FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to______________
Commission File No. 1-9318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2670991
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
777 Mariners Island Blvd., San Mateo, CA 94404
(Address of Principal Executive Offices)
(Zip Code)
(650) 312-2000
(Registrant's telephone number, including area code)
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ______
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES _____ NO ______
APPLICABLE ONLY TO CORPORATE ISSUERS:
Outstanding: 243,545,406 shares, common stock, par value $.10 per share at
July 31, 2000.
1
PART I -FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
FRANKLIN RESOURCES, INC.
Consolidated Income Statements
Unaudited
Three months ended Nine months ended
June 30 June 30
(In thousands, except per share data) 2000 1999 2000 1999
- --------------------------------------------------------------------------------------
Operating revenues:
Investment management fees $344,805 $340,515 $1,044,856 $993,304
Underwriting and distribution fees 165,181 176,118 529,557 543,128
Shareholder servicing fees 54,143 45,376 159,104 138,872
Other, net 4,768 4,766 13,573 13,221
---------------------------------------------------
Total operating revenues 568,897 566,775 1,747,090 1,688,525
---------------------------------------------------
Operating expenses:
Underwriting and distribution 142,684 151,353 462,728 467,699
Compensation and benefits 133,125 126,821 398,555 389,451
Information systems, technology
and occupancy 50,708 53,829 153,780 154,419
Advertising and promotion 25,279 26,379 73,719 80,010
Amortization of deferred sales
commissions 20,980 23,600 63,211 71,582
Amortization of intangible assets 9,283 9,283 27,849 27,939
Other 18,006 19,004 58,704 60,579
Restructuring charges - - - 58,455
---------------------------------------------------
Total operating expenses 400,065 410,269 1,238,546 1,310,134
---------------------------------------------------
Operating income 168,832 156,506 508,544 378,391
---------------------------------------------------
Other income (expense):
Investment and other income 19,836 12,227 56,267 37,253
Interest expense (3,998) (4,876) (10,542) (15,825)
----------------------------------------------------
Other income (expense), net 15,838 7,351 45,725 21,428
----------------------------------------------------
Income before taxes on income 184,670 163,857 554,269 399,819
Taxes on income 44,300 40,550 133,003 105,549
---------------------------------------------------
Net income $140,370 $123,307 $421,266 $294,270
===================================================
Earnings per share:
Basic $0.58 $0.49 $1.71 $1.17
Diluted $0.58 $0.49 $1.70 $1.16
Dividends per share $0.06 $0.055 $0.18 $0.165
The accompanying notes are an integral part of these consolidated financial
statements.
2
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited
June 30 September 30
(In thousands) 2000 1999
- --------------------------------------------------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents $1,096,151 $811,300
Receivables:
Sponsored investment products 229,196 225,132
Other 20,108 33,178
Investment securities, available-for-sale 211,610 392,022
Prepaid expenses and other 17,884 24,257
- --------------------------------------------------------------------------------
Total current assets 1,574,949 1,485,889
- --------------------------------------------------------------------------------
Banking/Finance assets:
Cash and cash equivalents 14,538 7,944
Loans receivable, net 213,158 186,185
Investment securities, available-for-sale 20,074 20,484
Other 4,093 3,165
- --------------------------------------------------------------------------------
Total banking/finance assets 251,863 217,778
- --------------------------------------------------------------------------------
Other assets:
Deferred sales commissions 84,299 103,289
Property and equipment, net 441,786 416,395
Intangible assets, net 1,174,928 1,202,777
Receivable from banking/finance group 128,327 107,148
Other 194,420 133,514
- --------------------------------------------------------------------------------
Total other assets 2,023,760 1,963,123
- --------------------------------------------------------------------------------
Total assets $3,850,572 $3,666,790
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
3
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited
June 30 September 30
(In thousands except share data) 2000 1999
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Compensation and benefits $155,628 $162,842
Current maturities of long-term debt 68,913 108,985
Accounts payable and accrued expenses 63,609 80,966
Commissions 66,941 61,971
Income taxes 55,224 57,968
Other 8,187 13,758
- --------------------------------------------------------------------------------
Total current liabilities 418,502 486,490
- --------------------------------------------------------------------------------
Banking/finance liabilities:
Payable to Parent 128,327 107,148
Deposits 57,044 58,216
Other 13,546 11,042
- --------------------------------------------------------------------------------
Total banking/finance liabilities 198,917 176,406
- --------------------------------------------------------------------------------
Other liabilities:
Long-term debt 334,530 294,260
Other 68,248 52,640
- --------------------------------------------------------------------------------
Total other liabilities 402,778 346,900
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Total liabilities 1,020,197 1,009,796
- -----------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $1.00 par value,
1,000,000 shares authorized; none issued - -
Common stock, $.10 par value, 500,000,000
shares authorized; 243,548,679 and
251,006,541 shares issued and outstanding,
for June and September, respectively 24,355 25,101
Capital in excess of par value - 69,631
Retained earnings 2,799,334 2,566,048
Other (4,014) (3,532)
Accumulated other comprehensive income 10,700 (254)
- --------------------------------------------------------------------------------
Total stockholders' equity 2,830,375 2,656,994
- --------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $3,850,572 $3,666,790
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
4
FRANKLIN RESOURCES, INC.
Consolidated Statements of Cash Flows
Unaudited Nine months ended
June 30
(In thousands) 2000 1999
- --------------------------------------------------------------------------------
Net income $421,266 $294,270
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in receivables, prepaid expenses
and other current assets (11,176) (73,857)
Advances of deferred sales commissions (44,220) (55,269)
(Decrease) increase in restructuring liabilities (2,564) 28,948
Increase in other current liabilities 3,441 40,156
Decrease in income taxes payable (8,517) (10,529)
Increase in commissions payable 4,971 6,069
Increase in accrued compensation and benefits 19,806 6,938
Depreciation and amortization 148,893 149,978
(Gains) losses on disposition of assets (4,347) 685
- --------------------------------------------------------------------------------
Net cash provided by operating activities 527,553 387,389
- --------------------------------------------------------------------------------
Purchase of investments (136,192) (555,826)
Liquidation of investments 294,126 663,903
Purchase of banking/finance investments (18,996) (19,967)
Liquidation of banking/finance investments 19,383 21,931
Proceeds from securitization of loans receivable 123,048 106,375
Net origination of loans receivable (150,134) (87,317)
Purchase of property and equipment (80,824) (92,209)
Other - 2,635
- --------------------------------------------------------------------------------
Net cash provided by investing activities 50,411 39,525
- --------------------------------------------------------------------------------
Decrease in bank deposits (1,172) (24,230)
Exercise of common stock options 390 1,095
Dividends paid on common stock (43,340) (40,337)
Purchase of stock (249,547) (24,434)
Issuance of debt 394,718 45,430
Payments on debt (387,568) (197,905)
- ---------------------------------------------------------------------------
Net cash used in financing activities (286,519) (240,381)
- ---------------------------------------------------------------------------
Increase in cash and cash equivalents 291,445 186,533
Cash and cash equivalents, beginning of period 819,244 556,043
- ---------------------------------------------------------------------------
Cash and cash equivalents, end of period $1,110,689 $742,576
- ---------------------------------------------------------------------------
Supplemental disclosure of non-cash information:
Value of common stock issued, principally
restricted stock $29,833 $33,567
The accompanying notes are an integral part of these consolidated financial
statements.
5
FRANKLIN RESOURCES, INC.
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
1. Basis of Presentation
We have prepared these unaudited interim financial statements of Franklin
Resources, Inc. and its consolidated subsidiaries ("Franklin Templeton
Investments") in accordance with the instructions to Form 10-Q pursuant to
the rules and regulations of the Securities and Exchange Commission ("SEC").
We have condensed or omitted certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles pursuant to such rules and
regulations. In our opinion, all appropriate adjustments necessary to a fair
presentation of the results of operations have been made for the periods
shown. All adjustments are of a normal recurring nature. You should read
these financial statements in conjunction with our audited financial
statements for the fiscal year ended September 30, 1999.
2. Restructuring
In December 1998, we adopted a restructuring plan estimated to cost
approximately $58.4 million and designed to reduce costs, improve service
levels and reprioritize our business activities. All of the total estimated
charges were utilized at June 30, 2000.
3. Debt
At June 30, 2000, we had interest-rate swap agreements, maturing through
October 2000, that effectively fix interest rates on $90 million of
commercial paper. The fixed rates of interest range from 6.36% to 6.64%. At
June 30, 2000, our overall weighted average interest rate on outstanding
commercial paper and medium-term notes was 6.56%. Through our interest-rate
swap agreements, medium-term note program and other fixed-rate debt, we have
effectively fixed the rate of interest we pay on 44% of debt outstanding at
June 30, 2000.
4. Comprehensive Income
Comprehensive income for the three- and nine-month periods ended June 30,
2000 was as follows:
Three months ended Nine months ended
June 30 June 30
(In thousands) 2000 1999 2000 1999
----------------------------------------------------------------------------
Net income $140,370 $123,307 $421,266 $294,270
Net unrealized (loss) gain on
available-for-sale securities (2,943) 6,919 15,739 17,311
Foreign currency translation
adjustments and other (1,048) 2,703 (4,785) 3,729
============================================================================
Comprehensive income $136,379 $132,929 $432,220 $315,310
============================================================================
6
5. Segment information
Franklin Templeton Investments has two operating segments: investment
management and banking/finance. The investment management segment derives
substantially all of its revenues and net income from providing investment
advisory, fund administration, distribution and related services to our
sponsored investment products. The banking/finance segment offers consumer
lending and selected retail banking services to individuals.
Financial information for our two operating segments for the three- and
nine- month periods ended June 30, 2000 and 1999 is presented in the table
below. Operating revenues of the banking/finance segment are reported
net of interest expense and provision for loan losses.
Three months ended Nine months ended
June 30 June 30
(In thousands) 2000 1999 2000 1999
---------------------------------------------------------------------
Operating revenues:
Investment management $564,093 $562,397 $1,734,513 $1,676,658
Banking/finance 4,804 4,378 12,577 11,867
---------------------------------------------------------------------
Company Totals $568,897 $566,775 $1,747,090 $1,688,525
Income before taxes:
Investment management $184,753 $162,764 $554,787 $398,501
Banking/finance (83) 1,093 (518) 1,318
=====================================================================
Company Totals $184,670 $163,857 $554,269 $399,819
=====================================================================
Operating segment assets were as follows:
(In thousands) June 30, 2000 September 30, 1999
---------------------------------------------------------------------
Investment management $3,598,709 $3,449,012
Banking/finance 251,863 217,778
=====================================================================
Company Totals $3,850,572 $3,666,790
=====================================================================
7
6. Earnings per share
Earnings per share were computed as follows:
Three months ended Nine months ended
June 30 June 30
(In thousands except per share
amounts) 2000 1999 2000 1999
----------------------------------------------------------------------------
Net income $140,370 $123,307 $421,266 $294,270
============================================================================
Weighted-average shares
outstanding - basic 243,542 252,103 246,933 252,161
Incremental shares from assumed
conversions 199 492 188 524
============================================================================
Weighted-average shares
outstanding - diluted 243,741 252,595 247,121 252,685
============================================================================
Earnings per share:
Basic $0.58 $0.49 $1.71 $1.17
Diluted $0.58 $0.49 $1.70 $1.16
7. Stock repurchases
During the current fiscal year, we continued our policy of repurchasing
shares of our common stock in the market. During the nine-month period ended
June 30, 2000, we repurchased 8.4 million shares at a cost of $249.5 million.
These repurchases were partially offset by the issuance of approximately 0.9
million shares primarily during the first quarter of fiscal 2000 for the
company's restricted stock and employee stock purchase plans.
8. Subsequent event - sale of property
On July 11, 2000, we finalized the sale of our 60% interest in our current
headquarters in San Mateo, California to an independent third party. The
total purchase price for the property was $80.0 million of which
approximately $22.0 million was applied toward the payment of an outstanding
loan secured by the property. We received proceeds from the sale of
approximately $34.0 million, net of closing costs and will record a gain on
sale of approximately $32.8 million, net of the write-off of certain
leasehold improvements on the property. We will recognize this gain over a
12-month period ending July 31, 2001, the anticipated period over which we
have agreed to leaseback the property pending completion of construction of
our new corporate headquarters in San Mateo, California.
9. Subsequent events - Acquisitions and investments
On July 26, 2000, we announced an offer to acquire all of the issued and
outstanding shares of Bissett & Associates Investment Management Ltd
("Bissett"), a Canadian asset management company. The all cash transaction is
valued at approximately $98 million. The offer has the unanimous support of
8
the board of directors of Bissett, and stockholders holding approximately 67%
of the outstanding Bissett shares have agreed to tender their shares into the
offer. It is expected that the transaction will be completed in October,
2000.
On July 22, 2000, we purchased all of the remaining outstanding shares of a
Korean asset management company in which we formerly held a 44% interest.
The purchase price for the shares was approximately $20 million.
On August 1, 2000, we entered into an agreement with Nedcor Investment Bank
Holdings, Ltd., a South African company, to form Franklin Templeton NIB Asset
Management ("FTNIB"). We contributed cash and other assets with a value of
approximately $27 million to the venture in return for a 50% ownership
interest in FTNIB.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
In this section, we discuss our results of operations and our financial
condition. We also make some statements relating to the future, which are
called "forward-looking" statements. Although we do our best to make clear and
accurate forward-looking statements, the actual results and outcomes could be
significantly different from those that we discuss in this document. For this
reason, you should not rely too heavily on these forward-looking statements. We
encourage you to look at the "Risk Factors" in our Annual Report on Form 10-K
filed with the Securities and Exchange Commission on December 21, 1999.
GENERAL
The majority of our operating revenues, operating expenses and net income are
derived from providing investment advisory and related services to retail
mutual funds, institutional and private accounts and other investment products.
This is our primary business activity and operating segment.
Our sponsored investment products include a broad range of domestic and
global/international equity, fixed-income and money market mutual funds, as
well as other investment products that meet a wide variety of investment needs
of individuals and institutions.
ASSETS UNDER MANAGEMENT
June 30 June 30
(In billions) 2000 1999
---------------------------------------------------------------------------
Equity:
Global/international $103.6 $102.0
Domestic 49.6 40.4
---------------------------------------------------------------------------
Total equity 153.2 142.4
---------------------------------------------------------------------------
Hybrid Funds 8.9 10.8
Fixed-income:
Tax-free 43.8 50.0
Taxable:
Domestic 15.3 15.9
Global/international 3.5 3.9
---------------------------------------------------------------------------
Total fixed-income 62.6 69.8
---------------------------------------------------------------------------
Money funds 5.2 4.7
===========================================================================
Total end of period $229.9 $227.7
===========================================================================
Simple monthly average for the
three-month period (1) $228.0 $223.6
---------------------------------------------------------------------------
Simple monthly average for the
nine-month period(1) $226.4 $219.3
===========================================================================
(1)Investment management fees from approximately 60% of our assets under
management are calculated using a daily average.
10
Total assets under management at June 30, 2000 increased $2.2 billion (1%) from
a year ago. This increase was largely caused by market appreciation in equity
products offset by decreases in fixed-income products from net redemptions.
Despite continued net redemptions, sales of our sponsored investment products
increased in both periods compared to the same periods a year ago.
Equity assets now comprise 67% of total assets under management as compared to
63% at June 30, 1999. Fixed income funds now comprise 27% of total assets under
management as compared to 31% at June 30, 1999.
RESULTS OF OPERATIONS
Three months ended Nine months ended
June 30 June 30
2000 1999 Change 2000 1999 Change
- --------------------------------------------------------------------------------
Net income (millions) $140.4 $123.3 14% $421.3 $294.3 43%
Earnings per share
Basic $0.58 $0.49 18% $1.71 $1.17 46%
Diluted $0.58 $0.49 18% $1.70 $1.16 47%
Operating margin
As reported 30% 28% 29% 22%
Without restructuring change 30% 28% 29% 26%
EBITDA margin(1)
As reported 37% 34% 36% 29%
Without restructuring change 37% 34% 36% 32%
- --------------------------------------------------------------------------------
(1) EBITDA margin is earnings before interest, taxes on income, depreciation and
the amortization of intangibles (not including amortization of deferred
sales commission) divided by total revenues.
Net income during the three-month period ended June 30, 2000 increased compared
to the same period last year as a result of reduced operating expenses and
increased investment income. Net income during the nine-month period ended June
30, 2000 increased compared to the same period last year as a result of
increased investment management fees from increased average assets under
management and as a result of a restructuring charge taken in the first two
fiscal quarters of 1999. During the three- and nine- month periods ended June
30, 2000, both the operating and EBITDA margins without restructuring charges
increased primarily due to increased operating revenues and reduced operating
expenses.
11
Operating revenues
Three months ended Nine months ended
June 30 June 30
(In millions) 2000 1999 Change 2000 1999 Change
- --------------------------------------------------------------------------------
Investment management
fees $344.8 $340.5 1% $1,044.8 $993.3 5%
Underwriting and
distribution fees 165.2 176.1 (6)% 529.6 543.1 (2)%
Shareholder servicing
fees 54.1 45.4 19% 159.1 138.9 15%
Other, net 4.8 4.8 - 13.6 13.2 3%
================================================================================
Total operating revenues $568.9 $566.8 - $1,747.1 $1,688.5 3%
================================================================================
Investment management fees, the largest component of our operating revenues,
include both investment advisory and fund administration fees. These fees are
generally calculated under fixed-fee arrangements as a percentage of the value
of assets under management. In return for these fees, we provide investment
advisory and administrative services to our sponsored investment products. There
have been no significant changes in these fee structures for the funds and
accounts that we manage in the periods under review.
Investment management fees during the three-month period ended June 30, 2000
remained relatively constant compared to the same period last year. Investment
management fees during the nine-month period ended June 30, 2000 increased 5%
over the same period last year. This increase was mainly due to the increases in
both the simple monthly average and daily average assets under management
between these periods, and a shift in our asset mix toward higher fee equity
products.
Underwriting commissions are earned from the sale of certain classes of mutual
funds that have a front-end sales commission. Distribution fees are paid by our
sponsored mutual funds in return for sales and marketing efforts on their
behalf. Distribution fees include 12b-1 plan fees that are subject to maximum
pay-out levels, based upon a percentage of the assets in each fund. A
significant portion of underwriting commissions and distribution fees are paid
to the brokers and other intermediaries who sell funds to the public on our
behalf. See the description of underwriting and distribution expenses below.
Underwriting and distribution fees during the three- and nine-month periods
ended June 30, 2000 decreased 6% and 2% over the same periods last year, due to
reduced commissions on the sale of mutual fund products. Although both the
three- and nine-month periods experienced increased product sales, there was a
decrease in commissionable sales, which led to reduced sales margins.
Distribution fees during both the three- and nine-month periods increased
primarily due to increased average assets under management.
Shareholder servicing fees are primarily fixed charges per shareholder account
that vary with the particular type of fund and the service being rendered. For
certain products, particularly outside the U.S. and Canada,
shareholder-servicing fees are calculated as a percentage of assets under
management. Fees are received as compensation for providing transfer agency
services, which include providing customer statements, transaction processing,
12
customer service and tax reporting. In accordance with current agreements with
most U.S. funds, closed accounts in a given calendar year remain billable
through the second quarter of the following calendar year at a reduced rate.
Shareholder servicing fees increased 19% and 15% respectively, from the same
three- and nine-month periods in 1999. This was due to increased fees from funds
whose servicing fees are based on assets under management and increases in the
per account charge, partially offset by a decrease in the number of billable
accounts.
Other, net consists primarily of revenues from the banking/finance-operating
segment:
* Operating revenues, consisting primarily of interest and servicing income
* Interest expense, and
* Provision for loan losses.
Other, net remained relatively constant during the three- and nine- month
periods ended June 30, 2000 compared with the same periods a year ago.
Operating expenses
Three months ended Nine months ended
June 30 June 30
(In millions) 2000 1999 Change 2000 1999 Change
- --------------------------------------------------------------------------------
Underwriting and distribution $142.7 $151.4 (6)% $462.7 $467.7 (1)%
Compensation and benefits 133.1 126.8 5% 398.6 389.4 2%
Information systems,
technology and occupancy 50.7 53.8 (6)% 153.8 154.4 -
Advertising and promotion 25.3 26.4 (4)% 73.7 80.0 (8)%
Amortization of deferred sales
commissions 21.0 23.6 (11)% 63.2 71.6 (12)%
Amortization of intangible
assets 9.3 9.3 - 27.8 27.9 -
Other 18.0 19.0 (5)% 58.7 60.7 (3)%
Restructuring charges - - - - 58.4 -
- --------------------------------------------------------------------------------
Total operating expenses $400.1 $410.3 (2)% $1,238.5 $1,310.1 (5)%
================================================================================
Underwriting and distribution includes sales commissions and distribution fees
paid to brokers and other third-party intermediaries. The decreases in
underwriting and distribution expenses were consistent with the decreases in
commissionable sales of mutual fund sales during the three- and nine-month
periods.
Compensation and benefits increased 5% and 2%, respectively, from the same
three- and nine-month periods in 1999. The increases due to annual salary
increases awarded in October 1999, were partially offset by a decrease in the
average number of employees during the three- and nine-month periods ended June
30, 2000 as compared to June 30, 1999. The number of employees at June 30,
2000 was approximately 6,500 as compared to approximately 6,800 at the same time
last year. In order to hire and retain our key employees in the current low
unemployment labor market, we are committed to keeping our salaries and
benefit packages competitive, which means that the level of compensation and
benefits may increase more quickly than our revenues.
13
Information systems, technology and occupancy costs decreased 6% in the
three-month period and remained constant in the nine-month period as compared to
the same three- and nine-month periods in 1999. These trends were primarily
the result of an increase in large projects subject to capitalization and of a
decrease in costs associated with Year 2000 efforts. During the past nine
months, we have embarked on a number of significant systems projects and
successfully transitioned to the Year 2000. We are also developing e-business
strategies to improve our service levels and productivity. We expect that such
major systems undertakings will continue to have an impact on our overall
expenditures through fiscal 2000 and beyond. During the three- and nine-month
periods under review we capitalized information systems and technology costs of
$22.5 million and $50.5 million, respectively, compared to $10.3 million and
$33.9 million in the same periods a year ago.
Advertising and promotion expenses decreased 4% and 8%, respectively over the
same periods last year, mainly due to decreased promotional activity. In the
current fiscal year, we have initiated a number of campaigns to increase the
visibility of our three major Franklin Templeton Investement brand names -
Franklin, Templeton and Mutual Series. These costs have been offset by
reductions in costs associated with printing marketing materials.
Certain fund classes are sold without a front-end sales charge to shareholders,
while, at the same time, we pay a commission to selling brokers and other
intermediaries. We expect to recover the payments in distribution revenues and
contingent deferred sales charges over periods of up to a maximum of eight years
following the sale. Accordingly, the payments are deferred and amortized over
periods not exceeding eight years. Amortization of deferred sales commissions
decreased 11% and 12% during the three- and nine-month periods ended June 30,
2000 over the same periods last year. In the second quarter of 1999, our
sponsored Canadian funds arranged for financing of their sales commissions
directly with a third party. As a result of this new arrangement, Canadian
deferred sales commissions are no longer recorded on our balance sheet. Also,
this new arrangement has resulted in decreased amortization levels in the
periods under review.
During fiscal 1999, we recognized pretax restructuring charges of $58.4 million
during the first and second fiscal quarters. These charges were related to a
plan announced and initiated by management in the first quarter of fiscal 1999.
See Note 2 to the condensed financial statements. We do not expect to incur any
incremental charges with respect to this plan.
All of the $58.4 million total restructuring charge was utilized at June 30,
2000. The anticipated lost revenues associated with discontinued products are
not expected to have a material impact on ongoing results of operations.
Other income/(expenses):
Three months ended Nine months ended
June 30 June 30
(In millions) 2000 1999 Change 2000 1999 Change
- --------------------------------------------------------------------------------
Investment and other income $19.8 $12.2 62% $56.2 $37.2 51%
Interest expense (4.0) (4.8) (17)% (10.5) (15.8) (34)%
================================================================================
Other income/(expenses) $15.8 $7.4 114% $45.7 $21.4 114%
================================================================================
14
Investment income exceeded that earned in the prior year, due to higher average
investments and realized gains. Interest expense decreased over the same periods
last year, following a reduction in our average outstanding debt.
Taxes on income
Our effective income tax rate for the nine months ended June 30, 2000 has
decreased to 24% as compared to 26% for the same period last year. This decrease
reflects the increase in the relative contributions of foreign earnings that are
subject to reduced tax rates and that are not currently included in U.S. taxable
income. The effective tax rate will continue to be reflective of the relative
contributions of foreign earnings that are subject to reduced tax rates and that
are not currently included in U.S. taxable income.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, our assets increased to $3,850.6 million compared to $3,666.8
million at September 30, 1999. Stockholders' equity increased to $2,830.4
million compared to $2,657.0 million at September 30, 1999. Outstanding debt
(long-term and short-term) was $403.4 million at June 30, 2000, compared to
$403.2 million at September 30, 1999.
Cash provided by operating activities for the nine months ended June 30, 2000
was $527.6 million, compared to $387.4 million in the same period last year.
This increase was due mainly to higher net income in the current year. The
increase in net income was due to lower operating expenses, increased revenues
and a reduced effective tax rate. We sold $157.9 million of our investments in
the period, net of purchases; used net cash of $27.1 million from the net
origination of banking/finance loans, net of sales; and used $80.8 million to
purchase property and equipment, providing $50.4 million from investing
activities in the period. We used $249.5 million in cash to purchase 8.4 million
shares of common stock and paid $43.3 million of cash dividends. Overall, for
the period, we used $286.5 million in cash for financing activities.
As of June 30, 2000, through our interest-rate swap agreements, medium-term
note-program and other fixed-rate debt, we have fixed the rates of interest we
pay on 44% of our outstanding debt. Interest-rate swaps of $90 million mature in
October 2000. Medium-term notes of $60 million mature in March 2001. Other
fixed-rate debt has various maturity dates through October 2003.
We expect that the principal uses of cash will be to increase assets under
management through expansion, make strategic acquisitions, purchase company
stock, advance sales commissions, fund property and equipment acquisitions, pay
shareholder dividends and to repay and service debt. We expect to finance future
increases in investment in our banking/finance activities through
existing debt facilities, operating cash flows, or through the securitization of
a portion of the receivables from consumer lending activities. We believe that
our existing liquid assets, together with the expected continuing cash flow from
operations, our borrowing capacity under current credit facilities, sales
commission financing arrangement and our ability to issue stock will be
sufficient to meet our present and reasonably foreseeable cash needs.
15
RISK FACTORS
Franklin Templeton Investments faces strong global competition from numerous and
sometimes larger companies. We compete with numerous stock brokerage and
investment banking firms, investment management companies, insurance companies,
banks, online and Internet investment sites, savings and loan associations and
other financial institutions. These companies also offer financial services and
other investment alternatives. In recent years, there has been a trend of
consolidation in the financial services industry, resulting in stronger
competitors, some with greater financial resources than Franklin Templeton
Investments. There has also been a trend toward online Internet financial
services. We are currently expanding our Internet e-business, but there can be
no assurance that our e-business will compete effectively with other
alternatives available to investors. To the extent that existing customers stop
investing with us and instead invest with our competitors, or if potential
customers decide to invest with other companies instead, this could cause our
market share, revenues and net income to decline.
Competing securities dealers and banks could restrict sales of our funds.
Although we rely on securities dealers to sell and distribute Franklin,
Templeton and Mutual Series fund shares, many of those securities dealers also
have mutual funds under their own names that compete directly with our products.
The banking industry also continues to expand its sponsorship of proprietary
funds. These firms or banks could decide to limit or restrict the sale of our
fund shares, which could lower our future sales, increase redemption rates, and
cause our revenues to decline.
We currently rely upon our distribution channels. Franklin Templeton Investments
derives a significant portion of its income from sales made by broker/dealers
and other intermediaries. We are heavily dependent upon these distribution
channels. However, 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. Higher distribution costs lower our net revenues and earnings. If one
of these major intermediaries had to cease operations, even for a few days, it
could have a significant adverse impact on our revenues and earnings. Similarly,
Franklin Templeton Investments relies upon these business relationships and
there is no guarantee that good relations can be maintained. If we cannot
effectively compete, distribute and sell our products, this would have a
negative effect on our level of assets under management, related revenues and
overall business and financial condition.
Sales of B and C share classes bring in lower revenues in the year of sale than
the traditional A share class. Franklin Templeton Investments receives no or
reduced sales charges at the time of an initial investment in B and C shares but
still must pay or finance the related dealer commission. In most instances,
Franklin Templeton Investments will realize lower operating margins on C share
assets as compared to A or B share assets.
If our asset mix shifts to predominantly fixed-income, our revenues would
decline. We derive higher fee revenues and income from the equity assets that we
manage. A shift in our asset mix towards fixed-income products has caused in the
past, and would cause in the future, a decline in our income and revenue.
We have become subject to an increased risk of asset volatility from changes in
the global equity markets. As Franklin Templeton Investments' asset mix has
shifted since 1992 from predominantly fixed-income to a majority of equity
assets, we have become subject to an increased risk of asset volatility from
changes in global equity markets. U.S. equity markets have been experiencing
16
extraordinary returns for an unusually long period of time which, due to the
cyclical nature of these markets, could decline in the future. Declines in these
markets - whether in general, or in certain geographic regions or investment
sectors - have caused in the past, and would cause in the future, a decline in
our income and revenue.
Global economic conditions, interest rates, inflation rates and other factors
which are difficult to predict affect the mix, market values, and levels of our
assets under management. Fluctuations in interest rates and in the yield curve
affect the value of fixed-income assets under management as well as the flow of
monies to and from fixed-income funds. In turn, this affects our revenues from
those funds. In addition, changes in the equity marketplace may significantly
affect the level of our assets under management. The multiplicity of factors
impacting asset mix make it difficult to predict the net effect of any
particular set of conditions.
General economic and securities markets fluctuations affect our business.
Adverse general securities market conditions, currency fluctuations,
governmental regulations and recessionary global economic conditions could lower
Franklin Templeton Investments' mutual fund share sales and other financial
services product sales.
An inability to meet cash needs could have a negative effect on our financial
condition and business operations. Franklin Templeton Investments' 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 future portfolios of auto loan and credit
card receivables would also be affected by the market's perception of those
portfolios, finance rates offered by competitors, and the general market for
private debt.
We face increased competition in hiring and retaining qualified employees. Our
continued success will depend upon our ability to attract and retain qualified
personnel. The competition from other companies to hire these kinds of employees
has increased, particularly in certain geographic locations where the majority
of our workforce is employed. We may be forced to offer compensation and
benefits to these employees at a level that exceeds our revenue growth. With
historically low unemployment in the United States and other nations in which we
operate, qualified personnel are now moving between firms and starting their own
companies with greater frequency. If Franklin Templeton Investments is not able
to attract and retain these employees, our overall business condition and
revenues could suffer.
Our emerging market portfolios and related revenues are subject to increased
risks. These portfolios and our 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.
Our consumer receivables business is subject to marketplace fluctuation and
competes with businesses with significantly larger portfolios. Auto loan and
credit card portfolio losses can be influenced significantly by trends in the
economy and credit markets, which reduce borrowers' ability to repay loans.
Diverse and strong competition limits the interest rates that we can charge on
consumer loans. We compete with many types of institutions for consumer loans,
including the finance subsidiaries of large automobile manufacturers. Some of
17
these competitors can provide loans at significantly below market interest rates
in connection with automobile sales. We rely on our relationships with various
automobile dealers and there is no guarantee that we can maintain relationships
with these dealers.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, our financial position is subject to a variety
of risks, including market risk associated with interest rate movements. We are
exposed to changes in interest rates primarily in its debt transactions. Through
its interest-rate swap agreements and its medium-term note program, we have
effectively fixed the rate of interest it pays on 44% of its debt outstanding at
June 30, 2000. We do not believe that the effect of reasonably possible
near-term changes in interest rates on our financial position, results of
operations or cash flow would be material.
We have considered the potential impact of the effect on the banking/finance
segment of a 100 basis point (1%) movement in market interest rates and we do
not expect it would have a material impact on our operating revenues or results
of operations.
We have also considered the potential impact of the effect on our debt
facilities of a 100 basis point (1%) movement in market interest rates and we do
not expect it would have a material impact on our pretax income.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in the litigation previously reported
in the Form 10-Q of Franklin Templeton Investments for the period ended March
31, 2000 as filed with the SEC on May 15, 2000.
Franklin Templeton Investments is involved from time to time in litigation
relating to claims arising in the normal course of business. Management is of
the opinion that the ultimate resolution of such claims will not materially
affect Franklin Templeton's business or financial position.
18
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of the report:
Exhibit 3(i)(a) Registrant's Certificate of Incorporation, as filed
November 28, 1969, incorporated by reference to Exhibit (3)(i)
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994 (the "1994 Annual Report")
Exhibit 3(i)(b) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1, 1985, incorporated by
reference to Exhibit (3)(ii) to the 1994 Annual Report
Exhibit 3(i)(c) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1, 1987, incorporated by
reference to Exhibit (3)(iii) to the 1994 Annual Report
Exhibit 3(i)(d) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated by
reference to Exhibit (3)(iv) to the 1994 Annual Report
Exhibit (3)(ii) Registrant's By-Laws incorporated by reference to
Exhibit 3(ii) to the Company's Form 10-K for the fiscal year
ended September 30, 1999
Exhibit 10 Purchase Agreement between Mariner's Island Co-Tenancy and
Keynote System, Inc. dated April 25, 2000
Exhibit 12 Computations of ratios of earnings to fixed charges
Exhibit 27 Financial Data Schedule.(Filed with the Securities and Exchange
Commission only.)
(b) Reports on Form 8-K:
(i) Form 8-K dated April 25, 2000 reporting under Item 5 "Other
Events" the filing of an earnings press release by the
Registrant on April 20, 2000 and including said press release
as an Exhibit under Item 7 "Financial Statements and Exhibits."
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN RESOURCES, INC.
Registrant.
Date: August 11, 2000 /s/ Martin L. Flanagan
-----------------------
MARTIN L. FLANAGAN
President, Member-Office of the President,
Chief Financial Officer and Chief Operating
Officer
20