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 December 31, 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: 244,128,652 shares, common stock, par value $.10 per share at
January 31, 2001.
PART I -FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
THREE MONTHS ENDED
DECEMBER 31
(In thousands, except per share data) 2000 1999
- --------------------------------------------------------------------------------
OPERATING REVENUES:
Investment management fees $345,785 $344,042
Underwriting and distribution fees 164,362 164,243
Shareholder servicing fees 48,222 51,759
Other, net 5,705 5,623
- --------------------------------------------------------------------------------
TOTAL OPERATING REVENUES 564,074 565,667
- --------------------------------------------------------------------------------
OPERATING EXPENSES:
Underwriting and distribution 145,684 143,168
Compensation and benefits 141,859 130,849
Information systems, technology and occupancy 57,528 51,631
Advertising and promotion 22,126 22,545
Amortization of deferred sales commissions 18,236 20,631
Amortization of intangible assets 9,909 9,283
Other 19,754 19,925
- --------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 415,096 398,032
- --------------------------------------------------------------------------------
Operating income 148,978 167,635
OTHER INCOME/(EXPENSES):
Investment and other income 49,956 16,679
Interest expense (2,270) (3,364)
- --------------------------------------------------------------------------------
Other income, net 47,686 13,315
- --------------------------------------------------------------------------------
Income before taxes on income 196,664 180,950
Taxes on income 47,199 43,428
- --------------------------------------------------------------------------------
NET INCOME $149,465 $137,522
- --------------------------------------------------------------------------------
Earnings per share:
Basic and diluted $0.61 $0.55
Dividends per share $0.065 $0.060
The accompanying notes are an integral part of these consolidated financial
statements.
2
FRANKLIN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
DECEMBER 31 SEPTEMBER 30
(In thousands) 2000 2000
- --------------------------------------------------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents $1,069,217 $734,071
Receivables:
Sponsored investment products 237,466 241,282
Other 18,297 27,105
Investment securities, available-for-sale 216,597 635,819
Prepaid expenses and other 26,645 18,017
- --------------------------------------------------------------------------------
Total current assets 1,568,222 1,656,294
- --------------------------------------------------------------------------------
Banking/Finance assets:
Cash and cash equivalents 14,528 11,934
Loans receivable, net 288,034 256,416
Investment securities, available-for-sale 29,917 26,851
Other 6,692 4,361
- --------------------------------------------------------------------------------
Total banking/finance assets 339,171 299,562
- --------------------------------------------------------------------------------
Other assets:
Deferred sales commissions 88,615 86,754
Property and equipment, net 440,720 444,694
Intangible assets, net 1,248,627 1,169,485
Receivable from banking/finance group 198,778 168,496
Other 208,244 217,158
- --------------------------------------------------------------------------------
Total other assets 2,184,984 2,086,587
- --------------------------------------------------------------------------------
TOTAL ASSETS $4,092,377 $4,042,443
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
3
FRANKLIN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
DECEMBER 31 SEPTEMBER 30
(In thousands except share data) 2000 2000
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Current liabilities:
Compensation and benefits 72,788 180,743
Current maturities of long-term debt 68,794 68,776
Accounts payable and accrued expenses 83,034 72,646
Commissions 87,671 76,965
Income taxes 71,964 61,661
Other 20,145 28,768
- --------------------------------------------------------------------------------
Total current liabilities 404,396 489,559
- --------------------------------------------------------------------------------
Banking/finance liabilities:
Payable to Parent 198,778 168,496
Deposits 55,503 54,846
Other 12,683 15,612
- --------------------------------------------------------------------------------
Total banking/finance liabilities 266,964 238,954
- --------------------------------------------------------------------------------
Other liabilities:
Long-term debt 285,760 294,090
Other 56,965 54,347
- --------------------------------------------------------------------------------
Total other liabilities 342,725 348,437
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total liabilities 1,014,085 1,076,950
- --------------------------------------------------------------------------------
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;244,128,959 and 243,730,140
shares issued and outstanding,for December and
September, respectively 24,413 24,373
Retained earnings 3,084,102 2,932,166
Other (2,810) (3,422)
Accumulated other comprehensive income (27,413) 12,376
- --------------------------------------------------------------------------------
Total stockholders' equity 3,078,292 2,965,493
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,092,377 $4,042,443
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
4
FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED THREE MONTHS
ENDED
DECEMBER 31
(In thousands) 2000 1999
- --------------------------------------------------------------------------------
Net income $149,465 $137,522
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease in receivables, prepaid expenses and other 19,726 2,097
Advances of deferred sales commissions (20,098) (18,846)
Decrease in restructuring liabilities - (1,190)
Increase in other current liabilities 12,025 3,160
Increase in income taxes payable 10,303 5,216
Increase in commissions payable 10,705 3,260
Decrease in accrued compensation and benefits (82,809) (46,291)
Depreciation and amortization 50,333 48,762
(Gains) losses on disposition of assets (31,572) 455
- --------------------------------------------------------------------------------
Net cash provided by operating activities 118,078 134,145
- --------------------------------------------------------------------------------
Purchase of investments (44,183) (41,597)
Liquidation of investments 439,418 197,429
Purchase of banking/finance investments (5,939) (2,744)
Liquidation of banking/finance investments 3,269 8,172
Net origination of loans receivable (31,440) (52,196)
Acquisition of subsidiary, net of cash acquired (94,483) -
Purchase of property and equipment (18,055) (22,496)
- --------------------------------------------------------------------------------
Net cash provided by investing activities 248,587 86,568
- --------------------------------------------------------------------------------
Increase (decrease) in bank deposits 658 (2,633)
Exercise of common stock options 1,020 266
Dividends paid on common stock (14,623) (13,799)
Purchase of stock (7,906) (98,423)
Issuance of debt 60,533 190,583
Payments on debt (68,607) (155,634)
- --------------------------------------------------------------------------------
Net cash used in financing activities (28,925) (79,640)
- --------------------------------------------------------------------------------
Increase in cash and cash equivalents 337,740 141,073
Cash and cash equivalents, beginning of period 746,005 819,244
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of period $1,083,745 $960,317
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION:
Value of common stock issued, principally restricted stock $23,811 $28,531
The accompanying notes are an integral part of these consolidated financial
statements.
5
FRANKLIN RESOURCES, INC.
Notes to Consolidated Financial Statements
December 31, 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, 2000.
2. DEBT
At December 31, 2000, our overall weighted average interest rate on
outstanding commercial paper and medium-term notes was 6.48%. During the
quarter ended December 31, 2000, interest-rate swap agreements with a
notional value of $90 million matured and were not renewed. These interest
rate swaps had effectively fixed interest rates on $90 million of
commercial paper.
3. COMPREHENSIVE INCOME
The following table shows comprehensive income for the three months ended
December 31, 2000 and 1999.
(In thousands) 2000 1999
--------------------------------------------------------------------------
Net income $149,465 $137,522
Change in net unrealized (loss) gain on
available-for-sales securities, net of tax (35,730) 13,259
Foreign currency translation adjustment (4,060) 1,958
--------------------------------------------------------------------------
Comprehensive income $109,675 $152,739
==========================================================================
4. SEGMENT INFORMATION
We have two operating segments: investment management and banking/finance.
The investment management segment derives substantially all of its revenues
and net income from providing investment advisory, fund administration,
distribution and related services to our sponsored investment products. The
banking/finance segment offers consumer lending and selected retail banking
services to individuals.
6
Financial information for our two operating segments for the quarters
ended December 31, 2000 and 1999 is presented in the table below.
Operating revenues of the banking/finance segment are reported net of
interest expense.
Assets Income before Operating
(In thousands) taxes revenues
--------------------------------------------------------------------------
December 2000
Investment management $3,753,206 $195,143 $557,360
Banking/finance 339,171 1,521 6,714
--------------------------------------------------------------------------
Company Totals $4,092,377 $196,664 $564,074
==========================================================================
Assets Income before Operating
taxes revenues
--------------------------------------------------------------------------
December 1999
Investment management $3,483,884 $180,085 $561,062
Banking/finance 265,408 865 4,605
--------------------------------------------------------------------------
Company Totals $3,749,292 $180,950 $565,667
==========================================================================
5. EARNINGS PER SHARE
Earnings per share were computed as follows:
Three months ended
December 31
(In thousands except per share amounts) 2000 1999
--------------------------------------------------------------------------
Net income $149,465 $137,522
==========================================================================
Weighted-average shares outstanding - basic 243,708 250,432
Incremental shares from assumed conversions 701 160
--------------------------------------------------------------------------
Weighted-average shares outstanding - diluted 244,409 250,592
==========================================================================
Earnings per share:
Basic and diluted $0.61 $0.55
6. SUBSEQUENT EVENT- SECURITIZATION OF LOANS RECEIVABLE
In January 2001, we sold auto loans receivable with a net book value of
$142.6 million to a securitization trust. The sale proceeds of this
securitization were $139.3 million. A gain of $2.9 million has been
recorded on the transaction. Significant assumptions used in determining
the gain were an excess cash flow discount rate of 12% and a cumulative
credit loss rate of 3.06%.
7
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" section below, where we discuss
these statements in more detail.
GENERAL
The majority of our operating revenues, operating expenses and net income are
derived from providing investment advisory and related services to retail mutual
funds, institutional and private accounts, and other investment products. This
is our primary business activity and operating segment.
Our sponsored investment products include a broad range of domestic and
global/international equity, hybrid, 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.
ASSETS UNDER MANAGEMENT
December 31 December 31
(In billions) 2000 1999
- --------------------------------------------------------------------------------
Equity:
Global/international $96.4 $111.0
Domestic 50.0 44.3
- --------------------------------------------------------------------------------
Total equity 146.4 155.3
- --------------------------------------------------------------------------------
Hybrid Funds 10.1 9.6
Fixed-income:
Tax-free 45.0 45.2
Taxable
Domestic 16.2 15.4
Global/international 3.7 3.9
- --------------------------------------------------------------------------------
Total fixed-income 64.9 64.5
- --------------------------------------------------------------------------------
Money funds 5.5 5.6
- --------------------------------------------------------------------------------
Total end of period $226.9 $235.0
================================================================================
Simple monthly average for the three-month period (1) $226.5 $224.1
================================================================================
(1) Investment management fees from approximately 60% of our assets under
management at December 31, 2000 are calculated using a daily average.
8
Our assets under management at December 31, 2000 were $226.9 billion, 3% lower
than they were a year ago, but simple monthly average assets increased 1% this
quarter over the same period a year ago. Equity assets now comprise 65% of total
assets under management as compared to 66% at December 31, 1999. Fixed income
assets now comprise 29% of total assets under management as compared to 27% at
the same time last year.
The change in our assets under management was as follows.
ASSETS UNDER MANAGEMENT 3 months ended December 31, PERCENT
in billions 2000 1999 CHANGE
- --------------------------------------------------------------------------------
Beginning assets under management $229.9 $218.1 5%
Sales 12.7 11.0 15%
Reinvested Dividends 5.4 4.2 29%
Redemptions (15.5) (14.5) 7%
(Depreciation)appreciation (5.6) 16.2 n/a
- --------------------------------------------------------------------------------
Ending assets under management $226.9 $235.0 (3)%
For the three-month period ended December 31, 2000, sales and reinvested
dividends exceeded redemptions ("net inflows") complex-wide by $2.6 billion,
compared to net inflows of $0.7 billion in the same period last year. Market
depreciation of $5.6 billion in the three months ended December 31, 2000 was
mostly experienced within the U.S. equity markets, partially offset by
appreciation in the fixed income sector. Approximately $3.7 billion of assets
under management were added in October 2000 from our acquisition of Bissett &
Associates Investment Management Ltd. ("Bissett"), which is reflected in
(Depreciation) appreciation in the above table. Domestic equity and fixed income
products continued to have strong relative performance to peer groups, while our
global equity products' relative performance improved materially compared to
peer groups.
9
RESULTS OF OPERATIONS
Three months ended
December 31 Percent
2000 1999 Change
- --------------------------------------------------------------------------------
Net income (in millions) $149.5 $137.5 9%
Earnings per share
Basic and diluted $0.61 $0.55 11%
Operating margin 26% 30% (13)%
EBITDA margin (1) 38% 37% 3%
- --------------------------------------------------------------------------------
(1) EBITDA margin is earnings before interest, taxes on income, depreciation and
the amortization of intangibles (not including amortization of deferred sales
commissions) divided by total revenues.
Net income during the quarter ended December 31, 2000 increased 9% compared to
the same quarter last year, primarily due to increased investment income,
partially offset by increased operating expenses.
OPERATING REVENUE
Three months ended
December 31 Percent
(In millions) 2000 1999 Change
- --------------------------------------------------------------------------------
Investment management fees $345.8 $344.0 1%
Underwriting and distribution fees 164.4 164.3 -
Shareholder servicing fees 48.2 51.8 (7)%
Other, net 5.7 5.6 2%
- --------------------------------------------------------------------------------
Total operating revenues $564.1 $565.7 -
- --------------------------------------------------------------------------------
SUMMARY
Total operating revenues for the quarter ended December 31, 2000 were similar to
those recorded for the same period a year ago. This was primarily due to similar
levels of simple average assets under management, effective management fee rates
and number of shareholder accounts for the two periods under review.
INVESTMENT MANAGEMENT FEES
Investment management fees, the largest component of our operating revenues,
include both investment advisory and business management fees. These fees are
generally calculated under contractual arrangements with our sponsored
investment products as a percentage of the market value of assets under
management. Annual rates vary and generally decline as the average net assets of
the portfolios exceed certain threshold levels. In return for these fees, we
provide investment advisory, administrative and other management services.
Investment management fees increased 1% during the quarter ended December 31,
2000 over the same period last year, consistent with the 1% increase in the
simple monthly average assets under management between these periods.
10
Our effective investment management fee rate for the quarter ended December 31,
2000 (investment management fees divided by simple monthly average assets under
management) remained constant at 0.61% from the same period last year.
UNDERWRITING AND DISTRIBUTION FEES
Underwriting commissions are earned from the sale of certain classes of mutual
funds that have a sales commission paid at the time of purchase. Distribution
fees are paid by our sponsored mutual funds in return for sales and marketing
efforts on their behalf. Distribution fees include 12b-1 plan fees, which are
subject to maximum pay-out levels, based upon a percentage of the assets in each
fund. A significant portion of underwriting commissions and distribution fees
are paid to the brokers and other intermediaries who sell our sponsored
investment products to the investing public on our behalf. See the description
of Underwriting and distribution expenses below.
Overall, Underwriting and distribution fees remained constant with the same
period last year, despite a 15% increase in product sales. This was mainly
caused by a decline in commissionable sales year over year, which led to a
reduction in aggregate sales commission revenues. Sales at reduced or zero
commissions are offered on certain classes of shares and for sales to
shareholders or intermediaries that exceed specified minimum amounts. Thus, as
the mix of sales change, so will our commission revenue. The decline in sales
commission revenue was offset by an increase in distribution fees during the
quarter ended December 31, 2000. This increase was primarily due to the
increased simple monthly average assets under management and increased
contingent deferred sales commissions.
SHAREHOLDER SERVICING FEES
Shareholder servicing fees are generally fixed charges per shareholder account
that vary with the particular type of fund and the service being rendered,
although some funds are charged fees based on the level of assets under
management. Fees are received as compensation for providing transfer agency
services, which include providing customer statements, transaction processing,
customer service and tax reporting. Current agreements with the sponsored
investment products provide that closed accounts in a given calendar year remain
billable through the second quarter of the following calendar year at a reduced
rate. Accordingly, the level of fees will vary with the split of total billable
accounts between open and closed accounts.
Shareholder servicing fees decreased 7% primarily as a result of a decrease in
the total number of billable accounts.
OTHER, NET
Other, net consists primarily of revenues from the banking/finance operating
segment:
- -- Operating revenues, consisting primarily of interest and servicing income
- -- Interest expense
- -- Provision for loan losses
Other, net has remained relatively constant during the current year as higher
interest and servicing income was offset by higher interest expense.
Additionally, revenues from management and advisory activities associated with
certain Real Estate Investment Trusts and partnerships have declined during
fiscal 2001 as we have reduced our involvement in this business.
11
We have considered the potential impact of the effect on the banking/finance
segment of a 100 basis point (1%) movement in market interest rates and we do
not expect it would have a material impact on our operating revenues or
consolidated results of operations.
OPERATING EXPENSES
Three months ended
December 31
(In millions) 2000 1999 Change
- --------------------------------------------------------------------------------
Underwriting and distribution $145.7 $143.2 2%
Compensation and benefits 141.9 130.9 8%
Information systems, technology and 57.5 51.6 11%
occupancy
Advertising and promotion 22.1 22.5 (2)%
Amortization of deferred sales 18.2 20.6 (12)%
commissions
Amortization of intangible assets 9.9 9.3 6%
Other 19.8 19.9 (1)%
- --------------------------------------------------------------------------------
Total operating expenses $415.1 $398.0 4%
================================================================================
SUMMARY
Operating expenses increased 4% during the quarter ended December 31, 2000
compared with the same period last year. This was mainly due to increased
compensation and technology costs.
UNDERWRITING AND DISTRIBUTION
Underwriting and distribution includes sales commissions and distribution fees
paid to brokers and other third parties for selling, distributing and providing
ongoing services to investors in our sponsored investment products. During the
quarter ended December 31, 2000, Underwriting and distribution expenses
increased 2% compared with the prior year. Total sales increased 15%, but a
significant number of those additional sales were at a low or zero commission
rate, resulting in a smaller proportional increase in the commissions paid to
intermediaries in the current year.
COMPENSATION AND BENEFITS
Compensation and benefits increased 8% during the quarter ended December 31,
2000 compared to the same period last year, primarily due to annual salary
increases partially offset by a 3% decrease in the average employee headcount.
Salary awards are given annually in October and are based upon the performance
of the individual employee. The number of employees at December 31, 2000 was
approximately 6,300 as compared to approximately 6,600 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.
12
INFORMATION SYSTEMS, TECHNOLOGY AND OCCUPANCY
Information systems, technology and occupancy costs increased 11% over the same
period last year. This increase was primarily due to continued expenditure on
new technology initiatives and a higher amortization charge resulting from the
continuing investment in technology. During the past year, we embarked on a
number of hardware upgrades, purchased, developed and installed new software
applications, replaced or upgraded older versions of software applications,
successfully transitioned to the Year 2000, and developed e-business strategies
to improve our service levels, work environment and productivity. We expect that
similar activities will continue to impact our overall expenditures through
fiscal 2001 and beyond.
Details of capitalized information systems and technology costs were as follows:
Three months ended
December 31
(In millions) 2000 1999
- --------------------------------------------------------------------------------
Cost at September 30 $317,767 $246,857
Net additions during period 14,834 12,474
- --------------------------------------------------------------------------------
Cost at December 31 332,601 259,331
Accumulated amortization at September 30 160,872 108,291
Charge for period 16,503 11,811
- --------------------------------------------------------------------------------
Accumulated amortization at December 31 177,375 120,102
- --------------------------------------------------------------------------------
Net book value at December 31 $155,226 $139,229
================================================================================
ADVERTISING AND PROMOTION
Advertising and promotion expenses during the quarter ended December 31, 2000
remained at a comparable level to the same period last year.
AMORTIZATION OF DEFERRED SALES COMMISSIONS
Amortization of deferred sales commissions decreased 12% during the quarter
ended December 31, 2000 compared to the same period last year, principally as a
result of lower sales and the financing arrangements described below. Certain
fund classes, namely classes B and C, are sold without a front-end sales charge
to shareholders, while, at the same time, our distribution subsidiaries pay a
commission to selling brokers and other intermediaries. Similarly, class A
shares are sold without a front-end sales charge to shareholders when certain
minimum investment criteria are met, yet our U.S. distribution subsidiaries pay
a commission on the sale. We have arranged to finance certain deferred
commission assets ("DCA") arising from our U.S., Canadian and European
operations through Lightning Finance Company Limited ("LFL"). DCA that is
recorded on our balance sheet, principally consisting of commissions arising
from the sale of class A, B and C shares sold in the U.S., is amortized. As a
result of the arrangement with LFL, Canadian and European DCA are no longer
recorded in our financial statements.
13
OTHER INCOME (EXPENSE)
Investment and other income is comprised primarily of:
- -- dividends from investments in our sponsored mutual funds
- -- interest income from investments in bonds and government securities
- -- realized gains and losses on investments
- -- foreign currency exchange gains and losses
- -- other miscellaneous income
Investment income increased 200% over the same period last year due to greater
realized gains, higher average available cash balances to invest and higher
interest rates. During the quarter ended December 31, 2000, we recognized net
realized gains of approximately $17 million more than the previous quarter from
the sale of certain sponsored investment products held by the company for
investment. In addition, realized gains of $8.2 million were included in other
income related to the $32.9 million gain on the sale of our headquarters
building in San Mateo, which is being recognized over 12-month leaseback period
through June 2001.
Interest expense decreased 33% over the prior year, following a reduction in our
average outstanding debt.
TAXES ON INCOME
Our effective income tax rate for the quarters ended December 31, 2000 and 1999
remained unchanged at 24%. 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 December 31, 2000, we had $1,083.7 million in cash and cash equivalents, as
compared to $746.0 million at September 30, 2000. Liquid assets, which consist
of cash and cash equivalents, investments available-for-sale and current
receivables decreased to $1,586.0 million at December 31, 2000 from $1,677.1
million at September 30, 2000. At December 31, 2000, approximately $659.4
million was available to Franklin Templeton Investments under unused commercial
paper and medium-term note programs. Revolving credit facilities at December 31,
2000 aggregated $550 million of which $250 million was under a 364-day facility.
The remaining $300 million facility will expire in May 2003.
Cash provided by operating activities decreased to $118.1 million in the quarter
ended December 31, 2000 compared to $134.1 million in the same period last year.
This decrease was due mainly to lower operating income resulting from higher
operating expenses. During the current quarter we sold $395.2 million of
investments, net of purchases; invested net cash of $34.1 million into the
banking/finance segment; and used $94.5 million to purchase Bissett, providing a
total of $248.6 million in investing activities. Net cash used in financing
activities during the current period was $28.9 million.
14
Outstanding debt declined to $354.6 million at December 31, 2000, compared to
$362.9 million at September 30, 2000. Debt primarily consisted of commercial
paper that carried interest at variable rates and fixed-interest medium-term
notes. Our overall weighted average interest rate on outstanding commercial
paper and medium-term notes was 6.48% at December 31, 2000. Through our
medium-term note program and other fixed rate debt, we have fixed the rates of
interest we pay on 24% of our outstanding debt at December 31, 2000.
Interest-rate swaps with a notional value of $90 million matured in October
2000. We do not expect to enter into any new interest rate swap agreements in
the reasonably foreseeable future. Medium-term notes of $60 million mature in
March 2001. Other fixed-rate debt has various maturity dates through October
2003.
We have entered into a series of agreements to finance the construction of a new
corporate headquarters on a 32-acre site in San Mateo, California. An
owner-lessor trust has been set up to finance the construction and lease the
completed facility. The construction is substantially on target and we expect to
move into our new headquarters in the summer of 2001. The lease agreements are
not expected to impact our cash flows or financial condition materially during
the initial five-year lease period.
We have arranged with LFL for non-recourse financing of sales commissions
advanced on sales of our B shares globally. The cumulative sales commissions
that we have financed through LFL since inception approximated $230.6 million
at December 31, 2000.
The acquisition of Bissett for $94.5 million in cash consideration closed on
October 2, 2000. The operations of Bissett and its assets under management have
been consolidated into our results from the date of closing.
We expect that the principal uses of cash will be to increase assets under
management through expansion of our business, make strategic acquisitions, fund
property and equipment acquisitions, enhance our technology infrastructure,
improve our business processes, pay shareholder dividends, repay and service
debt, and acquire shares of the company. We expect to finance future
increases in investment in our banking/finance activities through operating cash
flows, debt, 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, our ability to issue debt or equity
securities under shelf registrations, the sales commission financing arrangement
and our ability to issue stock will be sufficient to meet our present and
reasonably foreseeable operating cash needs.
RISK FACTORS
WE FACE STRONG COMPETITION FROM NUMEROUS AND SOMETIMES LARGER COMPANIES. We
compete with numerous investment management companies, stock brokerage
investment banking firms, insurance companies, banks, online and Internet
investment sites, savings and loan associations and other financial
institutions. These companies also offer financial services and other investment
alternatives. Recent consolidation in the financial services industry has
created stronger competitors with greater financial resources and broader
distribution channels than our own. In addition, the online services that we may
offer may fail to compete effectively with other alternatives available to
investors. To the extent that existing or potential customers decide to invest
with our competitors, our market share, revenues and net income could decline.
15
COMPETING SECURITIES DEALERS AND BANKS COULD RESTRICT SALES OF OUR FUNDS. Many
of the securities dealers on whom we rely to sell and distribute Franklin,
Templeton and Mutual Series fund shares also have mutual funds under their own
names that compete directly with our products. The banking industry also
continues to expand its sponsorship of proprietary funds. These firms or banks
could decide to limit or restrict the sale of our fund shares, which could lower
our future sales and cause our revenues to decline.
CHANGES IN THE DISTRIBUTION CHANNELS ON WHICH WE DEPEND COULD REDUCE OUR
REVENUES AND HINDER OUR GROWTH. We derive nearly all of our sales through
broker/dealers and other similar investment advisors. Increasing competition in
these distribution channels has caused our distribution costs to rise and could
cause further increases in the future. Higher distribution costs lower our net
revenues and earnings. Additionally, if one of the major financial advisors who
distributes our products were to cease operations, even for a few days, it could
have a significant adverse impact on our revenues and earnings. Moreover, our
failure to maintain strong business relationships with these advisors would
impair our ability to distribute and sell our products, which would have a
negative effect on our level of assets under management, related revenues and
overall business and financial condition.
NEW SHARE CLASSES THAT WE HAVE INTRODUCED YIELD LOWER REVENUES AND HAVE REDUCED
OPERATING MARGINS. Although we receive reduced or no sales charge at the time of
initial investments in our class A shares that are related to tax deferred plans
and involve sales of more than $1 million, and in our class B shares and C
shares, we must nonetheless pay the related dealer commission. In addition, due
to industry competition, the dealer commissions that we pay on these types of
shares are now higher than in the past and may increase in the future. This
could have a negative effect on our liquidity and operating margins.
IF OUR ASSET MIX SHIFTS TO PREDOMINANTLY FIXED-INCOME PRODUCTS OUR REVENUES
COULD DECLINE. We derive higher fee revenues and income from the equity assets
that we manage. Changing market conditions may cause a shift in our asset mix
towards fixed-income products and a decline in our income and revenue.
WE HAVE BECOME SUBJECT TO AN INCREASED RISK OF ASSET VOLATILITY FROM CHANGES IN
THE GLOBAL EQUITY MARKETS. As our asset mix has shifted since 1992 from
predominantly fixed-income to a majority of equity assets, we have become
subject to an increased risk of asset volatility from changes in global equity
markets. Declines in these markets have caused in the past, and would cause in
the future, a decline in our income and revenue.
THE LEVELS OF OUR ASSETS UNDER MANAGEMENT ARE SUBJECT TO SIGNIFICANT
FLUCTUATIONS. Global economic conditions, interest rates, inflation rates and
other factors that are difficult to predict affect the mix, market values, and
levels of our assets under management. Fluctuations in interest rates and in the
yield curve affect the value of fixed-income assets under management as well as
the flow of funds to and from fixed-income funds. In turn, this affects our
asset management revenues from those assets. Similarly, changes in the equity
marketplace may significantly affect the level of our assets under management.
The factors above often have opposite effects on equity funds and fixed-income
funds, making it difficult for us to predict the net effect of any particular
set of conditions on our business and to devise effective strategies to
counteract those conditions.
WE FACE RISKS ASSOCIATED WITH CONDUCTING OPERATIONS IN NUMEROUS FOREIGN
COUNTRIES. We sell mutual funds and offer investment advisory and related
services in many different regulatory jurisdictions around the world, and intend
to continue to expand our operations internationally. Regulators in these
16
jurisdictions could change their policies or laws in a manner that might
restrict or otherwise impede our ability to distribute or register investment
products in their respective markets, which could force us to revise our
business strategy.
GENERAL ECONOMIC AND SECURITIES MARKETS FLUCTUATIONS MAY REDUCE OUR SALES AND
MARKET SHARE. Adverse general securities market conditions, increased market
volatility, currency fluctuations, governmental regulations and recessionary
global economic conditions could reduce our mutual fund share sales and other
financial services products sales. Increased and unusual market volatility and
high valuations in the technology sector and many "new economy" stocks could
also reduce our mutual fund share sales to the extent that customers decided to
shift to predominately fixed-income products. Similarly, our securitized
consumer receivables business is subject to marketplace fluctuation. General
economic and credit market downturns could reduce the ability of our customers
to repay loans, which could cause our consumer loan portfolio losses to
increase.
OUR INABILITY TO MEET CASH NEEDS COULD HAVE A NEGATIVE EFFECT ON OUR FINANCIAL
CONDITION AND BUSINESS OPERATIONS. Our ability to meet anticipated cash needs
depends upon factors including our asset value, our creditworthiness as
perceived by lenders and the market value of our stock. Similarly, our ability
to securitize and hedge future portfolios of auto loan and credit card
receivables, and to obtain continued financing for class B shares, is also
subject to the market's perception of those assets, finance rates offered by
competitors, and the general market for private debt. If we are unable, for any
reason, to obtain these funds and financing, we may be forced to incur
unanticipated costs or revise our business plan.
WE FACE INCREASED COMPETITION IN HIRING AND RETAINING QUALIFIED EMPLOYEES. Our
continued success will depend upon our ability to attract and retain qualified
personnel. Competition to hire these employees has increased, particularly in
certain geographic locations where the majority of our workforce is employed. We
may be forced to offer compensation and benefits to these employees at a level
that exceeds inflation. With historically low unemployment in the United States,
qualified personnel are now moving between firms and starting their own
companies with greater frequency. If we are not able to attract and retain
qualified employees, our overall business condition and revenues could suffer.
OUR EMERGING MARKET PORTFOLIOS AND RELATED REVENUES ARE VULNERABLE TO POLITICAL
AND ECONOMIC RISKS ASSOCIATED WITH EMERGING MARKETS. Our emerging market
portfolios and revenues derived from managing these portfolios are subject to
significant risks of loss from political and diplomatic developments, currency
fluctuations, social instability, changes in governmental polices,
expropriation, nationalization, asset confiscation and changes in legislation
related to foreign ownership. Foreign trading markets, particularly in some
emerging market countries are often smaller, less liquid, less regulated and
significantly more volatile than the U.S. and other established markets.
DIVERSE AND STRONG COMPETITION LIMITS THE INTEREST RATES THAT WE CAN CHARGE ON
CONSUMER LOANS. We compete with many types of institutions for consumer loans,
including the finance subsidiaries of large automobile manufacturers. Some of
these competitors can provide loans at significantly below-market interest rates
in connection with automobile sales. Our inability to compete effectively
against these companies or to maintain our relationships with the various
automobile dealers through which we offer consumer loans could harm the growth
of our consumer loan business.
17
RISK FACTORS RELATING TO THE COMBINATION WITH FIDUCIARY TRUST COMPANY
INTERNATIONAL
In connection with the proposed acquisition of Fiduciary Trust Company
International ("Fiduciary"), which was announced in October 2000, we may be
subject to the following risks:
THE TRANSACTION IS SUBJECT TO REGULATORY AND SHAREHOLDER APPROVAL. Our Agreement
and Plan of Share Acquisition with Fiduciary is subject to the approval of the
share exchange by various governmental and regulatory agencies. The share
exchange is also subject to the approval of the shareholders of Fiduciary. There
is no assurance that all the necessary approvals will be obtained.
FLUCTUATING MARKET PRICES COULD CAUSE THE VALUE OF OUR STOCK TO BE RECEIVED BY
THE FIDUCIARY SHAREHOLDERS TO BE LESS THAN ITS CURRENT VALUE. The stock market
recently has experienced significant price and volume fluctuations. These market
fluctuations could have a material adverse effect on the market price of our
common stock before completion of the acquisition, and thereby result in
Fiduciary shareholders receiving our common stock with a value lower than the
average trading price used to determine the exchange ratio in connection with
the share exchange.
WE MAY BE SUBJECT TO A SUBSTANTIAL TERMINATION FEE IF WE CANCEL THE TRANSACTION.
The Agreement and Plan of Acquisition requires us to pay a termination fee of
$25 million if, under certain circumstances, the Agreement and Plan of
Acquisition is terminated.
WE MAY NOT BE ABLE TO ACHIEVE THE BENEFITS WE EXPECT FROM THE ACQUISITION.
Achieving the anticipated benefits of the acquisition will depend in part on
close collaboration between management and key personnel of the two companies in
a timely and efficient manner so as to minimize the risk that the acquisition
will result in the loss of clients or employees or the continued diversion of
the attention of management.
THE ACQUISITION COULD ADVERSELY AFFECT OUR COMBINED FINANCIAL RESULTS OR THE
MARKET PRICE OF OUR COMMON STOCK. If the benefits of the acquisition do not
exceed the costs associated with the acquisition, including any dilution to our
shareholders resulting form the issuance of shares in connection with the
acquisition, our financial results, including earnings per share, could be
adversely affected. In addition, if we do not achieve the perceived benefits of
the acquisition as rapidly as, or to the extent, anticipated by financial or
industry analysts, the market price of our common stock may decline.
UNCERTAINTIES ASSOCIATED WITH THE ACQUISITION MAY CAUSE FIDUCIARY TO LOSE
CLIENTS. Fiduciary's clients may, in response to the announcement of the
acquisition, delay or defer decisions concerning their use of Fiduciary products
and services following the acquisition. Any delay or deferral could have an
adverse effect on our combined businesses. For example, Fiduciary may experience
a decrease in expected revenue as a consequence of the uncertainties associated
with the acquisition.
FOLLOWING THE TRANSACTION, WE WILL BE SUBJECT TO FEDERAL RESERVE BOARD
REGULATION. We expect to become a bank holding company and financial holding
company that will be subject to Federal Reserve Board regulation under the Bank
Holding Company Act of 1956. Following the transaction, we and our subsidiaries
will be subject to certain banking regulations, including minimum capital
requirements. Additionally, prior approval of the Federal Reserve Board may be
required in order to effect a change in control of us.
18
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 our debt transactions. Through
our medium-term note program and other fixed interest debt, we have effectively
fixed the rate of interest we pay on 24% of our debt outstanding at December 31,
2000.
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the litigation previously reported
in our Annual Report on Form 10-K for the period ended September 30, 2000 as
filed with the SEC on December 7 , 2000.
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.
19
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 10.53 Employment Agreement entered into on December 22, 2000
by and among Anne M. Tatlock, Fiduciary Trust Company
International and Franklin Resources, Inc.
Exhibit 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.
Exhibit 12 Computations of ratios of earnings to fixed charges
(b) Reports on Form 8-K:
(i) Form 8-K filed on October 25, 2000 reporting under Item
5 "Other Events" the agreement and plan of share
acquisition between Fiduciary Trust Company
International and Registrant, and including said
agreement, an earnings press release and an acquisition
press release as Exhibits under Item 7 "Financial
Statements and Exhibits" release.
(ii) Form 8-K/A (Amendment No. 1) dated October 25, 2000 and
filed on October 26, 2000, reporting under Item 5
"Other Events" the agreement and plan of share
acquisition between Fiduciary Trust Company
International and Registrant and including said
agreement, an earnings press release and an acquisition
press release as Exhibits under Item 7 "Financial
Statements and Exhibits".
20
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: February 14, 2001 /s/ MARTIN L. FLANAGAN
----------------------
MARTIN L. FLANAGAN
President, Member-Office of the
President, Chief Financial Officer and
Chief Operating Officer
21