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, 2001
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.)
One Franklin Parkway, San Mateo, CA 94403
(Address of Principal Executive Offices)
(Zip Code)
(650) 312-2000
(Registrant's telephone number, including area code)
777 Mariners Island Blvd., San Mateo, CA 94404
(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 CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding: 261,640,925 shares, common stock, par value $.10 per share at July
31, 2001.
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) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------
OPERATING REVENUES:
Investment management fees $362,543 $344,805 $1,048,464 $1,044,856
Underwriting and distribution fees 180,757 165,181 523,284 529,557
Shareholder servicing fees 53,723 54,143 153,907 159,104
Other 12,450 4,768 25,305 13,573
---------------------------------------------------
TOTAL OPERATING REVENUEs 609,473 568,897 1,750,960 1,747,090
---------------------------------------------------
OPERATING EXPENSES:
Underwriting and distribution 162,977 142,684 470,795 462,728
Compensation and benefits 167,643 133,125 449,576 398,555
Information systems, technology and 70,576 50,708 187,106 153,780
occupancy
Advertising and promotion 27,314 25,279 73,873 73,719
Amortization of deferred sales 16,361 20,980 52,176 63,211
commissions
Amortization of intangible assets 16,672 9,283 36,688 27,849
Other 23,234 18,006 62,599 58,704
---------------------------------------------------
TOTAL OPERATING EXPENSES 484,777 400,065 1,332,813 1,238,546
---------------------------------------------------
OPERATING INCOME 124,696 168,832 418,147 508,544
---------------------------------------------------
OTHER INCOME (EXPENSE):
Investment and other income 34,698 19,836 116,708 56,267
Interest expense (1,889) (3,998) (7,418) (10,542)
---------------------------------------------------
OTHER INCOME (EXPENSE), NET 32,809 15,838 109,290 45,725
---------------------------------------------------
INCOME BEFORE TAXES ON INCOME 157,505 184,670 527,437 554,269
TAXES ON INCOME 37,802 44,300 126,585 133,003
---------------------------------------------------
NET INCOME $119,703 $140,370 $400,852 $421,266
===================================================
EARNINGS PER SHARE:
BASIC $0.46 $0.58 $1.61 $1.71
DILUTED $0.46 $0.58 $1.60 $1.70
DIVIDENDS PER SHARE $0.065 $0.06 $0.195 $0.18
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) 2001 2000
- -------------------------------------------------------------------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents $848,138 $734,071
Receivables:
Sponsored investment products 249,971 241,282
Other 41,357 27,105
Investment securities, available-for-sale 637,681 635,819
Prepaid expenses and other 38,952 18,017
- ---------------------------------------------------------------------------------------------
Total current assets 1,816,099 1,656,294
- ---------------------------------------------------------------------------------------------
Banking/Finance assets:
Cash and cash equivalents 26,975 11,934
Loans receivable, net 456,864 256,416
Investment securities, available-for-sale 548,589 26,851
Other 8,768 4,361
- ---------------------------------------------------------------------------------------------
Total banking/finance assets 1,041,196 299,562
- ---------------------------------------------------------------------------------------------
Other assets:
Deferred sales commissions 92,269 86,754
Property and equipment, net 472,950 444,694
Intangible assets, net 2,018,236 1,169,485
Receivable from banking/finance group 182,670 168,496
Other 311,443 217,158
- ---------------------------------------------------------------------------------------------
Total other assets 3,077,568 2,086,587
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS $5,934,863 $4,042,443
=============================================================================================
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) 2001 2000
- ---------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Compensation and benefits 174,252 180,743
Current maturities of long-term debt 8,703 68,776
Accounts payable and accrued expenses 102,726 72,646
Commissions 90,812 76,965
Income taxes 17,618 61,661
Other 1,828 28,768
- ---------------------------------------------------------------------------------------------
Total current liabilities 395,939 489,559
- ---------------------------------------------------------------------------------------------
Banking/finance liabilities:
Payable to Parent 182,670 168,496
Deposits 697,728 54,846
Other 34,066 15,612
- ---------------------------------------------------------------------------------------------
Total banking/finance liabilities 914,464 238,954
- ---------------------------------------------------------------------------------------------
Other liabilities:
Long-term debt 551,327 294,090
Other 137,997 54,347
- ---------------------------------------------------------------------------------------------
Total other liabilities 689,324 348,437
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Total liabilities 1,999,727 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; 261,527,312 and 243,730,140 shares
issued and outstanding 26,153 24,373
Capital in excess of par value 645,550 -
Retained earnings 3,309,080 2,932,166
Other (1,700) (3,422)
Accumulated other comprehensive (loss) income (43,947) 12,376
- ---------------------------------------------------------------------------------------------
Total stockholders' equity 3,935,136 2,965,493
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,934,863 $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 NINE MONTHS ENDED
JUNE 30
(In thousands) 2001 2000
- -------------------------------------------------------------------------------------------
Net income $400,852 $421,266
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease (increase) in receivables, prepaid
expenses and other 25,953 (11,176)
Advances of deferred sales commissions (57,693) (44,220)
Decrease in restructuring liabilities - (2,564)
(Decrease) increase in other current liabilities (37,986) 3,441
Decrease in income taxes payable (24,047) (8,517)
Increase in commissions payable 13,846 4,971
Increase in accrued compensation and benefits 790 19,806
Depreciation and amortization 161,830 148,893
Gains on disposition of assets (52,527) (4,347)
- -------------------------------------------------------------------------------------------
Net cash provided by operating activities 431,018 527,553
- -------------------------------------------------------------------------------------------
Purchase of investments (582,574) (136,192)
Liquidation of investments 454,230 294,126
Purchase of banking/finance investments (3,411) (18,996)
Liquidation of banking/finance investments 361 19,383
Proceeds from securitization of loans receivable 139,295 123,048
Net origination of loans receivable (189,560) (150,134)
Acquisition of subsidiaries, net of cash acquired (100,058) -
Purchase of property and equipment (81,919) (80,824)
- -------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (363,636) 50,411
- -------------------------------------------------------------------------------------------
Increase (decrease) in bank deposits 41,416 (1,172)
Exercise of common stock options 1,887 390
Dividends paid on common stock (46,366) (43,340)
Purchase of stock (137,213) (249,547)
Issuance of debt 694,383 394,718
Payments on debt (492,381) (387,568)
- -------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 61,726 (286,519)
- -------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 129,108 291,445
Cash and cash equivalents, beginning of period 746,005 819,244
- -------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $875,113 $1,110,689
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION:
Value of common stock issued, principally restricted stock $24,959 $29,833
Value of common stock issued to acquire Fiduciary $775,783 -
Fair value of Fiduciary assets acquired $1,539,080 -
Fair value of Fiduciary liabilities acquired $757,722 -
The accompanying notes are an integral part of these consolidated financial statements.
5
FRANKLIN RESOURCES, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(Unaudited)
1. Basis of presentation
---------------------
We have prepared these unaudited interim financial statements of Franklin
Resources, Inc. and its consolidated subsidiaries in accordance with the
instructions to Form 10-Q and pursuant to the rules and regulations of the
Securities and Exchange Commission. 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 for a fair statement 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 included in our Annual
Report on Form 10-K for the fiscal year ended September 30, 2000.
2. Debt
----
In May 2001, we received approximately $490 million in net proceeds upon
the closing of the sale of $877 million principal amount at maturity of
zero-coupon convertible senior notes due 2031 (the "Convertible Notes").
The Convertible Notes, which were offered to qualified institutional buyers
only, carry a yield to maturity of 1.875% per annum, with an initial
conversion premium of 43%. Each of the $1,000 (principal amount at
maturity) Convertible Notes is convertible into 9.3604 shares of our common
stock. We may redeem the Convertible Notes for cash on or after May 11,
2006 at their accreted value. We may be required to repurchase the
Convertible Notes at their accreted value, at the option of the holders, on
May 11 of 2003, 2004, 2006, 2011, 2016, 2021 and 2026. In such event, we
may choose to pay the purchase price for such repurchases in cash or shares
of our common stock. We used approximately $129 million of the offering
proceeds to repurchase 3 million shares of our common stock at $43 per
share.
During the quarter ended June 30, 2001, we allowed the remainder of our
commercial paper to mature. We did not have any commercial paper or medium
term notes outstanding at June 30, 2001.
6
3. Comprehensive income
--------------------
The following table shows comprehensive income for the three and nine
months ended June 30, 2001.
Three months ended Nine months ended
June 30 June 30
(In thousands) 2001 2000 2001 2000
--------------------------------------------------------------------------------------
Net income $119,703 $140,370 $400,852 $421,266
Net unrealized gain (loss) on
available-for-sale securities 1,929 (2,943) (47,753) 15,739
Foreign currency translation
adjustments 896 (1,048) (8,570) (4,785)
--------------------------------------------------------------------------------------
Comprehensive income $122,528 $136,379 $344,529 $432,220
======================================================================================
4. Segment information
-------------------
We have two operating segments: investment management, which accounted for
99% of revenues for the three and nine months ended June 30, 2001 and
represented 82% of our assets at June 30, 2001, 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 includes consumer lending and selected retail
banking services to individuals.
Financial information for our two operating segments for the three and nine
months ended June 30, 2001 and 2000 is presented in the table below.
Operating revenues of the banking/finance segment are reported net of
interest expense and provision for anticipated loan losses.
Three months ended Nine months ended
June 30 June 30
(In thousands) 2001 2000 2001 2000
------------------------------------------------------------------------------------
Operating revenues:
Investment management $600,715 $564,093 $1,727,544 $1,734,513
Banking/finance 8,758 4,804 23,416 12,577
------------------------------------------------------------------------------------
Company Totals $609,473 $568,897 $1,750,960 $1,747,090
Income (loss) before taxes:
Investment management $155,680 $184,753 $521,697 $554,787
Banking/finance 1,825 (83) 5,740 (518)
------------------------------------------------------------------------------------
Company Totals $157,505 $184,670 $527,437 $554,269
====================================================================================
7
Operating segment assets were as follows:
(In thousands) June 30, 2001 September 30, 2000
------------------------------------------------------------------------------------
Investment management $4,893,667 $3,742,881
Banking/finance 1,041,196 299,562
------------------------------------------------------------------------------------
Company Totals $5,934,863 $4,042,443
====================================================================================
5. 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) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------
Net income $119,703 $140,370 $400,852 $421,266
============================================================================================
Weighted-average shares
Outstanding - basic 260,815 243,542 249,591 246,933
Incremental shares from assumed
conversions 1,359 199 1,031 188
--------------------------------------------------------------------------------------------
Weighted-average shares
outstanding - diluted 262,174 243,741 250,622 247,121
===========================================================================================
Earnings per share:
Basic $0.46 $0.58 $1.61 $1.71
Diluted $0.46 $0.58 $1.60 $1.70
We issued approximately 20.2 million shares to purchase Fiduciary Trust Company International
on April 10, 2001.
6. New Statement of Financial Accounting Standard
----------------------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 141 "Business Combinations"
("SFAS 141"), and Statement of Financial Accounting Standard No. 142
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that
all business combinations initiated after June 30, 2001 be accounted for
using the purchase method of accounting, and prohibits the use of the
pooling-of-interests method for such transactions. The new standard also
requires identified intangible assets acquired in a business combination to
be recognized as an asset apart from goodwill if they meet certain
criteria. The impact of the adoption of SFAS 141 on our reported operating
results, financial position and existing financial statement disclosure is
not expected to be material.
SFAS 142 applies to all goodwill and identified intangible assets acquired
in a business combination. Under the new standard, all goodwill, including
that acquired before initial application of the standard, should not be
amortized but should be tested for impairment at least annually. Identified
intangible assets should be amortized over their useful lives and reviewed
8
for impairment in accordance with Statement of Financial Accounting
Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long Lived Assets to be Disposed Of". Within six months of initial
application of the new standard, a transitional impairment test must be
performed on all goodwill. Any impairment loss recognized as a result of
the transitional impairment test should be reported as a change in
accounting principle. In addition to the transitional impairment test, the
required annual impairment test should be performed in the year of adoption
of the standard.
The new standard is effective for fiscal years beginning after December 15,
2001, and must be adopted as of the beginning of a fiscal year. Early
application is permitted for entities with fiscal years beginning after
March 15, 2001, provided that the first interim financial statements have
not previously been issued. Retroactive application is not permitted.
We expect to early adopt SFAS 142 on October 1, 2001 for our fiscal year
2002 and we are currently evaluating the potential impact of the standard
on our financial position and results of operations.
7. Fiduciary acquisition
---------------------
On April 10, 2001, we acquired Fiduciary Trust Company International,
("Fiduciary"). These financial statements include the results of Fiduciary
from April 10, 2001. Each share of Fiduciary Trust common stock was
exchanged for 2.7744 shares of our common stock, resulting in the issuance
in the aggregate of approximately 20,187,000 shares of our common stock.
The value of the shares issued in exchange for Fiduciary was approximately
$776 million. We accounted for this transaction using the purchase method
of accounting. The excess of purchase price, including our relevant costs,
over the fair value of the net assets acquired resulted in goodwill of $569
million. Net assets acquired included $227 million of other intangible
assets. Until the adoption of SFAS 142, as described in note 6 above, we
will amortize goodwill over 40 years and other intangibles over 15 years on
a straight-line basis.
We have not presented proforma combined results of operations because the
results of operations as reported in the accompanying consolidated
statements of income would not have been materially different.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In this section, we discuss the results of our operations and financial
condition. We also make some statements relating to the future, which are, or
may be considered, "forward-looking" statements. These forward-looking
statements are subject to risks, uncertainties, and other important factors.
Consequently, actual results and outcomes may vary significantly from those
included in or contemplated or implied by our forward-looking statements. For
this reason, 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 high net worth 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
June 30 June 30
(In billions) 2001 2000
----------------------------------------------------------------------------------------
Equity:
Global/international $93.4 $103.6
Domestic 53.3 49.6
----------------------------------------------------------------------------------------
Total equity 146.7 153.2
----------------------------------------------------------------------------------------
Hybrid 38.3 8.9
Fixed-income:
Tax-free 46.9 43.8
Taxable:
Domestic 23.4 15.3
Global/international 7.2 3.5
----------------------------------------------------------------------------------------
Total fixed-income 77.5 62.6
----------------------------------------------------------------------------------------
Money 5.4 5.2
----------------------------------------------------------------------------------------
Total end of period $267.9 $229.9
========================================================================================
Simple monthly average for the three-month period (1) $255.9 $228.0
----------------------------------------------------------------------------------------
Simple monthly average for the nine-month period (1) $238.7 $226.4
========================================================================================
(1) Investment management fees from approximately 50% of our assets under management at June 30,
2001 are calculated using a daily average.
10
Our assets under management at June 30, 2001 were $267.9 billion, 17% higher
than they were a year ago. Simple monthly average assets for the three months
ended June 30, 2001 increased 12% this quarter over the same period a year ago,
primarily as a result of the inclusion of Fiduciary assets under management. The
following table shows the relative composition of assets under management.
June 30 June 30
Percentage of total assets under management 2001 2000
- --------------------------------------------------------------------------------
Equity 55% 67%
Fixed income 29% 27%
Hybrid 14% 4%
Money funds 2% 2%
- --------------------------------------------------------------------------------
Total 100% 100%
The change in the composition of assets under management was largely due to the
inclusion of the Fiduciary assets under management in April 2001. Equity assets
now comprise 55% of total assets under management as compared to 67% at June 30,
2000. Fixed income assets now comprise 29% of total assets under management, as
compared to 27% at the same time last year. Hybrid assets now account for 14% of
total assets under management, as compared to 4% at the same time last year.
Approximately 64% of Fiduciary's assets under management were classified as
hybrid assets at the time of acquisition.
The change in our assets under management was as follows.
ASSETS UNDER MANAGEMENT Three months ended Nine months ended
June 30 Percent June 30 Percent
in billions 2001 2000 Change 2001 2000 Change
--------------------------------------------------------------------------------------------------
Beginning assets under management $215.7 $233.4 (8)% $229.9 $218.1 5%
Sales 15.4 13.3 16% 43.7 40.1 9%
Reinvested Dividends 2.2 3.2 (31)% 8.4 8.1 4%
Redemptions (14.9) (15.9) (6)% (45.0) (48.9) (8)%
Fiduciary acquisition 45.8 - - 45.8 - -
Appreciation (depreciation) 3.7 (4.1) N/A (14.9) 12.5 N/A
-------------------------------------------------------------------------------------------------
Ending assets under management $267.9 $229.9 17% $267.9 $229.9 17%
=================================================================================================
The acquisition of Fiduciary Trust Company International on April 10, 2001 (the
"Fiduciary acquisition") increased our assets under management by $45.8 billion.
For both the three and nine months ended June 30, 2001 sales and reinvested
dividends exceeded redemptions ("net inflows") complex-wide by $2.7 billion and
$7.1 billion, respectively. In the same periods last year, we experienced net
inflows of $0.6 billion for the three month period, and net outflows, where
redemptions exceeded sales and reinvested dividends ("net outflows") by $0.7
billion for the nine month period. The increase in net inflows in the current
periods as compared to the same periods last year, was principally due to
increased sales and decreased redemptions resulting from strong relative
performance of our sponsored investment products.
11
RESULTS OF OPERATIONS
Three months ended Nine months ended
June 30 Percent June 30 Percent
2001 2000 Change 2001 2000 Change
----------------------------------------------------------------------------------------------------
Net income (millions) $119.7 $140.4 (15)% $400.9 $421.3 (5)%
Earnings per share
Basic $0.46 $0.58 (21)% $1.61 $1.71 (6)%
Diluted $0.46 $0.58 (21)% $1.60 $1.70 (6)%
Operating margin 20% 30% - 24% 29% -
EBITDA margin (1) 32% 37% - 35% 36% -
---------------------------------------------------------------------------------------------------
(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 three and nine months ended June 30, 2001 decreased 15%
and 5% compared to the same periods last year. This was due to higher operating
expenses resulting from increases to compensation and technology partially
offset by net investment income and the inclusion of the operating results of
Fiduciary from April 10, 2001. Earnings per share during the three and nine
months ended June 30, 2001 decreased 21% and 6% compared to the same periods
last year primarily due to decreased net income and the increase in number of
shares outstanding following the Fiduciary acquisition.
OPERATING REVENUES
Three months ended Nine months ended
June 30 Percent June 30 Percent
(In millions) 2001 2000 Change 2001 2000 Change
-----------------------------------------------------------------------------------------
Investment
management fees $362.5 $344.8 5% $1,048.5 $1,044.8 -
Underwriting and
distribution fees 180.8 165.2 9% 523.3 529.6 (1)%
Shareholder servicing
Fees 53.7 54.1 (1)% 153.9 159.1 (3)%
Other, net 12.5 4.8 160% 25.3 13.6 86%
-----------------------------------------------------------------------------------------
Total operating revenues $609.5 $568.9 7% $1,751.0 $1,747.1 -
=========================================================================================
SUMMARY
Total operating revenues increased 7% for the three months ended June 30, 2001
compared to the same period last year. The increase was primarily attributable
to the Fiduciary acquisition, which led to higher investment management fees
following higher average assets under management during the quarter. For the
nine months ended June 30, 2001, operating revenues were substantially unchanged
compared to the same period last year as increases in investment management fees
and other revenues related to the banking/finance segment were offset by
decreases in underwriting commissions and shareholder servicing fees.
12
INVESTMENT MANAGEMENT FEES
Investment management fees, accounting for 60% of our operating revenues in the
nine months ended June 30, 2001, 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 in certain
instances decline as the average net assets of the individual portfolios exceed
certain threshold levels. In return for these fees, we provide investment
advisory, administrative and other management services.
Investment management fees increased 5% and remained constant during the three
and nine months ended June 30, 2001 over the same periods last year. The
increase in this quarter was mainly due to the Fiduciary acquisition which
caused increases in the simple monthly average assets under management between
the period from $228.0 billion a year ago to $255.9 billion in the current year.
This increase was partially offset by a shift in our asset mix toward lower fee
fixed income and hybrid investment products. This shift toward fixed income and
hybrid investment products led to a decrease in our effective investment
management fee rate (investment management fees divided by simple monthly
average assets under management) in the quarter ended June 30, 2001. The
effective investment management fee rate declined to 0.57% in the current
quarter from 0.60% over 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.
Underwriting and distribution fees increased 9% and decreased 1% during the
three and nine months ended June 30, 2001 over the same periods last year. The
increase this quarter was consistent with a 16% increase in product sales and
constant distribution fee revenues. The decrease in the nine months ended June
30, 2001 as compared to the prior year was due to a decline in commissionable
sales year over year, which led to a reduction in aggregate sales commission
revenues despite a 9% increase in product sales. 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. Distribution fee
revenues remained substantially unchanged from the same periods last year as
average assets under management on which these fees are based on remained
relatively stable.
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 vary. In the U.S., they provide that closed accounts in a
given calendar year remain billable through the second quarter of the following
calendar year at a reduced rate. In Canada, the agreements provide that accounts
closed in the previous calendar year remain billable for five months after the
end of the calendar year. Accordingly, the level of fees will vary with the
13
split of total billable accounts between open and closed accounts, the date on
which closed accounts are no longer billable, and the growth in new accounts.
Shareholder servicing fees decreased 1% and 3% during the three and nine months
ended June 30, 2001 over the same periods last year 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 and custody services related to Fiduciary. Revenues from the
banking/finance operating segment include operating revenues, consisting
primarily of interest income on loans, servicing income, and investment income
on banking/finance investment securities, which are offset by interest expense
and the provision for anticipated loan losses.
Other, net increased 160% and 86% during the three and nine months ended June
30, 2001 over the same periods last year. This increase was principally due to
the addition of the Fiduciary banking and custody activities from the date of
acquisition.
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 Nine months ended
June 30 Percent June 30 Percent
(In millions) 2001 2000 Change 2001 2000 Change
------------------------------------------------------------------------------------------
Underwriting and distribution $163.0 $142.7 14% $470.8 $462.7 2%
Compensation and benefits 167.6 133.1 26% 449.5 398.6 13%
Information systems, technology
and occupancy 70.6 50.7 39% 187.1 153.8 22%
Advertising and promotion 27.3 25.3 8% 73.9 73.7 -
Amortization of deferred
sales commissions 16.4 21.0 (22)% 52.2 63.2 (17)%
Amortization of intangible
assets 16.7 9.3 80% 36.7 27.8 32%
Other 23.2 18.0 29% 62.6 58.7 7%
------------------------------------------------------------------------------------------
Total operating expenses $484.8 $400.1 21% $1,332.8 $1,238.5 8%
==========================================================================================
SUMMARY
Operating expenses increased 21% and 8% during the three and nine months ended
June 30, 2001 compared to the same periods last year. These changes were
primarily caused by increased compensation and technology costs, the addition of
the operating costs of Fiduciary, and increased underwriting and distribution
expenses for the three months ended June 30, 2001.
14
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. Underwriting
and distribution expenses increased 14% and 2% during the three and nine months
ended June 30, 2001 compared to the same periods last year. The increase during
the three months ended June 30, 2001 was consistent with a 16% increase in
product sales. During the nine months ended June 30, 2001, product sales
increased 9%, but a significant number of sales were at low or zero commission
rates, resulting in a smaller proportional increase in the commissions paid to
intermediaries in the current year.
COMPENSATION AND BENEFITS
Compensation and benefits increased 26% and 13% during the three and nine months
ended June 30, 2001 compared to the same periods last year. This increase was
primarily due to the addition of 790 Fiduciary employees, annual salary
increases, an increase in employee benefit costs and additional recruiting
costs. Salary awards are given annually in October and are based upon the
performance of the individual employee. Employee benefits are reviewed annually.
The number of employees at June 30, 2001 was approximately 7,100 as compared to
approximately 6,500 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
during volatile investment market conditions.
INFORMATION SYSTEMS, TECHNOLOGY AND OCCUPANCY
Information systems, technology and occupancy costs increased 39% and 22% during
the three and nine months ended June 30, 2001 compared to the same periods last
year. This increase was primarily due to continued expenditure on new technology
initiatives, the charges and costs in connection with IBM's assumption of the
management of our data center and distributed server operations and the added
costs of the Fiduciary acquisition. 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, 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, including the development
of a single global institutional sales and marketing platform.
15
Details of capitalized information systems and technology costs were as follows.
Three months ended Nine months ended
June 30 June 30
in thousands 2001 2000 2001 2000
-----------------------------------------------------------------------------------------
Beginning cost $353,456 $275,370 $317,767 $246,857
Net assets acquired in Fiduciary acquisition 10,797 - 10,797 -
Net additions during period 31,769 22,476 67,458 50,989
-----------------------------------------------------------------------------------------
Ending cost 396,022 297,846 396,022 297,846
Beginning Accumulated amortization 195,925 132,888 160,872 108,291
Charge during period 19,879 13,426 54,932 38,023
-----------------------------------------------------------------------------------------
Ending Accumulated amortization 215,804 146,314 215,804 146,314
-----------------------------------------------------------------------------------------
Net book value at end of period $180,218 $151,532 $180,218 $151,532
==========================================================================================
ADVERTISING AND PROMOTION
Advertising and promotion increased 8% and remained constant during the three
and nine months ended June 30, 2001 compared to the same periods last year. This
increase resulted primarily from increased promotion and advertising activity in
the current quarter to assist in educating the sales channels and the investing
public about the strong relative investment performance of our sponsored
investment products.
AMORTIZATION OF DEFERRED SALES COMMISSIONS
Amortization of deferred sales commissions decreased 22% and 17% during the
three and nine months ended June 30, 2001 compared to the same periods last
year. This decrease was 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"), a company in which we have an ownership interest. DCA that are 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., including DCA financed through
LFL, are amortized. As a result of the arrangement with LFL, all Canadian and
European DCA are no longer recorded in our financial statements. Generally, U.S.
DCA sold to LFL under the U.S. agreement are retained in the financial
statements since they are not considered sold under this agreement until resold
by LFL, which occurs at least once annually.
OTHER INCOME (EXPENSE)
Investment and other income is comprised primarily of:
- -- Dividends from investments in our sponsored mutual funds
- -- Interest income (except for Banking/Finance segment interest income)
16
- -- Realized gains and losses on investments
- -- Foreign currency exchange gains and losses
- -- Other miscellaneous income, including gain or loss on disposal of company
property
Other income increased 75% and 107% during the three and nine months ended June
30, 2001 compared to the same periods last year principally due to higher
realized gains in the current year. During the quarter ended December 31, 2000,
we recognized net realized gains of approximately $17 million from the sale of
certain sponsored investment products held by the company for investment. In
addition, other realized gains of $8.2 million and $24.6 million were included
in other income during the three and nine months ended June 30, 2001. These
gains related to the $32.9 million gain on the sale of our headquarters building
in San Mateo, which was recognized over the 12-month leaseback period through
June 2001.
Interest expense decreased 53% and 30% during the three and nine months ended
June 30, 2001 compared to the same periods last year due to the relatively low
interest rate of 1.875% on the Convertible Notes issued in May 2001, the
redemption of outstanding commercial paper during the three months ended June
30, 2001 and generally lower interest rates in the current year as compared to
the same periods last year.
TAXES ON INCOME
Our effective income tax rate for the quarters ended June 30, 2001 and 2000
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 June 30, 2001, we had $875.1 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 increased to $2,352.7 million at June 30, 2001 from $1,677.1 million
at September 30, 2000. At June 30, 2001, approximately $500 million was
available to us under unused commercial paper and medium-term note programs. In
addition, revolving credit facilities at June 30, 2001 aggregated to $500
million of which $200 million was under a 364-day facility. The remaining $300
million facility will expire in May 2003.
Cash provided by operating activities decreased to $431.0 million in the nine
months ended June 30, 2001 compared to $527.6 million in the same period last
year. This decrease was due mainly to lower operating income resulting from
higher operating expenses offsetting a small increase in operating revenues.
During the current year, we used a total of $363.6 million for investing
activities, including $128.3 million related to the purchase of investments, net
of liquidations; $53.3 million in connection with the banking/finance segment;
and $100.1 million primarily related to the purchase of Bissett and Associates
Investment Management Ltd. Net cash provided by financing activities during the
current year was $61.7 million as net debt issued of approximately $202 million
exceeded other uses of cash in financing activities.
Outstanding debt increased to $560.0 million at June 30, 2001 compared to $362.9
million at September 30, 2000. As described further in note 2 to the financial
statements, after May 2001, debt primarily consists of the Convertible Notes.
The Convertible Notes carry a yield to maturity of 1.875% per annum to maturity.
We repurchased 3 million shares of common stock at $43 per share on May 20, 2001
17
in conjunction with the issuance of the Convertible Notes. Prior to May 2001,
debt primarily consisted of commercial paper that carried interest at variable
rates and fixed-interest medium-term notes. During the quarter ended June 30,
2001, our remaining commercial paper was redeemed. Other fixed-rate debt
totaling $19 million has various maturity dates through October 2003.
We had previously 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 was set up to finance the construction and
lease the completed facility. The construction was substantially completed and
we moved into our new headquarters in the summer of 2001. The lease agreement is
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 $275 million at
June 30, 2001.
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 and
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
offer may fail to compete effectively with other alternatives available to
investors. To the extent that existing or potential customers decide to invest
with our competitors, our market share, revenues and net income could decline.
COMPETING SECURITIES DEALERS AND BANKS COULD RESTRICT SALES OF OUR FUNDS. Many
of the securities dealers on which 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 for
these distribution channels has caused our distribution costs to rise and could
cause further increases in the future. Higher distribution costs lower our net
revenues and earnings. Additionally, if one of the major financial advisors who
distributes our products were to cease their operations, even for a few days, it
could have a significant adverse impact on our revenues and earnings. Moreover,
18
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 than from fixed income assets. Changing market conditions may
cause a shift in our asset mix towards fixed-income products and a decline in
our revenue and income.
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 revenue and income.
THE LEVELS OF OUR ASSETS UNDER MANAGEMENT ARE SUBJECT TO SIGNIFICANT
FLUCTUATIONS. Global economic conditions, interest rates, inflation rates and
other factors that are difficult to predict affect the mix, market values, and
levels of our assets under management. Fluctuations in interest rates and in the
yield curve affect the value of fixed-income assets under management as well as
the flow of funds to and from fixed-income funds. In turn, this affects our
asset management revenues from those assets. Similarly, changes in the equity
marketplace may significantly affect the level of our assets under management.
The factors above often have opposite effects on equity funds and fixed-income
funds, making it difficult for us to predict the net effect of any particular
set of conditions on our business and to devise effective strategies to
counteract those conditions.
WE FACE RISKS ASSOCIATED WITH CONDUCTING OPERATIONS IN NUMEROUS FOREIGN
COUNTRIES. We sell mutual funds and offer investment advisory and related
services in many different regulatory jurisdictions around the world, and intend
to continue to expand our operations internationally. Regulators in these
jurisdictions could change their policies or laws in a manner that might
restrict or otherwise impede our ability to distribute or register investment
products in their respective markets, which could force us to revise our
business strategy.
GENERAL ECONOMIC AND SECURITIES MARKETS FLUCTUATIONS MAY REDUCE OUR SALES AND
MARKET SHARE. Adverse general securities market conditions, increased market
volatility, currency fluctuations, governmental regulations and recessionary
global economic conditions could reduce our mutual fund share sales and other
financial services products sales. Increased and unusual market volatility 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
19
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 is still strong, particularly in
certain geographic locations where the majority of our workforce is employed. We
may be forced to offer increases in compensation and benefits to these employees
at rates that exceed inflation. 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
MARKET-SPECIFIC POLITICAL AND ECONOMIC RISKS. Our emerging market portfolios and
revenues derived from managing these portfolios are subject to significant risks
of loss from political and diplomatic developments, currency fluctuations,
social instability, changes in governmental polices, expropriation,
nationalization, asset confiscation and changes in legislation related to
foreign ownership. Foreign trading markets, particularly in some emerging market
countries are often smaller, less liquid, less regulated and significantly more
volatile than the U.S. and other established markets.
DIVERSE AND STRONG COMPETITION LIMITS THE INTEREST RATES THAT WE CAN CHARGE ON
CONSUMER LOANS. We compete with many types of institutions for consumer loans,
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.
WE MAY NOT BE ABLE TO ACHIEVE THE BENEFITS WE EXPECT FROM THE RECENT ACQUISITION
OF FIDUCIARY TRUST COMPANY INTERNATIONAL ("FIDUCIARY"). 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 FIDUCIARY ACQUISITION COULD ADVERSELY AFFECT OUR COMBINED FINANCIAL RESULTS
OR THE MARKET PRICE OF OUR COMMON STOCK. If the benefits of the acquisition over
time do not exceed the costs associated with the acquisition, including any
dilution to our shareholders resulting from 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.
WE ARE SUBJECT TO FEDERAL RESERVE BOARD REGULATION. Upon completion of our
acquisition of Fiduciary Trust Company International, we became a bank holding
company and a financial holding company subject to the supervision and
regulation of the Federal Reserve Board under the Bank Holding Company Act of
1956. The Federal Reserve Board may impose limitations, restrictions, or
prohibitions on our activities if the Federal Reserve Board believes that we do
not have the appropriate financial and managerial resources to commence or
conduct an activity or make an acquisition, and the Federal Reserve Board may
take actions as appropriate to enforce applicable federal law. Additionally,
prior approval of the Federal Reserve Board may be required in order to effect a
change in control of us.
20
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. We have
effectively fixed the rate of interest we pay on 98% of our debt outstanding at
June 30, 2001.
We have considered the potential impact of the effect on the banking/finance
segment of a 100 basis point (1%) movement in market interest rates and we do
not expect it would have a material impact on our operating revenues or results
of operations.
20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
An initial complaint captioned Richard Nelson and Dorothy Nelson v. Edward K.
Dunn, Jr. was filed on May 7, 2001, Case No. 01-282-DRH, in the United States
District Court for the Southern District of Illinois. On June 22, 2001, the
Plaintiffs filed a First Amended complaint captioned Richard Nelson, et. al. v.
AIM Advisors, Inc. et. al, which added additional plaintiffs and named as
defendants advisory and distribution entities from 25 different mutual fund
complexes, including Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc., both wholly owned subsidiaries of Franklin Resources, Inc.
("FRI") and Templeton Global Advisors Limited, an indirect wholly owned
subsidiary of FRI (collectively, the "Franklin Defendants"). The First Amended
complaint alleges, among other things, violations of the Investment Company Act
of 1940 with respect to distribution and advisory contracts of funds advised or
distributed by the defendants, including the Franklin Defendants. The plaintiffs
are seeking actual and punitive damages, as well as equitable and other relief.
We previously reported that three individual plaintiffs filed a consolidated
complaint in the U.S. District Court for the Southern District of Florida,
against Templeton Vietnam Opportunities Fund, Inc. (now known as Templeton
Vietnam and Southeast Asia Fund, Inc.); Templeton Asset Management, Ltd., an
indirect wholly-owned subsidiary of FRI and the investment manager of the
closed-end investment company; certain of the fund's officers and directors;
FRI; and Templeton Worldwide, Inc., an FRI subsidiary. The plaintiffs in that
action, captioned In Re: Templeton Securities Litigation (Civil Action No.
98-6059) moved to certify a class with respect to certain claims raised in the
consolidated complaint. The district court recently denied the plaintiffs'
motion to certify a class with respect to their claims.
Management believes that these lawsuits are without merit and intends to
vigorously defend such actions.
In addition to the above-described lawsuits, we are involved from time to time
in litigation relating to claims arising in the normal course of business.
Management is of the opinion that the ultimate resolution of such claims will
not materially affect our business or financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On May 11, 2001, we completed a private offering of $877,000,000 principal
amount at maturity of zero-coupon convertible senior notes due 2031 (the
"Convertible Notes") for aggregate net proceeds of approximately
$490,000,000. Each $1,000 principal amount at maturity security was issued
21
at 57.128% of principal amount at maturity, accretes at a rate of 1.875%
per annum and is convertible into 9.3604 shares of our common stock. We may
be required to repurchase the securities at the accreted value at the
option of the holders on May 11 of 2003, 2004, 2006, 2011, 2016, 2021 and
2026. In such event, we may choose to pay the purchase price for such
repurchases in cash or shares of our common stock. We may redeem the
Convertible Notes for cash on or after May 11, 2006. We used approximately
$129 million of the net offering proceeds to repurchase 3 million shares of
our common stock. We will use the balance of the proceeds for general
corporate purposes. This transaction was completed without registration in
reliance upon section 4(2) of the Securities Act. The securities were
initially sold to Merrill Lynch, Pierce, Fenner & Smith Incorporated for
resale to qualified institutional buyers pursuant to Rule 144A under the
Securities Act.
22
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 4.1 Indenture between Franklin Resources, Inc. and The Bank
of New York dated May 11, 2001 incorporated by reference
to Exhibit 4.2 to the Registrant's Registration
Statement on Form S-3, filed on August 6, 2001
Exhibit 4.2 Registration Rights Agreement between Franklin Resources,
Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") dated May 11, 2001
incorporated by reference to Exhibit 4.4 to the
Registrant's Registration Statement on Form S-3, filed
on August 6, 2001
Exhibit 12 Computations of ratios of earnings to fixed charges
(b) Reports on Form 8-K:
(i) Form 8-K filed on April 10, 2001 reporting under
Item 2 "Acquisition or Disposition of Assets" the
completion of the share acquisition of Fiduciary Trust
Company International ("Fiduciary"), and including a
press release issued jointly on April 10, 2001 by
Registrant and Fiduciary as an Exhibit under Item 7
"Financial Statements and Exhibits".
(ii) Form 8-K filed on April 26, 2001 reporting under Item 5
"Other Events" an earnings press release, dated April
26, 2001, and including said press release as an Exhibit
under Item 7 "Financial Statements and Exhibits."
23
(iii) Form 8-K filed on May 7, 2001 reporting under Item 5
"Other Events" the filing of a press release dated, May
7, 2001, by Registrant announcing the offering of debt
securities convertible into shares of the Registrant's
common stock, and including said press release as an
Exhibit under Item 7 "Financial Statements and
Exhibits."
(iv) Form 8-K filed on May 8, 2001 reporting under Item 5
"Other Events" the filing of a press release dated, May
8, 2001, by Registrant announcing that Registrant had
entered into a purchase agreement for the sale of
zero-coupon convertible senior notes, and including said
press release as an Exhibit under Item 7 "Financial
Statements and Exhibits."
(v) Form 8-K filed on May 14, 2001 reporting under Item 5
"Other Events" the filing of a press release dated, May
11, 2001, by Registrant announcing the completion of the
zero-coupon convertible note offering and the
Registrant's repurchase of shares of common stock, and
including said press release as an Exhibit under Item 7
"Financial Statements and Exhibits."
(vi) Form 8-K/A filed on June 19, 2001 amending Form 8-K
filed on April 10, 2001 and reporting under Item 7
"Financial Statements and Exhibits" Registrant's
determination that the financial statements and the pro
forma financial statements relating to the acquisition
of Fiduciary need not be filed on Form 8-K.
24
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 13, 2001 /s/ Martin L. Flanagan
----------------------
MARTIN L. FLANAGAN
President, Member-Office of the President,
Chief Financial Officer and Chief Operating
Officer
25