiaries, and advances to employees of the Borrower or its Subsidiaries for travel, entertainment and relocation expenses in the ordinary course of business; (f) investments in the Finance Subsidiary; (g) investments constituting non-cash consideration received in connection with an Asset Disposition, PROVIDED that such non-cash consideration shall not exceed 25% of the aggregate consideration received for such Asset Disposition; and PROVIDED FURTHER that the aggregate amount of any such non-cash consideration with respect to Asset Dispositions shall not exceed $10,000,000 at any one time outstanding; and (h) other investments in an aggregate amount as to the Borrower and its Subsidiaries (other than the Banking Subsidiaries and the Finance Subsidiary) not exceeding $125,000,000 for the period since the Closing Date. 6.7 TRANSACTIONS WITH AFFILIATES. The Borrower shall not, and shall not permit any of its Subsidiaries to, enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate or any Subsidiary less than 80% owned, directly or indirectly, by the Borrower, unless such transaction is otherwise permitted under this Agreement, is in the ordinary course of the Borrower's or such Subsidiary's business and is upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person not an Affiliate. 6.8 FISCAL YEAR. The Borrower shall not permit the fiscal year of the Borrower to end on a day other than September 30, except with the consent of the Majority Banks (which consent shall not be unreasonably withheld and which consent may be conditioned upon adjusting the covenants in a manner to give each of the parties hereto substantially the same protection and benefits as were in effect prior to any such change in the fiscal year of the Borrower). 6.9 RESTRICTIONS AFFECTING SUBSIDIARIES. The Borrower shall not, and shall not permit any of its Included Subsidiaries to, enter into, or suffer to exist, any agreement with any Person other than the Banks which prohibits or limits the ability of any Included Subsidiary to (a) pay dividends or make other distributions or pay any Indebtedness owed to the Borrower or 44 any other Included Subsidiary, (b) make loans or advances to the Borrower or any other Included Subsidiary or (c) transfer any of its properties or assets to the Borrower or any other Included Subsidiary. Notwithstanding the foregoing, the provisions of this subsection shall not apply to the obligations of the Borrower and FTC under any Lease Financing Arrangement. SECTION 7. EVENTS OF DEFAULT If any of the following events shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Loan when due in accordance with the terms hereof; or the Borrower shall fail to pay any interest on any Loan, or any other amount payable hereunder, within five days after any such interest or other amount becomes due in accordance with the terms hereof; or (b) Any representation or warranty made or deemed made by the Borrower herein or in any other Loan Document or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) The Borrower shall default in the observance or performance of any agreement contained in subsection 6.1 or 6.4; or (d) The Borrower shall default in the observance or performance of any other agreement contained in this Agreement or the Notes (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of 30 days or, if longer, a period ending 15 days after the giving of notice of such default by the Administrative Agent to the Borrower (or, in the case of any such default in the observance or performance of subsection 5.7(a), for a period of 30 days after a Responsible Officer has knowledge of a Default or Event of Default as to which notice is required by said subsection); or (e) The Borrower or any of its Subsidiaries shall (i) default in any payment of principal of or interest, regardless of the amount, due in respect of any Indebtedness other than amounts due hereunder, including all of the Indebtedness issued under the same indenture or other agreement, of $75,000,000 or greater or in the payment of any Guarantee Obligation with respect to an amount of $75,000,000 or greater, beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness or Guarantee Obligation was created; or (ii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or Guarantee Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Guarantee Obligation (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or such Guarantee Obligation to become payable; or (f) (i) The Borrower or any of its Subsidiaries, except for Non-Material Subsidiaries, shall commence any case, proceeding or other action (A) under any existing or 45 future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Borrower or any of its Subsidiaries, except for Non-Material Subsidiaries, shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower or any of its Subsidiaries, except for Non-Material Subsidiaries, any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against the Borrower or any of its Subsidiaries, except for Non-Material Subsidiaries, any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Borrower or any of its Subsidiaries, except for Non-Material Subsidiaries, shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) the Borrower or any of its Subsidiaries, except for Non-Material Subsidiaries, shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (g) (i) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Majority Banks, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the Borrower or any Commonly Controlled Entity shall, or in the reasonable opinion of the Majority Banks is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist, with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could subject the Borrower or any of its Subsidiaries to any tax, penalty or other liabilities in the aggregate material in relation to the business, operations, property or financial or other condition of the Borrower and its Subsidiaries taken as a whole; or (h) One or more judgments or decrees shall be entered against the Borrower or any of its Subsidiaries involving in the aggregate a liability (not paid or fully covered by insurance) of $75,000,000 or more and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) above with respect to the Borrower, automatically the Commitments to the 46 Borrower shall immediately terminate and the Loans made to such Borrower hereunder (with accrued interest thereon) and all other amounts owing by the Borrower under this Agreement and the Notes shall immediately and automatically become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: (i) with the consent of the Majority Banks, the Administrative Agent may, or upon the request of the Majority Banks, the Administrative Agent shall, by notice to the Borrower declare the Commitments of the Borrower to be terminated forthwith, whereupon such Commitments shall immediately terminate; and (ii) with the consent of the Majority Banks, the Administrative Agent may, or upon the request of the Majority Banks, the Administrative Agent shall, by notice of default to the Borrower, declare the Loans hereunder made (with accrued interest thereon) and all other amounts owing by the Borrower under this Agreement and the Notes to be due and payable forthwith, whereupon the same shall immediately become due and payable. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. SECTION 8. THE AGENTS 8.1 APPOINTMENT. Each Bank hereby irrevocably designates and appoints JPMCB as Administrative Agent, Bank of America, N.A. and The Bank of New York as Co-Syndication Agents and Citicorp USA Inc. and BNP Paribas as Co-Documentation Agents of such Bank under this Agreement, and each such Bank irrevocably authorizes JPMCB, as the Administrative Agent, Bank of America, N.A. and The Bank of New York, as the Co-Syndication Agents and Citicorp USA Inc. and BNP Paribas, as Co-Documentation Agents for such Bank, to take such action on its behalf under the provisions of this Agreement and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent, the Co-Syndication Agents or the Co-Documentation Agents, as the case may be, by the terms of this Agreement , together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, neither the Administrative Agent, the Co-Syndication Agents nor the Co-Documentation Agents shall have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Administrative Agent, the Co-Syndication Agents or the Co-Documentation Agents in such respective capacities. 8.2 DELEGATION OF DUTIES. The Administrative Agent, the Co-Syndication Agents or the Co-Documentation Agents may execute any of their respective duties under this Agreement by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Neither the Administrative Agent, the Co-Syndication Agents nor the Co-Documentation Agents shall be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 8.3 EXCULPATORY PROVISIONS. Neither the Administrative Agent, the Co-Syndication Agents, the Co-Documentation Agents nor any of their respective officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except for its or such Person's own gross negligence or willful 47 misconduct) or (ii) responsible in any manner to any of the Banks for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent, the Co-Syndication Agents or the Co-Documentation Agents under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or for any failure of the Borrower to perform its obligations hereunder or thereunder. Neither the Administrative Agent, the Co-Syndication Agents nor the Co-Documentation Agents shall be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Borrower. 8.4 RELIANCE BY ADMINISTRATIVE AGENT. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by any of them to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Majority Banks as it deems appropriate or it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement in accordance with a request of the Majority Banks, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Banks. 8.5 NOTICE OF DEFAULT. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Bank or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give notice thereof to the Banks. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Majority Banks; PROVIDED that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Banks. 8.6 NON-RELIANCE ON ADMINISTRATIVE AGENT AND OTHER BANKS. Each Bank expressly acknowledges that none of the Administrative Agent or any of its respective officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Administrative Agent hereinafter taken, including any review of the affairs of the Borrower, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Bank. Each Bank represents to the Administrative 48 Agent that it has, independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower and made its own decision to make its Loans hereunder and enter into this Agreement. Each Bank also represents that it will, independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement or its Note(s), and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly required to be furnished to the Banks by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrower which may come into the possession of the Administrative Agent or any of its respective officers, directors, employees, agents, attorneys-in-fact or Affiliates. 8.7 INDEMNIFICATION. The Banks agree to indemnify the Administrative Agent in its respective capacities as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to the respective amounts of their original Commitments, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs (including, without limitation, the allocated cost of internal counsel), expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the repayment of the Loans) be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of this Agreement, the Notes or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Administrative Agent under or in connection with any of the foregoing; PROVIDED that no Bank shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting from the Administrative Agent's gross negligence or willful misconduct. The agreements in this subsection shall survive the repayment of the Loans and all other amounts payable hereunder. 8.8 THE ADMINISTRATIVE AGENT, THE CO-SYNDICATION AGENTS AND THE CO-DOCUMENTATION AGENTS IN THEIR INDIVIDUAL CAPACITIES. The Administrative Agent, the Co-Syndication Agents, the Co-Documentation Agents and their respective Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower as though the Administrative Agent, the Co-Syndication Agents and the Co-Documentation Agents were not the Administrative Agent, the Co-Syndication Agents and the Co-Documentation Agents, respectively, hereunder. With respect to the Administrative Agent, the Co-Syndication Agents or the Co-Documentation Agents, such Loans made or renewed by the Administrative Agent, the Co-Syndication Agents or the Co-Documentation Agents, the Administrative Agent, the Co-Syndication Agents or the Co-Documentation Agents, as the case may be, shall have the same rights and powers under this Agreement as any Bank and may exercise the same as though it were not the Administrative Agent, the Co-Syndication Agents or the Co-Documentation Agents, as the case may be, and the terms "Bank" and "Banks" shall include the Administrative 49 Agent, the Co-Syndication Agents and the Co-Documentation Agents in their individual capacities. 8.9 SUCCESSOR ADMINISTRATIVE AGENT. The Administrative Agent may resign as Administrative Agent upon 30 days' notice to the Banks. If the Administrative Agent shall resign as Administrative Agent under this Agreement, then the Majority Banks shall appoint from among the Banks a successor administrative agent for the Banks, which successor administrative agent shall be approved by the Borrower, whereupon such successor administrative agent shall succeed to the rights, powers and duties of the Administrative Agent and the term "Administrative Agent" shall mean such successor administrative agent effective upon its appointment, and the former Administrative Agent's rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement. After any retiring Administrative Agent's resignation as Administrative Agent, the provisions of this subsection shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. 8.10 CO-SYNDICATION AGENTS AND CO-DOCUMENTATION AGENTS. Without limiting any provision contained in this Section 8, none of the Banks identified in this Agreement as the Co-Syndication Agents or the Co-Documentation Agents shall have, except as and to the limited extent expressly provided herein, any obligation, responsibility or duty under this Agreement other than those applicable to all Banks as such. Each Bank acknowledges that it has not relied, and will not rely, on any of the Banks so identified in deciding to enter into this Agreement or in taking or not taking action hereunder. SECTION 9. MISCELLANEOUS 9.1 AMENDMENTS AND WAIVERS. Neither this Agreement, any Note, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this subsection. With the written consent of the Majority Banks, the Administrative Agent and the Borrower may, from time to time, enter into written amendments, supplements or modifications hereto and to the Notes for the purpose of adding any provisions to this Agreement or the Notes or changing in any manner the rights of the Banks or the Borrower hereunder or thereunder or waiving, on such terms and conditions as the Administrative Agent may specify in such instrument, any of the requirements of this Agreement or the Notes or any Default or Event of Default and its consequences; PROVIDED, HOWEVER, that no such waiver and no such amendment, supplement or modification shall (a) reduce the amount or extend the maturity of any Loan, or reduce the rate or extend the time of payment of interest thereon, or reduce or extend the time of payment of any fee payable to any Bank hereunder, or change the amount of any Bank's Commitment, in each case without the written consent of the Bank affected thereby, or (b) amend, modify or waive any provision of this subsection or reduce the percentage specified in the definition of Majority Banks, or consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement , in each case without the written consent of all the Banks, or (c) amend, modify or waive any provision of Section 8 without the written consent of the then Administrative Agent. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Banks and shall be binding upon the Borrower, the Banks and the Administrative Agent. In the case of any waiver, 50 the Borrower, the Banks and the Administrative Agent shall be restored to their former position and rights hereunder, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. 9.2 NOTICES. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by telecopy or other electronic transmission), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or 3 days after being deposited in the mail, postage prepaid, or, in the case of telecopy or other electronic notice, when received, addressed as follows in the case of the Borrower, the Co-Syndication Agents, the Co-Documentation Agents and the Administrative Agent, and as set forth in Schedule I in the case of the other parties hereto, or to such other address as may be hereafter notified by the respective parties hereto: The Borrower: Franklin Resources, Inc. One Franklin Parkway San Mateo, California 94403-1906 Attention: Martin L. Flanagan President, Member Office of the President Telecopy: 650-312-3528 With a copy to: Attention: Leslie M. Kratter Senior Vice President Telecopy: 650-312-2804 51 JPMCB, as JPMorgan Chase Bank Administrative Agent: 270 Park Avenue New York, New York 10017 Attention: Elisabeth Schwabe Telecopy: 212-270-1511 With a copy to: Roberta Whittington (212) 270-0670 With a copy to: JPMorgan Chase Bank Agency Services Corporation One Chase Manhattan Plaza Eighth Floor New York, New York 10081 Attention: Laura Rebecca or Maxeen Pinnock Telecopy: 212-552-7490 Bank of America, N.A., as Bank of America, N.A. Co-Syndication Agent: 231 South LaSalle Street, Suite 1044 Chicago, IL 60697 Attention: Elizabeth Bishop Telecopy: 312-987-0889 The Bank of New York, as The Bank of New York Co-Syndication Agent: One Wall Street, 17th Floor New York, NY 10286 Attention: Scott Buitekant Telecopy: 212-635-6348 Citicorp USA Inc., as Citicorp USA Inc. Co-Documentation Agent: 399 Park Avenue, 12th Floor New York, NY 10043 Attention: Alexander Duka Telecopy: 212-371-6309 BNP Paribas, as BNP Paribas Co-Documentation Agent 499 Park Avenue, 3rd Floor New York, NY 10022-1278 Attention: Laurent Vanderzyppe Telecopy: 212-841-2299 PROVIDED that any notice, request or demand to or upon the Administrative Agent, the Co-Syndication Agents, the Co-Documentation Agents or the Banks pursuant to subsection 2.2, 2.6, 52 2.7 or 2.8 or any notice to the Borrower pursuant to Section 7 shall not be effective until received. 9.3 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no delay in exercising, on the part of the Administrative Agent, the Co-Syndication Agents, the Co-Documentation Agents or any Bank, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 9.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement. 9.5 PAYMENT OF EXPENSES AND TAXES. The Borrower agrees (a) to pay or reimburse the Administrative Agent, the Co-Syndication Agents and the Co-Documentation Agents for all their reasonable costs and out-of-pocket expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of one external counsel to the Administrative Agent, the Co-Syndication Agents, the Co-Documentation Agents and the Banks, (b) after the occurrence of an Event of Default, to pay or reimburse each Bank, the Co-Syndication Agents, the Co-Documentation Agents and the Administrative Agent for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement and any such other documents, including, without limitation, fees and disbursements of counsel to the Administrative Agent, the Co-Syndication Agents, the Co-Documentation Agents and to the several Banks and the allocated cost of internal counsel to the Administrative Agent, (c) to pay, indemnify, and hold each Bank, the Co-Syndication Agents, the Co-Documentation Agents and the Administrative Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement and any such other documents, and (d) to pay, indemnify, and hold each Bank, the Co-Syndication Agents, the Co-Documentation Agents and the Administrative Agent harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement and any such other documents (all the foregoing, collectively, the "indemnified liabilities"), PROVIDED, that the Borrower shall have no obligation hereunder to the Administrative Agent, the Co-Syndication Agents, the Co-Documentation Agents or any Bank with respect to indemnified liabilities arising from (i) the negligence or willful misconduct of the Administrative Agent or any such Bank or their agents or attorneys-in-fact, (ii) legal proceedings commenced against the Administrative Agent or any such Bank by any security holder or creditor thereof arising out of and based upon rights 53 afforded any such security holder or creditor solely in its capacity as such or (iii) legal proceedings commenced against any such Bank, the Administrative Agent, the Co-Syndication Agents or the Co-Documentation Agents by any other Bank or the Administrative Agent with respect to fee arrangements and other payment obligations between the Administrative Agent, the Co-Syndication Agents, the Co-Documentation Agents and the Banks. The agreements in this subsection shall survive repayment of all amounts payable hereunder. The Administrative Agent and the Banks agree to provide reasonable details and supporting information concerning any costs and expenses required to be paid by the Borrower pursuant to the terms hereof. 9.6 SUCCESSORS AND ASSIGNS; PARTICIPATIONS; PURCHASING BANKS. (a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Banks, the Co-Syndication Agents, the Co-Documentation Agents and the Administrative Agent, all future holders of Loans or Commitments and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Bank. (b) (i) Subject to the conditions set forth in paragraph (b)(ii) below, any Bank may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it) with the prior written consent (any such consent not to be unreasonably withheld or delayed) of: (A) the Borrower, PROVIDED that no consent of the Borrower shall be required for an assignment to an assignee that is a Bank immediately prior to giving effect to such assignment, an Affiliate of a Bank, an Approved Fund (as defined below) or, if an Event of Default has occurred and is continuing, any other assignee; and (B) the Administrative Agent, PROVIDED that no consent of the Administrative Agent shall be required for an assignment to an assignee that is a Bank immediately prior to giving effect to such assignment. (ii) Assignments shall be subject to the following additional conditions: (A) except in the case of an assignment to a Bank or an Affiliate of a Bank or an assignment of the entire remaining amount of the assigning Bank's Commitment, the amount of the Commitment of the assigning Bank subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 unless each of the Borrower and the Administrative Agent otherwise consent, PROVIDED that no such consent of the Borrower shall be required if an Event of Default has occurred and is continuing; (B) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Bank's rights and obligations under this Agreement, PROVIDED that this clause shall not apply to rights in respect of outstanding Bid Loans; (C) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500; 54 (D) the assignee, if it shall not be a Bank prior to such assignment, shall deliver to the Administrative Agent an Administrative Questionnaire; and (E) in the case of an assignment to a CLO (as defined below), the assigning Bank shall retain the sole right to approve any amendment, modification or waiver of any provision of this Agreement, PROVIDED that the Assignment and Assumption between such Bank and such CLO may provide that such Bank will not, without the consent of such CLO, agree to any amendment, modification or waiver described in clause (a) or (b) of the proviso to subsection 9.1 that affects such CLO, PROVIDED FURTHER that nothing in this subsection 9.6 shall be construed to waive the requirement that mutual consent of the appropriate parties in accordance with subsection 9.1 is required in order to amend or modify the terms of this Agreement. For the purposes of this subsection 9.6, the terms "Approved Fund" and "CLO" have the following meanings: "APPROVED FUND" means (a) a CLO and (b) with respect to any Bank that is a fund which invests in bank loans and similar extensions of credit, any other fund that invests in bank loans and similar extensions of credit and is managed by the same investment advisor as such Bank or by an Affiliate of such investment advisor. "CLO" means any entity (whether a corporation, partnership, trust or otherwise) that is engaged in making, purchasing, holding or otherwise investing in bank loans and similar extensions of credit in the ordinary course of its business and is administered or managed by a Bank or an Affiliate of such Bank. (iii) Subject to acceptance and recording thereof pursuant to paragraph (b)(iv) of this subsection, from and after the effective date specified in each Assignment and Assumption the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Bank under this Agreement, and the assigning Bank thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto but shall continue to be entitled to the benefits of subsections 2.15, 2.16, 2.17 and 9.5). Any assignment or transfer by a Bank of rights or obligations under this Agreement that does not comply with this subsection 9.6 shall be treated for purposes of this Agreement as a sale by such Bank of a participation in such rights and obligations in accordance with paragraph (c) of this Section. (iv) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Banks, and the Commitment of, and principal amount of the Loans owing to, each Bank pursuant to the terms hereof from time to time (the "REGISTER"). The entries in the Register shall be conclusive, in the absence of demonstrable error, and the Borrower, the Administrative Agent and the Banks may treat each Person whose name is recorded in 55 the Register pursuant to the terms hereof as a Bank hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower and any Bank, at any reasonable time and from time to time upon reasonable prior notice. (v) Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Bank and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Bank hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall promptly accept such Assignment and Assumption and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (c) (i) Any Bank may, without the consent of the Borrower or the Administrative Agent, sell participations to one or more banks or other entities (a "PARTICIPANT") in all or a portion of such Bank's rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); PROVIDED that (A) such Bank's obligations under this Agreement shall remain unchanged, (B) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations and (C) the Borrower, the Administrative Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Bank sells such a participation shall provide that such Bank shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; PROVIDED that such agreement or instrument may provide that such Bank will not, without the consent of the Participant, agree to any amendment, modification or waiver described in clause (a) or (b) of subsection 9.1 that affects such Participant. Subject to paragraph (c)(ii) of this subsection, the Borrower agrees that each Participant shall be entitled to the benefits of subsections 2.15, 2.16 and 2.17 to the same extent as if it were a Bank and had acquired its interest by assignment pursuant to paragraph (b) of this subsection. To the extent permitted by law, each Participant also shall be entitled to the benefits of subsection 9.7(b) as though it were a Bank, provided such Participant agrees to be subject to subsection 9.7(a) as though it were a Bank. (ii) A Participant shall not be entitled to receive any greater payment under subsection 2.15, 2.16 or 2.17 than the applicable Bank would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. Subject to the preceding sentence, a Participant that would be a Foreign Bank if it were a Bank shall not be entitled to the benefits of subsection 2.16 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with subsection 2.16(e) as though it were a Bank and for purposes of claiming any benefit under subsection 2.16, any reference to a Foreign Bank shall be deemed to refer to such Participant. (d) Any Bank may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including any Note) to secure obligations of such 56 Bank, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; PROVIDED that no such pledge or assignment of a security interest shall release a Bank from any of its obligations hereunder or substitute any such pledgee or assignee for such Bank as a party hereto. 9.7 ADJUSTMENTS; SET-OFF. (a) If any Bank (a "BENEFITTED BANK") shall at any time receive any payment of all or part of its Loans, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in subsection 7(g), or otherwise), in a greater proportion than any such payment to or collateral received by any other Bank, if any, in respect of such other Bank's Loans, or interest thereon, such Benefitted Bank shall purchase for cash from the other Banks such portion of each such other Bank's Loans, or shall provide such other Banks with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefitted Bank to share the excess payment or benefits of such collateral or proceeds ratably with each of the Banks; PROVIDED, HOWEVER, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefitted Bank, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. The Borrower agrees that each Bank so purchasing a portion of another Bank's Loan may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Bank were the direct holder of such portion. (b) In addition to any rights and remedies of the Banks provided by law, each Bank shall have the right, exercisable upon the occurrence of an Event of Default and acceleration of the obligations of the Borrower owing in connection with this Agreement, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, to set-off and appropriate and apply against any such obligations any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Bank or any branch or agency thereof to or for the credit or the account of the Borrower (except for any such deposits, credits, indebtedness or claims held in any accounts maintained at any Bank as to which such Bank has waived its right of set-off). Each Bank agrees promptly to notify the Borrower, and the Administrative Agent after any such set-off and application made by such Bank, PROVIDED that the failure to give such notice shall not affect the validity of such set-off and application. 9.8 COUNTERPARTS. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with the Borrower and the Administrative Agent. 9.9 SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 57 9.10 INTEGRATION. This Agreement represents the agreement of the Borrower, the Administrative Agent and the Banks with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent, the Co-Syndication Agents, the Co-Documentation Agents or any Bank relative to subject matter hereof not expressly set forth or referred to herein. 9.11 GOVERNING LAW. THIS AGREEMENT (INCLUDING SECTION 9) AND THE NOTES AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAWS BUT OTHERWISE WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES). 9.12 SUBMISSION TO JURISDICTION; WAIVERS; APPOINTMENT OF PROCESS AGENT. (a) The Borrower, to the extent permitted by applicable law, hereby irrevocably and unconditionally: (i) submits for itself and its property in any legal action or proceeding relating to this Agreement or any Note to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof; (ii) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (iii) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Borrower at its address set forth in subsection 9.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto; and (iv) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction. 9.13 ACKNOWLEDGMENTS. The Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement; (b) neither the Administrative Agent, the Co-Syndication Agents, the Co-Documentation Agents nor any Bank has any fiduciary relationship to the Borrower, solely by virtue of any of the Loan Documents, and the relationship pursuant to the Loan Documents between the Administrative Agent, the Co-Syndication Agents, the Co-Documentation Agents 58 and the Banks, on one hand, and the Borrower, on the other hand, is solely that of creditor and debtor; and (c) no joint venture exists among the Banks or among the Borrower and the Banks. 9.14 WAIVERS OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVE AGENT, THE CO-SYNDICATION AGENTS, THE CO-DOCUMENTATION AGENTS AND THE BANKS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. 9.15 CONFIDENTIALITY. (a) Each of the Administrative Agent and the Banks agree to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (i) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (ii) to the extent requested by any regulatory authority, (iii) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (iv) to any other party to this Agreement, (v) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (vi) subject to an agreement containing provisions substantially the same as those of this Section, to (A) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or (B) any actual or prospective counterparty (or its advisors) to any securitization or swap or derivative transaction relating to the Borrower and its obligations, (vii) with the consent of the Borrower or (viii) to the extent such Information (ix) becomes publicly available other than as a result of a known breach of this Section or (x) becomes available to the Administrative Agent or any Bank on a nonconfidential basis from a source other than the Borrower. For the purposes of this Section, "INFORMATION" means all information received whether on or prior to the date hereof or hereafter from the Borrower relating to the Borrower or its business, other than any such information that is available to the Administrative Agent or any Bank on a nonconfidential basis prior to disclosure by the Borrower. (b) Notwithstanding anything herein to the contrary, any party subject to confidentiality obligations hereunder or under any other related document (and any employee, representative or other agent of such party) may disclose to any and all person, without limitation of any kind, such party's U.S. federal income tax treatment and the U.S. federal income tax structure of the transactions contemplated by this Agreement relating to such party and all materials of any kind (including opinions or other tax analyses) that are provided to it relating to such tax treatment and tax structure, all within the meaning of U.S. Treasury Regulations Section 1.6011-4; PROVIDED, however, each party recognizes that the privilege each has to maintain, in its sole discretion, the confidentiality of a communication relating to the transactions contemplated by the Loan Documents, including a confidential communication with its attorney or a confidential communication with a federally authorized tax practitioner under Section 7525 of the Code, is not intended to be affected by the foregoing. No such party shall disclose any 59 information relating to such tax treatment or tax structure to the extent nondisclosure is reasonably necessary in order to comply with applicable securities laws. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered in New York, New York by their proper and duly authorized officers as of the day and year first above written. FRANKLIN RESOURCES, INC. By: /s/ Leslie M. Kratter --------------------- Name: LESLIE M. KRATTER Title: SENIOR VICE PRESIDENT JPMORGAN CHASE BANK, as Administrative Agent and a Bank By: /s/ Roger A. Parker ------------------- Name: Roger A. Parker Title: Vice President BANK OF AMERICA, N.A., as Co-Syndication Agent and a Bank By: /s/ Sean Cassidy ------------------- Name: Sean Cassidy Title: Principal THE BANK OF NEW YORK, as Co-Syndication Agent and a Bank By: /s/ Phillip A. Kudla -------------------- Name: PHILLIP A. KUDLA Title: VICE PRESIDENT CITICORP USA INC., as Co-Documentation Agent and a Bank By: /s/ Alexander Duka ------------------- Name: Alexander Duka Title: Director BNP PARIBAS, as Co-Documentation Agent and a Bank By: /s/ Laurent Vanderzyppe ------------------- Name: LAURENT VANDERZYPPE Title: Director By: /s/ Toivo Kiiver ------------------- Name: TOIVO KIIVER Title: Vice President Signature page to the AMENDED AND RESTATED 364 DAY FACILITY CREDIT AGREEMENT dated as of June 4, 2003 (this "AGREEMENT") among Franklin Resources, Inc., a Delaware corporation (the "BORROWER"), the several banks and other financial institutions from time to time parties to this Agreement (the "BANKS"), Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas, as Co-Documentation Agents, and JPMorgan Chase Bank ("JPMCB"), as administrative agent for the Banks hereunder (in such capacity, the "ADMINISTRATIVE AGENT"). BANCO DI ROMA By: /s/ Luca Balestra ----------------- Name: Luca Balestra (#25050) Title: Senior Vice President and Manager By: /s/ Richard G. Dietz -------------------- Name: Richard G. Dietz (#97271) Title: Vice President Signature page to the AMENDED AND RESTATED 364 DAY FACILITY CREDIT AGREEMENT dated as of June 4, 2003 (this "AGREEMENT") among Franklin Resources, Inc., a Delaware corporation (the "BORROWER"), the several banks and other financial institutions from time to time parties to this Agreement (the "BANKS"), Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas, as Co-Documentation Agents, and JPMorgan Chase Bank ("JPMCB"), as administrative agent for the Banks hereunder (in such capacity, the "ADMINISTRATIVE AGENT"). Bayerische Hypo-und Vereinsbank AG By: /s/ Sessa von Richthofen ------------------------- Name: Sessa von Richthofen Title: Relationship Manger/ Financial Institutions Group By: /s/ Leonor A. Melgar -------------------- Name: LEONOR A. MELGAR Title: ASSOCIATE DIRECTOR Signature page to the AMENDED AND RESTATED 364 DAY FACILITY CREDIT AGREEMENT dated as of June 4, 2003 (this "AGREEMENT") among Franklin Resources, Inc., a Delaware corporation (the "BORROWER"), the several banks and other financial institutions from time to time parties to this Agreement (the "BANKS"), Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas, as Co-Documentation Agents, and JPMorgan Chase Bank ("JPMCB"), as administrative agent for the Banks hereunder (in such capacity, the "ADMINISTRATIVE AGENT"). DEUTSCHE BANK AG, NEW YORK BRANCH By: /s/ Gayma Z. Shivnarain ------------------------- Name: Gayma Z. Shivnarain Title: Director By: /s/ Nicolas Rueda -------------------- Name: Nicolas Rueda Title: Associate Signature page to the AMENDED AND RESTATED 364 DAY FACILITY CREDIT AGREEMENT dated as of June 4, 2003 (this "AGREEMENT") among Franklin Resources, Inc., a Delaware corporation (the "BORROWER"), the several banks and other financial institutions from time to time parties to this Agreement (the "BANKS"), Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas, as Co-Documentation Agents, and JPMorgan Chase Bank ("JPMCB"), as administrative agent for the Banks hereunder (in such capacity, the "ADMINISTRATIVE AGENT"). HSBC Bank USA By: /s/ Peter G. Nealon ------------------- Name: Peter G. Nealon Title: Senior Vice President Signature page to the AMENDED AND RESTATED 364 DAY FACILITY CREDIT AGREEMENT dated as of June 4, 2003 (this "AGREEMENT") among Franklin Resources, Inc., a Delaware corporation (the "BORROWER"), the several banks and other financial institutions from time to time parties to this Agreement (the "BANKS"), Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas, as Co-Documentation Agents, and JPMorgan Chase Bank ("JPMCB"), as administrative agent for the Banks hereunder (in such capacity, the "ADMINISTRATIVE AGENT"). ROYAL BANK OF CANADA By: /s/ Gabriella King ------------------ Name: Gabriella King Title: Senior Manager Signature page to the AMENDED AND RESTATED 364 DAY FACILITY CREDIT AGREEMENT dated as of June 4, 2003 (this "AGREEMENT") among Franklin Resources, Inc., a Delaware corporation (the "BORROWER"), the several banks and other financial institutions from time to time parties to this Agreement (the "BANKS"), Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas, as Co-Documentation Agents, and JPMorgan Chase Bank ("JPMCB"), as administrative agent for the Banks hereunder (in such capacity, the "ADMINISTRATIVE AGENT"). STATE STREET BANK OF TRUST COMPANY, As a Bank By: /s/ Steven G. Caron ------------------- Name: Steven G. Caron Title: Vice President Signature page to the AMENDED AND RESTATED 364 DAY FACILITY CREDIT AGREEMENT dated as of June 4, 2003 (this "AGREEMENT") among Franklin Resources, Inc., a Delaware corporation (the "BORROWER"), the several banks and other financial institutions from time to time parties to this Agreement (the "BANKS"), Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas, as Co-Documentation Agents, and JPMorgan Chase Bank ("JPMCB"), as administrative agent for the Banks hereunder (in such capacity, the "ADMINISTRATIVE AGENT"). Toronto Dominion (Texas), Inc. By: /s/ Jill Hall ------------------------- Name: Jill Hall Title: Vice President EXHIBIT A TO CREDIT AGREEMENT [FORM OF BID LOAN CONFIRMATION] _____, 200_ JPMorgan Chase Bank, as Administrative Agent 270 Park Avenue New York, New York 10017 Dear Sirs: Reference is made to the Amended and Restated 364 Day Facility Credit Agreement, dated as of June 4, 2003 (as amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), among the Borrower, the Banks parties thereto, Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas as Co-Documentation Agents and JPMorgan Chase Bank, as Administrative Agent. Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Credit Agreement. In accordance with subsection 2.3(b) of the Credit Agreement, the undersigned accepts and confirms on behalf of Franklin Resources, Inc. the offers by Bid Loan Bank(s) to make Bid Loans to Franklin Resources, Inc. on _____, 200 [Bid Loan Date] under subsection 2.3 of the Credit Agreement in the [respective] amount(s) set forth on the attached list of Bid Loans offered. Very truly yours, FRANKLIN RESOURCES, INC. By:_________________________ Name: Title: [Borrower to attach Bid Loan offer list prepared by Administrative Agent with accepted amount entered by the Borrower to right of each Bid Loan offer]. EXHIBIT B TO CREDIT AGREEMENT [FORM OF BID LOAN OFFER] _______, 200_ JPMorgan Chase Bank, as Administrative Agent 270 Park Avenue New York, New York 10017 Dear Sirs: Reference is made to the Amended and Restated 364 Day Facility Credit Agreement, dated as of June 4, 2003 (as amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), among the Borrower, the Banks parties thereto, Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas as Co-Documentation Agents and JPMorgan Chase Bank, as Administrative Agent. Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Credit Agreement. In accordance with subsection 2.3(b) of the Credit Agreement, the undersigned Bank offers to make Bid Loans thereunder in the following amounts to Franklin Resources, Inc. the following maturity dates: Bid Loan Date: _____, 200 Aggregate Maximum Amount: $_____ MATURITY DATE 1 _____: MATURITY DATE 2 _____: MATURITY DATE 3 _____: - --------------- --------------- --------------- Maximum Amount $___ Maximum Amount $___ Maximum Amount $___ Rate * Amount $___ Rate * Amount $___ Rate * Amount $___ - - - Rate * Amount $___ Rate * Amount $___ Rate * Amount $___ - - - Borrower: ______ Borrower: ______ Borrower: ______ [The undersigned Bank hereby waives the requirement, set forth in subsection 2.3(b)(iv)(B) of the Credit Agreement, that the Bid Loans made to the Borrower by any Bid Loan Bank be in a minimum amount of $5,000,000.] Very truly yours, [NAME OF BIDDING BANK] By:_________________________ Name: Title: Tel.: Fax: - ------------ * In the case of LIBOR Bid Loans, insert margin bid. In the case of Absolute Rate Bid Loans, insert fixed rate bid. EXHIBIT C TO CREDIT AGREEMENT [FORM OF BID LOAN REQUEST] _________, 200_ JPMorgan Chase Bank, as Administrative Agent 270 Park Avenue New York, New York 10017 Dear Sirs: Reference is made to the Amended and Restated 364 Day Facility Credit Agreement, dated as of June 4, 2003 (as amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), among the Borrower, the Banks parties thereto, Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas as Co-Documentation Agents and JPMorgan Chase Bank, as Administrative Agent. Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Credit Agreement. This is a[n] [LIBOR] [Absolute Rate] Bid Loan Request pursuant to subsection 2.3(b) of the Credit Agreement requesting quotes for the following Bid Loans: Aggregate Principal Amount: $----- $----- $----- Bid Loan Date: ----- ----- ----- [Interest Period:]* ----- ----- ----- Maturity Date:** ----- ----- ----- Interest Payment Dates: ----- ----- ----- Borrower: ----- ----- ----- - -------- * Insert only in a LIBOR Bid Loan Request. ** In a LIBOR Bid Loan Request, insert last day of Interest Period. - ------------ Note: Pursuant to the Credit Agreement, a Bid Loan Request may be transmitted in writing, by telex or by facsimile transmission, or by telephone, immediately confirmed by telex or facsimile transmission. In any case, a Bid Loan Request shall contain the information specified in the second paragraph of this form. Very truly yours, FRANKLIN RESOURCES, INC. By:_________________________ Name: Title: EXHIBIT D TO CREDIT AGREEMENT [ASSIGNMENT AND ASSUMPTION] Reference is made to the Amended and Restated 364 Day Facility Credit Agreement, dated as of June 4, 2003 (as amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), among the Borrower, the Banks parties thereto, Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas as Co-Documentation Agents and JPMorgan Chase Bank, as Administrative Agent. Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Credit Agreement. The Assignor named below hereby sells and assigns, without recourse, to the Assignee named below, and the Assignee hereby purchases and assumes, without recourse, from the Assignor, effective as of the Assignment Date set forth below, the interests set forth below (the "Assigned Interest") in the Assignor's rights and obligations under the Credit Agreement, including, without limitation, the interests set forth below in the Commitment of the Assignor on the Assignment Date and Bid Loans and Revolving Loans owing to the Assignor which are outstanding on the Assignment Date, but excluding accrued interest and fees to and excluding the Assignment Date. The Assignee hereby acknowledges receipt of a copy of the Credit Agreement. From and after the Assignment Date (i) the Assignee shall be a party to and be bound by the provisions of the Credit Agreement and, to the extent of the Assigned Interest, have the rights and obligations of a Bank thereunder and (ii) the Assignor shall, to the extent of the Assigned Interest, relinquish its rights and be released from its obligations under the Credit Agreement. The Assignor (a) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or with respect to the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement, any other Loan Document or any other instrument or document furnished pursuant thereto, other than that the Assignor has not created any adverse claim upon the interest being assigned by it hereunder and that such interest is free and clear of any such adverse claim and (b) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower, any of its Affiliates or any other obligor or the performance or observance by the Borrower, any of its Affiliates or any other obligor of any of their respective obligations under the Credit Agreement or any other Loan Document or any other instrument or document furnished pursuant hereto or thereto. This Assignment and Assumption is being delivered to the Administrative Agent together with (i) if the Assignee is a Foreign Lender, any documentation required to be delivered by the Assignee pursuant to Section 2.16(e) of the Credit Agreement, duly completed and executed by the Assignee, and (ii) if the Assignee is not already a Lender under the Credit Agreement, an Administrative Questionnaire in the form supplied by the Administrative Agent, duly completed by the Assignee. The [Assignee/Assignor] shall pay the fee payable to the Administrative Agent pursuant to Section 9.6(b) of the Credit Agreement. This Assignment and Assumption shall be governed by and construed in accordance with the laws of the State of New York. Date of Assignment: Legal Name of Assignor: Legal Name of Assignee: Assignee's Address for Notices: Effective Date of Assignment ("Assignment Date"): ========================================================================= Percentage Assigned of Facility/Commitment (set forth, to at least 8 decimals, as a Principal Amount percentage of the Assigned (and Facility and the identifying aggregate Commitments information as to of all Lenders FACILITY individual BID LOANS) THEREUNDER) - ------------------------------------------------------------------------- Commitment Assigned: $ % - ------------------------------------------------------------------------- Revolving Loans: - ------------------------------------------------------------------------- Competitive Loans: - ------------------------------------------------------------------------- ========================================================================= The terms set forth above are hereby agreed to: [Name of Assignor] , as Assignor By:______________________________ Name: Title: [Name of Assignee] , as Assignee By: ______________________________ Name: Title: The undersigned hereby consent to the within assignment: Franklin Resources, Inc., JPMorgan Chase Bank, (if required) as Administrative Agent, (if required) By: ______________________ Name: By: __________________________ Title: Name: Title: EXHIBIT E-1 TO CREDIT AGREEMENT [FORM OF REVOLVING CREDIT NOTE] $______________ New York, New York ________ __, 200_ FOR VALUE RECEIVED, the undersigned, Franklin Resources, Inc., a Delaware corporation (the "BORROWER"), hereby unconditionally promises to pay on the Termination Date to the order of ____________________________________________ (the "BANK") at the office of JPMORGAN CHASE BANK, located at 270 Park Avenue, New York, New York 10017, in lawful money of the United States of America and in immediately available funds, the principal amount of the lesser of (a) ______________________ DOLLARS ($__________) and (b) the aggregate unpaid principal amount of all Revolving Credit Loans made by the Bank to the undersigned pursuant to subsection 2.1 of the Credit Agreement referred to below. The undersigned further agrees to pay interest in like money at such office on the unpaid principal amount hereof from time to time from the Effective Date at the applicable rates per annum set forth in subsection 2.10 of the Credit Agreement referred to below until any such amount shall become due and payable (whether at the stated maturity, by acceleration or otherwise), and thereafter on such overdue amount at the rate per annum set forth in subsection 2.10(d) of the Credit Agreement until paid in full (both before and after judgment). Interest shall be payable in arrears on each applicable Interest Payment Date, commencing on the first such date to occur after the date hereof and terminating upon payment (including prepayment) in full of the unpaid principal amount hereof; PROVIDED that interest accruing on any overdue amount shall be payable on demand. The holder of this Note is authorized to record the date and amount of each Revolving Credit Loan made pursuant to subsection 2.1 of the Credit Agreement, its character as an Alternate Base Rate Loan or LIBOR Loan, the date and amount of each payment or prepayment of principal with respect thereto, the length of each Interest Period with respect to the portion of such Revolving Credit Loan made and/or maintained as a LIBOR Loan, and the LIBOR Adjusted Rate with respect thereto and each conversion made pursuant to subsection 2.8 of the Credit Agreement, on the schedules annexed hereto and made a part hereof, or on a continuation thereof which shall be attached hereto and made a part hereof, which recordation shall constitute PRIMA FACIE evidence of the accuracy of the information so recorded; PROVIDED that failure by the Bank to make any such recordation on this Note shall not affect the obligations of the Borrower under this Note or under the Credit Agreement. This Note is one of the Revolving Credit Notes referred to in the Amended and Restated 364 Day Facility Credit Agreement, dated as of June 4, 2003 (as amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), among the Borrower, the Banks parties thereto, Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas, as Co-Documentation Agents and JPMorgan Chase Bank, as Administrative Agent, is entitled to the benefits thereof and is subject to optional and mandatory prepayment in whole or in part as provided therein. Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Credit Agreement. Upon the occurrence of any one or more of the Events of Default specified in the Credit Agreement, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable, all as provided therein. THIS REVOLVING CREDIT NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. FRANKLIN RESOURCES, INC. By:_________________________ Name: Title: SCHEDULE A to REVOLVING CREDIT NOTE
LOANS, CONVERSIONS AND PAYMENTS OF ALTERNATE BASE RATE LOANS - ---------------------------------------------------------------------------------------- Amount of Alternate Unpaid Amount of Base Rate Principal LIBOR Loans Loans Balance of Converted into Converted Amount of Alternate Amount Alternate Base into LIBOR Principal Base RATE Notation DATE OF LOAN RATE LOANS LOANS REPAID LOANS MADE BY ---- ------- ---------- ----- ------ ----- ------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- -------- ------- ------- --------- ---------- --------- ---------- --------
SCHEDULE B to REVOLVING CREDIT NOTE
LOANS, CONVERSIONS AND PAYMENTS OF LIBOR LOANS Amount of Amount of Alternate LIBOR Loans Base Rate Interest Converted Loans Period and into Unpaid Converted LIBOR Adjusted Alternate Amount of Principal Amount into LIBOR Rate with Base Rate Principal Balance of Notation Date of Loan Loans Respect Thereto Loans Repaid LIBOR Loans Made by ---- ------- ---------- --------------- ----- ------ ----------- ------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- -------- ------- ------- --------- ---------- --------- ---------- ---------- --------
EXHIBIT E-2 TO CREDIT AGREEMENT [FORM OF GRID BID LOAN NOTE] PROMISSORY NOTE $ New York, New York ----------------- _______, 200_ FOR VALUE RECEIVED, the undersigned, Franklin Resources, Inc., a Delaware corporation, (the "BORROWER"), hereby unconditionally promises to pay to the order of _________________ (the "BANK") at the office of JPMorgan Chase Bank located at 270 Park Avenue, New York, New York 10017, in lawful money of the United States of America and in immediately available funds, the principal amount of (a) ________DOLLARS ($____), or, if less, (b) the aggregate unpaid principal amount of each Bid Loan which is (i) made by the Bank to the Borrower pursuant to subsection 2.3 of the Credit Agreement hereinafter referred to and (ii) not evidenced by an Individual Bid Loan Note executed and delivered by the Borrower pursuant to subsection 2.4(e) of the Credit Agreement. The principal amount of each Bid Loan evidenced hereby shall be payable on the maturity date therefor set forth on the schedule annexed hereto and made a part hereof or on a continuation thereof which shall be attached hereto and made a part hereof (the "GRID"). The Borrower further agrees to pay interest in like money at such office on the unpaid principal amount of each Bid Loan evidenced hereby, at the rate per annum set forth in respect of such Bid Loan on the Grid, calculated on the basis of a year of 360 days and actual days elapsed from the date of such Bid Loan until the due date thereof (whether at the stated maturity, by acceleration or otherwise) and thereafter at the rates determined in accordance with subsection 2.3(d) of the Credit Agreement. Interest on each Bid Loan evidenced hereby shall be payable on the date or dates set forth in respect of such Bid Loan on the Grid. Bid Loans evidenced by this Note may not be optionally prepaid. The holder of this Note is authorized to endorse on the Grid the date, amount, interest rate, interest payment dates and maturity date in respect of each Bid Loan made pursuant to subsection 2.3 of the Credit Agreement, each payment of principal with respect thereto and any transfer of such Bid Loan from this Note to an Individual Bid Loan Note delivered to the Bank pursuant to subsection 2.4(e) of the Credit Agreement, which endorsement shall constitute PRIMA FACIE evidence of the accuracy of the information endorsed; PROVIDED, HOWEVER, that the failure to make any such endorsement shall not affect the obligations of the Borrower in respect of such Bid Loan. This Note is one of the Grid Bid Loan Notes referred to in the Amended and Restated 364 Day Facility Credit Agreement, dated as of June 4, 2003 (as amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), among the Borrower, the Banks parties thereto, Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas, as Co-Documentation Agents and JPMorgan Chase Bank, as Administrative Agent, is entitled to the benefits thereof and is subject to optional and mandatory prepayment in whole or in part as provided therein. Upon the occurrence of any one or more of the Events of Default specified in the Credit Agreement, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable, all as provided therein. All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind. Capitalized terms used but not defined herein shall hae the meanings assigned to such terms in the Credit Agreement. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. Very truly yours, FRANKLIN RESOURCES, INC. By:_________________________ Name: Title:
SCHEDULE OF BID LOANS Date of Transfer to Date Amount Interest Individual of of Interest Payment Maturity Payment Bid Loan Loan Bid Loan Rate Dates Date Date Note Authorization - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- -------- - ------- ------- --------- ---------- --------- ---------- ---------- --------
EXHIBIT E-3 TO CREDIT AGREEMENT [FORM OF INDIVIDUAL BID LOAN NOTE] NON-NEGOTIABLE BID NOTE $ New York, New York ----------------- _____________, 200_ FOR VALUE RECEIVED, the undersigned, Franklin Resources, Inc., a Delaware corporation (the "BORROWER"), promises to pay on __________, 200 to the order of ___________(the "BANK") at the office of JPMorgan Chase Bank located at 270 Park Avenue, New York, New York 10017, in lawful money of the United States of America and in immediately available funds, the principal sum of _____DOLLARS ($______). The Borrower further agrees to pay interest in like money at such office on the unpaid principal amount hereof from time to time from the date hereof at the rate of _% per annum (calculated on the basis of a year of 360 days and actual days elapsed) until the due date hereof (whether at the stated maturity, by acceleration, or otherwise) and thereafter at the rates determined in accordance with subsection 2.4(e) of the Amended and Restated 364 Day Facility Credit Agreement, dated as of June 4, 2003 (as amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), among the Borrower, the Banks parties thereto, Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas, as Co-Documentation Agents and JPMorgan Chase Bank, as Administrative Agent. Interest shall be payable on ________. This Note may not be optionally prepaid. This Note is one of the Individual Bid Loan Notes referred to in, is subject to and is entitled to the benefits of, the Credit Agreement, which Credit Agreement, among other things, contains provisions for acceleration of the maturity and mandatory prepayments hereof upon the happening of certain stated events. All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind. Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Credit Agreement. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. FRANKLIN RESOURCES, INC. By:_________________________ Name: Title: SCHEDULE I ---------- LOANS; ADDRESSES OF LENDERS NAME AND ADDRESS OF LENDER LOAN AMOUNT - -------------------------- ----------- JPMorgan Chase Bank $21,000,000 270 Park Avenue New York, New York 10017 Attention: Thorne Gregory Phone: (212) 622-6936 Citibank, N.A. $21,000,000 388 Greenwich Street, 22nd Floor New York, New York 10013 Attn: Alexander Duka Phone: (212) 816-3260 HSBC Bank USA $17,500,000 452 5th Avenue, 25th Floor New York, New York 10018 Attn: Scott Buitekant Phone: (212) 525-2571 BNP Paribas $21,000,000 499 Park Avenue, 3rd Floor New York, New York 10022-1278 Attn: Marguerite Lebon Phone: (212) 841-2906 Deutsche Bank AG, New York Branch $17,500,000 31 West 52nd Street, 23rd Floor New York, New York 10019 Attn: Gayma Shivnarain Phone: (212) 469-8551 The Bank of New York $21,000,000 One Wall Street, 17th Floor New York, New York 10286 Attn: Sukumar Shanmughanathan Phone: (212) 635-7657 Royal Bank of Canada $17,500,000 1 Liberty Plaza, 4th Floor New York, New York 10006-1404 Attn: Gabriella King Phone: (212) 428-6318 Bank of America, N.A. $21,000,000 231 South LaSalle Street, Suite 1044 Chicago, Illinois 60697 Attn: Susan Jalics Phone: (312) 828-6723 Toronto Dominion Bank $17,500,000 31 West 52nd Street, 20th Floor New York, New York 10019-6101 Attn: Jennifer McQuillan Phone: (212) 827-7440 HypoVereinsbank $15,000,000 150 East 42nd Street New York, New York 10017 Attn: Thomas Drelles Phone: (212) 672-6206 State Street Bank $10,000,000 2 Avenue de Lafayette, 2nd Floor Boston, Massachusetts 02211 Attn: Steven Caron Phone: (617) 662-1674 Banca Di Roma $10,000,000 One Market Plaza, Steuart Tower, Suite 1000 San Francisco, California 94105 Attn: Rick Dietz Phone: (415) 977-7310 SCHEDULE II ----------- SAMPLE COMPUTATIONS OF FACILITY AND UTILIZATION FEES Example 1: Average Aggregate Commitment of All Banks: $210,000,000 Facility Fee: $210,000,000 x .00090 = $189,000 Average Aggregate Loans Over Quarter (under this Agreement AND the Five Year Facility): $0 Utilization Fee: $0 Example 2: Average Aggregate Commitment of All Banks: $210,000,000 Facility Fee: $210,000,000 x .00090 = $189,000 Average Aggregate Loans Over Quarter (under this Agreement AND the Five Year Facility): $300,000,000 Utilization Fee: $300,000,000 x .00125 = $375,000 SCHEDULE III - CONSENTS AND AUTHORIZATIONS ------------------------------------------ None. SCHEDULE IV - U.S. INVESTMENT ADVISORS -------------------------------------- Fiduciary International, Inc. Fiduciary Investment Management International, Inc. Fiduciary Trust International Limited Franklin Advisers, Inc. Franklin Advisory Services, LLC Franklin Investment Advisory Services, Inc. Franklin Private Client Group, Inc. Franklin Mutual Advisers, LLC Franklin Templeton Alternative Strategies, Inc. Franklin Templeton Investment Management Limited Franklin Templeton Investments (Asia) Limited Franklin Templeton Investments Corporation FTI Institutional, LLC Templeton Asset Management Limited Templeton Global Advisors Limited Templeton Investment Counsel, LLC Templeton/Franklin Investment Services, Inc. SCHEDULE V - U.S. BROKER/DEALERS -------------------------------- Fiduciary Financial Services Corp. Franklin/Templeton Distributors, Inc. Templeton/Franklin Investment Services, Inc. SCHEDULE VI - LIST OF SUBSIDIARIES OF BORROWER ---------------------------------------------- Fiduciary International Holding, Inc. Fiduciary International, Inc. Fiduciary Investment Corporation Fiduciary Investment Management International, Inc. Fiduciary Trust (International) S.A. Fiduciary Trust Company International Fiduciary Trust International Investment Management, Inc. Fiduciary Trust International Limited Fiduciary Trust International of California Fiduciary Trust International of the South Franklin Advisers, Inc. Franklin Capital Corporation Franklin Mutual Advisers, LLC Franklin Receivables LLC Franklin Templeton Bank & Trust, F.S.B. Franklin Templeton Global Investors Limited Franklin Templeton Holding Limited Franklin Templeton International Services S.A. Franklin Templeton Investment Management Limited Franklin Templeton Investment Services GmbH Franklin Templeton Investment Trust Management Co., Ltd. Franklin Templeton Investments Corp. Franklin Templeton Investments Japan Limited Franklin/Templeton Distributors, Inc. FTI-Banque Fiduciary Trust Templeton Asset Management (India) Private Limited Templeton Asset Management (Labuan) Limited Templeton Asset Management Ltd. Templeton Funds Annuity Company Templeton Global Advisors Limited Templeton Global Holdings Ltd. Templeton International, Inc. Templeton Investment Counsel, LLC Templeton Worldwide, Inc. SCHEDULE VII - OUTSTANDING INDEBTEDNESS --------------------------------------- $871,000,000.00 Face Value Franklin Resources, Inc. Liquid Yield Option Notes due 2031 (Zero Coupon-Senior) Outstanding Indebtedness under the Amended and Restated 5 Year Facility Credit Agreement dated as of June 05, 2002 among the Company, the several banks parties thereto, Bank of America, N.A. and The Bank of New York, as Co-Syndication Agents, Citicorp USA Inc and BNP Paribas as Co-Documentation Agents, JPMorgan Chase Bank as Administrative Agent and J.P. Morgan Securities Inc., as Sole Bookrunner and Sole Lead Arranger. $420,000,000.00, Franklin Resources, Inc. 3.700% senior notes due 2008. SCHEDULE VIII - EXISTING LIENS ------------------------------ None. EX-12 6 exhibit12.txt
EXHIBIT 12 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES FOR THE YEARS ENDED SEPTEMBER 30, - ----------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 2003 2002 2001 2000 1999 - ----------------------------------------------------------------------------------------------------- Income before taxes $700,203 $578,275 $637,790 $739,591 $574,084 Add fixed charges: Interest expense-excluding interest on deposits 22,924 18,108 21,336 22,580 26,989 Interest expense-deposits 6,122 9,812 10,768 2,742 3,622 Interest factor on rent 13,413 20,977 20,228 19,170 12,953 - ----------------------------------------------------------------------------------------------------- Total fixed charges $42,459 $48,897 $52,332 $44,492 $43,564 - ----------------------------------------------------------------------------------------------------- Earnings before fixed charges and taxes on income $742,662 $627,172 $690,122 $784,083 $617,648 - ----------------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges- including interest on deposits 17.5 12.8 13.2 17.6 14.2 Ratio of earnings to fixed charges- excluding interest on deposits 20.3 15.8 16.3 18.7 15.4 - -----------------------------------------------------------------------------------------------------
EX-14 7 exhibit14.txt CODE OF ETHICS EXHIBIT 14 CODE OF ETHICS AND BUSINESS CONDUCT The Code of Ethics and Business Conduct (the "Code") is applicable to all officers, directors, employees and temporary employees of Franklin Resources, Inc. and all of its subsidiaries and affiliates (the "Company"). The Code summarizes the values, principles and business practices that guide our business conduct and also provides a set of basic principles to guide officers, directors and employees regarding the minimum ethical requirements expected of them. The Code supplements our existing employee policies, including those specified in the respective U.S. and Non-U.S. employee handbooks and also supplements various other codes of ethics, policies and procedures that have been adopted by the Company. It is the responsibility of all officers, directors and employees of the Company to maintain a work environment that fosters fairness, respect and integrity. The Company requires all officers, directors and employees to conduct themselves in a lawful, honest and ethical manner in all our business practices. All officers, directors and employees are expected to become familiar with the Code and to apply these principles in the daily performance of their jobs. All employees are expected to seek the advice of a supervisor, manager or the Human Resources Department for additional guidance or if there is any question about issues discussed in this Code. If you observe possible unethical or illegal conduct, you should report your concerns or complaints as set forth below. FOR PURPOSES OF THIS CODE, REFERENCES TO A "COVERED PERSON" OR "COVERED PERSONS" INCLUDE EMPLOYEES, OFFICERS AND DIRECTORS OF THE COMPANY. ALL CAPITALIZED TERMS SHALL HAVE THE MEANING SET FORTH IN SECTION XVIII. "DEFINITIONS". I. COMPLIANCE WITH LAWS, RULES AND REGULATIONS. All Covered Persons of the Company are required to comply with all of the applicable laws, rules and regulations of the United States and other countries, and the states, counties, cities and other jurisdictions, in which the Company conducts its business. Local laws may in some instances be less restrictive than the principles set forth in this Code. In those situations, Covered Persons should comply with the Code, even if the conduct would otherwise be legal under applicable laws. On the other hand, if local laws are more restrictive than the Code, Covered Persons should comply with applicable laws. Such legal compliance includes, without limitation, compliance with the Company's insider trading policy, which prohibits Covered Persons from trading securities either personally or on behalf of others, while in possession of material non-public information or communicating material non-public information to others in violation of the law. Securities include common stocks, bonds, options, futures and other financial instruments. Material information includes any information that a reasonable investor would consider important in a decision to buy, hold, or sell securities. These laws provide substantial civil and criminal penalties for individuals who fail to comply. The policy is described in more detail in the various employee handbooks and compliance policies. In addition, the Company has implemented trading restrictions to reduce the risk, or appearance, of insider trading. All questions regarding insider trading or reports of impropriety regarding stock transactions should be made to the Legal Compliance Department. See also Section XV.b. II. CONFLICTS OF INTEREST All Covered Persons are required to conduct themselves in a manner and with such ethics and integrity so as to avoid a conflict of interest, either real or apparent. A conflict of interest is any circumstance where an individual's personal interest interferes or even appears to interfere with the interests of the Company. All Covered Persons have a duty to avoid financial, business or other relationships that might be opposed to the interests of the Company or might cause a conflict with the performance of their duties. A conflict can arise when a Covered Person takes actions or has interests that may make it difficult to perform his or her company related work objectively and effectively. Conflicts also may arise when a Covered Person or a member of his or her family, receives improper personal benefits as a result of his or her position in the Company. Some of the areas where a conflict could arise include: a. Employment by a competitor, regardless of the nature of the employment, while employed by the Company. 1 b. Placement of business with any company in which a Covered Person, or any member of the Covered Person's family, has a substantial ownership interest or management responsibility. c. Making endorsements or testimonials for third parties. d. Processing a transaction on the Covered Person's personal account(s), or their friend or family members' account(s), through the Company's internal systems without first submitting the transaction request to the Customer Service Center. e. Disclosing the Company's confidential information to a third party without the prior consent of senior management. III. GIFTS AND ENTERTAINMENT The Company's aim is to deter providers of gifts from seeking or receiving special favors from Covered Persons. Covered Persons may not at any time accept any item that is conditioned upon the Company doing business with the entity or person giving the gift. Cash gifts of any amount should never be accepted. In addition, Covered Persons should not solicit any third party for any gift, gratuity, entertainment or any other item regardless of its value. Gifts of more than a nominal value can cause Covered Persons to feel placed in a position of "obligation" and/or give the appearance of a conflict of interest. Therefore, Covered Persons, including members of their immediate families, may not, directly or indirectly, take, accept or receive bonuses, fees, commissions, gifts, gratuities, or any other similar form of consideration, from any person, firm, corporation or association with which the Company does or seeks to do business if the value of such item is in excess of $100.00 on an annual basis. Covered Persons, including members of their immediate families, may accept or participate in reasonable entertainment provided by any person, firm, corporation or association with which the Company does or seeks to do business. Reasonable entertainment would include, among other things, an occasional meal, a ticket to a sporting event or the theater, or comparable entertainment, which is neither so frequent nor so excessive as to raise any question of propriety; attended by the entity or person providing the entertainment, meal, or tickets; not more frequent than once per quarter; and not preconditioned on a "quid pro quo" business relationship. "Excessive entertainment" is entertainment that has a value greater than $1000.00 or is provided more frequently than once per quarter. Covered Persons are prohibited from accepting "excessive entertainment" without the prior written approval by one of the co- Presidents or the Office of the Chairman. Covered Persons presented with a gift with a value in excess of $100.00 or entertainment valued in greater than $1000.00 should politely decline and explain that the Company policy makes it impossible to accept such a gift. Covered Persons are encouraged to be guided by their own sense of ethical responsibility, and if they are presented with such a gift from an individual or company, they should notify their manager so the gift can be returned. The Company recognizes that this Section III. does not prohibit directors who do not also serve in management positions within the Company from accepting compensation, bonuses, fees and other similar consideration paid in the normal course of business as a result of their outside business activity, employment or directorships. ANY QUESTIONS REGARDING THIS POLICY SHOULD BE DIRECTED TO THE LEGAL COMPLIANCE DEPARTMENT. IV. OUTSIDE EMPLOYMENT Subject to any departmental restrictions, Covered Persons are permitted to engage in outside employment if it is free of any actions that could be considered a conflict of interest. Outside employment must not adversely affect a Covered Person's job performance at the Company, and outside employment must not result in absenteeism, tardiness or a Covered Person's inability to work overtime when requested or required. Covered Persons may not engage in outside employment, which requires or involves using Company time, materials or resources. For purposes of this policy, outside employment includes self-employment. Due to the fiduciary nature of our business, all potential conflicts of interest that could result from a Covered Person's outside 2 employment should be discussed with the Covered Person's manager and the Human Resources Department, prior to entering into additional employment relationships. The Company recognizes that this Section IV is not applicable to directors who do not also serve in management positions within the Company. V. CONFIDENTIALITY Covered Persons are responsible for maintaining the confidentiality of information entrusted to them by the Company or its customers, except when disclosure is authorized or legally mandated. The sensitive nature of the investment business requires that the Company keep its customers' confidence and trust. Covered Persons must be continuously sensitive to the confidential and privileged nature of the information to which they have access concerning the Company, and must exercise the utmost discretion when discussing any work-related matters with third parties. Each Covered Person must safeguard the Company's confidential information and not disclose it to a third party without the prior consent of senior management. "Confidential information" includes but is not limited to information, knowledge, ideas, documents or materials that are owned, developed or possessed by the Company or that in some other fashion are related to confidential or proprietary matters of the Company, its business, customers, shareholders, Covered Persons or brokers. It includes all business, product, marketing, financial, accounting, personnel, operations, supplier, technical and research information. It also includes computer systems, software, documentation, creations, inventions, literary works, developments, discoveries and trade secrets. All employees of the Company ("Company employees") are expected to sign an acknowledgment regarding the confidentiality policy set forth above at the time they become employed with the Company. Company employees are expected to comply with the confidentiality policy not only for the duration of their employment with the Company, but also after the end of the employee's employment with the Company. VI. OWNERSHIP OF INTELLECTUAL PROPERTY The Company owns all of the work performed by Covered Persons at and/or for the Company, whether partial or completed. All Covered Persons shall be obligated to assign to the Company all "intellectual property" that is created or developed by Covered Persons, alone or with others, while working for the company. To the extent applicable, non-trade secret intellectual property constitutes a "work made for hire" owned by the Company, even if it is not a trade secret. "Intellectual Property" includes all trademarks and service marks, trade secrets, patents and patent subject matter and inventor rights in the United States and foreign countries and related applications. It includes all United States and foreign copyrights and subject matter and all other literary property and author rights, whether or not copyrightable. It includes all creations, not limited to inventions, discoveries, developments, works of authorship, ideas and know-how. It does not matter whether or not the Company can protect them by patent, copyright, trade secrets, trade names, trade or service marks or other intellectual property right. It also includes all materials containing any intellectual property. These materials include but are not limited to computer tapes and disks, printouts, notebooks, drawings, artwork and other documentation. The Company will not be considered to have a proprietary interest in a Covered Person's work product if: (a) the work product is developed entirely on the Covered Person's own time without the use or aid of any Company resources, including without limitation, equipment, supplies, facilities or trade secrets; (b) the work product does not result from Covered Person's employment with the Company; and, (c) at the time Covered Person conceives or reduces the creation to practice, it is not related to the Company's business nor the Company's actual or expected research or development. All Covered Persons must disclose to the Company all intellectual property conceived or developed while working for the Company. If requested, a Covered Person must sign all documents necessary to memorialize the Company's ownership of intellectual property under this Policy. These documents include but are not limited to assignments and patent, copyright and trademark applications. 3 VII. CORPORATE OPPORTUNITIES Covered Persons are prohibited from (a) taking for themselves opportunities that are discovered through the use of corporate property, information or position, (b) using corporate property, information or position for personal gain, and/or (c) competing with the Company. VIII. FAIR DEALING Each Covered Person should endeavor to deal fairly with the Company's customers, suppliers, competitors and Covered Persons and not to take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair dealing practice. IX. PROTECTION AND USE OF COMPANY PROPERTY All Covered Persons should protect the Company's assets and ensure they are used for legitimate business purposes during employment with the Company. Improper use includes unauthorized personal appropriation or use of the Company's assets, data or resources, including computer equipment, software and data. X. STANDARDS OF BUSINESS CONDUCT The Company is committed to fostering a work environment in which all individuals are treated with respect and dignity. Each individual should be permitted to work in a business-like atmosphere that promotes equal employment opportunities. The following conduct will not be tolerated and could result in disciplinary action, including termination: a. Any act which causes doubt about a Covered Person's integrity, such as falsifying of company records and documents, competing in business with the Company, divulging trade secrets, or engaging in any criminal conduct. b. Any act which may create a dangerous situation, such as carrying weapons, firearms or explosives on company premises or surrounding areas, assaulting another individual, or disregarding property and safety standards. c. The use, sale, purchase, transfer, possession, or attempted sale, purchase or transfer of alcohol or drugs while at work. Reporting to work while under the influence of alcohol or drugs, or otherwise in a condition not fit for work. d. Insubordination, including refusal to perform a job assignment or to follow a reasonable request of a Covered Person's manager, or discourteous conduct toward customers, associates, or supervisors. e. Harassment of any form including threats, intimidation, abusive behavior and/or coercion of any other person in the course of doing business. f. Falsification or destruction of any timekeeping record, intentionally clocking in on another Covered Person's attendance or timekeeping record, the knowledge of another Covered Person tampering with their attendance record or tampering with one's own attendance record. g. Failure to perform work, which meets the standards/expectations of the Covered Person's position. h. Excessive absenteeism, chronic tardiness, or consecutive absence of 3 or more days without notification or authorization. i. Any act of dishonesty or falsification of any company records or documents, including obtaining employment based on false, misleading, or omitted information. 4 It should be noted that the Covered Person or the Company can terminate the employment relationship at will, at any time, without cause or advance notice. Thus, the Company does not strictly adhere to a progressive disciplinary system since each incident of misconduct may have a different set of circumstances or differ in its severity. The Company will take such disciplinary action as it deems appropriate and commensurate with any misconduct of the Covered Person. XI. DISCLOSURE IN REPORTS AND DOCUMENTS As a public company, it is important that the Company's filings with the Securities and Exchange Commission (the "SEC") and other Federal, State, domestic and international regulatory agencies are full, fair, accurate, timely and understandable. The Company also makes many other filings with the SEC and other domestic and international regulatory agencies on behalf of the funds that its subsidiaries and affiliates manage. Further, the Company prepares mutual fund account statements, client investment performance information, prospectuses and advertising materials that are sent out to its mutual fund shareholders and clients. Depending on his or her position with the Company, a Covered Person, may be called upon to provide necessary information to assure that the Company's public reports and regulatory filings are full, fair, accurate, timely and understandable. The Company's policy is to comply with all applicable financial reporting and accounting regulations applicable to the Company. The Company maintains the highest commitment and expects all Covered Persons to record information accurately and truthfully. The Company also expects all Covered Persons to be diligent in providing accurate information to the inquiries that are made related to the Company's public disclosure requirements. Covered Persons are required to cooperate and comply with the Company's disclosure controls and procedures so that the Company's reports and documents filed with the SEC and other Federal, State, domestic and international regulatory agencies comply in all material respects with applicable laws, and rules and regulations, and provide full, fair, accurate, timely and understandable disclosure. XII. RELATIONSHIPS WITH GOVERNMENT PERSONNEL Covered persons should be aware that practices that may be acceptable in the commercial business environment (such as providing certain transportation, meals, entertainment and other things of nominal value) may be entirely unacceptable and even illegal when they relate to government employees or others who act on the government's behalf. Therefore, covered persons are required to comply with the relevant laws and regulations governing relations between government employees and customers and suppliers in every country where the Company conducts business. Covered persons are prohibited from giving money or gifts to any official or any employee of a governmental entity if doing so could reasonably be construed as having any connection with the Company's business relationship. Any proposed payment or gift to a government official or employee must be reviewed in advance by the Legal Compliance Department, even if such payment is common in the country of payment. XIII. POLITICAL CONTRIBUTIONS Election laws in many jurisdictions generally prohibit political contributions by corporations to candidates. Many local laws also prohibit corporate contributions to local political campaigns. In accordance with these laws, the Company does not make direct contributions to any candidates for federal, state or local offices where applicable laws make such contributions illegal. Contributions to political campaigns must not be, or appear to be, made with or reimbursed by the Company's funds or resources. The Company's funds and resources include (but are not limited to) the Company's facilities, office supplies, letterhead, telephones and fax machines. Employees may make personal political contributions as they see fit in accordance with all applicable laws. 5 XIV. ACCOUNTABILITY FOR ADHERENCE TO THE CODE The Company is committed to uphold ethical standards in all of its corporate and business activities. We expect all Covered Persons, to perform their work with honesty, truthfulness and integrity and to comply with the general principles set forth in the Code. Covered Persons are also expected to perform their work with honesty and integrity in any areas not specifically addressed by the Code. A violation of the Code may result in appropriate disciplinary action including the possible termination from employment with the Company. Nothing in this Code restricts the Company from taking any disciplinary action on any matters pertaining to the conduct of a Covered Person, whether or not expressly set forth in the Code. XV. REPORTING VIOLATIONS OF THE CODE a. VIOLATIONS OF ETHICS CODE. We have described above procedures generally available for addressing ethical issues that may arise. As a general matter, if you have any questions or concerns about compliance with this Code you are encouraged to speak with your supervisor, manager, representatives of the Human Resources Department or the Company's General Counsel. If you do not feel comfortable talking to any of these persons for any reason, you should call the Compliance and Ethics Hot-Line at 1-800- 636-6592. Calls to the Compliance and Ethics Hot-Line may be made anonymously. The Company will treat the information set forth in a report of any suspected violation of the Code of Ethics or law in a confidential manner and will conduct a prompt and appropriate evaluation and investigation of any matter reported. Failure to report knowledge of a violation of the Code of Ethics or other misconduct may result in disciplinary action. Covered Persons are expected to cooperate in any investigations of reported violations. b. ACCOUNTING/AUDITING COMPLAINTS. The law requires that the Company's Audit Committee have in place procedures for the receipt, retention and treatment of complaints concerning accounting, internal accounting controls, or auditing matters and procedures for Covered Persons to anonymously submit their concerns regarding questionable accounting or auditing matters. Complaints concerning accounting, internal accounting controls or auditing matters will be directed to the attention of the Audit Committee of the Board of Directors of the Company, or the appropriate members of that committee. For direct access to the Company's Audit Committee, please address your complaints regarding accounting, internal accounting controls, or auditing matters to: Chairman of the Audit Committee Franklin Resources, Inc. One Franklin Parkway San Mateo, California 94403 You may also call the Compliance and Ethics Hot-Line at 1-800-636-6592. Calls to the Compliance and Ethics Hot-Line may be made anonymously. c. RESPONSIBILITY TO REPORT VIOLATIONS OF THE CODE OF ETHICS AND LAW. As part of its commitment to ethical and lawful conduct, the Company expects Covered Persons to report any suspected violations of the Code of Ethics or law. By law, the Company may not discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee to provide information or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of any rule or regulation of the SEC or any provision of Federal law relating to fraud against shareholders when the information or assistance is provided to or the investigation is conducted, by, among others, a person(s) working for the Company with the authority to investigate, discover or terminate misconduct. To encourage employees to report violations of illegal or unethical conduct, the Company will not allow retaliation to be taken against an employee who has made a report under this section in good faith. 6 XVI. WAIVERS OF THE CODE OF ETHICS AND BUSINESS CONDUCT Any change in or waiver of this Code for Executive Officers or directors of the Company may be made only by the Board of Directors of the Company (the "Board") or a committee thereof, and may require prompt disclosure as required by law or the regulations of the New York Stock Exchange. Any requests for waivers of this Code for other Covered Persons may be made to the Legal Compliance Department. See also Section XVII.c. of this Code. XVII. COMPLIANCE STANDARDS AND PROCEDURES a. ANNUAL CERTIFICATIONS BY DIRECTORS AND EXECUTIVE OFFICERS. Directors and Executive Officers of the Company will be required to certify annually, on a form to be provided by the Legal Compliance Department, that they have received, read and understand the Code and have complied with the requirements of the Code. b. TRAINING AND EDUCATIONAL REQUIREMENTS. 1. ORIENTATION. New Covered Persons will receive a copy of the Code during the orientation process conducted by representatives of the Human Resources Department and shall acknowledge that they have received, read and understand the Code and will comply with the requirements of the Code. 2. CONTINUING EDUCATION. Covered Persons shall be required to complete such additional training and continuing education requirements as the Company shall from time to time establish. c. WAIVER REQUESTS. 1. DIRECTORS AND EXECUTIVE OFFICERS. A director or Executive Officer may submit to the Director of Global Compliance of the Legal Compliance Department a written request for a waiver of the Code only if he/she can demonstrate that such a waiver: * is necessary to alleviate undue hardship or in view of unforeseen circumstances or is otherwise appropriate under all the relevant facts and circumstances; * will not be inconsistent with the purposes and objectives of the Code; * will not adversely affect the interests of clients of the Company or the interests of the Company; and * will not result in a transaction or conduct that would violate provisions of applicable laws or regulations. The Legal Compliance Department will forward the waiver request to the Board of Directors of the Company or a committee thereof for consideration. Any decision to grant a waiver from the Code shall be at the sole and absolute discretion of the appropriate board or subcommittee thereof. The Secretary of the Company will advise the Legal Compliance Department in writing of the Board's decision regarding the waiver, including the grounds for granting or denying the waiver request. The Legal Compliance Department shall promptly advise the Director or Executive Officer in writing of the Board's decision. 2. OTHER COVERED PERSONS. Waivers of the Code for other Covered Persons (non-directors, non-Executive Officers of the Company) may be submitted to the Legal Compliance Department. Any such waiver request must be made in writing and set forth the grounds for a waiver. Any Covered Person who is a Non-director and Non-Executive Officer must also submit a written waiver request, which shall demonstrate that the waiver would satisfy the same requirements set forth in Section XVII.c.1. 7 The Legal Compliance Department shall forward the waiver request to the General Counsel of the Company for consideration. The decision to grant a waiver request shall be at the sole and absolute discretion of the General Counsel. d. OTHER POLICIES AND PROCEDURES. The "Code of Ethics and Policy Statement on Insider Trading" under Rule 17j-1 pursuant to the Investment Company Act and other policies and procedures adopted by the Company are separate requirements that apply to Covered Persons. XVIII. DEFINITIONS a. "COMPANY" shall mean, for purposes of the Code, Franklin Resources, Inc. and all of its U.S. and Non-U.S. subsidiaries and affiliates. b. "COVERED PERSON" or "COVERED PERSONS" shall mean for purposes of the Code, officers, directors and employees of the Company. c. "EXECUTIVE OFFICERS" shall mean, for purposes of the Code, officers designated by resolution of the Board of Directors of the Company. d. "WAIVERS" shall mean, for purposes of the Code, a material departure from a provision of the Code. An implicit waiver is defined as failure to take action within a reasonable period of time regarding a material departure from a provision of the Code that has been made known, as appropriately, to an Executive Officer of Franklin Resources, Inc. XIX. CONFIDENTIALITY All reports and records prepared or maintained pursuant to this Code shall be considered confidential and shall be maintained and protected accordingly. XX. INTERNAL USE The Code is intended solely for the internal use by the Company and does not constitute an admission, by or on behalf of the Company, as to any fact, circumstance, or legal conclusion. 8 EX-21 8 exhibit21.txt
EXHIBIT 21 FRANKLIN RESOURCES, INC. LIST OF SUBSIDIARIES STATE OR NATION OF NAME INCORPORATION - --------------------------------------------------------------------------------- ------------------- Asia Infrastructure Mezzanine Capital Management Co., Ltd. Cayman Islands Darby Asia Investors, Ltd. British Virgin Islands Darby Asia Investors (HK), Ltd. Hong Kong Darby Emerging Markets Income Investments, LLC Delaware Darby Emerging Markets Income Investments, Ltd. Cayman Islands Darby Emerging Markets Investments, LDC Cayman Islands Darby Holdings, Inc. Delaware Darby Global SICAV Managers, LLC Delaware Darby Latin American Mezzanine Investments Cayman Islands Darby Overseas Investments, Ltd. Delaware Darby Overseas Partners, L.P. Delaware DBVA de Mexico, S. de R. L. de C. V. Mexico DBVA Mexico Holdings I, LLC Delaware DBVA Mexico Holdings II, LLC Delaware FCC Receivables Corporation Delaware Fiduciary Financial Services Corp. New York Fiduciary International, Inc. New York Fiduciary International Holding, Inc. New York Fiduciary International Ireland Limited Ireland Fiduciary Investment Corporation New York Fiduciary Investment Management International, Inc. Delaware Fiduciary Trust (International) S.A. Switzerland Fiduciary Trust Company International New York Fiduciary Trust International Australia Limited Australia Fiduciary Trust International Limited England Fiduciary Trust International of California California Fiduciary Trust International of Delaware Delaware Fiduciary Trust International of the South Florida Franklin Advisers, Inc. California Franklin Advisory Services, LLC Delaware Franklin Agency, Inc. California Franklin Capital Corporation Utah Franklin Investment Advisory Services, Inc. Delaware Franklin Mutual Advisers, LLC Delaware Franklin Private Client Group, Inc. California Franklin Receivables LLC Delaware Franklin Templeton AMC Limited India Franklin Templeton Alternative Strategies, Inc. Delaware Franklin Templeton Asset Management S.A. France Franklin Templeton Bank & Trust, F.S.B. United States Franklin Templeton Companies, LLC Delaware STATE OR NATION OF NAME INCORPORATION - --------------------------------------------------------------------------------- ------------------- Franklin Templeton France S.A. France Franklin Templeton Global Investors Limited United Kingdom Franklin Templeton Holding Limited Mauritius Franklin Templeton Institutional, LLC Delaware Franklin Templeton Institutional Asia Limited Hong Kong Franklin Templeton International Services (India) Private Limited India Franklin Templeton International Services S.A. Luxembourg Franklin Templeton Investment Management Limited United Kingdom Franklin Templeton Investment Services GmbH Germany Franklin Templeton Investment Trust Management Co., Ltd. Korea Franklin Templeton Investments (Asia) Limited Hong Kong Franklin Templeton Investments Australia Limited Australia Franklin Templeton Investments Corp. Canada Franklin Templeton Investments Japan Limited Japan Franklin Templeton Investor Services, LLC Delaware Franklin Templeton Italia Societa di Gestione del Risparmio Per Azioni Italy Franklin Templeton Management Luxembourg SA Luxembourg Franklin Templeton Services Limited Ireland Franklin Templeton Services, LLC Delaware Franklin/Templeton Distributors, Inc. New York Franklin/Templeton Travel, Inc. California FS Capital Group California FS Properties, Inc. California FTCI (Cayman) Ltd. Cayman Islands FTI-Banque Fiduciary Trust Switzerland Happy Dragon Holdings Limited British Virgin Islands ITI Capital Markets Limited India Pioneer ITI Mutual Fund Private Limited India Templeton (Switzerland) Ltd. Switzerland Templeton Asian Direct Investments Limited Hong Kong Templeton Asset Management (India) Private Limited India Templeton Asset Management (Labuan) Limited Malaysia Templeton Asset Management Ltd. Singapore Templeton Capital Advisors Ltd. Bahamas Templeton China Research Limited Hong Kong Templeton do Brasil Ltda. Brazil Templeton Franklin Global Distributors, Ltd. Bermuda Templeton Funds Annuity Company Florida Templeton Global Advisors Limited Bahamas Templeton Global Holdings Ltd. Bahamas Templeton Heritage Limited Canada Templeton International, Inc. Delaware Templeton Investment Counsel, LLC Delaware Templeton Research Poland SP.z.o.o. Poland STATE OR NATION OF NAME INCORPORATION - --------------------------------------------------------------------------------- ------------------- Templeton Restructured Investments, L.L.C. Delaware Templeton Trust Services Private Limited India Templeton Worldwide, Inc. Delaware Templeton/Franklin Investment Services, Inc. Delaware TRFI Investments Limited Cyprus *All subsidiaries currently do business principally under their respective corporate name except as follows: Templeton/Franklin Investment Services, Inc. operates as Templeton Private Client Group; Franklin Private Client Group, Inc. conducts business as Private Client Group. Some Templeton subsidiaries also occasionally use the name Templeton Worldwide.
EX-23 9 exhibit23.txt EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference of our report dated December 5, 2003, relating to the consolidated financial statements of Franklin Resources, Inc. and subsidiaries, which appears in this Form 10-K, in the following Registration Statements, as amended: Form S-3 filed April 14, 1994 for issuance of debt securities, Amendment No. 1 to Form S-3 filed May 18, 1994 Form S-3 filed September 30, 1994 for the registration of shares of common stock, Amendment No. 1 to Form S-3 filed October 28, 1994 Form S-3 filed September 16, 1996 for the issuance of medium term notes, Amendment No. 1 to Form S-3 filed October 4, 1996 Form S-3 filed December 8, 2000 for the issuance of common stock, Amendment No. 1 to Form S-3 filed January 30, 2001 Amendment No. 2 to Form S-3 filed February 12, 2001 Amendment No. 3 to Form S-3 filed February 15, 2001 Form S-3 filed August 6, 2001 for the issuance of zero-coupon convertible senior note offering, Amendment No. 1 to Form S-3 filed November 1, 2001 Form S-3 filed April 3, 2003 for the issuance of debt securities Form S-4 filed December 26, 2000, for the issuance of common stock in connection with acquisition of Fiduciary Trust Company International. Amendment No. 1 to Form S-4 filed January 26, 2001 Form S-8 filed April 29, 1994 for United Kingdom Stock Option Plan #1 Form S-8 filed September 13, 1995 for Universal Stock Plan Form S-8 filed March 18, 1998 for 1998 Employee Stock Investment Plan Form S-8 filed December 31, 1998 for 1998 Universal Stock Incentive Plan Form S-8 filed July 21, 1999 for 1998 Universal Stock Incentive Plan Form S-8 filed October 22, 1999 for 1998 Universal Stock Incentive Plan Form S-8 filed March 27, 2001 for Amended and Restated 1998 Universal Stock Incentive Plan Post Effective Amendment No. 1 to Form S-8 filed March 27, 2001 for 1998 Universal Stock Incentive Plan Form S-8 filed October 29, 2002 for the 1998 Employee Stock Incentive Plan Form S-8 filed March 17, 2003 for 2002 Universal Stock Incentive Plan Post Effective Amendment No. 1 to Form S-8 filed March 17, 2003 for Amended and Restated Universal Stock Incentive Plan Annual Report on Form 11-K filed on October 29, 2002 for the 1998 Employee Stock Incentive Plan Annual Report on Form 11-K filed on October 24, 2003 for the 1998 Employee Stock Incentive Plan /s/ PricewaterhouseCoopers LLP San Francisco, California December 19, 2003 EX-31 10 exhibit31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION I, Charles B. Johnson, certify that: 1. I have reviewed this annual report on Form 10-K of Franklin Resources, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 19, 2003 /s/ CHARLES B. JOHNSON ------------------------------- Charles B. Johnson Chief Executive Officer EX-31 11 exhibit31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION I, James R. Baio, certify that: 1. I have reviewed this annual report on Form 10-K of Franklin Resources, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 19, 2003 /s/ JAMES R. BAIO ------------------------------- James R. Baio Senior Vice President and Chief Financial Officer EX-32 12 exhibit32-1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (FURNISHED HEREWITH) I, Charles B. Johnson, Chief Executive Officer of Franklin Resources, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The Annual Report on Form 10-K of the Company for the fiscal year ended September 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: December 19, 2003 /s/ CHARLES B. JOHNSON ----------------------------------- Charles B. Johnson Chief Executive Officer EX-32 13 exhibit32-2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (FURNISHED HEREWITH) I, James R. Baio, Senior Vice President and Chief Financial Officer of Franklin Resources, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The Annual Report on Form 10-K of the Company for the fiscal year ended September 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: December 19, 2003 /s/ JAMES R. BAIO ------------------------------------ James R. Baio Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----