UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-9318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-2670991
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code: (650) 312-2000
SECURITIES REGISTERED PURSUANT TO
SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, par value $.10 New York Stock Exchange
per share Pacific Exchange
London Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [ ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of $36.99 on December 3, 2002 on the
New York Stock Exchange was $5,354,696,667. Calculation of holdings by
non-affiliates is based upon the assumption, for these purposes only, that
executive officers, directors, nominees, Registrant's Profit Sharing Plan and
persons holding 5% or more of Registrant's Common Stock are affiliates. Number
of shares of the Registrant's common stock outstanding at December 3, 2002:
257,878,976
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the Registrant's proxy statement for its Annual Meeting of
Stockholders to be held on January 30, 2003, which will be filed under cover of
Schedule 14A with the Securities and Exchange Commission (the "SEC") on or about
December 23, 2002 (the "Proxy Statement"), are incorporated by reference into
Part III of this report.
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INDEX TO ANNUAL REPORT ON FORM 10-K
-----------------------------------
PAGE
NUMBER
FORM 10-K REFERENCE TO THIS
REQUIRED INFORMATION 2002 ANNUAL REPORT
- -------------------- ON FORM 10-K
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PART I
ITEM 1. BUSINESS..................................................4
General.................................................4
Company History and Acquisitions........................4
Lines of Business.......................................5
Types of Investment Management and Related Services...6
Banking/Finance Operations...........................19
Regulatory Considerations..............................19
Competition............................................21
Financial Information About Industry Segments..........22
Intellectual Property..................................22
Employees..............................................22
ITEM 2. PROPERTIES...............................................23
ITEM 3. LEGAL PROCEEDINGS........................................23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.......................................23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS.................24
Information About Our Common Stock...................24
ITEM 6. SELECTED FINANCIAL DATA..................................24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK......................................40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...................................70
2
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PAGE
NUMBER
FORM 10-K REFERENCE TO THIS
REQUIRED INFORMATION 2002 ANNUAL REPORT
- -------------------- ON FORM 10-K
-------------------
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT.........................................70
Proxy: "Proposal 1: Election of Directors"*
ITEM 11. EXECUTIVE COMPENSATION...................................72
Proxy: "Proposal 1: Election of Directors"*
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..................................72
Equity Compensation Plan Information
Proxy: "Security Ownership of Principal Shareholders"
and "Security Ownership of Management"*
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS...........................................72
Proxy: "Proposal 1: Election of Directors -
Certain Relationships and Related Transactions" *
ITEM 14. CONTROLS & PROCEDURES....................................73
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K....................................73
Consolidated Financial Statements
Reports on Form 8-K
List of Exhibits
SIGNATURES...........................................................74
CERTIFICATIONS ......................................................75
* Incorporated by reference to the Proxy Statement.
Franklin Resources, Inc. files reports with the United States Securities and
Exchange Commission (the "SEC"). Copies of any of these filings can be obtained
from the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Information on the operation of the Public Reference Room can be obtained
by calling the SEC at 1-800-SEC-0330.
We also file reports with the SEC electronically via the Internet. The SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC, at http://www.sec.gov. Additional information about Franklin
Resources, Inc. can also be obtained at our website at
http://www.franklintempleton.com. We make available free of charge on our
website our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.
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PART I
"FORWARD-LOOKING STATEMENTS." In addition to historical information, this Annual
Report on Form 10-K contains forward-looking statements that involve risks and
uncertainties, including the risk factors explained in the section entitled
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), that could cause our actual results to differ materially
from those reflected in the forward-looking statements. When used in this
report, words or phrases about the future such as "expected to," "could have,"
"will continue," "anticipates," "estimates," or similar expressions are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Statements in MD&A and elsewhere in this report that
speculate about future events are "forward-looking statements." Forward-looking
statements are our best prediction at the time that they are made, and you
should not rely on them. If a circumstance occurs that causes any of our
forward-looking statements to be inaccurate, we do not have an obligation to
announce publicly the change to our expectations, or to make any revision to the
forward-looking statements.
ITEM 1. BUSINESS
GENERAL
Franklin Resources, Inc. ("FRI" or the "Company"), is a diversified financial
services company, which is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"), and as a financial
holding company under the Gramm-Leach-Bliley Act (the "GLB Act"). Through our
wholly-owned direct and indirect subsidiary companies, we provide a broad range
of investment advisory, investment management and related services to open-end
investment companies, including our own family of retail mutual funds,
institutional accounts, high net-worth families, individuals and separate
accounts in the United States (the "U.S.") and internationally. Our 249
"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, which are sold to the public under the
Franklin, Templeton, Mutual Series, Bissett and Fiduciary Trust brand names. As
of September 30, 2002, we had $247.8 billion in assets under our management with
approximately 9.6 million shareholder accounts worldwide. In support of our
primary business segment, investment management, we also provide certain related
services, including transfer agency, fund administration, distribution,
shareholder processing, custodial, trustee and other fiduciary services. In our
secondary business segment, banking/finance, we provide clients with select
retail, private banking, consumer loan and other credit services through our
bank subsidiaries. The common stock of FRI is traded in the U.S. primarily on
the New York Stock Exchange and the Pacific Exchange under the ticker symbol
"BEN" and under the ticker symbol "FKR" on the London Stock Exchange. The term
"Franklin(R) Templeton(R) Investments" as used in this document, refers to
Franklin Resources, Inc. and its consolidated subsidiaries.
COMPANY HISTORY AND ACQUISITIONS
Franklin Templeton Investments and its predecessors have been engaged in the
financial services business since 1947. Franklin Resources, Inc. was
incorporated in Delaware in November 1969. We originated our mutual fund
business with the Franklin family of funds, which is now known as the Franklin
Funds(R). We expanded our business, in part, by acquiring companies engaged in
the investment advisory and investment management business.
In October 1992, we acquired substantially all of the assets and liabilities of
the investment adviser to the Templeton, Galbraith & Hansberger Ltd. financial
services business. This acquisition added the Templeton family of funds to our
Company. The Templeton funds are known for their international and global
investment objectives and value style of investing.
In November 1996, we acquired certain assets and liabilities of Heine Securities
Corporation, which provided investment management services to various accounts
and investment companies, including Mutual Series Fund Inc., now known as
Franklin Mutual Series Fund Inc. ("Mutual Series"). The Mutual Series funds are
primarily value oriented equity funds.
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We expanded our business in Korea in July 2000 when we purchased all of the
remaining outstanding shares of a Korean asset management company, in which we
previously held a partial interest. With over $2 billion in assets under
management in Korea, we are now one of the larger foreign money managers in that
country.
We acquired all of the outstanding shares of Bissett & Associates Investment
Management, Ltd. ("Bissett") in October 2000 for approximately $95 million.
Bissett now operates as part of our Canadian subsidiary, Franklin Templeton
Investments Corp. ("FTIC"). With the addition of Bissett, we added Bissett's
family of mutual funds to our existing Canadian based funds and expanded our
investment advisory services throughout Canada to a broad range of clients,
including institutional clients such as pension plans, municipalities,
universities, charitable foundations and private clients.
In April 2001, we acquired Fiduciary Trust Company International, a bank
organized under the New York State Banking Law ("Fiduciary"). Following the
acquisition, Fiduciary became a wholly-owned subsidiary of Franklin Resources,
Inc. The stock transaction was valued at approximately $776 million at closing.
Fiduciary has a reputation as one of the leading providers of investment
management and related trust and custody services to institutional clients and
high net-worth families and individuals. With the acquisition of Fiduciary, we
also added Fiduciary's U.S. and non-U.S. mutual funds to our product line.
On July 26, 2002, our 75% owned subsidiary, Templeton Asset Management (India)
Private Limited, acquired all of the outstanding shares of Pioneer ITI AMC
Limited ("Pioneer") for approximately $55.4 million. Pioneer is an Indian
investment management company with approximately $800 million in assets under
management as of the purchase date. The acquisition makes us one of the largest
private sector fund companies in India, with combined assets at the time of
acquisition, of approximately $1.6 billion and more than 850,000 shareholder
accounts.
LINES OF BUSINESS
I. INVESTMENT MANAGEMENT AND RELATED SERVICES
We derive substantially all of our revenues from providing investment advisory
and investment management, distribution and administrative services to our
various family of funds, high net-worth clients, institutional accounts and
separate accounts. Our revenues depend to a large extent on the amount of assets
under management. Underwriting and distribution revenues, also a large source of
revenue, consist of sales charges and commissions derived from sales of our
sponsored investment products and distribution and service fees. When used in
this report "Franklin Templeton mutual funds" or "funds" means all of the
Franklin, Templeton, Mutual Series, Bissett, and Fiduciary mutual funds;
"sponsored investment products" means all of the Franklin Templeton mutual funds
together with closed-end investment companies, foreign-based investment
products, and other U.S. and international private, institutional, high
net-worth and separate accounts.
A. ASSETS UNDER MANAGEMENT ("AUM")
-------------------------------
Investment management fees, our most substantial source of revenue, are based
upon the dollar value of assets under management, because we earn most of our
revenues from fees linked to the amount of assets in the accounts that we
advise. As of September 30, 2002, the type of assets under management by
investment objective held by investors on a worldwide basis was:
TYPE OF ASSETS VALUE IN BILLIONS % TOTAL OF AUM
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EQUITY $117.9 48%
- ------
Growth potential, income potential or various combinations thereof.
FIXED-INCOME $87.5 35%
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Both long and short-term.
HYBRID FUNDS $36.6 15%
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Asset allocation, balanced, flexible and income-mixed funds.
MONEY FUNDS $5.8 2%
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Short term liquid assets
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Broadly speaking, the change in the net assets of the sponsored investment
products depends upon two factors: (1) the level of sales (inflows) as compared
to the level of redemptions (outflows); and (2) the increase or decrease in the
market value of the securities held in the portfolio of investments. In recent
years, we have become subject to an increased risk of asset volatility,
resulting from changes in the domestic and global financial and equity markets.
In addition, because we generally derive higher revenues and income from our
equity assets, a shift in assets from equity to fixed-income and hybrid funds
reduces total revenue and thus, net income. Despite such volatility, we believe
that we are more competitive as a result of the greater diversity of sponsored
investment products available to our customer base.
B. TYPES OF INVESTMENT MANAGEMENT AND RELATED SERVICES
---------------------------------------------------
A majority of our revenues are derived from providing investment management,
advisory, distribution, transfer agency and related services for the Franklin
Templeton mutual funds. We advise, manage and implement the investment
activities of and provide other administrative services necessary to operate our
registered investment companies, the related U.S.-open-end and closed-end funds
or series and our many non-U.S. based sponsored investment products.
1. ADVISORY SERVICES FOR OUR FUNDS
We earn investment management fee revenues by providing investment advisory and
management services pursuant to investment management agreements with each fund.
This business is primarily conducted through our wholly-owned direct and
indirect subsidiary companies, including, among others, the following:
Fiduciary International, Inc. ("FII"), a registered investment adviser under the
Investment Advisers Act of 1940 (the "Advisers Act"), provides investment
advisory and portfolio management to certain mutual funds and separate accounts;
Franklin Advisers, Inc. ("FAV"), a registered investment adviser under the
Advisers Act, provides investment advisory, portfolio management and
administrative services to various Franklin Templeton mutual funds and also
provides sub-advisory services to non-affiliated entities;
Franklin Advisory Services, LLC ("FAS"), a registered investment adviser under
the Advisers Act, provides investment advisory and portfolio management services
to certain of the Franklin Templeton mutual funds and also provides sub-advisory
services to non-affiliated entities;
Franklin Mutual Advisers, LLC ("FMA"), a registered investment adviser under the
Advisers Act, provides investment and portfolio management services to the
Mutual Series funds;
Franklin Templeton Investment Management Limited ("FTIML"), a registered
investment adviser in the United Kingdom and under the Advisers Act, provides
and serves as an investment adviser to various of our investment companies
registered in foreign jurisdictions, including Europe;
Franklin Templeton Investments Corp. ("FTIC"), a registered investment advisor
with many of the Canadian securities commissions, a mutual fund dealer with the
Ontario Securities Commission and Alberta Securities Commission and an
investment adviser under the Advisers Act, provides investment advisory,
portfolio management, distribution and administrative services for Canadian
registered retail funds;
Franklin Templeton Investments (Asia) Limited ("FTIL"), a registered investment
adviser in Hong Kong and under the Advisers Act, provides investment advisory
and management services to our sponsored investment products with mandates in
the emerging markets;
Templeton Asset Management Ltd. ("TAML"), a registered investment adviser in
Singapore, Hong Kong and under the Advisers Act, provides investment advisory
and related services to certain Templeton developing funds and portfolios;
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Templeton Global Advisors Limited ("TGAL"), a registered investment adviser
under the Advisers Act, provides investment advisory, portfolio management, and
administrative services to certain of the Templeton funds;
Templeton Investment Counsel, LLC ("TICL"), a registered investment advisor
under the Advisers Act, provides investment advisory, portfolio management and
administrative services to certain of the Templeton funds and sub-advisory
services to certain of the Franklin Funds; and
Franklin Templeton Asset Strategies, LLC ("FTAS"), a registered investment
adviser under the Advisers Act and a registered Commodity Pool Operator under
the Commodity Exchange Act, provides investment advisory, portfolio management
and administrative services to certain of our sponsored investment products with
mandates in alternative investments.
Our subsidiary companies conduct research and provide the investment advisory
services and determine which securities the funds will purchase, hold or sell as
directed by each fund's board of trustees, directors or administrative managers.
In addition, the subsidiary companies take all steps necessary to implement such
decisions, including selecting brokers and dealers, executing and settling
trades in accordance with detailed criteria set forth in the management
agreement for each fund, and applicable law and practice. In addition, certain
of our subsidiary companies also provide similar investment management and
administrative services to a number of non-U.S. open-end and closed-end
investment companies, as well as other U.S. and international private and
institutional accounts, including certain of our sponsored investment companies
organized in Luxembourg and Ireland.
Our investment advisory services include fundamental investment research and
valuation analyses, including original economic, political, industry and company
research, company visits and inspections, and the utilization of such sources as
company public records and activities, management interviews, company prepared
information, and other publicly available information, as well as analyses of
suppliers, customers and competitors. In addition, research services provided by
brokerage firms are used to support our findings.
Investment management and related services are provided pursuant to agreements
in effect with each of our U.S.-registered open-end and closed-end funds.
Comparable agreements are in effect with foreign-registered funds and with
private accounts. In general, the management agreements for our U.S.-registered
open-end and closed-end funds must be renewed each year, and must be
specifically approved at least annually by a vote of such funds' board of
trustees or directors or by a vote of the holders of a majority of such funds'
outstanding voting securities. Foreign-registered funds have various termination
rights, review and renewal provisions that are not discussed in this report.
Under the majority of investment management agreements, the funds pay us a fee
payable monthly in arrears based upon a fund's average daily net assets. Annual
fee rates under the various global investment management agreements generally
range from 0.15% to a maximum of 2.25% and are often reduced as net assets
exceed various threshold levels. The funds generally pay their own expenses such
as legal, custody and audit fees, reporting costs, board and shareholder meeting
costs, SEC and state registration fees and similar expenses.
We use a "master/feeder" fund structure in limited situations. This structure
allows an investment adviser to manage a single portfolio of securities at the
"master fund" level and have multiple "feeder funds" invest all of their
respective assets into the master fund. Individual and institutional
shareholders invest in the "feeder funds" which can offer a variety of service
and distribution options. An advisory fee is charged at the master fund level,
and administrative and shareholder servicing fees are charged at the feeder fund
level.
Our investment management agreements permit us to serve as an adviser to more
than one fund so long as our ability to render services to each of the funds is
not impaired, and so long as purchases and sales for various advised funds are
made on an equitable basis. Our management personnel and the fund directors or
boards of trustees regularly review the fund advisory and other administrative
fee structures in light of fund
7
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performance, the level and range of services provided, industry conditions and
other relevant factors. Advisory and other administrative fees are generally
waived or voluntarily reduced when a new fund is established and then increased
to contractual levels within an established timeline or as net asset values
reach certain levels.
Each U.S. investment management or advisory agreement between Franklin Templeton
Investments and each fund automatically terminates in the event of its
"assignment", as defined in the Investment Company Act of 1940 (the " '40 Act").
In addition, either party may terminate the agreement without penalty after
written notice ranging from 30 to 60 days. If management agreements representing
a significant portion of our assets under management were terminated, it would
have a material adverse impact on our Company. To date, none of our management
agreements with any of our retail Franklin Templeton mutual funds have been
involuntarily terminated.
2. UNDERWRITING AND DISTRIBUTION
A large portion of our revenues under the investment management operating
segment is generated from providing underwriting and distribution services.
Franklin/Templeton Distributors, Inc. ("FTDI"), a wholly-owned subsidiary of the
Company, acts as the principal underwriter and distributor of shares of most of
our U.S.-registered open-end mutual funds. Templeton/Franklin Investment
Services, Inc. acts as principal underwriter and distributor of the shares of
FTI Funds, a Fiduciary product distributed in the U.S. We earn underwriting and
distribution fees primarily by distributing the funds pursuant to distribution
agreements between FTDI and the funds. Under each distribution agreement, we
offer and sell the fund's shares on a continuous basis and pay certain costs
associated with underwriting and distributing the funds, including the costs of
developing and producing sales literature and printing of prospectuses, which
may be then either partially or fully reimbursed by the funds.
Most of our U.S. and non-U.S.-registered retail funds are distributed with a
multi-class share structure. We adopted this share structure to provide
investors with greater sales charge alternatives for their investments. Class A
shares represent a traditional fee structure whereby the investor pays a
commission at the time of purchase unless minimum investment criteria are met.
Class B shares, which are available in many of our funds globally, have no
front-end sales charges but instead have a declining schedule of sales charges
(called contingent deferred sales charges) if the investor redeems within a
number of years from original purchase date. Class C shares have a pricing
structure combining aspects of conventional front-end, back-end and level-load
pricing. Class R shares with reduced sales charges are available for purchase by
certain retirement plan accounts.
Globally, we offer Advisor Class shares in many of our Franklin Templeton mutual
funds and in the U.S. we offer Z Class shares in Mutual Series funds on a
limited basis, both of which have no sales charges. FTI Funds, managed by our
subsidiary FII, offers three series of funds with no sales charges. The Advisor
and Z Class shares are sold to our officers, directors and current and former
employees, and are also offered to institutions and investment advisory clients
(both affiliated and unaffiliated), as well as individuals generally investing
$5 million or more. We also sell money market funds to investors without a sales
charge. Under the terms and conditions described in the prospectuses or the
statements of additional information for some funds, certain investors can
purchase shares at net asset value or at reduced sales charges. In addition,
investors may generally exchange their shares of a fund at net asset value for
shares within the same class of another Franklin Templeton mutual fund without
having to pay additional sales charges.
Our insurance product funds offered for sale in the U.S. generally have a
two-class share structure, Class 1 and Class 2, which are offered at net asset
value without a sales load directly to the insurance company separate accounts
(the shareholder). The only difference between the two classes is that Class 2
shares are assessed a distribution and service fee ("12b-1 fee") (as described
below) payable to those who sell and distribute Class 2 shares and provide
services to shareholders and contract owners (e.g., FTDI), the insurance company
or others. These 12b-1 fees are generally assessed quarterly at an annual rate
of 0.25% of the average daily net assets of the class.
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The following table summarizes the sales charges and distribution and service
fee structure for various share classes of our U.S.-registered retail mutual
funds. The fees below generally apply to our U.S.-registered retail mutual
funds, however, there are exceptions to this fee schedule for some funds.
SALES CHARGES AND DISTRIBUTION AND SERVICE FEES FOR MOST U.S.-REGISTERED RETAIL FUNDS
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U.S. RETAIL FUNDS CLASS A SHARES CLASS B SHARES (c) CLASS C SHARES (d) CLASS R SHARES
- --------------------------------------- ----------------- -------------------- --------------------- --------------------
Sales Charge at Time of Sale
Equity 5.75% (a) None. 1.00% None.
Fixed-income 4.25% (a) None. 1.00% None.
- --------------------------------------- ----------------- -------------------- --------------------- --------------------
Contingent Deferred
Sales Charge None. (b) 4% maximum 1% if shareholder 1% if shareholder
declining to zero sells shares within sells shares within
after 6-years of 18 months of 18 months of
each investment. investment. investment.
- --------------------------------------- ---------------- -------------------- --------------------- --------------------
Maximum Yearly
12b-1 Plan Fees
Equity 0.35% 1.00% 1.00% 0.50%
Fixed-income
Taxable 0.25% 0.65% 0.65% 0.50%
Tax-free 0.10% 0.65% 0.65% None.
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Types of investors that may
purchase this share class Any. Any. Any. Qualified plans
with assets of less
than $10 million,
or investment only
qualified plans
with assets of less
than $20 million.
Investors with a
rollover from a
retirement plan
that offered
Franklin Templeton
funds.
- --------------------------------------- ----------------- -------------------- -------------------- --------------------
U.S. RETAIL FUNDS ADVISOR CLASS SHARES Z CLASS SHARES (e)
- ------------------------------------- -------------------------------------- -------------------------------------------
Sales Charge At Time None. None.
of Sale
Equity
Fixed-income
- ------------------------------------- -------------------------------------- -------------------------------------------
Contingent Deferred Sales
Charge None. None.
- ------------------------------------- -------------------------------------- -------------------------------------------
Maximum Yearly 12b-1
Plan Fees None. None.
- ------------------------------------- -------------------------------------- -------------------------------------------
Types of investors that may Officers, directors and current and Officers, directors and current and
purchase this share class former employees of Franklin former employees of Franklin Templeton
Templeton Investments; institutions, Investments; institutions, investment
investment advisory clients, advisory clients, individuals investing
individuals investing $5 million or $5 million or more in Mutual Series
more in Franklin or Templeton funds. funds and shareholders that hold
shares of the Mutual Series funds
reclassified as Z shares.
- ------------------------------------- -------------------------------------- -------------------------------------------
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(a) Reductions in the maximum sales charges may be available depending upon the
amount invested and the type of investor. In some cases noted in each
fund's prospectus or statement of additional information, certain investors
may invest in Class A shares at net asset value (with no load). In
connection with certain of these no-load purchases, FTDI may make a payment
out of its own resources to a broker/dealer involved with that sale.
(b) For Net Asset Value ("NAV") purchases over $1 million, a contingent
deferred sales charge ("CDSC") of 1.00% may apply to shares redeemed within
one year of investment for purchases made prior to February 1, 2002. A CDSC
of 1.00% may apply to shares redeemed within 18 months effective February
1, 2002.
(c) Class B shares convert to Class A shares after eight (8) years of
ownership.
(d) FTDI pays a 2.00% dealer commission to brokers of record of Class C Shares,
which consists of a 1.00% sales charge assessed to the investor at the time
of sale, and 1.00% of which is paid by FTDI. FTDI recovers a portion of the
amount it pays to brokers by retaining certain 12b-1 fees assessed during
the first 12 months and from collecting contingent deferred sales charges
on any redemptions made within 18 months of the time of sale.
(e) When the Company entered into management contracts for the Mutual Series
funds, the outstanding shares of Mutual Series funds were reclassified as Z
Class shares on October 31, 1996. Current Shareholders who held shares of
any Mutual Series funds on October 31, 1996 may continue to purchase Z
Class shares of any Mutual Series fund. Shareholders of the Z Class shares
may also exchange into Advisor Class shares of other Franklin Templeton
mutual funds if otherwise meeting the Advisor Class shares' eligibility
requirements. Alternatively, Z Class shareholders may exchange into Class A
shares of other Franklin Templeton mutual funds at net asset value, which
are subject to 12b-1 fees. FTDI may make a payment out of its own resources
to a broker/dealer involved in selling Z Class shares.
Our non-U.S.-registered funds, including the Tax Class shares offered in Canada,
have various sales charges and fee structures that are not discussed in this
report.
The distribution agreements with the funds generally provide for FTDI to pay
commission expenses for sales of fund shares to broker/dealers. These
broker/dealers receive various sales commissions and other fees from FTDI,
including fees from investors and the funds, for services in matching investors
with funds whose investment objectives match such investors' goals and risk
profiles. Broker/dealers may also receive fees for their assistance in
explaining the operations of the funds, in servicing the investor's account,
reporting and various other distribution services. Franklin Templeton mutual
fund shares are sold primarily through a large network of independent
intermediaries, including broker/dealers, banks and other similar investment
advisers. We are heavily dependent upon these distribution channels and business
relationships. There is increasing competition for access to these channels,
which has caused our distribution costs to rise and could cause further
increases in the future as competition continues and service expectations
increase. As of September 30, 2002, over 4,000 local, regional and national
securities brokerage firms offered shares of the U.S.-registered Franklin
Templeton mutual funds for sale to the investing public. In the U.S., we have
approximately 85 general wholesalers and 8 retirement plan wholesalers who
interface with the broker/dealer community.
Most of the U.S.-registered Franklin Templeton mutual funds, with the exception
of certain Franklin Templeton money market funds, have adopted distribution
plans (the "Plans") under Rule 12b-1 promulgated under the '40 Act ("Rule
12b-1"). The Plans are established for an initial term of one (1) year and,
thereafter, must be approved annually by the particular fund's board of
directors and by a majority of its disinterested fund directors/trustees. All
such Plans are subject to termination at any time by a majority vote of the
disinterested directors or by the particular fund shareholders. The Plans permit
the funds to bear certain expenses relating to the distribution of their shares,
such as expenses for marketing, advertising, printing and sales promotion. The
implementation of the Plans provided for a lower fee on Class A shares acquired
prior to the adoption of such Plans. Fees from the Plans are paid primarily to
third-party dealers who provide service to the shareholder accounts, and engage
in distribution activities. FTDI may also receive reimbursement from the funds
for various expenses that FTDI incurs in distributing the funds, such as
marketing, advertising, printing and sales promotion subject to the Plans'
limitations on amounts. Each fund has a percentage limit for these type of
expenses based on average daily net assets under management.
Class B and C shares are generally more costly to us in the year of sale, but
they allow us to be competitive by increasing our presence in various
distribution channels. We have arranged to finance Class B and certain Class C
share deferred commissions arising from our U.S., Canadian and European
operations through Lightning Finance Company Limited, a company in which we have
an ownership interest. The repayment of the financing advances is limited to the
cash flows generated by the funds' 12b-1 Plans and by any contingent deferred
sales charges collected in connection with early redemptions (within six years
after purchase on Class B shares).
10
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The sales commissions and payments below, payable to qualifying broker/dealers,
generally apply to our U.S.-registered retail funds, however, there are
exceptions to this schedule for some funds.
SALES COMMISSIONS AND OTHER PAYMENTS PAID TO QUALIFYING BROKER/DEALERS AND
OTHER INTERMEDIARIES FOR MOST U.S.-REGISTERED RETAIL FUNDS
U.S. RETAIL FUNDS CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS R SHARES (g)
- -------------------------------- --------------- ---------------- --------------- -------------------
Dealer Commission at Time of Sale
Equity 5.00% 4.00% 2.00% 1.00%
Fixed-income 4.00% 3.00% (b) 2.00% 1.00%
- -------------------------------- --------------- ---------------- --------------- -------------------
Maximum Yearly 12b-1 Plan Fees
Equity 0.25% (a) 1.00% (c) 1.00% (e) 0.35%
Fixed-income 0.35%
Taxable 0.25% (a) 0.65% (d) 0.65% (f)
Tax-free 0.10% 0.65% (d) 0.65% (f)
- -------------------------------- --------------- ---------------- --------------- -------------------
(a) The fees referenced above generally apply, however, there are certain
individual funds that may apply a different fee structure, including the
Rising Dividends Fund whose 12b-1 fee is 0.50%, certain equity funds whose
12b-1 fees are 0.35% and certain taxable fixed-income funds whose 12b-1
fees are 0.15%.
(b) Certain fixed-income funds now pay 4.00%.
(c) FTDI receives a fee equal to 0.75% and pays 0.25% to the broker/dealer on
the daily average assets in the account. After 8 years from the date of the
investment, Class B shares are converted into Class A shares.
(d) FTDI receives a fee equal to 0.50% and pays 0.15% to the broker/dealer on
the daily average assets in the account. After 8 years from the date of the
investment, Class B shares are converted into Class A shares.
(e) FTDI retains a fee equal to 0.75% and pays 0.25% to the dealer/broker on
the average assets in the account for the first twelve (12) months
following the sale, after which the full 12b-1 fee is paid to the
broker/dealer.
(f) FTDI retains a fee equal to 0.50% and pays 0.15% to the dealer/broker on
the assets in the account for the first twelve (12) months following the
sale, after which it is paid to the broker/dealer.
(g) With respect to Class R Shares, dealers may be eligible to receive a 12b-1
fee of 0.35% starting in the 13th month. During the first 12 months, the
full 12b-1 fee will be paid to FTDI to partially offset commission paid at
the time of purchase. Starting in the 13th month, FTDI will receive 0.15%.
Dealers may be eligible to receive the full 0.50% 12b-1 fee starting at the
time of purchase if they forego the prepaid commission of 1%.
Our various foreign subsidiaries provide underwriting and distribution services
for our non-U.S.-registered open-end mutual funds, and pay various sales
commissions and other payments to qualifying broker dealers and other
intermediaries that are not discussed in this report.
3. SHAREHOLDER SERVICES
Our subsidiary, Franklin Templeton Investor Services, LLC ("FTIS"), provides
shareholder record keeping services and acts as transfer agent and
dividend-paying agent for the U.S.-registered Franklin Templeton open-end funds.
FTIS is registered with the SEC as a transfer agent under the Securities
Exchange Act of 1934 (the " '34 Act"). FTIS is compensated under an agreement
with each fund on the basis of an annual fee per account, which varies with the
fund and the type of services being provided, and is reimbursed for
out-of-pocket expenses. In addition, certain funds compensate FTIS based on
assets under management. Other subsidiaries provide the same services to the
open-end funds offered for sale in Canada, Europe and Asia under similar fee
arrangements.
4. ADMINISTRATIVE SERVICES
Generally, the funds themselves have no paid employees. Through our
subsidiaries, including Franklin Templeton Services, LLC ("FTS"), we provide and
pay the salaries of personnel who serve as officers of the Franklin Templeton
mutual funds, including the President and other administrative personnel as
necessary to conduct such funds' day-to-day business operations. These personnel
provide information, ensure compliance with securities regulations, maintain
accounting systems and controls, prepare annual reports and perform other
administrative activities. FTS is compensated under an agreement with each fund
on the basis of assets under management.
11
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C. HIGH NET-WORTH INVESTMENT MANAGEMENT
------------------------------------
Through our subsidiary Fiduciary, and our Canadian high net-worth business unit,
Bissett, we provide global investment management and market and sell our
sponsored investment products to high net-worth individuals and families. These
services focus on managing family wealth from generation to generation through a
full service package including wealth management, estate planning, private
funds, private banking, and custody services. Our high net-worth client business
seeks to maintain relationships that span generations and help families plan the
best method of intergenerational wealth transfer.
Individual client assets are held in accounts separately managed by individual
portfolio managers. These portfolio managers determine asset allocation and
stock selection for client accounts, taking into consideration each client's
specific long-term objectives while utilizing our macroeconomic and individual
stock research.
We offer clients personalized attention and estate planning expertise in an
integrated package of services under the Family Resource Management(R) ("FRM")
brand. Services under FRM provide clients with an integrated strategy to
optimize wealth accumulation and maximize after-tax wealth transfer to the next
generation. These services include advice concerning strategic planning and
asset allocation, investment management, and custody and reporting.
D. INSTITUTIONAL INVESTMENT MANAGEMENT
-----------------------------------
We provide a broad array of investment management services to institutional
clients, focusing on foundations, endowment funds and government and corporate
pension funds. Our subsidiaries offer a wide range of both domestic and
international equity, fixed-income and specialty products through a variety of
investment vehicles, including separate and commingled accounts and open-ended
domestic and offshore mutual funds.
We operate our institutional business through FTI Institutional, LLC, a
registered investment adviser under the Advisers Act. This entity distributes
and markets our investment advisory capabilities to our institutional accounts
under the Franklin, Templeton, Mutual Series, Bissett and Fiduciary brand names
globally. We primarily attract new institutional business through our strong
relationships with pension and management consultants and through additional
mandates from our existing client relationships.
During fiscal 2002, we created the Retirement Group, a division of our
subsidiary FTDI, to service sponsors of defined contribution plans, including
401(k)s, bundled deferred contribution plans, variable annuity products and
individual retirement accounts. This business unit will allow us to focus on
expanding sales of our asset management capabilities to the retirement industry
by offering a number of investment options, including sub-advised portfolios,
mutual funds, education savings plans and variable insurance trusts.
E. SEPARATELY MANAGED ACCOUNTS
---------------------------
Through our subsidiaries, Franklin Private Client Group, Inc. ("FPCG"), a
registered investment adviser, and Templeton Private Client Group ("TPCG"), a
division of Templeton/Franklin Investment Services, Inc. ("TFIS"), we provide
private portfolio management services and advisory services through third party
broker/dealer wrap fee programs. Our subsidiary, TFIS, also serves as a direct
marketing broker/dealer for institutional investors in the Franklin Templeton
mutual funds. Through our various subsidiaries, we also market and distribute
our sponsored investment products to individually managed and separate accounts.
F. TRUST AND CUSTODY
-----------------
Our subsidiary, Fiduciary, provides trust and custody business including global
master custody and support services to high net-worth and institutional clients.
Through various trust company subsidiaries, including Fiduciary, we offer a wide
range of investment-related services, including, custody and administration,
trust services, estate planning, tax planning, securities brokerage, trade
clearance and private banking to high net-worth individuals, families and
institutional clients in the U.S. and abroad. In addition to custody services,
12
- --------------------------------------------------------------------------------
we also offer clients with a series of other services, including foreign
exchange, performance measurement, securities lending and brokerage services. We
provide planned giving administration for non-profit organizations and related
custody services, including pooled income funds, charitable remainder trusts,
charitable lead trusts and gift annuities, for which we may or may not act as
trustee.
Our other subsidiaries involved in the trust business, either as trust companies
or companies investing in trust companies, include Fiduciary Investment
Corporation, an investment company incorporated under New York State Banking Law
and an indirect holding company for many of the trust company subsidiaries;
Fiduciary Trust International of the South, a Florida state-chartered limited
purpose trust company; Fiduciary Trust International of California, a California
state-chartered limited purpose trust company; Fiduciary Trust International of
Delaware, a Delaware state-chartered limited purpose trust company; FTI-Banque
Fiduciary Trust, a Swiss bank based in Geneva, Switzerland; FTCI (Cayman) Ltd.,
an offshore trust company licensed as a bank and trust company (with a type "B"
license) in the Cayman Islands; and Franklin Templeton Bank & Trust, F.S.B.
("FTB&T"). All of the trust companies referenced above have full trust power.
FTB&T, among other things, exercises full trust powers and serves primarily as
custodian of Individual Retirement Accounts ("IRA") and business retirement
plans.
G. SUMMARY OF OUR SPONSORED INVESTMENT PRODUCTS
--------------------------------------------
Our sponsored investment products are offered to retail, institutional, high
net-worth and separate accounts, which include individual investors, qualified
groups, trustees, tax-deferred (such as IRAs) or money purchase plans, employee
benefit and profit sharing plans, trust companies, bank trust departments and
institutional investors in over 128 countries.
1. INVESTMENT OBJECTIVES
The sponsored investment products that we offer accommodate a variety of
investment goals, including growth, growth at a reasonable price, value, capital
appreciation, growth and income, income, tax-free income and preservation of
capital. In seeking to achieve such objectives, each portfolio emphasizes
different investment securities.
Our equity investment products include some that are value-oriented, others that
reflect a growth style of investing and some that use a combination of growth
and value. Value investing focuses on identifying companies which our research
analysts and portfolio managers believe are undervalued based on a number of
factors. Portfolios that seek capital appreciation invest primarily in equity
securities in a wide variety of international and U.S. markets; some seek broad
national market exposure, while others focus on narrower sectors such as
precious metals, health care, emerging technology, large-cap companies,
small-cap companies, real estate securities and utilities. Growth investing
relies on the review of macro-economic, industry and sector trends to identify
companies that exhibit superior growth potential relative to industry peers and
the broad market. Unlike other management styles that focus on short-term market
trends, our growth portfolio investment management team invests in companies
demonstrating long-term growth potential, based mainly on proprietary in-house
analysis and research.
Portfolios seeking income generally focus on taxable and tax-exempt money market
instruments, tax-exempt municipal bonds, global fixed-income securities,
fixed-income debt securities of corporations and of the U.S. government and its
agencies and instrumentalities such as the Government National Mortgage
Association, the Federal National Mortgage Association, and the Federal Home
Loan Mortgage Corporation, and of the various states in the U.S. Still others
focus on investments in particular countries and regions, such as emerging
markets.
Again, we also provide investment management and related services to a number of
closed-end investment companies whose shares are traded on various major U.S.
and some international stock exchanges. In addition, we provide investment
management, marketing and distribution services to SICAV ("Societe d'
Investissement a Capital Variable") funds and umbrella unit trusts organized in
Luxembourg and Ireland,
13
- --------------------------------------------------------------------------------
respectively, which are distributed in international market places, as well as
to locally organized funds in various countries outside the U.S.
Our sponsored investment products also include portfolios managed for some of
the world's largest corporations, endowments, charitable foundations, pension
funds, wealthy individuals and other institutions. We use various investment
techniques to focus on specific client objectives for these specialized
portfolios.
2. TYPES OF SPONSORED INVESTMENT PRODUCTS
As of September 30, 2002, our U.S.-registered open-end mutual funds accounted
for $148.0 billion of our assets under management. As of this date, the net
assets under management of our 5 largest funds were Franklin California Tax-Free
Income Fund, Inc. ($14.7 billion), Templeton Growth Fund ($11.4 billion),
Franklin U.S. Government Securities Fund ($9.3 billion), Templeton Foreign Fund
($8.7 billion), and Franklin Income Fund ($8.6 billion). These 5 mutual funds
represented, in the aggregate, 21.3% of our assets under management.
Franklin Templeton Variable Insurance Products Trust, our insurance products
trust, offers 24 funds, with assets of $6.6 billion as of September 30, 2002.
The insurance product funds are available as investment options through variable
insurance contracts. Most of the funds have been fashioned after some of the
more popular funds offered to the general public and are managed, in most cases,
by the same investment adviser.
Our U.S. closed-end and interval (floating rate) funds accounted for $4.3
billion of our assets under management. Our U.S. separately managed accounts,
partnership and trust accounts made up $5.1 billion of our assets under
management. On a Company-wide basis, institutional separate and high net-worth
accounts accounted for $58.6 billion of assets under management.
In addition, $25.2 billion of our assets under management were held in
foreign-based funds and open-end and closed-end accounts whose investment
objectives vary, but are primarily international and global equity-oriented.
The following table shows the various types of our U.S.-registered open-end
mutual funds and dedicated insurance product funds as of September 30, 2002, and
is categorized using the Investment Company Institute ("ICI") definitions, which
are more detailed than the broad investment objective definitions used in "MD&A"
and in our Consolidated Financial Statements.
14
- --------------------------------------------------------------------------------
U.S.-REGISTERED OPEN-END MUTUAL FUNDS (a)
-----------------------------------------
CATEGORY NO. OF
(and approximate assets NO. OF INSURANCE
under management, MUTUAL PRODUCT
as of September 30, 2002) INVESTMENT OBJECTIVE FUNDS FUNDS
IN BILLIONS
- -------------------------------------------- ------------------------------ ------------ -------------
I. EQUITY FUNDS ($75.2)
- -------------------------------------------- ------------------------------ ------------ -------------
A. Capital Appreciation Funds ($16.5) Seek capital appreciation;
dividends are not a primary
consideration.
- -------------------------------------------- ------------------------------ ------------ -------------
1. Aggressive Growth Funds Invest primarily in common
stocks of small, growth
companies. 4 2
- -------------------------------------------- ------------------------------ ------------ -------------
2. Growth Funds Invest primarily in common
stocks of well-established
companies. 8 2
- -------------------------------------------- ------------------------------ ------------ -------------
3. Sector Funds Invest primarily in common
stocks of companies in
related fields. 8 3
- -------------------------------------------- ------------------------------ ------------ -------------
B. World Equity Funds ($38.9) Invest primarily in stocks of
foreign companies.
- -------------------------------------------- ------------------------------ ------------ -------------
1. Emerging Market Funds Invest primarily in companies
based in developing regions of 2 1
the world.
- -------------------------------------------- ------------------------------ ------------ -------------
2. Global Equity Funds Invest primarily in equity
securities traded worldwide,
including those of U.S.
companies. 12 2
- -------------------------------------------- ------------------------------ ------------ -------------
3. International Equity Funds Must invest in equity securities
of companies located outside the
U.S. and cannot invest in U.S.
company stocks. 3 2
- -------------------------------------------- ------------------------------ ------------ -------------
4. Regional Equity Funds Invest in companies based in a
specific part of the world. 4 2
- -------------------------------------------- ------------------------------ ------------ -------------
C. Total Return Funds ($19.8) Seek a combination of current
income and capital appreciation.
- -------------------------------------------- ------------------------------ ------------ -------------
1. Growth and Income Funds Invest primarily in common
stocks of established companies
with the potential for growth and
a consistent record of dividend
payments. 7 4
- -------------------------------------------- ------------------------------ ------------ -------------
II. HYBRID FUNDS ($9.5) May invest in a mix of equity,
fixed-income securities and
derivative instruments.
- -------------------------------------------- ------------------------------ ------------ -------------
A. Asset Allocation Funds ($0.5) Invest in various asset classes
including, but not limited to,
equities, fixed-income securities
and money market instruments.
They seek high total return by
maintaining precise weightings 3 1
in asset classes.
- -------------------------------------------- ------------------------------ ------------ -------------
B. Income-mixed Funds ($9.0) Invest in a variety of income-
producing securities, including
equities and fixed-income
securities. These funds seek a
high level of current income
without regard to capital
appreciation. 1 1
-------------------------------------------- ------------------------------ ------------ -------------
(a) This table excludes separately managed accounts, trust and partnership accounts and closed-end funds.
A significant number of institutional assets are invested in U.S. Open-end mutual funds and are
disclosed in the table.
15
- --------------------------------------------------------------------------------
CATEGORY NO. OF
(and approximate assets NO. OF INSURANCE
under management, MUTUAL PRODUCT
as of September 30, 2002) INVESTMENT OBJECTIVE FUNDS FUNDS
IN BILLIONS
- -------------------------------------------- ------------------------------ ------------ -------------
III. TAXABLE BOND FUNDS ($14.5)
- -------------------------------------------- ------------------------------ ------------ -------------
A. High Yield Funds ($2.2) Invest two-thirds or more of
their portfolios in lower rated
U.S. corporate bonds (Baa or
lower by Moody's and BBB or
lower by Standard and Poor's
rating services). 1 1
- -------------------------------------------- ------------------------------ ------------ -------------
B. World Bond Funds ($0.5) Invest in debt securities offered
by foreign companies and
governments. They seek the
highest level of current income
available worldwide.
- -------------------------------------------- ------------------------------ ------------ -------------
1. Global Bonds Funds: Invest in worldwide debt
General securities with no stated average
maturity or an average maturity
of five years or more. These
funds may invest up to 25% of
assets in companies located in
the U.S. 1 2
- -------------------------------------------- ------------------------------ ------------ -------------
2. Global Bond Funds: Invest in debt securities
Short Term worldwide with an average
maturity of one to five years.
These funds may invest up to
25% of assets in companies
located in the U.S. 1 0
- -------------------------------------------- ------------------------------ ------------ -------------
3. Other World Bond Funds Invest in international bond and
emerging market debt funds,
foreign government and corporate
debt instruments. 1 0
- -------------------------------------------- ------------------------------ ------------ -------------
C. Government Bond Funds ($11.0) Invest in U.S. Government
bonds of varying maturities.
They seek high current income.
- -------------------------------------------- ------------------------------ ------------ -------------
1. Government Bond Funds: Invest two-thirds or more of
Intermediate Term their portfolios in U.S.
Government securities with an
average maturity of five to ten
years. Securities utilized by
investment managers may
change with market conditions. 0 1
- -------------------------------------------- ------------------------------ ------------ -------------
2. Government Bond Funds: Invest two-thirds or more of
Short Term their portfolios in U.S.
Government securities with an
average maturity of one to five
years. Securities utilized by
investment managers may
change with market conditions. 1 0
- -------------------------------------------- ------------------------------ ------------ -------------
3. Mortgage-backed Funds Invest two-thirds or more of
their portfolios in pooled
mortgage-backed securities. 3 0
- -------------------------------------------- ------------------------------ ------------ -------------
D. Strategic Income Funds ($0.7) Invest in a combination of U.S.
fixed-income securities to
provide a high level of current
income. 2 2
- -------------------------------------------- ------------------------------ ------------ -------------
E. Corporate Bond Funds ($0.1)
Short Term 1 0
- -------------------------------------------- ------------------------------ ------------ -------------
16
- --------------------------------------------------------------------------------
CATEGORY NO. OF
(and approximate assets NO. OF INSURANCE
under management, MUTUAL PRODUCT
as of September 30, 2002) INVESTMENT OBJECTIVE FUNDS FUNDS
IN BILLIONS
- -------------------------------------------- ------------------------------ ------------ -------------
IV. TAX-FREE BOND FUNDS ($51.0)
- -------------------------------------------- ------------------------------ ------------ -------------
A. State Municipal Bond Funds ($36.0) Invest primarily in municipal
bonds issued by a particular
state. These funds seek high
after-tax income for residents of
individual states.
- -------------------------------------------- ------------------------------ ------------ -------------
1. State Municipal Bond Funds: Invest primarily in the single-
General state municipal bonds with an
average maturity of greater than
five years or no specific stated
maturity. The income from these
funds is largely exempt from
federal as well as state income
tax for residents of the state. 30 0
- -------------------------------------------- ------------------------------ ------------ -------------
B. National Municipal Bond Funds ($15.0) Invest primarily in the bonds of
various municipal issuers in the
U.S. These funds seek high
current income free from federal
tax.
- -------------------------------------------- ------------------------------ ------------ -------------
1. National Municipal Bond Funds: Invest primarily in municipal
General bonds with an average maturity
of more than five years or no
specific stated maturity. 4 0
- -------------------------------------------- ------------------------------ ------------ -------------
V. MONEY MARKET FUNDS ($4.3)
- -------------------------------------------- ------------------------------ ------------ -------------
A. Taxable Money Market Funds ($3.4) Invest in short-term, high-grade
money market securities and
must have average maturity of
90 days or less. These funds
seek the highest level of income
consistent with preservation of
capital (i.e. maintaining a stable
share price).
- -------------------------------------------- ------------------------------ ------------ -------------
1. Taxable Money Market Funds: Invest primarily in U.S. Treasury
Government obligations and other financial
instruments issued or guaranteed
by the U.S. Government, its
agencies or its instrumentalities. 2 0
- -------------------------------------------- ------------------------------ ------------ -------------
2. Taxable Money Market Funds: Invest in a variety of money
Non-government market instruments, including
certificates of deposit from large
banks, commercial paper and
bankers' acceptances. 5 1
- -------------------------------------------- ------------------------------ ------------ -------------
B. Tax-Exempt Money Market Funds ($0.9) Invest in short-term municipal
securities and must have average
maturities of 90 days or less.
These funds seek the highest
level of income - free from
federal and, in some cases, state
and local taxes - consistent with
preservation of capital.
- -------------------------------------------- ------------------------------ ------------ -------------
1. National Tax-Exempt Money Market Invest primarily in short-term
Funds securities of various U.S.
municipal issuers. 1 0
- -------------------------------------------- ------------------------------ ------------ -------------
2. State Tax-Exempt Money Market Invest primarily in short-term
Funds securities of municipal issuers in
a single state to achieve the
highest level of tax-free income
for residents of that state. 2 0
- -------------------------------------------- ------------------------------ ------------ -------------
17
- -------------------------------------------------------------------------------------------------------
The following table sets forth the types of our non-U.S. open-end mutual funds
as of September 30, 2002 and is categorized by investment objectives and sales
region.
NON-U.S. OPEN-END MUTUAL FUNDS (a)
----------------------------------
CATEGORY
(and approximate assets NO. OF
under management, MUTUAL FUNDS
as of September 30, 2002) INVESTMENT OBJECTIVE BY SALES REGION
IN BILLIONS
- ------------------------------------------ ---------------------------- ------------------ -------
I. EQUITY FUNDS ($14.5)
- ------------------------------------------ ---------------------------- ------------------ -------
A. Global/International Equity ($13.6) Invest in equity Asia Pacific: 37
securities of companies Canada: 18
traded worldwide, UK/Europe: 32
including foreign and U.S.
companies.
- ------------------------------------------ ---------------------------- ------------------ -------
B. Domestic (U.S.) Equity ($0.9) Invest in equity securities Canada: 4
of U.S.companies. UK/Europe: 12
- ------------------------------------------ ---------------------------- ------------------ -------
II. FIXED-INCOME FUNDS ($5.2)
- ------------------------------------------ ---------------------------- ------------------ -------
A. Global/International Invest worldwide in debt Asia Pacific: 28
Fixed-Income ($1.9) securities offered by Canada: 5
foreign companies and UK/Europe: 7
governments. These funds
may invest assets in debt
securities offered by
companies located in the U.S.
- ------------------------------------------ ---------------------------- ------------------ -------
B. Domestic Fixed-Income ($3.3) Invest in debt securities Asia Pacific: 1
offered by U.S. companies UK/Europe: 3
and the U.S. government
and/or municipalities
located in the U.S.
- ------------------------------------------ ---------------------------- ------------------ -------
III. HYBRID FUNDS ($0.7) May invest in a mix of Asia Pacific: 17
global equity, Canada: 7
fixed-income securities UK/Europe: 4
and derivative instruments.
- ------------------------------------------ ---------------------------- ------------------ -------
IV. TAXABLE MONEY FUNDS ($1.5) Invest in short term high Asia Pacific: 7
grade money market Canada: 3
securities issued or UK/Europe: 2
guaranteed by domestic or
global governments or agencies.
- ------------------------------------------ ---------------------------- ------------------ -------
(a) Does not include the Franklin Templeton Global Fund, the Fiduciary Emerging
Markets Bond Fund, nor fund-of-funds mutual funds. For purposes of this table,
we consider the sales region to be where a fund is based and primarily sold and
not necessarily the region where a particular fund is invested. Many funds are
also distributed across different sales regions (e.g. SICAV funds are based,
primarily sold in and therefore considered to be within the U.K./Europe sales
region, although also distributed in the Asia Pacific sales region), but are
only designated a single sales region in the table.
3. FUND INTRODUCTIONS, MERGERS AND LIQUIDATIONS
From time to time, as market conditions or investor demand warrants, we
introduce new funds, merge existing funds or liquidate existing funds. During
the fiscal year ended September 30, 2002, we added and introduced a number of
funds both within the U.S. and internationally.
In the U.S., we expanded our product line by launching new funds and share
classes, including those targeted to our institutional clients. We introduced a
new R share class for our retirement business in the U.S. We also added two
donor-advised fund alternatives for our clients, including one for Franklin
Templeton retail clients and the other for high net-worth clients of our
subsidiary, Fiduciary.
Internationally, through our indirect wholly-owned investment management and
advisory subsidiaries and joint ventures, we continued to expand our business in
and launched new funds and investment products to target country specific
markets. Through our acquisition of Pioneer, we not only added new funds and
investment products in India, but also became that country's largest non-Indian
mutual fund manager. In Canada, we added new wrap investment portfolios and
launched a series of funds known as the Quotential Program, which consists of
fund-of-fund mutual funds. In other parts of Asia, including Korea, Japan and
18
- --------------------------------------------------------------------------------
Singapore, we launched a variety of fixed-income and hybrid funds. In Europe, we
introduced funds in, among other regions, Ireland, the United Kingdom, Germany,
Sweden, Switzerland and France. We also added an additional share class for our
Luxembourg-domiciled SICAV funds and a Euro-denominated share class of the
Mutual European Fund.
During the fiscal year ended September 30, 2002, the following fund mergers and
liquidations took place: 3 variable annuity funds merged into other variable
annuity funds; 4 FTI Funds were merged into 3 Franklin Funds and 1 Templeton
Fund; 2 Dublin-domiciled FTI Funds were liquidated; 2 closed-end funds were
merged into 1 open-end fund and 1 closed-end fund was merged into another
closed-end fund.
II. BANKING/FINANCE OPERATIONS
--------------------------
Our secondary business segment is banking/finance, which offers select retail,
consumer, private banking and credit related services.
Our subsidiary, Fiduciary, is a New York state chartered bank and provides
private banking services primarily to high net-worth clients who maintain trust,
custody and or investment management accounts with Fiduciary. Fiduciary's
private banking and credit products include, among others, loans secured by
marketable securities, foreign exchange services, deposit accounts and other
credit services. As discussed in Investment Management and Related Services,
Fiduciary also offers investment management, trust and estate, custody and
related services to institutional accounts and high net-worth individuals and
families.
Franklin Capital Corporation ("FCC") is a subsidiary of FRI, which was formed to
expand our lending activities related primarily to the purchase, securitization
and servicing of retail installment sales contracts ("automobile contracts")
originated by independent automobile dealerships. FCC, headquartered in Utah,
conducts its business primarily in the Western region of the U.S. and is a
finance company organized and licensed under the laws of Utah. As of September
30, 2002, FCC's total assets included $103 million of outstanding automobile
contracts. During fiscal 2002, FCC securitized approximately $544.8 million of
automobile contract receivables for which it maintains servicing rights. FCC
continues to service $530.9 million of receivables that have been securitized to
date. See Note 6 in the Notes to the Financial Statements.
Our securitized consumer receivables business is subject to marketplace
fluctuation and competes with businesses with significantly larger portfolios.
Auto loan and credit card portfolio losses can be influenced significantly by
trends in the economy and credit markets which reduce borrowers' ability to
repay loans. A more detailed analysis of loan losses and delinquency rates in
our consumer lending and dealer auto loan business is contained in Note 5 in the
Notes to the Financial Statements.
Our subsidiary Franklin Templeton Bank & Trust, F.S.B. ("FTB&T"), with total
assets of $192.3 million, as of September 30, 2002, provides FDIC insured
deposit accounts and general consumer loan products such as credit card loans,
fund-secured loans and auto loans. FTB&T (formerly known as Franklin Bank)
became chartered as a federal savings bank on May 1, 2000 when the Office of
Thrift Supervision approved FTB&T's application to convert from a California
state banking charter to a Federal thrift charter. Immediately following the
conversion of FTB&T's state charter to a federal thrift charter, Franklin
Templeton Trust Company, a California chartered trust company, was merged into
FTB&T and continues to perform its prior activities as a division of FTB&T.
Our other banking subsidiaries include, FTI-Banque Fiduciary Trust, a Swiss bank
based in Geneva, Switzerland, which provides an array of private banking trust
and investment services to clients outside of the U.S., and FTCI (Cayman) Ltd.,
a licensed bank and trust company in the Cayman Islands.
REGULATORY CONSIDERATIONS
Virtually all aspects of our business, including those conducted through our
various subsidiaries, are subject to various federal, state, and foreign
regulation, and supervision. Domestically, we are subject to regulation and
supervision by, among others, the SEC, the National Association of Securities
Dealers ("NASD"), the
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Federal Reserve Board (the "FRB"), the Federal Deposit Insurance Corporation
("FDIC"), the Office of Thrift Supervision and the New York State Banking
Department. Globally, we are subject to regulation and supervision by, among
others, the Ontario and Alberta Securities Commissions in Canada, the Monetary
Authority of Singapore, the Financial Services Authority in the United Kingdom,
the Central Bank of Ireland, the Securities and Futures Commission of Hong Kong,
the Korean Ministry of Finance and Economy and the Financial Supervisory
Commission in Korea, and the Securities Exchange Board of India. The Advisers
Act imposes numerous obligations on our subsidiaries, which are registered as
investment advisers, including record keeping, operating and marketing
requirements, disclosure obligations and prohibitions on fraudulent activities.
The '40 Act imposes similar obligations on the investment companies that are
advised by our subsidiaries. The SEC is authorized to institute proceedings and
impose sanctions for violations of the Advisers Act and the '40 Act, ranging
from fines and censure to termination of an investment adviser's registration.
FRI and many of the investment companies advised by our various subsidiaries are
also subject to the recently enacted Sarbanes-Oxley Act of 2002.
Since 1993, the NASD Conduct Rules have limited the amount of aggregate sales
charges which may be paid in connection with the purchase and holding of
investment company shares sold through brokers. The effect of the rule might be
to limit the amount of fees that could be paid pursuant to a fund's 12b-1 Plan
to FTDI, our principal underwriting and distribution subsidiary, which earns
underwriting commissions on the distribution of fund shares in the U.S. Such
limitations would apply in a situation where a fund has no, or limited, new
sales for a prolonged period of time. None of the Franklin Templeton mutual
funds are in, or close to, that situation at the present time.
Following the acquisition of Fiduciary, in fiscal 2001, the Company became a
bank holding company under the BHC Act and is subject to supervision and
regulation by the FRB. Pursuant to the GLB Act, as a qualifying bank holding
company, we also became a financial holding company, which enables us to
affiliate with a far broader range of financial companies than had previously
been permitted for bank holding companies. Permitted affiliates include
securities brokers, underwriters and dealers, investment managers, mutual fund
distributors, insurance companies and companies engaged in other activities that
are "financial in nature or incidental thereto" or "complementary" to a
financial activity. The FRB has issued interim rules specifying that organizing,
sponsoring, and managing a mutual fund are activities that are permissible for
financial holding companies under certain guidelines. A bank holding company may
elect to become a financial holding company if, as in our case, each of its
subsidiary banks and other depository institution subsidiaries is well
capitalized, is well managed and has at least a "satisfactory" rating under the
Community Reinvestment Act (the "CRA").
The FRB may impose limitations, restrictions, or prohibitions on the activities
or acquisitions of a financial holding company if the FRB believes that the
Company does not have the appropriate financial and managerial resources to
commence or conduct an activity, make an acquisition, or retain ownership of a
company. The GLB Act establishes the FRB as the umbrella supervisor for
financial holding companies and adopts an administrative approach to regulation
that requires the FRB to defer to the actions and requirements of the U.S.
"functional" regulators of subsidiary broker/dealers, investment advisers,
investment companies, insurance companies, and other regulated non-depository
institutions.
FRB policy provides that, as a matter of prudent banking, a bank holding company
generally should not pay dividends unless its net income is sufficient to fully
fund the dividends and the prospective rate of earnings retention appears to be
consistent with the capital needs, asset quality and overall financial condition
of the holding company and its bank and thrift institution subsidiaries. As we
are a bank holding company, this policy may be applied to us even though we are
also a financial holding company.
Almost every aspect of the operations and financial condition of our banking and
thrift subsidiaries are subject to extensive regulation and supervision and to
various requirements and restrictions under Federal and state law, including
requirements governing capital adequacy, management practices, liquidity,
branching, earnings, loans, dividends, investments, reserves against deposits,
and the provision of services. Under Federal law, a depository institution is
prohibited from paying a dividend if the depository institution
20
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would thereafter be "undercapitalized" as determined by the Federal bank
regulatory agencies. The relevant Federal banking regulatory agencies, and the
state banking regulatory agencies, also have authority to prohibit a bank or a
bank holding company from engaging in what, in the opinion of the regulatory
body, constitutes an unsafe or unsound practice.
Each of our banking subsidiaries is subject to restrictions under Federal law
that limit transactions with FRI and its non-bank subsidiaries, including loans
and other extensions of credit, investments or asset purchases. These and
various other transactions, including any payment of money to FRI and its
non-bank subsidiaries, must be on terms and conditions that are, or in good
faith would be, offered to companies that are not affiliated with these
companies.
Federal banking agencies are required to take prompt supervisory and regulatory
actions with respect to institutions that do not meet minimum capital standards.
There are five defined capital tiers, the highest of which is "well
capitalized." A depository institution is generally prohibited from making
capital distributions, including paying dividends, or paying management fees to
a holding company if the institution would thereafter be undercapitalized.
Undercapitalized institutions may not accept, renew or roll over brokered
deposits. To remain a financial holding company, each company's banking
subsidiaries must be well capitalized and well managed. As of September 30,
2002, our bank and thrift subsidiaries continued to be considered "well
capitalized" and "well managed". See "MD&A".
The FRB has adopted various capital guidelines for bank holding companies. The
GLB Act authorizes the FRB to establish consolidated capital requirements for
financial holding companies. The GLB Act prohibits the FRB from imposing capital
requirements on functionally regulated non-bank subsidiaries of a financial
holding company, such as broker/dealers and investment advisers. The FRB has not
published consolidated capital requirements specific to financial holding
companies, but may do so in the future.
The Federal banking agencies have broad enforcement powers, including the power
to terminate deposit insurance, impose substantial fines and other civil and
criminal penalties and appoint a conservator or receiver. Failure to comply with
applicable laws, regulations and supervisory agreements could subject FRI, our
thrift and banking subsidiaries, as well as officers, directors and other
so-called "institution-affiliated parties" of these organizations, to
administrative sanctions and potentially substantial civil money penalties. In
addition, the appropriate Federal banking agency may appoint the FDIC as
conservator or receiver for a banking institution, or the FDIC may appoint
itself if any one or more of a number of circumstances exist.
COMPETITION
The financial services industry is highly competitive and has increasingly
become a global industry. There are approximately 8,300 open-end investment
companies of varying sizes, investment policies and objectives whose shares are
being offered to the public in the U.S. Due to our international presence and
varied product mix, it is difficult to assess our market position relative to
other investment managers on a worldwide basis, but we believe that we are one
of the more widely diversified investment managers in the U.S. We believe that
our equity and fixed-income asset mix coupled with our global presence will
serve our competitive needs well over the long term. We continue to focus on
service to customers, performance of investment products and extensive marketing
activities with our strong broker/dealer and other financial institution
distribution network as well as high net-worth customers.
We face strong competition from numerous investment management, stock brokerage
and investment banking firms, insurance companies, banks, savings and loan
associations and other financial institutions, which offer a wide range of
financial and investment management services to the same institutional accounts,
separate accounts and high net-worth customers that we are seeking to attract.
In recent years, there has been a trend of consolidation in the financial
services industry, resulting in stronger competitors with greater financial
resources than us.
We rely largely on intermediaries to sell and distribute Franklin Templeton
mutual fund shares. In addition to offering our products, many of these
intermediaries also have mutual funds under their own names that compete
directly with our products. These intermediaries could decide to limit or
restrict the sale of our
21
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fund shares, which could lower our future sales and cause our revenues to
decline. We have and continue to pursue sales relationships with all types of
intermediaries to broaden our distribution network. We have experienced
increased costs related to maintaining our distribution channels and we
anticipate that this trend will continue.
We have implemented an award winning Internet platform to compete with the
rapidly developing and evolving capabilities being offered with this technology.
Together with several large financial services companies, we made a capital
investment in the development of an industry-wide Internet portal, known as
Advisorcentral.com, which provides our broker, dealer and investment advisor
customers with the ability to view their clients' holdings using one log-in ID.
As investor interest in the mutual fund industry has increased, competitive
pressures have increased on sales charges of broker/dealer distributed funds. We
believe that, although this trend will continue, a significant portion of the
investing public still relies on the services of the broker/dealer or financial
adviser community, particularly during weaker market conditions.
We believe that we are well positioned to deal with changes in marketing trends
as a result of our already extensive advertising activities and broad based
marketplace recognition. We conduct significant advertising and promotional
campaigns through various media sources to promote brand recognition. We
advertise in major national financial publications, as well as on radio and
television to promote brand name recognition and to assist our distribution
network. Such activities included purchasing network and cable programming,
sponsorship of sporting events, and extensive newspaper and magazine
advertising.
Diverse and strong competition affects the banking/finance segment of our
business as well, and limits the fees that can be charged for our services. For
example, in the banking segment we compete with many types of institutions for
consumer loans, including the finance subsidiaries of large automobile
manufacturers, which have offered special incentives to stimulate automobile
sales, including no-interest loans. These product offerings by our competitors
limit the interest rates that we can charge on consumer loans.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Information on our operations in various geographic areas of the world and a
breakout of business segment information is contained in Note 9 in the Notes to
the Consolidated Financial Statements.
INTELLECTUAL PROPERTY
We have used, registered, and/or applied to register certain trademarks and
service marks to distinguish our sponsored investment products and services from
those of our competitors in the U.S. and in foreign countries and jurisdictions,
including Franklin(R), Templeton(R), Bissett(R), Mutual Series(R), and
FiduciaryTM. We enforce our trademark, service mark and trade name rights in the
U.S. and abroad.
EMPLOYEES
As of September 30, 2002, we employed approximately 6,700 employees in our
offices located in 28 countries. We consider our relations with our employees to
be satisfactory.
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ITEM 2. PROPERTIES
We conduct our worldwide operations using a combination of leased and owned
facilities. While we believe we have sufficient facilities to conduct business
during fiscal 2003, we will continue to lease, acquire and dispose of facilities
throughout the world as necessary.
We lease space domestically in California, Delaware, Florida, New Jersey, New
York, Utah and the District of Columbia, and internationally in Abu Dhabi,
Australia, Belgium, Brazil, Canada, England, France, Germany, Holland, Hong
Kong, India, Italy, Japan, Korea, Luxembourg, Poland, Russia, Scotland,
Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, and Turkey. As of
September 30, 2002, we leased and occupied approximately 1.68 million square
feet of space. We also subleased to third parties a total of 0.4 million square
feet of space.
In addition, we own 6 buildings near Sacramento, California, as well as 5
buildings in St. Petersburg, Florida, 2 buildings in Nassau, Bahamas, as well as
space in office buildings in Argentina, China and Singapore. The buildings we
own consist of approximately 1.06 million square feet. Since we operate on a
unified basis, corporate activities, fund related activities, accounting
operations, sales, real estate and banking operations, auto loans and credit
cards, management information system activities, publishing and printing
operations, shareholder service operations and other business activities and
operations take place in a variety of such locations. In fiscal 2002 we sold two
of our buildings, one located in St. Petersburg, Florida for $7 million and one
located in Rancho Cordova, California for $10 million.
We lease our corporate headquarters in San Mateo, California from a lessor trust
under an operating lease that expires in fiscal 2005. In connection with this
lease, we are contingently liable for approximately $145 million in residual
guarantees, representing approximately 85% of the total construction costs of
$170 million. The lease includes renewal options that can be exercised at the
end of the initial lease period, and purchase options that can be exercised
prior to the expiration of the lease term. We are monitoring the project of the
Financial Accounting Standards Board to address accounting for special purpose
entities to determine the effect, if any, it may have on our treatment of the
owner-lessor trust described above.
ITEM 3. LEGAL PROCEEDINGS
There have been no material developments in the litigation previously reported
in our Form 10-Q for the period ended June 30, 2002 as filed with the SEC on
August 12, 2002. We are involved from time to time in litigation relating to
claims arising in the normal course of business. Management is of the opinion
that the ultimate resolution of such claims will not materially affect our
business or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of security holders.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
INFORMATION ABOUT OUR COMMON STOCK
Our common stock is traded on the New York Stock Exchange ("NYSE") and the
Pacific Exchange under the ticker symbol "BEN", and the London Stock Exchange
under the ticker symbol "FKR." On September 30, 2002, the closing price of FRI's
common stock on the NYSE was $31.10 per share. At December 3, 2002, there were
approximately 5,100 shareholders of record. Based on nominee solicitation, we
believe that there are approximately 23,000 beneficial shareholders whose shares
are held in street name.
The following table sets forth the high and low sales prices for our common
stock on the NYSE.
2002 FISCAL YEAR 2001 FISCAL YEAR
---------------- ----------------
QUARTER HIGH LOW HIGH LOW
- ------------------------------ --------------- ---------------- ------------------ ----------------
October-December $37.85 $30.85 $45.50 $34.00
January-March $44.15 $34.52 $48.30 $34.20
April-June $44.48 $39.45 $47.40 $36.05
July-September $43.15 $29.52 $46.07 $31.65
We declared dividends of $0.28 per share in fiscal 2002 and $0.26 per share in
fiscal 2001. We expect to continue paying dividends on a quarterly basis to
holders of our common stock depending upon earnings and other relevant factors.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(in millions, except assets under management, per share amounts and employee headcount)
AS OF AND FOR THE
YEARS ENDED SEPTEMBER 30, 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Operating Revenues $2,518.5 $2,354.8 $2,340.1 $2,262.5 $2,577.3
Net Income 432.7 484.7 562.1 426.7 500.5
FINANCIAL DATA
Total Assets 6,422.7 6,265.7 4,042.4 3,666.8 3,480.0
Long-Term Debt 595.1 566.0 294.1 294.3 494.5
Stockholders' Equity 4,266.9 3,977.9 2,965.5 2,657.0 2,280.8
Operating Cash Flow 736.8 553.2 701.7 584.5 693.7
ASSETS UNDER MANAGEMENT (in billions)
Period Ending 247.8 246.4 229.9 218.1 208.6
Simple Monthly Average 263.2 243.4 227.7 219.8 226.9
PER COMMON SHARE
Earnings
Basic 1.66 1.92 2.28 1.69 1.98
Diluted 1.65 1.91 2.28 1.69 1.98
Cash Dividends 0.28 0.26 0.24 0.22 0.20
Book Value 16.50 15.25 12.17 10.59 9.06
EMPLOYEE HEADCOUNT 6,711 6,868 6,489 6,650 8,678
- -------------------------------------------------------------------------------------------------
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In this section, we discuss our results of operations and our financial
condition. 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 differ
significantly from those that we discuss in this document. For this reason, you
should not rely too heavily on these forward-looking statements and should
review the "Risk Factors" section, where we discuss these statements in more
detail.
GENERAL
We derive the majority of our operating revenues, operating expenses and net
income from providing investment advisory and related services to retail mutual
funds, institutional, high net-worth and private accounts, and other investment
products. This is our main business activity and operating segment. The mutual
funds and other products that we advise, collectively called our sponsored
investment products, are distributed to the public globally via five distinct
names:
* Franklin * Templeton * Mutual Series * Fiduciary Trust * Bissett
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.
The level of our revenues depends largely on the level and relative mix of
assets under management. To a lesser degree, our revenues also depend on the
level of mutual fund sales and the number of mutual fund shareholder accounts.
The fees charged for our services are based on contracts with our sponsored
investment products or our clients. These arrangements could change in the
future.
Our secondary business and operating segment is banking/finance. Our
banking/finance group offers selected retail-banking services to high net-worth
individuals, foundations and institutions and consumer lending.
At September 30, 2002, we employed approximately 6,700 people in 28 countries
serving customers on six different continents.
RESULTS OF OPERATIONS
The table below presents the highlights of our operations for the last three
fiscal years.
2002 2001
(in millions except per share amounts) 2002 2001 2000 vs 2001 vs 2000
- -------------------------------------------------------------------------------------------------
NET INCOME $432.7 $484.7 $562.1 (11)% (14)%
EARNINGS PER COMMON SHARE
Basic $1.66 $1.92 $2.28 (14)% (16)%
Diluted $1.65 $1.91 $2.28 (14)% (16)%
OPERATING MARGIN 23% 22% 28% -- --
EBITDA MARGIN /1/ 30% 33% 36% -- --
- -------------------------------------------------------------------------------------------------
/1/ EBITDA margin is earnings before interest, taxes on income, depreciation and
the amortization of intangibles divided by total revenues. The effect of the
September 2002 $60.1 million other-than-temporary decline in investments value
is excluded from EBITDA. Our September 2002 EBITDA margin, including
other-than-temporary decline in investments value, is 28%.
Net income decreased by 11% and diluted earnings per share decreased by 14% in
fiscal 2002 mainly due to lower investment and other income related to an
other-than-temporary decline in the value of certain investments and increased
operating expenses, partially offset by higher revenues. Net income decreased by
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14% and diluted earnings per share decreased by 16% in fiscal 2001, mainly due
to increased operating expenses offset by slightly higher revenue and investment
income.
ASSETS UNDER MANAGEMENT
(in billions)
2002 2001
AS OF SEPTEMBER 30, 2002 2001 2000 vs 2001 vs 2000
- -------------------------------------------------------------------------------------------------
EQUITY
Global/international $76.5 $80.2 $97.6 (5)% (18)%
Domestic (U.S.) 41.4 44.5 53.9 (7)% (17)%
- ---------------------------------------------------------------------------------------------------------------
TOTAL EQUITY 117.9 124.7 151.5 (5)% (18)%
HYBRID 36.6 36.1 9.3 1% 288%
FIXED-INCOME
Tax-free 52.8 48.4 44.0 9% 10%
Taxable
Domestic (U.S.) 26.1 24.4 15.6 7% 56%
Global/international 8.6 7.2 4.2 19% 71%
- ---------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME 87.5 80.0 63.8 9% 25%
MONEY 5.8 5.6 5.3 4% 6%
- ---------------------------------------------------------------------------------------------------------------
TOTAL $247.8 $246.4 $229.9 1% 7%
- -------------------------------------------------------------------------------------------------
Simple monthly average for the year /2/ $263.2 $243.4 $227.7 8% 7%
- -------------------------------------------------------------------------------------------------
/2/ Investment management fees from approximately 50% of our assets under
management at September 30, 2002 are calculated using daily average assets under
management.
Our assets under management at September 30, 2002 were $247.8 billion, 1% higher
than a year ago. The simple monthly average value of these assets during fiscal
2002 was $263.2 billion as compared to $243.4 billion in fiscal 2001, an 8%
increase. The year over year change in simple monthly average assets under
management generally is more indicative of investment management fee revenue
trends than the year over year change in year-end assets.
The mix of assets under management is shown below, followed by industry data
showing average effective investment management fees using data from Lipper(R)
Inc. Our actual effective fee rates may vary from these rates.
AS OF SEPTEMBER 30, 2002 2001 2000
- --------------------------------------------------------------------------------------------------
PERCENTAGE OF TOTAL ASSETS UNDER MANAGEMENT
Equity 48% 51% 66%
Fixed-income 35% 32% 28%
Hybrid 15% 15% 4%
Money 2% 2% 2%
- --------------------------------------------------------------------------------------------------
Total 100% 100% 100%
- --------------------------------------------------------------------------------------------------
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EQUITY HYBRID FIXED-INCOME MONEY
----------------------- ------ ----------------------------------- -----
TAXABLE- TAXABLE -
GLOBAL/ DOMESTIC TAX DOMESTIC GLOBAL/
INTERNATIONAL (U.S.) -FREE (U.S.) INTERNATIONAL
- --------------------------------------------------------------------------------------------------------
<c>
Industry effective
investment management
fee rates as of
September 30, 2002 /3/ 0.71% 0.55% 0.45% 0.43% 0.43% 0.59% 0.27%
- ---------------------------------------------------------------------------------------------------------
/3/ Calculated by Franklin Templeton Investments based on asset-weighted
averages of management fee rates provided by Lipper(R) Inc. Industry effective
investment management fee rates are calculated using all U.S.-based, open-ended
funds that reported expense data to Lipper(R) Inc. as of the funds' most recent
annual report date, and for which management fee rates were greater or equal to
zero. Industry effective fee rates reflect the investment management expenses of
retail and institutional funds drawn from all distribution channels, without
exception. The averages reflect combined retail and institutional funds data and
include all share classes, and all distribution channels, without exception.
Variable annuities are not included.
The change in the mix of assets under management was largely due to the
inclusion of the assets under management of Fiduciary Trust Company
International ("Fiduciary") beginning in fiscal 2001 and the market depreciation
in equity assets in 2002 and 2001. Approximately 64% of Fiduciary's assets under
management were classified as hybrid assets at the time of acquisition in April
2001. This change in mix lowered our overall effective fee rate on assets
managed, as a greater percentage of assets under management are in the
fixed-income and hybrid categories which generally carry a lower management fee
than equity assets. The effective investment management fee rate (investment
management fees divided by simple monthly average assets under management)
declined to 0.56% for the 2002 fiscal year compared to 0.58% in fiscal 2001 and
0.61% in fiscal 2000.
At September 30, 2002 assets under management by shareholder location were as
follows:
UNITED ASIA/PACIFIC
(in billions) STATES CANADA EUROPE AND OTHER TOTAL
- ---------------------------------------------------------------------------------------------------
Assets Under Management $209.4 $17.3 $9.6 $11.5 $247.8
- ---------------------------------------------------------------------------------------------------
Investors in the United States own approximately 85% of our assets under
management and approximately 73% of our revenues originate in the United States.
Investment advisory and administrative services related to these assets may be
provided in jurisdictions outside the United States in accordance with
contractual arrangements with our sponsored investment products.
The components of the change in our assets under management were as follows:
(in billions)
2002 2001
YEAR ENDED SEPTEMBER 30, 2002 2001 2000 vs 2001 vs 2000
- -------------------------------------------------------------------------------------------------
Beginning assets under management $246.4 $229.9 $218.1 7% 5%
Sales 72.4 58.5 51.7 24% 13%
Reinvested dividends 4.8 9.0 8.7 (47)% 3%
Redemptions (57.5) (58.6) (62.8) (2)% (7)%
Acquisitions 0.8 49.5 1.5 (98)% 3,200%
(Depreciation) appreciation (19.1) (41.9) 12.7 (54)% N/A
- -------------------------------------------------------------------------------------------------
Ending assets under management $247.8 $246.4 $229.9 1% 7%
- -------------------------------------------------------------------------------------------------
During fiscal 2002 and 2001, our sponsored investment products experienced
overall net cash inflows, including reinvested dividends, in contrast to the net
cash outflows experienced in fiscal 2000. Gross product sales increased 24%
while redemptions decreased 2% in 2002. Our acquisition of Pioneer ITI AMC
Limited ("Pioneer"), an Indian investment management company, in July 2002
increased our assets under management by $0.8 billion as of the date of this
acquisition. In 2001, the acquisition of Bissett in
27
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October 2000 increased our assets under management by $3.7 billion, and the
Fiduciary acquisition in April 2001 increased our assets under management by
$45.8 billion, as of the dates of those acquisitions.
Despite an overall decline in domestic and global equity markets in the latter
half of 2002, our assets under management increased from fiscal 2001 primarily
as a result of strong net sales during the year and less depreciation than in
2001. In fiscal 2001, assets under management increased mainly due to the
Fiduciary and Bissett acquisitions and net inflows, partially offset by
depreciation.
OPERATING REVENUES
The table below presents the percentage change in each revenue category between
fiscal 2002 and fiscal 2001 and between fiscal 2001 and fiscal 2000.
2002 2001 AS A PERCENTAGE OF TOTAL REVENUES
vs 2001 vs 2000 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
Investment management fees 4% 1% 58% 60% 60%
Underwriting and distribution fees 12% -- 31% 30% 30%
Shareholder servicing fees (4)% (6)% 8% 8% 9%
Other, net 86% 90% 3% 2% 1%
- -------------------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUES 7% 1% 100% 100% 100%
- -------------------------------------------------------------------------------------------------------------
SUMMARY
In fiscal 2002, total operating revenues increased 7% over the prior year.
Investment management and underwriting and distribution fees increased due to
both higher net sales and higher average assets under management. We also
benefited from the inclusion of Fiduciary revenues for a full fiscal year in
2002, as well as higher net gains related to auto loan securitizations included
in Other, net revenue.
In fiscal 2001, total operating revenues increased 1%. The acquisition of
Fiduciary in April 2001 provided higher investment management fees from higher
average assets under management. We also experienced higher banking revenues
included in other, net offset by reduced shareholder servicing fees.
INVESTMENT MANAGEMENT FEES
Investment management fees, accounting for 58% of our operating revenues in
fiscal 2002, include both investment advisory and administration fees. These
fees are generally calculated under contractual arrangements with our sponsored
investment products as a percentage of the market value of assets under
management. Annual rates vary by investment objective and type of services
provided. In return for these fees, we provide a combination of investment
advisory, administrative and other management services.
Investment management fees increased 4% in fiscal 2002 mainly due to increased
net sales, which increased assets under management, and the impact of including
Fiduciary for a full fiscal year. This increase was partially offset by a shift
in our asset mix toward fixed-income investment products, which led to a
decrease in our effective investment management fee rate.
Investment management fees increased 1% in fiscal 2001 from the prior year. This
increase was primarily due to the Fiduciary acquisition, which increased the
simple monthly average assets under management in the latter half of the year,
partially offset by a shift in our asset mix toward fixed-income and hybrid
investment products, which carry lower effective fee rates.
UNDERWRITING AND DISTRIBUTION FEES
We earn underwriting fees from the sale of some classes of sponsored investment
products on which investors pay a sales commission at the time of purchase.
Sales at reduced or zero commissions are offered on some classes of shares and
for sales to shareholders or intermediaries that exceed specified minimum
28
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amounts. Therefore, underwriting fees will change with the overall level of
gross sales and the relative mix of sales between different share classes.
Our sponsored investment products pay distribution fees in return for sales,
marketing and distribution efforts on their behalf. While other contractual
arrangements exist in international jurisdictions, in the United States,
distribution fees include 12b-1 fees. These fees are subject to maximum payout
levels based on a percentage of the assets in each fund. We pay a significant
portion of underwriting and distribution fees to the financial advisors and
other intermediaries who sell our sponsored investment products to the public on
our behalf. See the description of underwriting and distribution expenses below.
Overall, underwriting and distribution fees increased 12% in fiscal 2002.
Underwriting fees increased 24% consistent with a 24% increase in gross product
sales and distribution fees increased 5% consistent with an 8% increase in
simple monthly average assets under management.
Underwriting and distribution fees remained constant in fiscal 2001 as an
overall increase in product sales was offset by a greater percentage of overall
sales being made at no or lower commission levels. Distribution fees also
remained constant as the increase in average assets under management was related
to the Fiduciary acquisition. The Fiduciary assets under management are not
subject to distribution fees; therefore, these assets did not affect
distribution fee income as would be expected with a year over year increase in
average assets under management.
SHAREHOLDER SERVICING FEES
Shareholder servicing fees are generally fixed charges per shareholder account
that vary with the particular type of fund and the service being rendered. In
some instances, sponsored investment products are charged these fees based on
the level of assets under management. We receive fees as compensation for
providing transfer agency services, which include providing customer statements,
transaction processing, customer service and tax reporting. In the United
States, transfer agency service agreements provide that accounts closed in a
calendar year remain billable through the second quarter of the following
calendar year at a reduced rate. In Canada, such agreements provide that
accounts closed in the previous calendar year remain billable for four months
after the end of the calendar year. Accordingly, the level of fees will vary
with the growth in new accounts and the level of closed accounts that remain
billable.
Shareholder servicing fees decreased 4% in fiscal 2002 and 6% in fiscal 2001
consistent with a decrease in the quarterly average number of billable accounts.
Our acquisition of Pioneer added approximately 0.7 million shareholder accounts.
OTHER, NET
Other, net consists mainly of revenues from the banking/finance operating
segment and Fiduciary's custody services. Revenues from the banking/finance
operating segment include 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 86% in fiscal 2002. This increase was mainly due to the
inclusion of Fiduciary's banking and custody activities for a full fiscal year
in 2002 and increased gains recognized on auto loan portfolio sales. Other, net
increased 90% in fiscal 2001. This increase was primarily due to the addition of
the Fiduciary banking and custody activities from the date of acquisition of
Fiduciary to those of Franklin Bank and Trust, F.S.B., and Franklin Capital
Corporation.
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OPERATING EXPENSES
2002 2001 AS A PERCENTAGE OF TOTAL EXPENSES
vs 2001 vs 2000 2002 2001 2000
- -------------------------------------------------------------------------------------------------
Underwriting and distribution 12% 2% 37% 35% 37%
Compensation and benefits 5% 15% 33% 33% 32%
Information systems, technology
and occupancy 12% 23% 15% 14% 13%
Advertising and promotion 1% 5% 6% 6% 6%
Amortization of deferred sales
commissions (2)% (18)% 3% 4% 5%
Amortization of intangible assets (70)% 52% 1% 3% 2%
Other (2)% 7% 5% 5% 5%
September 11, 2001 expense, net (100)% 100% 0% 0% N/A
- -------------------------------------------------------------------------------------------------
Total operating expenses 5% 10% 100% 100% 100%
- ------------------------------------------------------------------------------------------------
SUMMARY
Operating expenses increased 5% during fiscal 2002. This increase was mainly due
to increased underwriting and distribution fees consistent with higher
underwriting and distribution revenue, and higher compensation and benefits and
technology and occupancy costs primarily due to the inclusion of Fiduciary's
activity for a full fiscal year in 2002. The increase in these expense
categories was offset in part by a decline in amortization of intangible assets
on discontinuation of the amortization of goodwill and indefinite-lived
intangible assets. In fiscal 2001, operating expenses increased 10% mainly
caused by increased compensation and benefits, information systems, technology
and occupancy costs, the addition of the operating costs of Fiduciary, increased
underwriting and distribution expenses and increased amortization of intangible
assets.
UNDERWRITING AND DISTRIBUTION
Underwriting and distribution includes expenses paid to financial advisers and
other third parties for selling, distributing and providing ongoing services to
investors in our sponsored investment products.
Underwriting and distribution expenses increased 12% in fiscal 2002 and 2% in
fiscal 2001 consistent with similar trends in underwriting and distribution
revenues.
COMPENSATION AND BENEFITS
Compensation and benefits increased 5% during fiscal 2002 due mainly to the
inclusion of Fiduciary's activity for a full fiscal year, including retention
bonuses committed to the Fiduciary staff. This increase was partially offset by
an overall decline in employees as well as the decision made by management
during the quarter ended December 2001 to reduce employee salaries by 5% or 10%,
depending on specific salary categories. In May 2002, we reinstated salaries for
employees whose salaries were reduced by 5% and, in July 2002, we reinstated
employee salaries in the 10% reduction category. We employed approximately 6,700
people at September 30, 2002 compared to approximately 6,900 at the same time
last year. Our acquisition of Pioneer added approximately 180 employees. In
order to hire and retain our key employees, we are committed to keeping our
salaries and benefit packages competitive, which means that the level of
compensation and benefits may increase more quickly or decrease more slowly than
our revenues.
Compensation and benefits increased 15% during fiscal 2001. This increase was
mainly due to the addition of approximately 790 Fiduciary employees from the
date of acquisition, retention bonuses for Fiduciary employees, annual salary
increases, and an increase in employee benefit and recruiting costs.
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INFORMATION SYSTEMS, TECHNOLOGY AND OCCUPANCY
Information systems, technology and occupancy costs increased 12% in fiscal
2002. This increase was mainly due to the inclusion of costs related to the
outsourcing of the management of our data center and distributed server
operations and added technology and occupancy costs of the Fiduciary acquisition
for a full fiscal year in 2002.
Information systems, technology and occupancy costs increased 23% in fiscal
2001. This increase was primarily due to continued expenditure on new technology
initiatives, an investment in the technology infrastructure of the company, the
charges and costs in connection with the outsourcing of the management of our
data center and distributed server operations, and the added technology and
occupancy costs of the Fiduciary acquisition. We also experienced an increase in
occupancy costs related to our expansion in Asia, Canada, and Europe as well as
costs related to the relocation to our new worldwide headquarters in San Mateo,
California.
Details of capitalized information systems and technology costs were as follows:
(in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------
Net carrying amount at beginning of period $162,857 $156,895 $138,566
Additions during period, net of disposals and other
adjustments 35,570 69,794 71,884
Net assets purchased through acquisitions 206 11,266 --
Amortization during period (77,147) (75,098) (53,555)
- --------------------------------------------------------------------------------------------------
Net carrying amount at end of period $121,486 $162,857 $156,895
- --------------------------------------------------------------------------------------------------
Information systems and technology costs capitalized in fiscal 2002 were less
than amounts capitalized in fiscal 2001 as we slowed down a number of
initiatives, realized synergies from previous investments in technology and
delayed the start of other technology projects given the current economic
slowdown and our focus on cost control and management.
ADVERTISING AND PROMOTION
Advertising and promotion increased 1% during fiscal 2002 and 5% in fiscal 2001.
Increases in both years resulted mainly from increased promotion and advertising
activity to educate the sales channels and the investing public about the strong
relative investment performance of our sponsored investment products.
AMORTIZATION OF DEFERRED SALES COMMISSIONS
Certain fund share classes, including class B, are sold without a front-end
sales charge to shareholders, while at the same time, our distribution
subsidiaries pay a commission on the sale. In the United States, class A shares
are sold without a front-end sales charge to shareholders when minimum
investment criteria are met while our U.S. distribution subsidiary pays a
commission on such sales. Class C shares are sold with a front-end sales charge
that is lower than the commission paid by the U.S. distributor. We defer and
amortize all up-front commissions paid by our distribution subsidiaries.
We have arranged to finance certain of these 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. In the United States, LFL has entered into a financing agreement with
our U.S. distribution subsidiary and we maintain a continuing interest in the
assets until resold by LFL. As a result, we retain DCA sold to LFL under the
U.S. agreement in our financial statements and amortize them over an 8-year
period until resold by LFL in a securitization, which generally occurs at least
once annually. LFL sold approximately $61.5 million U.S. DCA in fiscal 2002 and
approximately $20.3 million U.S. DCA in fiscal 2001 in securitization
transactions. In contrast to the U.S. arrangement, LFL has entered into direct
agreements with the Canadian and European sponsored investment products, and, as
a result, we do not record DCA from these sources in our financial statements.
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Amortization of deferred sales commissions decreased 2% in fiscal 2002 and 18%
in fiscal 2001. These changes were mainly a result of changes in sales mix and
our current financing arrangements. As the balance of DCA on our balance sheet
changes, so does the amortization expense.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets decreased 70% in fiscal 2002. This decrease
was due to the adoption of Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets" ("SFAS 142"), on October 1, 2001. Under
the new accounting standard, we ceased to amortize goodwill and indefinite-lived
intangible assets. This resulted in a reduction in amortization expense of
approximately $50 million in fiscal 2002 as compared to the prior year. We
completed our impairment testing as specified in SFAS 142 in March 2002 and we
determined that there was no impairment to the goodwill and indefinite-lived
assets recorded in our financial statements as of October 1, 2001. Amortization
of intangible assets increased 52% in fiscal 2001, due to the amortization of
goodwill and other intangible assets related to the purchase of Bissett and
Fiduciary.
OTHER INCOME (EXPENSE)
Other income (expense) includes investment and other income and interest
expense. Investment and other income is comprised primarily of the following:
* dividends from investments
* interest income from investments in bonds and government securities
* realized gains and losses on investments
* foreign currency exchange gains and losses
* miscellaneous income, including gain or loss on disposal of property.
Other income (expense) was a net expense in fiscal 2002 mainly due to a $60.1
million other-than-temporary decline in value of some of our investments
recognized in the fourth quarter of fiscal 2002. In contrast, in fiscal 2001, we
recognized net realized gains of approximately $34.2 million on the sale of
certain sponsored investment products held for investment purposes and other
realized gains of $24.6 million related to the sale of our former headquarters
building in San Mateo.
Other income (expense) increased 65% in fiscal 2001 from the prior year,
primarily due to net realized gains related to our sponsored investment products
and the sale of our former headquarters building in San Mateo.
TAXES ON INCOME
Our effective income tax rate for fiscal 2002 increased to 25% compared to 24%
in fiscal 2001 and 2000. As a multi-national corporation, we provide investment
management services to a wide range of international investment products, often
managed from locations outside the United States. Some of these jurisdictions
have lower tax rates than the United States. The mix of income (primarily
investment management fees) subject to these lower rates, when aggregated with
income originating in the United States, produces a lower overall effective tax
rate than existing U.S. Federal and state tax rates. 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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, we had $980.6 million in cash and cash equivalents, as
compared to $596.2 million at September 30, 2001. Cash and cash equivalents
include cash, U.S. Treasury bills and other debt instruments with original
maturities of three month or less and other highly liquid investments that are
readily convertible into cash, including money market funds. The mix of
short-term instruments and, in particular, the maturity schedules of some debt
instruments, affect the level reported in cash and cash equivalents and in
investments, available-for-sale in any given year. Liquid assets, which consist
of cash and
32
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cash equivalents, investments available-for-sale and current receivables
increased to $2,826.0 million at September 30, 2002 from $2,273.1 million at
September 30, 2001.
At September 30, 2002, approximately $850 million was available to us under
unused commercial paper and medium-term note programs. In addition, in fiscal
2001 we filed a shelf registration statement with the Securities and Exchange
Commission permitting the issuance of debt and equity securities of up to $300
million. Our committed revolving credit facilities at September 30, 2002 totaled
$420 million, of which, $210 million was under a 364-day facility. The remaining
$210 million facility is under a five-year facility and will expire in June
2007. In addition, our Fiduciary subsidiary has $350 million available in
uncommitted bank lines under the Federal Reserve Funds system.
Our ability to access the capital markets in a timely manner depends on a number
of factors including our credit rating, the condition of the global economy,
investors' willingness to purchase our securities, interest rates, credit
spreads and the equity market valuation levels. In extreme circumstances, we
might not be able to access this liquidity readily.
Outstanding debt increased to $603.0 million at September 30, 2002 compared to
$574.4 million at September 30, 2001. As of September 30, 2002 outstanding debt
consists of $514.2 million in principal and accrued interest related to
outstanding convertible notes that we issued in May 2001 and $88.8 million of
other long-term debt. As of September 30, 2001, outstanding debt included $504.7
million related to the convertible notes and $69.7 million of other long-term
debt. 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 have 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 this event, we may choose to pay the purchase price in cash or shares of our
common stock. The amount of convertible notes that will be redeemed depends on,
among other factors, the performance of our common stock. Other long-term debt
consists primarily of deferred commission liability recognized in relation to
the U.S. DCA financed by LFL that has not yet been sold by LFL in a
securitization transaction. The increase in outstanding debt in fiscal 2002 is
due to additional financing activity of our mutual fund Class B shares sales and
the accretion of the convertible notes to maturity, partially offset by an
increase in DCA sold by LFL.
We have arranged with LFL for non-recourse financing of sales commissions
advanced on sales of our B and C shares globally. The sales commissions that we
have financed through LFL during fiscal 2002 were approximately $135.3 million
compared to $84.7 million in fiscal 2001.
Since September 1998, our banking/finance operating segment has entered into a
number of auto loan securitization transactions with qualified special purpose
entities, which then issue asset-backed securities to private investors. The
outstanding loan balances held by these special purpose entities were $530.9
million as of September 30, 2002 and $210.8 million as of September 30, 2001.
Our ability to access the securitization market will directly affect our plans
to finance the auto loan portfolio in the future.
We expect that the main uses of cash will be to:
* expand our core business
* make strategic acquisitions
* acquire shares of our common stock
* fund property and equipment purchases
* pay operating expenses of the business
* enhance our technology infrastructure
* improve our business processes
* pay shareholder dividends
* repay and service debt.
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We believe that we can meet our present and reasonably foreseeable operating
cash needs and future commitments through the following:
* our existing liquid assets
* the continuing cash flow from operations
* our borrowing capacity under current credit facilities
* our ability to issue debt or equity securities
* our mutual fund sales commission financing arrangement.
In particular, we expect to finance future investment in our banking/finance
activities through operating cash flows, debt, increased deposit base, or
through the securitization of a portion of the receivables from consumer lending
activities.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
As described in Note 11 to the financial statements, our largest commitment at
September 30, 2002 relates to our convertible debt outstanding.
In addition, at September 30, 2002, the banking/finance operating segment had
commitments to extend credit aggregating $281.5 million, mainly under its credit
card lines. Standby letters of credit issued to Fiduciary clients totaled $7.4
million and expire through December 2003. The standby letters of credit are
secured by marketable securities.
BANKING/FINANCE GROUP EARNING ASSETS
---------------------------------------------------------------------
2002 2001
------------------------------- ------------------------------------
Average Average Average Average
(in thousands) balance Interest rate balance Interest rate
- ----------------------------- ---------- ---------- ---------- ----------- --------- --------------
Federal funds sold and
securities purchased
under agreements to
resell $91,496 $1,438 1.57% $42,109 $861 2.04%
Investment securities,
available-for-sale 368,693 18,366 4.98% 202,540 10,569 5.22%
Loans receivable /4/ 490,729 33,523 6.83% 337,662 34,296 10.16%
- ----------------------------- ---------- ---------- ---------- ----------- --------- --------------
Total earning assets $950,918 53,327 5.61% $582,311 45,726 7.85%
Interest-bearing deposits $814,159 9,812 1.21% $319,042 10,768 3.38%
Inter-segment debt 150,566 5,415 3.60% 187,006 9,778 5.23%
Federal funds purchased
and securities sold under
agreements to repurchase 19,233 392 2.04% 24,621 1,003 4.07%
- ----------------------------- ---------- ---------- ---------- ----------- --------- --------------
Total interest bearing
liabilities $983,958 15,619 1.59% $530,669 21,549 4.06%
- ----------------------------- ---------- ---------- ---------- ----------- --------- --------------
Net interest income and
margin $37,708 3.97% $24,177 4.15%
- ----------------------------- ---------- ---------- ---------- ----------- --------- --------------
/4/ Non-accrual loans are included in the average loans receivable balance.
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with
generally accepted accounting principles in the United States. The preparation
of these financial statements requires us to make estimates and assumptions that
impact our financial position and results of operations. These estimates and
assumptions are affected by our application of accounting policies. Below we
describe certain critical accounting policies that we believe are important to
understanding our results of operations and financial position.
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In addition, please refer to Note 1 to the financial statements for further
discussion of our accounting policies. Estimates, by their nature, are based on
judgment and available information. Differences between actual results and these
estimates could have a material impact on our financial statements.
INTANGIBLE ASSETS
At September 30, 2002 our assets included intangible assets as follows:
(in thousands) NET CARRYING AMOUNT
- --------------------------------------------------------------------------------
Goodwill $1,321,939
Intangible assets - definite-lived 221,942
Intangible assets - indefinite-lived 475,304
- --------------------------------------------------------------------------------
Total $2,019,185
- --------------------------------------------------------------------------------
Under Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", we are required to test the fair value of goodwill and
indefinite-lived intangibles for impairment at least once a year. As of March
31, 2002, we completed the impairment testing of goodwill and indefinite-lived
intangible assets and we determined that there was no impairment to the goodwill
and indefinite-lived assets recorded in our books and records as of October 1,
2001. While we believe that our testing was appropriate, it involved the use of
estimates and assumptions. Using different assumptions may have resulted in
recognizing some impairment of goodwill and indefinite-lived intangible assets
in our financial statements.
We are also required to consider if any impairment has occurred to
definite-lived intangible assets. Based on our review and evaluation, we do not
believe any impairment has occurred.
INCOME TAXES
As a multinational corporation, we operate in various locations outside the
United States. We have made no provision for U.S. taxes on $1,894 million of
cumulative undistributed earnings of foreign subsidiaries as those earnings are
intended to be reinvested for an indefinite period of time. Changes to our
policy of reinvesting foreign earnings may have a significant effect on our
financial condition and results of operation.
VALUATION OF INVESTMENTS
We record substantially all investments in our financial statements at fair
value or amounts that approximate fair value. Where available, we use prices
from independent sources such as listed market prices or broker or dealer price
quotations. For investments in illiquid and privately held securities that do
not have readily determinable fair values, we estimate the value of the
securities based upon available information. However, even where the value of a
security is derived from an independent market price or broker or dealer quote,
some assumptions may be required to determine the fair value. For example, we
generally assume that the size of positions in securities that we hold would not
be large enough to affect the quoted price of the securities when sold, and that
any such sale would happen in an orderly manner. However, these assumptions may
be incorrect and the actual value realized on sale could differ from the current
carrying value.
We evaluate our investments for other-than-temporary decline in value. This may
exist when the fair value of an investment security has been below the current
value for an extended period of time. As most of our investments are carried at
fair value, if an other-than-temporary decline in value is determined to exist,
the unrealized investment loss recorded net of tax in accumulated other
comprehensive income is realized as a charge to net income, in the period in
which the other -than-temporary decline in value is determined. During fiscal
2002, we recognized $60.1 million for an other-than-temporary decline in the
value of certain investments. While we believe that we have accurately estimated
the amount of other-than-temporary decline in value in our portfolio, different
assumptions could result in changes to the recorded amounts in our financial
statements.
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LOSS CONTINGENCIES
We are involved in various lawsuits and claims encountered in the normal course
of business. When such a matter arises and periodically thereafter, we consult
with our legal counsel and evaluate the merits of the claim based on the facts
available at that time. In management's opinion, an adequate accrual has been
made as of September 30, 2002 to provide for any losses that may arise from
these matters.
SPECIAL PURPOSE ENTITIES
Special purpose entities ("SPEs") consist of corporations, trusts, partnerships
and other entities that are established for a limited purpose. In the United
States, the Financial Accounting Standards Board (FASB) has currently undertaken
a project to address accounting for SPEs. We will continue to monitor the FASB's
project to determine the effect, if any, it will have on our treatment of any of
the SPEs described below.
LIGHTNING FINANCE COMPANY LIMITED. We finance certain DCA arising from our U.S.,
Canadian and European operations through LFL, a company in which we have an
ownership interest. In the United States, LFL has entered into a financing
agreement with our U.S. distribution subsidiary and we maintain a continuing
interest in the assets until resold by LFL. As a result, we retain DCA sold
under the U.S. agreement in our financial statements and amortize them over an
8-year period, until resold by LFL in a securitization. In contrast to the U.S.
arrangement, LFL has entered into direct agreements with the Canadian and
European sponsored investment products, and we do not record DCA from these
sources in our financial statements.
AUTO LOAN SECURITIZATION TRUSTS. We have entered into auto loan securitization
transactions with a number of qualified SPEs and have recorded these
transactions as sales. In addition, we retained interest-only strips receivable,
representing our contractual right to receive interest and other cash flows from
the pool of securitized loans after payment of required amounts to the holders
of the securities and certain costs associated with the securitization.
Interest-only strips are valued based on the present value of estimated future
cash flows.
LESSOR TRUST. We lease our corporate headquarters in San Mateo, California from
a lessor trust under an operating lease that expires in fiscal 2005, with
additional renewal options for a further period of up to 10 years. In connection
with this lease, we are contingently liable for approximately $145 million in
residual guarantees, representing approximately 85% of the total construction
costs of $170 million. The lease agreement is not expected to impact our cash
flows or financial condition materially during the initial five-year lease
period. The lease is treated as an operating lease, as none of the
capitalization criteria under Statement of Financial Accounting Standards No.13,
"Accounting for Leases", were met at the inception of the lease.
COLLATERALIZED DEBT OBLIGATIONS. We provide investment management services to,
and have made investments in, a number of Collateralized Debt Obligation ("CDO")
SPEs. These CDOs were established as a vehicle for our clients and invest mainly
in debt instruments. Our ownership interest in the CDOs is not sufficient to
meet consolidation requirements and they are reported at fair value as further
described in Note 1 to the financial statements.
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QUARTERLY INFORMATION (UNAUDITED)
(in thousands except per share data)
QUARTER FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------------------------
2002
Revenues $618,207 $625,968 $666,050 $608,307
Operating income $142,865 $148,019 $153,852 $140,766
Net income $118,519 $119,996 $125,690 $68,518
Earnings per share:
Basic $0.45 $0.46 $0.48 $0.26
Diluted $0.45 $0.46 $0.48 $0.26
Dividend per share $0.070 $0.070 $0.070 $0.070
Common stock price per share:
High $37.85 $44.15 $44.48 $43.15
Low $30.85 $34.52 $39.45 $29.52
- --------------------------------------------------------------------------------
2001
Revenues $564,074 $577,413 $609,473 $603,883
Operating income $148,978 $144,473 $124,696 $93,848
Net income $149,465 $131,684 $119,703 $83,869
Earnings per share:
Basic $0.61 $0.54 $0.46 $0.32
Diluted $0.61 $0.54 $0.46 $0.32
Dividend per share $0.065 $0.065 $0.065 $0.065
Common stock price per share:
High $45.50 $48.30 $47.40 $46.07
Low $34.00 $34.20 $36.05 $31.65
- --------------------------------------------------------------------------------
2000
Revenues $565,667 $612,526 $568,897 $593,050
Operating income $167,635 $172,077 $168,832 $154,899
Net income $137,522 $143,374 $140,370 $140,823
Earnings per share:
Basic $0.55 $0.58 $0.58 $0.58
Diluted $0.55 $0.58 $0.58 $0.58
Dividend per share $0.06 $0.06 $0.06 $0.06
Common stock price per share:
High $35.00 $39.19 $36.25 $45.63
Low $27.44 $24.63 $28.19 $30.00
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Our common stock is traded on the New York Stock Exchange ("NYSE") and the
Pacific Exchange, Inc. under the ticker symbol BEN and the London Stock Exchange
under the ticker symbol FKR. On September 30, 2002, the closing price of our
common stock on the NYSE was $31.10 per share. At December 3, 2002, there were
approximately 5,100 shareholders of record.
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RISK FACTORS
"FORWARD-LOOKING STATEMENTS". When used in this Annual Report, words or phrases
about the future such as "expected to," "will continue," "anticipates,"
"estimates," or similar expressions are "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995. Statements about our
future cash needs, our anticipated uses of cash, the expected sources of future
cash inflows, and the anticipated costs related to the September 11, 2001
tragedy, are also "forward-looking statements." These types of statements are
subject to certain risks and uncertainties, such as the factors described in the
risk factors outlined below. These risks and uncertainties could cause our
actual results to differ materially from those reflected in forward-looking
statements. Forward-looking statements are our best prediction at the time that
they are made, and you should not rely on them. Rather, you should read the
forward-looking statements in conjunction with the risk disclosures in this
Annual Report. If a circumstance occurs that causes any of our forward-looking
statements to be inaccurate, we have no obligation to announce publicly the
change in our expectations, or to revise the forward-looking statements.
WE FACE STRONG COMPETITION FROM NUMEROUS AND SOMETIMES LARGER COMPANIES. We
compete with numerous investment management companies, stock brokerage and
investment banking firms, insurance companies, banks, savings and loan
associations and other financial institutions. Continuing consolidation in the
financial services industry has created stronger competitors with greater
financial resources and broader distribution channels than our own.
Additionally, competing securities dealers whom we rely upon to distribute our
mutual funds also sell their own proprietary funds and investment products,
which could limit the distribution of our investment products. To the extent
that existing or potential customers, including securities dealers, decide to
invest in or distribute the products of our competitors, the sales of our
products as well as our market share, revenues and net income could decline.
CHANGES IN THE DISTRIBUTION CHANNELS ON WHICH WE DEPEND COULD REDUCE OUR
REVENUES AND HINDER OUR GROWTH. We derive nearly all of our fund sales through
broker/dealers and other similar investment advisors. Increasing competition for
these distribution channels has caused our distribution costs to rise and could
cause further increases in the future. Higher distribution costs lower our net
revenues and earnings. Additionally, if one of the major financial advisors who
distribute our products were to cease their operations, it could have a
significant adverse impact on our revenues and earnings. Moreover, our failure
to maintain strong business relationships with these advisors would impair our
ability to distribute and sell our products, which would have a negative effect
on our level of assets under management, related revenues and overall business
and financial condition.
WE HAVE BECOME SUBJECT TO AN INCREASED RISK OF ASSET VOLATILITY FROM CHANGES IN
THE GLOBAL EQUITY MARKETS. We have become subject to an increased risk of asset
volatility from changes in the domestic and global financial and equity markets
due to the continuing threat of terrorism and the recent reports of accounting
irregularities at certain public companies. Declines in these markets have
caused in the past, and would cause in the future, a decline in our revenue and
income.
THE LEVELS OF OUR ASSETS UNDER MANAGEMENT, WHICH IN TURN IMPACT REVENUES, ARE
SUBJECT TO SIGNIFICANT FLUCTUATIONS. Global economic conditions, changes in the
equity market place, interest rates, inflation rates, the yield curve and other
factors that are difficult to predict affect the mix, market values and levels
of our assets under management. Changing market conditions may cause a shift in
our asset mix towards fixed-income products and a related decline in our revenue
and income, since we generally derive higher fee revenues and income from equity
assets than from fixed-income products we manage. Similarly, our securitized
consumer receivables business is subject to marketplace fluctuation.
WE FACE RISKS ASSOCIATED WITH CONDUCTING OPERATIONS IN NUMEROUS FOREIGN
COUNTRIES. We sell mutual funds and offer investment advisory and related
services in many different regulatory jurisdictions around the world, and intend
to continue to expand our operations internationally. Regulators in these
jurisdictions could change their policies or laws in a manner that might
restrict or otherwise impede our ability to distribute or register investment
products in their respective markets.
38
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OUR ABILITY TO SUCCESSFULLY INTEGRATE THE WIDELY VARIED SEGMENTS OF OUR BUSINESS
CAN BE IMPEDED BY SYSTEMS AND OTHER TECHNOLOGICAL LIMITATIONS. Our continued
success in effectively managing and growing our business globally depends on our
ability to integrate the varied accounting, financial and operational systems of
our international business with that of our domestic business.
OUR INABILITY TO MEET CASH NEEDS COULD HAVE A NEGATIVE EFFECT ON OUR FINANCIAL
CONDITION AND BUSINESS OPERATIONS. Our ability to meet anticipated cash needs
depends upon factors including our asset value, our creditworthiness as
perceived by lenders and the market value of our stock. Similarly, our ability
to securitize and hedge future loan portfolios and credit card receivables, and
to obtain continued financing for Class B and C shares, is also subject to the
market's perception of those assets, finance rates offered by competitors, and
the general market for private debt. If we are unable to obtain these funds and
financing, we may be forced to incur unanticipated costs or revise our business
plans.
WE FACE COMPETITION IN HIRING AND RETAINING QUALIFIED EMPLOYEES. Our continued
success will depend upon our ability to attract and retain qualified personnel.
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,
which 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 whom we offer consumer loans could limit the growth of our
consumer loan business. Economic and credit market downturns could reduce the
ability of our customers to repay loans, which could cause our consumer loan
portfolio losses to increase.
THE SEPTEMBER 11, 2001 WORLD TRADE CENTER TRAGEDY MAY ADVERSELY AFFECT OUR
ABILITY TO ACHIEVE THE BENEFITS WE EXPECT FROM THE ACQUISITION OF FIDUCIARY. The
September 11, 2001 tragedy at the World Trade Center resulted in the destruction
of our Fiduciary headquarters, loss of 87 of our employees, additional operating
expenses to re-establish and relocate our operations, and asset write-offs, all
of which could adversely affect or delay our ability to achieve the anticipated
benefits from the acquisition. Our insurance coverage may not cover all losses
on claims for property, damage, extra expenses and business interruptions
arising out of the destruction of the World Trade Center. For the next several
years, insurance costs are likely to increase materially and we may not be able
to obtain the same types or amounts of coverage.
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. Revenue and cost synergies from the acquisition of
Fiduciary may not be fully realized and may take longer to realize than
originally anticipated.
WE ARE SUBJECT TO FEDERAL RESERVE BOARD REGULATION. Upon completion of our
acquisition of Fiduciary, we became a bank holding company and a financial
holding company subject to the supervision and regulation of the Federal Reserve
Board. We are subject to the restrictions, limitations, or prohibitions of the
Bank Holding Company Act of 1956 and the Gramm-Leach Bliley Act. The Federal
Reserve Board may impose additional limitations or restrictions on our
activities, including if the Federal Reserve Board believes that we do not have
the appropriate financial and managerial resources to commence or conduct an
activity or
39
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make an acquisition. The Federal Reserve Board may also take actions as
appropriate to enforce applicable federal law.
TECHNOLOGY AND OPERATING RISK COULD CONSTRAIN OUR OPERATIONS. We are highly
dependent on the integrity of our technology, operating systems and premises.
Although we have in place certain disaster recovery plans, we may experience
system delays and interruptions as a result of natural disasters, power
failures, acts of war, and third party failures, which could negatively impact
our operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, our financial position is subject to market
risk: the potential loss due to changes in the value of investments resulting
from adverse changes in interest rates, foreign exchange and/or equity prices.
Management is responsible for managing this risk. Our Risk Management Committee
is responsible for providing a framework to assist management to identify,
assess and manage market and other risks.
We are exposed to changes in interest rates mainly through our debt transactions
and portfolio debt holdings available-for-sale, which are carried at fair value
in our financial statements. As of September 30, 2002, a significant percentage
of our outstanding debt is at fixed interest rates. In our banking/finance
operating segment, we monitor the net interest rate margin and the average
maturity of interest earning assets, as well as funding sources. In addition, we
have considered the potential impact of the effect on the banking/finance
operating segment, our outstanding debt and portfolio debt holdings,
individually and collectively, of a 100 basis point (1%) movement in market
interest rates. We do not expect this change would have a material impact on our
operating revenues or results of operations in either scenario.
We are also exposed to equity price fluctuations through securities we hold that
are carried at fair value. To mitigate this risk, we maintain a diversified
investment portfolio.
We operate mainly in the United States, but also provide services and earn
revenues in Canada, the Bahamas, Europe, Asia, South America, Africa and
Australia. A significant portion of these revenues and associated expenses,
however, are denominated in U.S. dollars. Therefore, our exposure to foreign
currency fluctuations in our revenues and expenses is not material at this time.
This situation may change in the future as our business continues to grow
outside the United States.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index of Consolidated Financial Statements for the years ended September 30,
2002, 2001 and 2000.
CONTENTS PAGE
Consolidated Financial Statements of Franklin Resources, Inc.:
Consolidated Statements of Income
for the years ended September 30, 2002, 2001, and 2000 42
Consolidated Balance Sheets
as of September 30, 2002 and 2001 43
Consolidated Statements of Stockholders' Equity and Comprehensive Income
as of and for the years ended September 30, 2002, 2001, and 2000 45
Consolidated Statements of Cash Flows
for the years ended September 30, 2002, 2001, and 2000 47
Notes to Consolidated Financial Statements 48
Report of Independent Accountants 69
All schedules have been omitted as the information is provided in the financial
statements or in related notes thereto or is not required to be filed as the
information is not applicable.
41
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CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
FOR THE YEARS ENDED SEPTEMBER 30, 2002 2001 2000
- -------------------------------------------------------------------------------------------------
OPERATING REVENUES
Investment management fees $1,462,655 $1,407,202 $1,399,121
Underwriting and distribution fees 792,697 709,476 709,285
Shareholder servicing fees 191,302 199,525 211,416
Other, net 71,878 38,640 20,318
- -------------------------------------------------------------------------------------------------
Total operating revenues 2,518,532 2,354,843 2,340,140
OPERATING EXPENSES
Underwriting and distribution 716,234 636,868 623,144
Compensation and benefits 645,104 615,281 535,710
Information systems, technology and occupancy 294,161 263,297 213,670
Advertising and promotion 106,877 106,261 101,196
Amortization of deferred sales commissions 67,608 68,977 83,627
Amortization of intangible assets 17,107 56,590 37,163
Other 85,939 87,925 82,187
September 11, 2001 expense, net -- 7,649 --
- -------------------------------------------------------------------------------------------------
Total operating expenses 1,933,030 1,842,848 1,676,697
Operating income 585,502 511,995 663,443
OTHER INCOME (EXPENSE)
Investment and other income 5,075 136,351 90,108
Interest expense (12,302) (10,556) (13,960)
- --------------------------------------------------------------------------------------------------
Other income, net (7,227) 125,795 76,148
Income before taxes on income 578,275 637,790 739,591
Taxes on income 145,552 153,069 177,502
- -------------------------------------------------------------------------------------------------
NET INCOME $432,723 $484,721 $562,089
- -------------------------------------------------------------------------------------------------
Earnings per Share
Basic $1.66 $1.92 $2.28
Diluted $1.65 $1.91 $2.28
See accompanying notes to the consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
(in thousands)
AS OF SEPTEMBER 30, 2002 2001
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $829,237 $497,241
Receivables 292,325 296,165
Investment securities, available-for-sale 1,103,463 923,693
Prepaid expenses and other 97,783 108,895
- --------------------------------------------------------------------------------
Total current assets 2,322,808 1,825,994
BANKING/FINANCE ASSETS
Cash and cash equivalents 151,367 98,966
Loans receivable, net 444,338 555,314
Investment securities, available-for-sale 449,629 457,050
Other 45,889 117,914
- --------------------------------------------------------------------------------
Total banking/finance assets 1,091,223 1,229,244
NON-CURRENT ASSETS
Investments, other 263,927 243,110
Deferred sales commissions 130,617 104,082
Property and equipment, net 394,172 449,626
Intangible assets, net 697,246 702,198
Goodwill 1,321,939 1,286,622
Receivable from banking/finance group 100,705 307,214
Other 100,101 117,560
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Total non-current assets 3,008,707 3,210,412
- --------------------------------------------------------------------------------
TOTAL ASSETS $6,422,738 $6,265,650
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See accompanying notes to the consolidated financial statements.
43
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CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
AS OF SEPTEMBER 30, 2002 2001
- -------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Compensation and benefits $228,093 $221,672
Current maturities of long-term debt 7,830 8,361
Accounts payable and accrued expenses 117,246 127,918
Commissions 81,033 83,518
Income taxes 12,510 11,925
Other 8,307 4,039
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Total current liabilities 455,019 457,433
BANKING/FINANCE LIABILITIES
Deposits 733,571 723,608
Payable to Parent 100,705 307,214
Other 49,660 39,839
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Total banking/finance liabilities 883,936 1,070,661
NON-CURRENT LIABILITIES
Long-term debt 595,148 566,013
Deferred taxes 175,176 152,487
Other 46,513 41,160
- -------------------------------------------------------------------------------------------------
Total non-current liabilities 816,837 759,660
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Total liabilities 2,155,792 2,287,754
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COMMITMENTS AND CONTINGENCIES (NOTE 14)
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; 258,555,285 and 260,797,545 shares
issued and outstanding for 2002 and 2001 25,856 26,080
Capital in excess of par value 598,196 657,878
Retained earnings 3,702,636 3,342,979
Accumulated other comprehensive loss (59,742) (49,041)
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 4,266,946 3,977,896
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,422,738 $6,265,650
- -------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
44
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME
(in thousands)
SHARES CAPITAL IN
AS OF AND FOR THE YEARS ENDED COMMON COMMON EXCESS OF
SEPTEMBER 30, 2002, 2001 AND 2000 STOCK STOCK PAR VALUE
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, OCTOBER 1, 1999 251,007 $25,101 $69,631
Net Income
Other Comprehensive Income:
Net unrealized gains on investments
Currency translation adjustments
Total comprehensive income
Purchase of stock (8,442) (844) (112,046)
Cash dividends on common stock
Issuance of restricted shares, net 989 99 30,081
Employee stock plan (ESIP) shares 349 34 11,030
Exercise of options and other (173) (17) 1,304
BALANCE, SEPTEMBER 30, 2000 243,730 24,373 --
- -----------------------------------------------------------------------------------------------------------------------
Net Income
Other Comprehensive Income:
Net unrealized loss on investments
Currency translation adjustments
Total comprehensive income
Purchase of stock (4,200) (420) (163,438)
Cash dividends on common stock
Issuance of restricted shares, net 716 71 32,313
Employee stock plan (ESIP) shares 359 36 13,077
Stock issued to acquire Fiduciary 20,187 2,019 773,768
Exercise of options and other 6 1 2,158
BALANCE, SEPTEMBER 30, 2001 260,798 26,080 657,878
- -----------------------------------------------------------------------------------------------------------------------
Net Income
Other Comprehensive Income:
Net unrealized loss on investments
Currency translation adjustments
Minimum pension liability adjustment
Total comprehensive income
Purchase of stock (3,929) (393) (124,538)
Cash dividends on common stock
Issuance of restricted shares, net 842 84 27,469
Employee stock plan (ESIP) shares 436 44 14,323
Proceeds from issuance of put options 6,954
Exercise of options and other 408 41 16,110
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BALANCE, SEPTEMBER 30, 2002 258,555 $25,856 $598,196
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[Table continued on next page]
See accompanying notes to the consolidated financial statements.
45
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME
[Table continued from previous page]
(in thousands)
ACCUMULATED
OTHER TOTAL TOTAL
AS OF AND FOR THE YEARS ENDED RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
SEPTEMBER 30, 2002, 2001 AND 2000 EARNINGS OTHER INCOME EQUITY INCOME
- ----------------------------------------------------------------------------------------------------------------------
<c>
BALANCE, OCTOBER 1, 1999 $2,566,048 $(3,532) $(254) $2,656,994
Net Income 562,089 562,089 $562,089
Other Comprehensive Income:
Net unrealized gains on investments 22,511 22,511 22,511
Currency translation adjustments (9,881) (9,881) (9,881)
Total comprehensive income $574,719
Purchase of stock (137,152) (250,042)
Cash dividends on common stock (58,819) (58,819)
Issuance of restricted shares, net 110 30,290
Employee stock plan (ESIP) shares 11,064
Exercise of options and other 1,287
BALANCE, SEPTEMBER 30, 2000 2,932,166 (3,422) 12,376 2,965,493
- ----------------------------------------------------------------------------------------------------------------------
Net Income 484,721 484,721 $484,721
Other Comprehensive Income:
Net unrealized loss on investments (58,170) (58,170) (58,170)
Currency translation adjustments (3,247) (3,247) (3,247)
Total comprehensive income $423,304
Purchase of stock (8,255) (172,113)
Cash dividends on common stock (65,653) (65,653)
Issuance of restricted shares, net 3,422 35,806
Employee stock plan (ESIP) shares 13,113
Stock issued to acquire Fiduciary 775,787
Exercise of options and other 2,159
BALANCE, SEPTEMBER 30, 2001 3,342,979 -- (49,041) 3,977,896
- ----------------------------------------------------------------------------------------------------------------------
Net Income 432,723 432,723 $432,723
Other Comprehensive Income:
Net unrealized loss on investments (4,084) (4,084) (4,084)
Currency translation adjustments (837) (837) (837)
Minimum pension liability adjustment (5,780) (5,780) (5,780)
Total comprehensive income $422,022
Purchase of stock (124,931)
Cash dividends on common stock (73,066) (73,066)
Issuance of restricted shares, net 27,553
Employee stock plan (ESIP) shares 14,367
Proceeds from issuance of put options 6,954
Exercise of options and other 16,151
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BALANCE, SEPTEMBER 30, 2002 $3,702,636 $-- $(59,742) $4,266,946
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See accompanying notes to the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
FOR THE YEARS ENDED SEPTEMBER 30, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $432,723 $484,721 $562,089
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Decrease (increase) in receivables, prepaid expense and other 66,266 (88,360) (63,098)
Net advances of deferred sales commissions (102,092) (86,305) (67,091)
Increase in other current liabilities 66,736 14,218 33,229
Increase (decrease) in income taxes payable 584 (29,739) (2,079)
(Decrease) increase in commissions payable (2,485) 6,552 14,996
Increase in accrued compensation and benefits 26,655 54,056 44,999
Depreciation and amortization 183,121 223,846 199,639
Decrease in restructuring liabilities -- -- (2,564)
Losses (gains) on disposition of assets 5,224 (45,687) (18,407)
Other-than-temporary decline in investments value 60,068 -- --
September 11, 2001 asset write-offs -- 19,885 --
- ----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 736,800 553,187 701,713
Purchase of investments (1,708,998) (947,615) (628,206)
Liquidation of investments 1,425,848 463,276 374,102
Purchase of banking/finance investments (66,921) (103,872) (32,788)
Liquidation of banking/finance investments 68,387 187,082 26,449
Net proceeds from securitization of loans receivable 558,082 139,295 123,048
Net originations of loans receivable (426,386) (294,557) (194,100)
Net addition of property and equipment (53,062) (107,326) (108,432)
Proceeds from sale of property 9,569 10,392 4,088
Acquisitions of subsidiaries, net of cash acquired (51,779) (99,058) --
September 11, 2001 insurance proceeds 28,562 -- --
- ----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (216,698) (752,383) (435,839)
Increase (decrease) in bank deposits 9,963 67,297 (3,372)
Exercise of common stock options 17,045 2,158 1,142
Proceeds from issuance of put options 6,059 -- --
Dividends paid on common stock (71,778) (63,471) (57,953)
Purchase of stock (124,929) (172,113) (250,042)
Issuance of debt 103,794 711,847 497,118
Payments on debt (75,859) (496,320) (526,006)
- ----------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (135,705) 49,398 (339,113)
Increase (decrease) in cash and cash equivalents 384,397 (149,798) (73,239)
Cash and cash equivalents, beginning of year 596,207 746,005 819,244
- ----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $980,604 $596,207 $746,005
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest, including banking/finance group interest $16,746 $17,746 $26,370
Income taxes 125,083 148,268 180,098
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Value of common stock issued, mainly restricted stock $28,009 $28,640 $30,181
Value of common stock issued to acquire Fiduciary -- 775,786 --
Fair value of Fiduciary assets acquired -- 1,538,084 --
Fair value of Fiduciary liabilities acquired -- 757,722 --
See accompanying notes to the consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
We derive the majority of our revenues and net income from providing investment
management, administration, distribution and related services to the Franklin,
Templeton, Mutual Series, Fiduciary Trust and Bissett funds, institutional, high
net-worth and other investment products (our "Sponsored Investment Products").
Services to our Sponsored Investment Products are provided under contracts that
set forth the level and nature of the fees to be charged for these services. The
majority of our revenues relate to mutual fund products which are subject to
contracts that are periodically reviewed and approved by each mutual fund's
Board of Directors/Trustees and/or its shareholders. Currently, no single
Sponsored Investment Product's revenues represent more than 10% of total
revenues.
BASIS OF PRESENTATION. The consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United States of
America, which require us to estimate some amounts. Actual amounts may differ
from these estimates. Certain comparative amounts for prior years have been
reclassified to conform to the fiscal 2002 financial statement presentation.
The consolidated financial statements include the accounts of Franklin
Resources, Inc. and its majority-owned subsidiaries ("Franklin Templeton
Investments"). All material intercompany accounts and transactions have been
eliminated except that we have not eliminated the Receivable from
banking/finance group and Payable to parent from our Consolidated Balance Sheets
which represent balances outstanding related to the funding of banking
activities, including auto and credit card loan financing. In addition, the
related intercompany interest expense is included in Other, net revenue and the
intercompany interest income is included in Investment and other income in our
Consolidated Statements of Income, see Note 9. This treatment provides
additional information on funding sources available to the banking/finance group
and on its operations.
CASH AND CASH EQUIVALENTS include cash on hand, demand deposits with banks, debt
instruments with original maturities of three months or less and other highly
liquid investments, including money market funds, which are readily convertible
into cash.
INVESTMENT SECURITIES, AVAILABLE-FOR-SALE are carried at fair value. Fair values
for investments in our Sponsored Investment Products are based on the last
reported net asset value. Fair values for other investments are based on the
last reported price on the exchange on which they are traded. Realized gains and
losses are included in investment income currently based on specific
identification. Unrealized gains and losses are recorded net of tax as part of
accumulated other comprehensive income until realized.
When the cost of an investment exceeds its fair value, we review the investment
for an other-than-temporary decline in value. In making the determination of
whether the decline is other-than-temporary, we use a systematic methodology
that includes consideration of the duration and extent to which the fair value
is less than cost, the financial condition of the investee, including industry
and sector performance, and our intent and ability to hold the investment. When
a decline in fair value of an available-for-sale security is determined to be
other-than-temporary, the unrealized loss recorded net of tax in Accumulated
other comprehensive income is realized as a charge to Net income.
DERIVATIVES. We do not hold or issue derivative financial instruments for
trading purposes. Periodically, we enter into interest-rate swap agreements to
reduce variable interest-rate exposure with respect to our commercial paper,
designated as cash flow hedges, and to hedge exposures or modify the interest
rate characteristics of fixed-rate borrowings with maturities in excess of one
year, designated as fair value hedges. As of September 30, 2002, we held
interest rate swaps with a total notional amount of $43 million and these were
reported at their fair value of $2.7 million.
We periodically enter into spot and forward currency contracts as principal to
facilitate client transactions and, on limited occasions, hold currency options
for our own account. It is our policy that substantially all forward contracts
be covered no later than the close of business each day. Gains or losses on
these contracts
48
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are reflected in the Consolidated Statements of Income. The gross fair market
value of all contracts outstanding that had a positive fair market value totaled
$2.7 million at September 30, 2002. This represents a credit exposure to the
extent that counterparties fail to settle their contractual obligations. This
risk is mitigated by the use of master netting agreements, careful valuation of
counterparty credit standings, diversification and limits.
We occasionally sell put options over our common stock. During fiscal 2002, we
sold put options giving the purchaser the right to sell up to 3.5 million shares
of our common stock to us at specified prices upon exercise of the options if
certain conditions are met. We received premiums of approximately $7.0 million
that were recorded in stockholders' equity as Capital in excess of par value. At
September 30, 2002, 3 million common stock put options were outstanding, with
designated expiration dates in January, March, June and July of 2003.
LOANS RECEIVABLE. Our banking/finance group offers retail-banking and consumer
lending services. We accrue interest on loans using the simple interest method.
The majority of retail-banking loans are at variable rates, which are adjusted
periodically.
ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses on our consumer loan
portfolio is maintained at a level sufficient to absorb probable losses inherent
in the loan portfolio. Probable losses are estimated for the consumer loan
portfolio based on contractual delinquency status and historical loss
experience. The allowance on our consumer portfolio is based on aggregated
portfolio segment evaluations, generally by loan type, and reflects our judgment
of portfolio risk factors such as economic conditions, bankruptcy trends,
product mix, geographic concentrations and other similar items. A loan is
charged to the allowance for loan losses when it is deemed to be uncollectible,
taking into consideration the value of the collateral, the financial condition
of the borrower and other factors. Recoveries on loans previously charged-off as
uncollectible are credited to the allowance for loan losses. The allowance for
loan losses on our auto loan portfolio includes a portion of acquisition
discounts from our purchase of automobile installment loan contracts, commonly
referred to as dealer holdbacks. This allocation represents our estimate of the
losses expected over the life of the loan.
We have not recorded allowance for possible loan losses on our retail-banking
loans and advances as these loans are generally payable on demand and are fully
secured by assets under our custody. Advances on customers' accounts are
generally secured or subject to rights of offset and, consistent with past
experience, no loan losses are anticipated.
Past due loans 90 days or more in both our consumer lending and retail-banking
portfolios are reviewed individually to determine whether they are collectible.
If warranted, after considering collateral level and other factors, loans 90
days past due are placed on non-accrual status.
INVESTMENTS, OTHER include investments that we intend to hold for a period in
excess of one year.
Investments are accounted for using the equity method of accounting if we are
able to exercise significant influence, but not control, over the investee.
Significant influence is generally considered to exist when an ownership
interest in the voting stock of the investee is between 20% and 50%, although
other factors, such as representation on the investee's Board of Directors and
the impact of commercial arrangements are also considered in determining whether
the equity method of accounting is appropriate. Lower thresholds are used for
our investments in limited partnerships in determining whether we are able to
exercise significant influence. Companies in which we hold in excess of 50%
ownership interest are consolidated in our financial statements.
Investments are accounted for under the cost method if we are not able to
exercise significant influence over the investee. In addition, investments,
other include debt instruments carried at fair value in accordance with our
treatment of investment securities, available-for-sale. These include
collateralized debt obligations ("CDOs") which are valued based on cash flow
projections.
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Investments, other are adjusted for other-than-temporary declines in value. When
a decline in fair value of an investment carried at fair value is determined to
be other-than-temporary, the unrealized loss recorded net of tax in Accumulated
other comprehensive income is realized as charge to net income. When a decline
in fair value of an investment carried at cost is determined to be
other-than-temporary, the investment is written down to fair value and the loss
in value is included in earnings.
DEFERRED SALES COMMISSIONS. Sales commissions paid to brokers and other
investment advisors in connection with the sale of shares of our mutual funds
sold without a front-end sales charge are capitalized and amortized over periods
not exceeding eight years - the periods in which we estimate that they will be
recovered from distribution plan payments and from contingent deferred sales
charges.
PROPERTY AND EQUIPMENT are recorded at cost and are depreciated on the
straight-line basis over their estimated useful lives. Expenditures for repairs
and maintenance are charged to expense when incurred. We amortize leasehold
improvements on the straight-line basis over their estimated useful lives or the
lease term, whichever is shorter.
SOFTWARE DEVELOPED FOR INTERNAL USE. Some internal and external costs incurred
in connection with developing or obtaining software for internal use are
capitalized. These capitalized costs are included in Property and equipment, net
on our Consolidated Balance Sheets and are amortized beginning when the software
project is complete and the application is put into production, over the
estimated useful life of the software.
INTANGIBLE ASSETS AND GOODWILL. Intangible assets consist mainly of the
estimated value of mutual fund management contracts and customer base resulting
from our acquisition of the assets and liabilities of Templeton, Galbraith &
Hansberger Ltd. in October 1992 and Heine Securities Corporation in November
1996, as well as the purchase of the following companies:
* Bissett and Associates Investment Management Ltd. ("Bissett") in October
2000;
* Fiduciary Trust Company International ("Fiduciary") in April 2001; and
* Pioneer ITI AMC Limited in July 2002.
We amortize intangible assets over their estimated useful lives, ranging from 5
to 15 years, using the straight-line method, unless the asset is determined to
have an indefinite useful life. Amounts assigned to indefinite-lived intangible
assets mainly represent the value of contracts to manage mutual fund assets, for
which there is no foreseeable limit on the contract period.
Goodwill represents the excess cost of a business acquisition over the fair
value of the net assets acquired. In accordance with Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"), indefinite-lived intangible assets and goodwill are not amortized.
We review intangible assets and goodwill at least annually to determine whether
the value of the assets is impaired and the amortization periods are
appropriate. If an asset is impaired, the difference between the carrying amount
of the asset reflected on the financial statements and its current fair value is
recognized as an expense in the period in which the impairment occurs.
Intangible assets subject to amortization are reviewed for impairment at each
reporting period on the basis of the expected future undiscounted operating cash
flows without interest charges to be derived from these assets. For intangible
assets with indefinite lives, fair value is determined based on anticipated
discounted cash flows. Goodwill is impaired when the carrying amount of the
reporting unit exceeds the implied fair value of the reporting unit. In
estimating the fair value of the reporting unit, we use valuation techniques
based on discounted cash flows similar to models employed in analyzing the
purchase price of an acquisition target. Goodwill has been assigned to our
investment management operating segment. See Note 8 for additional information
regarding intangible assets and goodwill.
50
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DEMAND AND INTEREST BEARING DEPOSITS. The fair value of demand deposits are, by
definition, equal to their carrying amounts. The interest-bearing deposits are
variable rate and short-term and, therefore, the carrying amounts approximate
their fair values.
REVENUES. We recognize investment management fees, shareholder servicing fees,
investment income and distribution fees as earned, over the period in which
services are rendered. Investment management fees are determined based on a
percentage of assets under management. Shareholder servicing fees are calculated
based on the number of accounts serviced. We record underwriting commissions
related to the sale of shares of our Sponsored Investment Products on the trade
date.
ADVERTISING AND PROMOTION. We expense costs of advertising and promotion as
incurred.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of foreign subsidiaries are
translated at current exchange rates as of the end of the accounting period, and
related revenues and expenses are translated at average exchange rates in effect
during the period. Net exchange gains and losses resulting from translation are
excluded from income and are recorded as part of Accumulated other comprehensive
income. Foreign currency transaction gains and losses are reflected in income
currently.
DIVIDENDS. For the years ended September 30, 2002, 2001 and 2000, we declared
dividends to common stockholders of $0.28, $0.26 and $0.24 per share.
STOCK-BASED COMPENSATION. As allowed under the provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), we have elected to apply Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for our stock-based plans. Accordingly, no
compensation costs are recognized with respect to stock options granted, or with
respect to shares issued under the Employee Stock Investment Plan. We recognize
compensation expense for the matching contribution that we may elect to make in
connection with the Employee Stock Investment Plan over the 18-month holding
period and for the full cost of restricted stock grants in the year that they
are earned.
ACCUMULATED OTHER COMPREHENSIVE INCOME is reported in our consolidated
statements of stockholders' equity and includes net income, minimum pension
liability adjustment, unrealized gains (losses) on investment securities
available-for-sale, net of income taxes and currency translation adjustments.
The changes in net unrealized gains (losses) on investment securities include
reclassification adjustments relating to the net realized gains on the sale of
investment securities of $5.7 million, $34.2 million and $9.9 million during
fiscal 2002, 2001 and 2000. The tax effect of the change in unrealized gains
(losses) on investment securities was $(1.7) million, $(18.4) million and $7.1
million during fiscal 2002, 2001 and 2000.
EARNINGS PER SHARE. Earnings per share were computed as follows:
(in thousands except per share amounts) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Net income $432,723 $484,721 $562,089
- ---------------------------------------------------------------------------------------------------------------
Weighted-average shares outstanding - basic 261,239 252,628 246,116
Incremental shares from assumed conversions 815 1,035 508
- ---------------------------------------------------------------------------------------------------------------
Weighted-average shares outstanding - diluted 262,054 253,663 246,624
- ---------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $1.66 $1.92 $2.28
Diluted $1.65 $1.91 $2.28
NOTE 2 - ACQUISITIONS
On July 26, 2002, our 75% owned subsidiary, Templeton Asset Management (India)
Private Limited, acquired all of the issued and outstanding shares of Pioneer
ITI AMC Limited ("Pioneer"), an Indian
51
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investment management company with approximately $0.8 billion in assets under
management as of the purchase date. This all-cash transaction was valued at
approximately $55.4 million. Our consolidated financial statements include the
operating results of Pioneer from July 26, 2002. We recognized goodwill of $38.7
million and indefinite-lived management contracts of $13.1 million from this
acquisition.
On April 10, 2001, we acquired Fiduciary. Each share of Fiduciary's common stock
was exchanged for 2.7744 shares of our common stock, resulting in the issuance
in the aggregate of approximately 20,187,000 shares of our common stock. The
value of the shares issued in exchange for Fiduciary was approximately $775.8
million. We accounted for this transaction using the purchase method of
accounting. The excess of the purchase price, including our acquisition costs,
over the fair value of the net assets acquired resulted in goodwill of $559.5
million. Net assets acquired included $235.5 million of other intangible assets.
As of September 30, 2001, we wrote off the net intangible asset related to
Fiduciary's headquarters lease of $8.2 million as a result of the September 11,
2001 terrorist attack. See Note 20. The estimated life of the other intangible
assets is 15 years.
On October 2, 2000, we acquired all of the issued and outstanding shares of
Bissett, a Canadian asset management company. The all-cash transaction was
valued at approximately $95 million. Intangible assets of approximately $89
million with lives ranging from 15 to 40 years were recorded as a result of the
acquisition. We accounted for this transaction using the purchase method. Our
consolidated financial statements include the operating results of Bissett from
October 2, 2000.
We have not presented proforma combined results of operations for these
acquisitions, because the results of operations as reported in the accompanying
consolidated statements of income would not have been materially different.
NOTE 3 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents at September 30, 2002 and 2001, consisted of the
following:
(in thousands) 2002 2001
- --------------------------------------------------------- ----------------------- ---------------------
Cash and due from banks $224,214 $204,907
Federal funds sold and securities purchased under
agreements to resell 82,150 25,020
Other 674,240 366,280
- --------------------------------------------------------- ----------------------- ---------------------
TOTAL $980,604 $596,207
- --------------------------------------------------------- ----------------------- ---------------------
Federal Reserve Board regulations require reserve balances on deposits to be
maintained with the Federal Reserve Banks by banking subsidiaries. The average
required reserve balance was $5.3 million at September 30, 2002 and $3.1 million
at September 30, 2001.
52
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NOTE 4 - INVESTMENT SECURITIES AND OTHER INVESTMENTS
Investment securities at September 30, 2002 and 2001, consisted of the
following:
AMORTIZED GROSS UNREALIZED FAIR
(in thousands) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------
2002
INVESTMENT SECURITIES, AVAILABLE-FOR-SALE
Sponsored Investment Products $421,612 $7,309 $(66,888) $362,033
Debt (mainly U.S. Government) 1,159,126 18,058 -- 1,177,184
Securities of U.S. states and political
subdivisions 10,758 597 -- 11,355
Equities 1,264 1,269 (13) 2,520
- ----------------------------------------------------------------------------------------------------
TOTAL $1,592,760 $27,233 $(66,901) $1,553,092
- ----------------------------------------------------------------------------------------------------
INVESTMENTS, OTHER
Investment in equity-method investees $65,347 $-- $-- $65,347
Equities and other 189,008 18,702 (9,130) 198,580
- ----------------------------------------------------------------------------------------------------
TOTAL $254,355 $18,702 $(9,130) $263,927
- ----------------------------------------------------------------------------------------------------
2001
INVESTMENT SECURITIES, AVAILABLE-FOR-SALE
Sponsored Investment Products $225,150 $2,191 $(48,388) $178,953
Debt (mainly U.S. Government) 1,151,818 11,990 -- 1,163,808
Securities of U.S. states and political
subdivisions 13,156 252 -- 13,408
Equities 18,560 6,024 (10) 24,574
- ----------------------------------------------------------------------------------------------------
TOTAL $1,408,684 $20,457 $(48,398) $1,380,743
---------------------------------------------------------------------------------------------------
INVESTMENTS, OTHER
Investments in equity-method investees $59,261 $-- $-- $59,261
Equities and other 176,385 16,867 (9,403) 183,849
- ----------------------------------------------------------------------------------------------------
TOTAL $235,646 $16,867 $(9,403) $243,110
- ----------------------------------------------------------------------------------------------------
Investments, other included investments that we intend to hold for a period in
excess of one year. Investments in equity method investees include investment
partnerships where we have significant influence. Equities and other investments
include debt, including CDOs, and other securities with a determinable fair
value as well as investments carried at cost.
Gross unrealized losses on Investment securities, available-for-sale and
Investments, other at September 30, 2002 were deemed to be temporary in nature.
See Note 1 for a description of our investments valuation methodology.
53
- --------------------------------------------------------------------------------
At September 30, 2002, maturities of securities of the U.S. Treasury and federal
agencies and the U.S. states and political subdivisions were as follows:
(in thousands) AMORTIZED COST FAIR VALUE
- --------------------------------------------------------------------------------
SECURITIES OF U.S. TREASURY AND FEDERAL AGENCIES
Due in one year or less $769,590 $770,138
Due after one year through five years 305,086 321,096
Due after five years through ten years 84,450 85,950
- --------------------------------------------------------------------------------
TOTAL $1,159,126 $1,177,184
- --------------------------------------------------------------------------------
SECURITIES OF U.S. STATES AND POLITICAL SUBDIVISIONS
Due in one year or less $2,151 $2,187
Due after one year through five years 7,161 7,566
Due after five years through ten years 1,446 1,602
- --------------------------------------------------------------------------------
TOTAL $10,758 $11,355
- --------------------------------------------------------------------------------
NOTE 5 - LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of loans receivable by major category is shown below. Included in
installment loans to individuals are auto and credit card receivables. Other
loans include secured loans made to Fiduciary clients. No loan loss allowance is
recognized on Fiduciary's retail-banking loans and advances as described in Note
1.
(in thousands) 2002 2001
- --------------------------------------------------------------------------------
Commercial $67,772 $72,298
Real estate (secured) 99,935 7,196
Installment loans to individuals 158,159 354,588
Other 127,506 130,800
- --------------------------------------------------------------------------------
Loans receivable 453,372 564,882
Less: allowance for loan losses (9,034) (9,568)
- --------------------------------------------------------------------------------
LOANS RECEIVABLE, NET $444,338 $555,314
- --------------------------------------------------------------------------------
Maturities of loans at September 30, 2002 were as follows:
AFTER 1
ONE YEAR OR THROUGH 5
(in thousands) LESS YEARS AFTER 5 YEARS TOTAL
- -------------------------------------------------------------------------------------
Commercial $67,772 $-- $-- $67,772
Real estate (secured) 17,721 44,590 37,624 99,935
Installment loans to individuals 58,399 86,639 13,121 158,159
Other 124,506 3,000 -- 127,506
- -------------------------------------------------------------------------------------
TOTAL $268,398 $134,229 $50,745 $453,372
- -------------------------------------------------------------------------------------
The following table summarizes contractual maturities of loans due after one
year by repricing characteristic at September 30, 2002:
(in thousands) CARRYING AMOUNT
- --------------------------------------------------------------------------------
Loans at predetermined interest rates $101,019
Loans at floating or adjustable rates 83,955
- --------------------------------------------------------------------------------
TOTAL $184,974
- --------------------------------------------------------------------------------
54
- --------------------------------------------------------------------------------
At September 30, 2002, the banking/finance operating segment had commitments to
extend credit aggregating $281.5 million, mainly under its credit card lines.
Standby letters of credit issued to Fiduciary clients totaled $7.4 million and
expire through December 2003. The standby letters of credit are secured by
marketable securities.
Changes in the allowance for loan losses during 2002 and 2001 were as follows:
(in thousands) 2002 2001
- --------------------------------------------------------------------------------------------------
Balance, beginning of year $9,568 $4,971
Provision for loan losses 13,890 9,585
Charge-offs (8,639) (6,710)
Recoveries 1,845 1,367
Loans securitized (10,903) (2,880)
Dealer holdback and other 3,273 3,235
- --------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $9,034 $9,568
- --------------------------------------------------------------------------------------------------
Total net loan charge-offs as a percentage of average total loans 1.38% 1.58%
Allowance as a percentage of total loans 1.99% 1.69%
The following is a summary of delinquency information for fiscal 2002, 2001 and
2000:
(in thousands) 2002 2001 2000
- ----------------------------------------------------- -------------- --------------- -------------
Commercial loans, 90 days or more delinquent $300 $300 $--
Installment loans, 90 days or more delinquent $750 $292 $683
Non-accrual loans $439 $306 $470
- ----------------------------------------------------- -------------- --------------- -------------
NOTE 6 - SECURITIZATION OF LOANS RECEIVABLE
The following table shows details of auto loan securitization transactions:
(in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------
Gross sale proceeds $565,154 $145,385 $123,951
Net carrying amount of loans sold $544,831 $142,541 $124,883
Pre-tax gain (loss) $20,323 $2,844 $(932)
- --------------------------------------------------------------------------------------------------
When we sell auto loans in a securitization transaction, we record an
interest-only strip receivable, representing our contractual right to receive
interest and other cash flows from the pool of securitized loans after payment
of required amounts to the holders of the securities and certain costs
associated with the securitization. The gross sales proceeds include the fair
value of the interest-only strips.
We generally estimate fair value based on the present value of future expected
cash flows. The key assumptions used in the present value calculations of our
securitization transactions at the date of securitization were as follows:
2002 2001 2000
- ---------------------------------------------------------------------------------------------------
Excess cash flow discount rate (annual rate) 12% 12% 12%
Cumulative life loss rate 3.30% 3.53% 3.00%
Pre-payment speed assumption (average monthly rate) 1.75% 1.50% 1.50%
- ---------------------------------------------------------------------------------------------------
We determined these assumptions using data from comparable transactions,
historical information and management's estimate. Interest-only strip
receivables are generally restricted assets and subject to limited recourse
provisions. The carrying value of the interest-only strips included in other
banking/finance assets as of September 30, 2002 was $29.1 million and as of
September 30, 2001 was $10.8 million.
55
- --------------------------------------------------------------------------------
We generally estimate the fair value of the interest-only strips at each
period-end based on the present value of future expected cash flows, consistent
with the methodology used at the date of securitization.
The following shows the sensitivity of the interest-only strip receivables at
September 30, 2002 and 2001 to adverse changes in the key economic assumptions
used to measure fair value, which are hypothetical:
(in thousands) 2002 2001
- --------------------------------------------------------------------------------------------------
CARRYING AMOUNT/ FAIR VALUE OF INTEREST-ONLY STRIPs $29,088 $10,785
EXCESS CASH FLOW DISCOUNT RATE (ANNUAL RATE) 12% 12%
Impact on fair value of 10% adverse change $(400) $(137)
Impact on fair value of 20% adverse change $(789) $(270)
CUMULATIVE LIFE LOSS RATE 3.63% 3.08%
Impact on fair value of 10% adverse change $(1,787) $(665)
Impact on fair value of 20% adverse change $(3,579) $(1,328)
PRE-PAYMENT SPEED ASSUMPTION (AVERAGE MONTHLY RATE) 1.73% 1.70%
Impact on fair value of 10% adverse change $(2,632) $(846)
Impact on fair value of 20% adverse change $(5,155) $(1,630)
- --------------------------------------------------------------------------------------------------
This sensitivity analysis shows the hypothetical effect of a change in the
assumptions used to determine the fair value of the interest-only strip
receivable. Actual future market conditions may differ materially and
accordingly, these forward-looking statements should not be considered our
projections of future events or losses.
With respect to retained servicing responsibilities relating to the
securitization trusts, we receive annual servicing fees ranging from 1.0% to
2.0% of the loans securitized. We also receive the rights to future cash flows,
if any, arising after the investors in the securitization trust have received
their contracted return.
The following is a summary of cash flows received from and paid to
securitization trusts during fiscal 2002, 2001 and 2000:
(in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Servicing fees received $7,921 $4,538 $3,846
Other cash flows received 15,375 7,401 5,161
Purchase of loans from trusts (8,659) (521) (286)
- --------------------------------------------------------------------------------
Amounts payable to the trustee for servicing income collected on behalf of the
trusts of $24.9 million as of September 30, 2002 and $10.9 million as of
September 30, 2001 are included in other banking/finance liabilities.
The securitized loan portfolio that we manage and the related delinquencies as
of September 30, 2002 and September 30, 2001 were as follows:
(in thousands) 2002 2001
- --------------------------------------------------------------------------------
Securitized loans held by securitization trusts $530,896 $210,763
Delinquencies 9,317 3,769
Net charges-offs during the period on securitized loans 6,494 3,484
- --------------------------------------------------------------------------------
56
- --------------------------------------------------------------------------------
NOTE 7 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at September 30, 2002 and
2001:
USEFUL LIVES
(in thousands) IN YEARS 2002 2001
- -------------------------------------------------------------------------------
Furniture, software and equipment 3-5 $526,256 $505,246
Premises and leasehold improvements 5-35 195,024 207,484
Land -- 66,923 68,446
- --------------------------------------------------------------------------------
788,203 781,176
Less: Accumulated depreciation and amortization (394,031) (331,550)
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET $394,172 $449,626
- --------------------------------------------------------------------------------
NOTE 8 - INTANGIBLE ASSETS AND GOODWILL
Intangible assets at September 30, 2002 and September 30, 2001 were as follows:
GROSS CARRYING ACCUMULATED NET CARRYING
(in thousands) AMOUNT AMORTIZATION AMOUNT
- --------------------------------------------------------------------------------
AS OF SEPTEMBER 30, 2002
Amortized intangible assets:
Customer base $231,935 $(23,358) $208,577
Other 31,546 (18,181) 13,365
- --------------------------------------------------------------------------------
263,481 (41,539) 221,942
Non-amortized intangible assets:
Management contracts 475,304 -- 475,304
- --------------------------------------------------------------------------------
TOTAL $738,785 $(41,539) $697,246
- --------------------------------------------------------------------------------
AS OF SEPTEMBER 30, 2001
Amortized intangible assets:
Customer base $232,190 $(7,913) $224,277
Other 31,546 (16,552) 14,994
- --------------------------------------------------------------------------------
263,736 (24,465) 239,271
Non-amortized intangible assets:
Management contracts 462,927 - 462,927
- --------------------------------------------------------------------------------
TOTAL $726,663 $(24,465) 702,198
- --------------------------------------------------------------------------------
The change in the carrying amount of goodwill during the year ended September
30, 2002 was as follows:
(in thousands)
- --------------------------------------------------------------------------------
Goodwill, October 1, 2001 $1,286,622
Pioneer acquisition (see Note 2) 38,652
Foreign currency movements (3,335)
- --------------------------------------------------------------------------------
GOODWILL, SEPTEMBER 30, 2002 $1,321,939
- --------------------------------------------------------------------------------
We adopted SFAS 142 on October 1, 2001. SFAS 142 addresses the initial
recognition and measurement of intangible assets acquired outside a business
combination and the recognition and measurement of goodwill and other intangible
assets after acquisition. Under the new standard, all goodwill and
indefinite-lived intangible assets, including those acquired before initial
application of the standard, will not be amortized
57
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but will be tested for impairment at least annually. Accordingly, on October 1,
2001, we ceased amortization on goodwill and indefinite-lived assets. This
resulted in the following amortization expense reduction:
YEAR ENDED
(in thousands except per share amounts) SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
Amortization expense reduction $50,197
Amortization expense reduction - net of tax $37,562
Increase in basic and diluted earnings per share $0.14
- --------------------------------------------------------------------------------
All of our goodwill and intangible assets, including those arising from the
purchase of Fiduciary in April 2001, relate to our investment management
operating segment. Indefinite-lived intangible assets represent the value of
management contracts with our Sponsored Investment Products. The following table
reflects our results as though we had adopted SFAS 142 on October 1, 2000.
(in thousands except per share amounts)
YEAR ENDED SEPTEMBER 30, 2002 2001 2000
- --------------------------------------------------------------------------------
Net income as reported $432,723 $484,721 $562,089
Goodwill amortization -- 29,443 20,865
Indefinite-lived intangibles amortization -- 13,152 12,762
Tax effect at effective tax rate -- (10,223) (8,071)
- --------------------------------------------------------------------------------
NET INCOME AS ADJUSTED $432,723 $517,093 $587,645
- --------------------------------------------------------------------------------
Basic earnings per share as reported $1.66 $1.92 $2.28
Diluted earnings per share as reported $1.65 $1.91 $2.28
Basic earnings per share as adjusted $1.66 $2.05 $2.39
Diluted earnings per share as adjusted $1.65 $2.04 $2.38
Estimated amortization expense for each of the next 5 fiscal years is as
follows:
FOR THE YEARS ENDING
(in thousands) SEPTEMBER 30,
- --------------------------------------------------------------------------------
2003 $16,934
2004 16,934
2005 16,934
2006 16,934
2007 16,934
- --------------------------------------------------------------------------------
As of March 31, 2002, we completed the impairment testing of goodwill and
indefinite-lived intangible assets under the guidance set out in SFAS 142 and we
determined that there was no impairment in the value of goodwill and
indefinite-lived assets recorded in our books and records as of October 1, 2001.
NOTE 9 - SEGMENT INFORMATION
We have two operating segments: investment management and banking/finance. We
based our operating segment selection process primarily on services offered. The
investment management segment derives substantially all of its revenues and net
income from providing investment advisory, fund administration, distribution and
related services to our Sponsored Investment Products. The banking/finance
segment offers consumer lending and selected retail-banking services to
individuals.
Financial information for our two operating segments for the years ended
September 30, 2002, 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 loan losses.
58
- --------------------------------------------------------------------------------
(in thousands)
INVESTMENT
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 2002 MANAGEMENT BANKING/FINANCE TOTALS
- --------------------------------------------------- ---------------- ------------------ -----------
Assets $5,331,515 $1,091,223 $6,422,738
Operating revenues 2,463,086 55,446 2,518,532
Interest revenue - inter-segment 5,415 -- 5,415
Interest expense 12,302 N/A 12,302
Income before taxes 546,396 31,879 578,275
- --------------------------------------------------- ---------------- ------------------ -----------
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 2001
- --------------------------------------------------- ---------------- ------------------ -----------
Assets $5,036,406 $1,229,244 $6,265,650
Operating revenues 2,323,085 31,758 2,354,843
Interest revenue - inter-segment 9,778 -- 9,778
September 11, 2001 expense, net 7,649 -- 7,649
Interest expense 10,556 N/A 10,556
Income before taxes 629,908 7,882 637,790
- --------------------------------------------------- ---------------- ------------------ -----------
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 2000
- --------------------------------------------------- ---------------- ------------------ -----------
Assets $3,742,881 $299,562 $4,042,443
Operating revenues 2,320,755 19,385 2,340,140
Interest revenue - inter-segment 8,617 -- 8,617
Interest expense 13,960 N/A 13,960
Income before taxes 739,030 561 739,591
- --------------------------------------------------- ---------------- ------------------ -----------
Operating revenues of the banking/finance segment included above were as
follows:
(in thousands)
FOR THE YEAR ENDED SEPTEMBER 30, 2002 2001 2000
- ------------------------------------------------ ---------------- ----------------- ---------------
Interest and fees on loans $33,523 $34,296 $30,589
Interest and dividends on investment securities 19,804 11,430 2,077
- ------------------------------------------------ ---------------- ----------------- ---------------
Total interest income 53,327 45,726 32,666
Interest on deposits 9,812 10,768 2,742
Interest on short-term debt 392 1,003 --
Interest expense - inter-segment 5,415 9,778 8,617
- ------------------------------------------------ ---------------- ----------------- ---------------
Total interest expense 15,619 21,549 11,359
Net interest income 37,708 24,177 21,307
Other income 31,628 17,166 3,329
Provision for loan losses (13,890) (9,585) (5,251)
- ------------------------------------------------ ---------------- ----------------- ---------------
TOTAL OPERATING REVENUES $55,446 $31,758 $19,385
- ------------------------------------------------ ---------------- ----------------- ---------------
Inter-segment interest payments from the banking/finance segment to the
investment management segment are based on market rates prevailing at the
inception of each loan. As further described in Note 1, inter-segment interest
income and expense are not eliminated in our Consolidated Statements of Income.
The investment management segment incurs substantially all of our depreciation
and amortization costs and expenditures on long-lived assets.
We conduct operations in the following principal geographic areas of the world:
the United States, Canada, the Bahamas, Europe, Asia, South America, Africa and
Australia. For segment reporting purposes, we have
59
- --------------------------------------------------------------------------------
combined Asia, South America, Africa and Australia into one category - Other.
Revenues by geographic area include fees and commissions charged to customers
and fees charged to affiliates.
Information by geographic area is summarized below:
(in thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
OPERATING REVENUES:
United States $1,846,867 $1,685,108 $1,596,712
Canada 206,287 267,007 250,778
Bahamas 258,745 294,922 284,518
Europe 134,252 129,090 126,111
Other 167,457 144,200 191,095
Eliminations (95,076) (165,484) (109,074)
- ---------------------------------------------------------------------------------------------------------------
TOTAL $2,518,532 $2,354,843 $2,340,140
- ---------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET:
United States $338,763 $394,082 $387,197
Canada 5,151 7,246 7,096
Bahamas 7,299 7,916 8,126
Europe 6,371 7,159 6,692
Other 36,588 33,223 35,583
- ---------------------------------------------------------------------------------------------------------------
TOTAL $394,172 $449,626 $444,694
- ---------------------------------------------------------------------------------------------------------------
NOTE 10 - DEPOSITS
Deposits at September 30, 2002 and 2001 were as follows:
(in thousands) 2002 2001
- ---------------------------------------------------------------------------------------------------
DOMESTIC
Interest-bearing $670,448 $602,115
Noninterest-bearing 45,332 97,130
- ---------------------------------------------------------------------------------------------------
Total domestic deposits 715,780 699,245
- ---------------------------------------------------------------------------------------------------
FOREIGN
Interest-bearing 12,725 12,500
Noninterest-bearing 5,066 11,863
- ---------------------------------------------------------------------------------------------------
Total foreign deposits 17,791 24,363
- ---------------------------------------------------------------------------------------------------
TOTAL $733,571 $723,608
- ---------------------------------------------------------------------------------------------------
Maturities of time certificates in amounts of $100,000 or more at September 30,
2002 were:
(in thousands) DOMESTIC (U.S.) FOREIGN TOTAL
- ---------------------------------------------------------------------------------------------------
3 months or less $5,715 $12,725 $18,440
Over 3 months through 6 months 100 -- 100
Over 6 months through 12 months 604 -- 604
Over 12 months 1,970 -- 1,970
- ---------------------------------------------------------------------------------------------------
TOTAL $8,389 $12,725 $21,114
- ---------------------------------------------------------------------------------------------------
60
- --------------------------------------------------------------------------------
NOTE 11 - DEBT
Debt at September 30, 2002 and 2001 was as follows:
2002 2001
(in thousands) CARRYING WEIGHTED CARRYING WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
- ---------------------------------------- ----------- ------------------ ----------- ---------------
Federal Home Loan Board advances $8,500 1.94% $1,000 2.73%
- ---------------------------------------- ----------- ------------------ ----------- ---------------
Convertible Notes 514,190 1.88% 504,683 1.88%
Other 88,788 69,691
- ---------------------------------------- ----------- ------------------ ----------- ---------------
602,978 574,374
Less current maturities 7,830 8,361
- ---------------------------------------- ----------- ------------------ ----------- ---------------
Total long-term debt $595,148 $566,013
- ---------------------------------------- ----------- ------------------ ----------- ---------------
Federal Home Loan Board advances are included in other liabilities of the
banking/finance operating segment. Other long-term debt consists primarily of
deferred commission liability recognized in relation to the U.S. deferred
commission assets financed by Lightning Finance Company Limited ("LFL") that
have not been sold by LFL in a securitization transaction as of September 30,
2002.
As of September 30, 2002, maturities of long-term debt were as follows:
(in thousands) Carrying amount
- --------------------------------------------------------------------------------
2003 $10,082
2004 10,101
2005 10,368
2006 10,642
2007 10,924
Thereafter 543,031
- --------------------------------------------------------------------------------
Total long-term debt $595,148
- --------------------------------------------------------------------------------
In May 2001, we received approximately $490 million in net proceeds from 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 an interest rate of
1.875% per annum, with an initial conversion premium of 43%. Each of the $1,000
(principal amount at maturity) Convertible Notes is convertible into 9.3604
shares of our common stock. We may redeem the Convertible Notes for cash on or
after May 11, 2006 at their accreted value. We may have 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 this event, we may choose
to pay the purchase price in cash or shares of our common stock.
At September 30, 2002, the amount included in long-term debt in respect of the
Convertible Notes was $514.2 million including principal outstanding and accrued
interest. In the maturity schedule above, we have classified this amount as
maturing after September 2007, as the final maturity date is May 2031. The
amount of convertible notes that will be redeemed depends on, among other
factors, the performance of our common stock.
At September 30, 2002, approximately $850 million was available to us under
unused commercial paper and medium-term note programs and an additional $300
million was available under a shelf registration statement with the Securities
and Exchange Commission permitting the issuance of debt and equity securities.
We did not have any commercial paper outstanding or medium-term notes issued at
September 30, 2002.
Our committed revolving credit facilities at September 30, 2002 totaled $420
million, of which, $210 million was under a 364-day facility. The remaining $210
million facility was under a five-year facility and
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will expire in June 2007. The agreements related to the revolving credit
facilities include various restrictive covenants, including: a capitalization
ratio, interest coverage ratio, minimum working capital and limitations on
additional debt. In addition, our Fiduciary subsidiary has $350 million
available in uncommitted bank lines under the Federal Reserve Funds system.
NOTE 12 - INVESTMENT INCOME
(in thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Dividends $12,934 $24,369 $12,294
Interest 37,796 63,455 57,025
Realized gains on sale of assets, net 3,957 54,869 19,718
Other-than-temporary decline in investments value (60,068) -- --
Foreign exchange losses, net (6,149) (3,629) (1,311)
Other 16,605 (2,713) 2,382
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME $5,075 $136,351 $90,108
- ---------------------------------------------------------------------------------------------------------------
During fiscal 2002, we recognized a $60.1 million other-than-temporary decline
in value of investments. Substantially all of our dividend income was generated
by investments in our Sponsored Investment Products. We realized a gain of $32.9
million on the sale of our former headquarters building in San Mateo in July
2000. That gain was amortized over 12 months, the period of our leaseback on the
building.
NOTE 13 - TAXES ON INCOME
Taxes on income for the years ended September 30, 2002, 2001 and 2000 were as
follows:
(in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------
Current
Federal $71,400 $84,220 $96,074
State 17,065 16,694 18,558
Foreign 38,653 41,532 59,590
Deferred expense 18,434 10,623 3,280
- --------------------------------------------------------------------------------------------------
TOTAL PROVISION FOR INCOME TAXES $145,552 $153,069 $177,502
- --------------------------------------------------------------------------------------------------
Included in income before taxes was $283.7 million, $357.0 million and $446.0
million of foreign income for the years ended September 30, 2002, 2001 and 2000.
The provision for income taxes includes benefits of $9.3 million for the year
ended September 30, 2002 related to the utilization of net operating loss
carry-forwards.
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The major components of the net deferred tax liability as of September 30, 2002
and 2001 were as follows:
(in thousands) 2002 2001
- ---------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS
State taxes $5,088 $5,186
Loan loss reserves 4,007 5,021
Deferred compensation and employee benefits 26,117 24,330
Restricted stock compensation plan 32,925 34,328
Severance and retention compensation 20,735 18,232
Net operating loss and foreign tax credit carry-forwards 70,030 65,161
Investments 2,144 2,399
Other 16,260 6,796
- ---------------------------------------------------------------------------------------------------------------
Total deferred tax assets 177,306 161,453
Valuation allowance for tax carry-forwards (64,939) (52,268)
- ---------------------------------------------------------------------------------------------------------------
Deferred tax assets, net of valuation allowance 112,367 109,185
DEFERRED TAX LIABILITIES
Depreciation on fixed assets 14,271 10,842
Goodwill and other purchased intangibles 145,110 135,508
Deferred commissions 14,968 12,368
Interest Expense on Convertible Notes 11,863 3,157
Other 22,511 16,199
- ---------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 208,723 178,074
- ---------------------------------------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITY $(96,356) $(68,889)
- ---------------------------------------------------------------------------------------------------------------
At September 30, 2002, there were approximately $43 million of foreign net
operating loss carry-forwards, approximately $27 million of which expire between
2003 and 2010 with the remaining carry-forwards having an indefinite life. In
addition, there were approximately $725 million in state net operating loss
carry-forwards that expire between 2003 and 2022. There were also approximately
$10 million in federal foreign tax credit carry-forwards which will expire in
2004. A valuation allowance has been recognized on some deferred tax assets due
to the uncertainty of realizing the benefit of the loss and credit
carry-forwards.
We have made no provision for U.S. taxes on $1,894 million of cumulative
undistributed earnings of foreign subsidiaries as those earnings are intended to
be reinvested for an indefinite period of time. Determination of the potential
amount of unrecognized deferred U.S. income tax liability related to such
reinvested income is not practicable because of the numerous assumptions
associated with this hypothetical calculation; however, foreign tax credits
would be available to reduce some portion of this amount.
The following is a reconciliation between the amount of tax expense at the
Federal statutory rate and taxes on income as reflected in operations for the
years ended September 30, 2002, 2001 and 2000:
(in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Federal statutory rate 35% 35% 35%
Federal taxes at statutory rate $202,396 $223,226 $258,857
State taxes, net of federal tax effect 10,661 11,716 17,586
Effect of foreign operations (52,269) (75,963) (96,260)
Other (15,236) (5,910) (2,681)
- --------------------------------------------------------------------------------
ACTUAL TAX PROVISION $145,552 $153,069 $177,502
Effective tax rate 25% 24% 24%
- --------------------------------------------------------------------------------
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NOTE 14 - COMMITMENTS AND CONTINGENCIES
We lease office space and equipment under long-term operating leases expiring at
various dates through fiscal year 2017. Lease expense aggregated $34.8 million,
$41.3 million and $43.1 million for the fiscal years ended September 30, 2002,
2001 and 2000. Future minimum lease payments under non-cancelable operating
leases are not material.
We are contingently liable for approximately $145 million in residual guarantees
under an operating lease for our global corporate headquarters in San Mateo,
California. This represents about 85% of the total construction costs of $170
million. The lease is classified as an operating lease under Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
We are involved in various claims and legal proceedings that are considered
normal in our business. While it is not feasible to predict or determine the
final outcome of these proceedings, we do not believe that they should have a
material adverse effect on our financial position, results of operations or
liquidity.
In February 2001, we signed an agreement to outsource management of our data
center and distributed server operations. Under the agreement, we may end the
agreement any time after March 2004 by incurring a termination charge. The
maximum termination charge payable depends on the termination date, the service
levels prior to our termination of the agreement, and costs incurred to wind
down the services. Based on September 30, 2002 service levels, this termination
fee would approximate $37.2 million. We do not consider it likely that we will
incur this cost. Under the terms of the agreement, we must also pay an
additional transition charge of approximately $2.7 million in March 2003.
NOTE 15 - EMPLOYEE STOCK AWARD AND OPTION PLANS
We sponsor a Universal Stock Incentive Plan ("USIP") and an Annual Incentive
Compensation Plan ("AICP"). Under the terms of these plans, eligible employees
may receive cash and stock awards based on the performance of Franklin Templeton
Investments and that of the individual employee. The USIP provides for the
issuance of up to 26 million shares of our common stock for various
stock-related awards, including those related to the AICP. As of September 30,
2002 and prior to considering fiscal 2002 grants, we had approximately 4.8
million shares available for grant under the USIP, including those related to
the AICP. In addition to the annual award of stock under the plan, we may award
options and other forms of stock-based compensation to some employees. The
Compensation Committee of the Board of Directors determines the terms and
conditions of awards under the plans. Total compensation cost recognized for
stock-based compensation during fiscal 2002, 2001 and 2000 was $34.2 million,
$28.5 million and $28.9 million.
Information regarding stock options is as follows:
2002 2001 2000
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
(shares in thousands) SHARES PRICE SHARES PRICE SHARES PRICE
- --------------------------------------------------------------------------------------------------
Outstanding, beginning of year 8,397 $36.94 2,222 $32.52 1,315 $32.02
Granted 4,208 $37.10 6,640 $38.41 1,108 $32.60
Exercised/cancelled (926) $37.03 (465) $36.70 (201) $29.73
- --------------------------------------------------------------------------------------------------
Outstanding, end of year 11,679 $37.00 8,397 $36.94 2,222 $32.52
Exercisable, end of year 5,479 $36.66 2,602 $35.65 437 $34.44
- --------------------------------------------------------------------------------------------------
The range of exercise prices for these outstanding options at September 30, 2002
was from $28.19 to $45.67. Of the exercisable options, 93% were exercisable at
prices ranging from $32.63 to $38.38. The weighted-average remaining contractual
life for the options was 7 years. These options generally vest over a 3-year
period.
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If we had determined compensation costs for our stock option plans and our
Employee Stock Investment Plan (See Note 16) based upon fair values at the grant
dates in accordance with the provisions of SFAS 123, our net income and earnings
per share would have been reduced to the pro forma amounts indicated below. For
pro forma purposes, the estimated fair value of options is amortized to expense
over the options' vesting period.
FOR THE YEARS ENDED SEPTEMBER 30, 2002 2001 2000
- --------------------------------------------------------------------------------------------------
Net income (in millions)
As reported $432.7 $484.7 $562.1
Pro forma 373.4 $445.3 $553.4
- --------------------------------------------------------------------------------------------------
Basic earnings per share
As reported $1.66 $1.92 $2.28
Pro forma $1.43 $1.76 $2.25
- --------------------------------------------------------------------------------------------------
Diluted earnings per share
As reported $1.65 $1.91 $2.28
Pro forma $1.42 $1.76 $2.24
- --------------------------------------------------------------------------------------------------
The weighted-average estimated fair value of options granted on the date of
grant using Black-Scholes option-pricing model was as follows:
FOR THE YEARS ENDED SEPTEMBER 30, 2002 2001 2000
- --------------------------------------------------- -------------- ----------------- -----------------
Weighted-average fair value of options granted $16.14 $19.58 $15.31
Assumptions made:
Dividend yield 1% 1% 1%
Expected volatility 42% 40% 38%
Risk-free interest rate 4% 5% 6%
Expected life 3 - 6 years 2 - 9 years 2 - 7 years
- --------------------------------------------------- -------------- ----------------- -----------------
NOTE 16 - EMPLOYEE STOCK INVESTMENT PLAN
We have a qualified, non-compensatory Employee Stock Investment Plan ("ESIP")
which allows participants who meet certain eligibility criteria to buy shares of
our common stock at 90% of their market value on defined dates. Our stockholders
approved 4 million shares of common stock for issuance under the ESIP. The ESIP
is open to substantially all employees of U.S. subsidiaries and some employees
of non-U.S. subsidiaries. At September 30, 2002, approximately 1,248,000 shares
had been purchased on a cumulative basis under the ESIP at a weighted-average
price of $32.14.
In connection with the ESIP, we may, at our election, provide matching grants to
participants in the ESIP of whole or partial shares of common stock. While
reserving the right to change this determination, we have indicated that we will
provide one half-share for each share held by a participant for a minimum period
of 18 months. We made our first matching grant in fiscal 2000. During fiscal
2002, 2001, and 2000, we issued approximately 85,000, 81,000 and 84,000 shares
at an average market price of $35.47, $45.04 and $35.52.
NOTE 17 - OTHER COMPENSATION AND BENEFIT PLANS
Fiduciary has a noncontributory retirement plan (the "retirement plan") covering
substantially all its employees who were hired before our acquisition of
Fiduciary, have attained age 21 and completed one year of service. Fiduciary
also maintains a nonqualified supplementary executive retirement plan ("SERP")
to pay defined benefits that are in excess of limits imposed by Federal tax law,
to participants in the retirement plan who attain age 55 and 10 years of
service. In addition to these pension retirement plans, Fiduciary sponsors a
defined benefit healthcare plan that provides post-retirement medical benefits
to full-time
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employees who have worked 10 years and attained age 55 while in service of
Fiduciary. As of the date of acquisition, the defined benefit healthcare plan
was closed to new entrants.
The following table shows the funded status of the plans, accrued benefit
liability we recognized for amounts not yet funded, and assumptions used as of
September 30, 2002 and 2001:
PENSION BENEFITS NON-PENSION BENEFITS
(in thousands, except assumptions) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------
BENEFIT OBLIGATION $31,635 $29,999 $5,094 $4,454
FAIR VALUE OF PLAN ASSETS $16,592 $19,180 $-- $--
FUNDED STATUS AT YEAR END $(15,043) $(10,819) $(5,094) $(4,454)
Unrecognized actuarial losses (gains) 6,861 2,138 300 (155)
Unrecognized prior service (credit) cost (128) 274 -- --
- --------------------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED $(8,310) $(8,407) $(4,794) $(4,609)
- --------------------------------------------------------------------------------------------------
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEETS
Accrued benefit cost recognized $(14,090) $(8,762) $(4,794) $(4,609)
Intangible asset -- 355 -- --
Accumulated other comprehensive income 5,780 -- -- --
- --------------------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED $(8,310) $(8,407) $(4,794) $(4,609)
- --------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 6.50% 7.25% 6.50% 7.25%
Expected return on plan assets 8.00% 9.00% N/A N/A
Increase in compensation rate 4.50% 5.50% 4.50% 5.50%
Following the acquisition of Fiduciary, we established an $85 million retention
pool aimed at retaining key Fiduciary employees, under which employees will
receive both cash payments and options. Salaried employees who remain
continuously employed through the applicable dates are eligible for compensation
under the program. Excluding the value of options granted, the value of the
retention plan is $68 million, and is being expensed over a period ranging from
one to five years. We expensed $26 million and $24 million in fiscal 2002 and
2001, including the acceleration of retention payments related to the September
11, 2001 events as described in Note 20.
NOTE 18 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. The methods and assumptions used to
estimate fair values of our financial instruments are described below. See Note
1.
Due to the short-term nature and liquidity of Cash and cash equivalents and
Receivables, the carrying amounts of these assets in the Consolidated Balance
Sheets approximated fair value.
Investment securities, available-for-sale are carried at fair market value as
required by generally accepted accounting principles.
Loans receivable, net are valued using interest rates that consider the current
credit and interest rate risk inherent in the loans and the current economic and
lending conditions. The amounts in the Consolidated Balance Sheets approximated
fair value.
Deposits of the banking/finance segment are valued using interest rates offered
by comparable institutions on deposits with similar remaining maturities. The
amounts in the Consolidated Balance Sheets approximated fair value.
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Interest-rate swap agreements and foreign exchange contracts are carried at fair
value.
Debt is valued using publicly-traded debt with similar maturities, credit risk
and interest rates. The amounts in the Consolidated Balance Sheet approximate
fair values.
Guarantees and letters of credit have fair values based on the face value of the
underlying instrument.
NOTE 19 - BANKING REGULATORY RATIOS
Following the acquisition of Fiduciary in April 2001, we became a bank holding
company and a financial holding company subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional, discretionary actions by regulators that, if undertaken, could have
a direct material effect on our financial statements. Under capital adequacy
guidelines, we must meet specific capital guidelines that involve quantitative
measures of our assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. Our capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require us to maintain a minimum Tier 1 capital and Tier 1 leverage ratio (as
defined in the regulations), as well as minimum Tier 1 and Total risk-based
capital ratios (as defined in the regulations). Based on our calculations as of
September 30, 2002 and 2001, we exceeded the capital adequacy requirements
applicable to us as listed below.
MINIMUM FOR OUR
CAPITAL ADEQUACY
(in thousands) 2002 2001 PURPOSES
- --------------------------------------------------------------------------------
Tier 1 capital $2,170,328 $1,957,612 N/A
Total risk-based capital 2,179,363 1,966,075 N/A
Tier 1 leverage ratio 45% 49% 4%
Tier 1 risk-based capital ratio 65% 72% 4%
Total risk-based capital ratio 65% 72% 8%
- --------------------------------------------------------------------------------
NOTE 20 - SEPTEMBER 11, 2001 EVENT
On September 11, 2001, the headquarters of our subsidiary company, Fiduciary, at
Two World Trade Center was destroyed in the terrorist attacks on New York City
(the "September 11, 2001 Event"). We have since leased office space for
Fiduciary in midtown Manhattan, to resume permanent operations. The following
table shows the financial impact of the event recognized at September 30, 2002
and 2001:
(in thousands) 2002 2001
- ----------------------------------------------------------------------- ----------- ----------------
Cumulative September 11, 2001 costs recognized as of end of period $64,853 $50,185
September 11, 2001 expense, net -- 7,649
- ----------------------------------------------------------------------- ----------- ----------------
Approximately $19.9 million of the cumulative estimated costs recognized as of
September 30, 2002 pertain to the write-off of an intangible asset related to
leased office space and to the write-off of property and equipment lost in the
September 11, 2001 Event. In addition, as of September 30, 2002 we had
recognized a $16.5 million charge related to employee benefit expenses. These
expenses include the acceleration of payments under the employee retention bonus
plan related to the acquisition of Fiduciary, and other payments made in respect
of victims of the tragedy. Cumulative insurance proceeds received through
September 30, 2002 were $38.6 million and included $28.6 million related to
property and equipment. At September 30, 2002, we were in the process of
pursuing a number of additional claims with our insurance carriers.
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NOTE 21 - NEW ACCOUNTING STANDARDS
In October 2001, Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"),
was issued. This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and broadens the definition of what
constitutes a discontinued operation and how the results of a discontinued
operation are to be measured and presented. The provisions of SFAS 144 are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and we early adopted this statement on October 1, 2001. The
impact of the adoption of SFAS 144 on our reported operating results, financial
position and existing financial statement disclosure was not material.
In April 2002, Statement of Financial Accounting Standards No. 145, "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS 145"), was issued. SFAS 145 rescinds Statement of
Financial Accounting Standards No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", and an amendment of that Statement, Statement of
Financial Accounting Standards No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." SFAS 145 also rescinds Statement of Financial
Accounting Standards No. 44, "Accounting for Intangible Assets of Motor
Carriers." SFAS 145 amends Statement of Financial Accounting Standards No. 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for some
lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. This statement is
effective for financial statements issued for fiscal years beginning after May
15, 2002. We believe that the adoption of SFAS 145 will not have a material
impact on our results of operations or financial condition.
In June 2002, Statement of Financial Accounting Standards No. 146 "Accounting
for Exit or Disposal Activities" ("SFAS 146"), was issued. SFAS 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for under Emerging Issues
Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The scope of SFAS 146 also includes costs
related to terminating a contract that is not a capital lease and termination
benefits that employees who are involuntarily terminated receive under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred-compensation contract. SFAS 146 will be effective for
exit or disposal activities that are initiated after December 31, 2002 but early
application is encouraged. The provisions of EITF Issue No. 94-3 will continue
to apply for an exit activity initiated under an exit plan that met the criteria
of EITF Issue No. 94-3 prior to the adoption of SFAS 146. Adopting the
provisions of SFAS 146 will change, on a prospective basis, the timing of when
restructuring charges are recorded from a commitment date approach to when the
liability is incurred. We intend to adopt the new standard effective October 1,
2002 and we do not expect this adoption to have a material impact on our results
of operations or financial condition.
In October 2002, Statement of Financial Accounting Standards No.147,
"Acquisition of Certain Financial Institutions" ("SFAS 147"), was issued. This
statement, which provides guidance on the accounting for the acquisition of a
financial institution, applies to all acquisitions except those between two or
more mutual enterprises. This statement is effective for financial statements
issued for fiscal years beginning after September 30, 2002. We believe that the
adoption of SFAS 147 will not have a material impact on our results of
operations or financial condition.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Franklin Resources, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and comprehensive income
and cash flows present fairly, in all material respects, the consolidated
financial position of Franklin Resources, Inc. and its subsidiaries at September
30, 2002 and 2001, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended September 30, 2002,
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
December 6, 2002
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF REGISTRANT
The following information on the executive officers of FRI, including their
principal occupations for the past five (5) years, is given as of December 3,
2002.
JENNIFER J. BOLT
AGE 38
Vice President of FRI since June 1994; officer and/or director of other Company
subsidiaries; employed by FRI or subsidiaries in various other capacities for
more than the past eight (8) years.
HARMON E. BURNS
AGE 57
DIRECTOR SINCE 1991
Vice Chairman and Director of FRI, formerly Executive Vice President and
director of the Company for more than the past five (5) years; officer and/or
director of many other Company subsidiaries; officer and/or director or trustee
in 48 investment companies of Franklin Templeton Investments.
MARTIN L. FLANAGAN
AGE 42
President, Member - Office of the President, Chief Financial Officer and Chief
Operating Officer of FRI; formerly Senior Vice President; Chief Financial
Officer of FRI since December 1995; officer and/or director of many other
Company subsidiaries; officer, director and/or trustee in 49 investment
companies of Franklin Templeton Investments.
BARBARA J. GREEN
AGE 55
Vice President and Deputy General Counsel of FRI since January 2000; Vice
President, Franklin Templeton Companies, LLC since March 2000; Senior Vice
President of Templeton Worldwide, Inc. since October 1996; officer in 50
investment companies of Franklin Templeton Investments.
DONNA S. IKEDA
AGE 46
Vice President of FRI since October 1993. Previously employed by FRI from 1982
to 1990 as Director of Human Resources.
CHARLES B. JOHNSON
AGE 69
DIRECTOR SINCE 1969
Chairman of the Board, Chief Executive Officer and director of the Company for
more than the past five (5) years; officer and/or director of many other Company
subsidiaries; officer and/or director or trustee in 45 investment companies of
Franklin Templeton Investments.
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GREGORY E. JOHNSON
AGE 41
President, Member - Office of the President; formerly Vice President of FRI for
more than the past five (5) years; officer of many other Company subsidiaries
and in two investment companies of Franklin Templeton Investments.
RUPERT H. JOHNSON, JR.
AGE 62
DIRECTOR SINCE 1969
Vice Chairman, formerly Executive Vice President and director of the Company for
more than the past five (5) years; officer and/or director of many other Company
subsidiaries; officer and/or director or trustee in 48 investment companies of
Franklin Templeton Investments.
LESLIE M. KRATTER
AGE 57
Senior Vice President of FRI since January 2000 and Secretary since March 1998;
formerly Vice President of FRI since March 1993; officer of many other Company
subsidiaries.
KENNETH A. LEWIS
AGE 41
Vice President of Finance, Chief Accounting Officer and Treasurer of FRI since
June 2002 and officer of many other Company subsidiaries for the past five
years; formerly Vice President of FRI since September 1996. Prior to the
Templeton acquisition, employed by various Templeton entities since 1989.
WILLIAM J. LIPPMAN
AGE 77
Senior Vice President of FRI since March 1990; officer and/or director or
trustee of other Company subsidiaries and in two investment companies of
Franklin Templeton Investments.
MURRAY L. SIMPSON
AGE 65
Executive Vice President and General Counsel of FRI since January 2000; officer
in 50 investment companies of Franklin Templeton Investments. Previously
Managing Director and Chief Executive Officer of Templeton Franklin Investment
Services (Asia), Limited from 1994-2000.
CHARLES R. SIMS
AGE 41
Vice President of FRI and officer of many other Company subsidiaries for the
past five years; formerly Vice President - Finance, Chief Accounting Officer
since March 2000 and Treasurer of FRI since September 1997; and assistant
treasurer in 53 investment companies of Franklin Templeton Investments. Prior to
September 1997, employed as Vice President and Chief Financial Officer of
Franklin Templeton Investments Corp. formerly known as Templeton Management
Limited. Employed by Franklin Templeton Investments since 1989.
ANNE M. TATLOCK
AGE 63
Vice Chairman, Member - Office of the Chairman and director of the Company;
Chairman of the Board (since 2000), Chief Executive Officer (since 2000),
President (since 1994) and Director of Fiduciary Trust Company International, a
subsidiary of Company; officer and/or director of certain other subsidiaries of
Company. Director, Fortune Brands, Inc. and Merck & Co., Inc.
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FAMILY RELATIONS. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Peter M. Sacerdote, a director of FRI, is a brother-in-law of Charles B. Johnson
and Rupert H. Johnson, Jr. Gregory E. Johnson is the son of Charles B. Johnson,
the nephew of Rupert H. Johnson, Jr. and Peter Sacerdote and the brother of
Jennifer Bolt. Jennifer Bolt is the daughter of Charles B. Johnson, the niece of
Rupert H. Johnson, Jr. and Peter Sacerdote and the sister of Gregory E. Johnson.
Information regarding the biographies of the directors of FRI and compliance
with Section 16(a) of the Exchange Act in the Proxy Statement under the section
entitled "Proposal 1: Election of Directors" is incorporated herein by this
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information in the Proxy Statement under the section entitled "Proposal 1:
Election of Directors" is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information about equity compensation
plans that have been approved by security holders and plans that have not been
approved by security holders.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
remaining available for
Number of securities to Weighted-average future issuance under equity
be issued upon exercise exercise price of compensation plans
of outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
PLAN CATEGORY (#)(a) ($)(b) (#)(c)
- ------------------------- ------------------------- ------------------------- ------------------------------
Equity compensation
plans approved by
security holders (1) 11,678,702 (2) $ 37.00 7,271,783 (3)
Equity compensation
plans not approved
by security holders 0 0 0
- ------------------------- ------------------------- ------------------------- ------------------------------
Total 11,678,702 $ 37.00 7,271,783
(1) Consists of the Amended and Restated 1998 Universal Stock Incentive Plan
and the 1998 Employee Stock Investment Plan (the "Purchase Plan").
(2) Excludes options to purchase accruing under the Company's Purchase Plan.
Due to a stock split which became effective January 15, 1998, the
shareholder approved reserve increased from 2,000,000 shares to 4,000,000
shares. Under the Purchase Plan each eligible employee is granted a
separate option to purchase up to 22,500 shares of Common Stock per annum
at semi-accrual periods on January 31 and July 31 at a purchase price per
share equal to 90% of the fair market value of the Common Stock on the
enrollment date or the exercise date, whichever is lower.
(3) Includes shares available for future issuance under the Purchase Plan. As
of September 30, 2002, 2,514,331 of shares of Common Stock were available
for issuance under the Purchase Plan.
(4) The table includes information for equity compensation plans assumed by the
Company in connection with acquisitions of the companies, which originally
established those plans.
The information in the Proxy Statement under the section entitled "Security
Ownership of Principal Shareholders" and "Security Ownership of Management" is
incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Proxy Statement under the section entitled
"Proposal 1: Election of Directors - Certain Relationships and Related
Transactions."
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ITEM 14. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Company's filings under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the periods
specified in the rules and forms of the Securities and Exchange Commission. Such
information is accumulated and communicated to the Company's management,
including its principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure. The
Company's management, including the principal executive officer and the
principal financial officer, recognizes that any set of controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives.
Within 90 days prior to the filing date of this Annual Report on Form 10-K, the
Company has carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's principal
executive officer and the Company's principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on such evaluation, the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective.
(b) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
the internal controls subsequent to the date of their evaluation in connection
with the preparation of this Annual Report on Form 10-K.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Please see the index in Item 8 on page 41 of this Annual Report for a
list of the financial statements filed as part of this report.
(a)(2) Please see the index in Item 8 on page 41 of this Annual Report for a
list of the financial statement schedules filed as part of this
report.
(a)(3) Exhibits: See Index to Exhibits on Pages 77 to 82.
(b)(1) Form 8-K filed on July 25, 2002 reporting under Item 5 "Other
Events" an earnings press release, dated July 25, 2002, and including
said press release as an Exhibit under Item 7 "Financial Statements
and Exhibits".
(b)(2) Form 8-K filed on August 13, 2002 reporting under Item 7 "Financial
Statements and Exhibits", a Statement Under Oath of Principal
Executive Officer and Principal Financial Officer Regarding Facts and
Circumstances Relating to Exchange Act Filings dated August 7, 2002 of
Charles B. Johnson, the Principal Executive Officer and a Statement
Under Oath of Principal Executive Officer and Principal Financial
Officer Regarding Facts and Circumstances Relating to Exchange Act
Filings dated August 9, 2002 of Martin L. Flanagan, the Principal
Financial Officer and under Item 9 "Regulation FD Disclosure".
(c) See Item 15(a)(3) above.
(d) No separate financial statements are required; schedules are included
in Item 8.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
FRANKLIN RESOURCES, INC.
Date: December 18, 2002 By: /s/ Charles B. Johnson
----------------------
Charles B. Johnson, Chairman, Chief Executive
Officer, and Member - Office of the Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Date: December 18, 2002 By: /s/ Charles B. Johnson
----------------------
Charles B. Johnson, Chairman, Chief Executive
Officer, Member - Office of the Chairman, and
Director
Date: December 18, 2002 By: /s/ Harmon E. Burns
-------------------
Harmon E. Burns, Vice Chairman, Member -
Office of the Chairman, and Director
Date: December 18, 2002 By: /s/ Martin L. Flanagan
----------------------
Martin L. Flanagan, President, Member - Office
of the President, Chief Operating Officer, and
Chief Financial Officer
Date: December 18, 2002 By: /s/ Gregory E. Johnson
----------------------
Gregory E. Johnson, President, and Member -
Office of the President
Date: December 18, 2002 By: /s/ Rupert H. Johnson, Jr.
--------------------------
Rupert H. Johnson, Jr., Vice Chairman, Member
- Office of the Chairman, and Director
Date: December 18, 2002 By: /s/ Harry O. Kline
------------------
Harry O. Kline, Director
Date: December 18, 2002 By: /s/ Kenneth A. Lewis
--------------------
Kenneth A. Lewis, Vice President - Finance,
Chief Accounting Officer, and Treasurer
Date: December 18, 2002 By: /s/ James A. McCarthy
---------------------
James A. McCarthy, Director
Date: December 18, 2002 By: /s/ Peter M. Sacerdote
----------------------
Peter M. Sacerdote, Director
Date: December 18, 2002 By: /s/ Anne M. Tatlock
-------------------
Anne M. Tatlock, Vice Chairman, Member -
Office of the Chairman, and Director
Date: December 18, 2002 By: /s/ Louis E. Woodworth
----------------------
Louis E. Woodworth, Director
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CERTIFICATIONS
I, Charles B. Johnson, certify that:
1. I have reviewed this Annual Report on Form 10-K of Franklin Resources,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 18, 2002 /s/ Charles B. Johnson
----------------------
Charles B. Johnson
Chief Executive Officer
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I, Martin L. Flanagan, certify that:
1. I have reviewed this Annual Report on Form 10-K of Franklin Resources,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 18, 2002 /s/ Martin L. Flanagan
----------------------
Martin L. Flanagan
Chief Financial Officer
76
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EXHIBIT INDEX
EXHIBIT NO.
- -----------
3(i)(a) Registrant's Certificate of Incorporation, as filed November 28,
1969, incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1994 (the "1994 Annual
Report")
3(i)(b) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1, 1985, incorporated by reference to
the 1994 Annual Report
3(i)(c) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1, 1987, incorporated by reference to
the 1994 Annual Report
3(i)(d) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated by reference to
the 1994 Annual Report
3(ii) Registrant's Amended and Restated By-laws adopted November 12, 2002
4.1 Indenture between the Registrant and The Chase Manhattan Bank
(formerly Chemical Bank), as trustee, dated as of May 19, 1994,
incorporated by reference to the Company's Registration Statement on
Form S-3, filed on April 14, 1994
4.2 Indenture between Franklin Resources, Inc. and The Bank of New York
dated May 11, 2001, incorporated by reference to the Registrant's
Registration Statement on Form S-3, filed on August 6, 2001
4.3 Form of Liquid Yield Option Note due 2031 (Zero Coupon-Senior)
(included in Exhibit 4.2 hereto)
4.4 Registration Rights Agreement between Franklin Resources, Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
dated May 11, 2001, incorporated by reference to the Registrant's
Registration Statement on Form S-3, filed on August 6, 2001
10.1 Representative Distribution Plan between Templeton Growth Fund, Inc.
and Franklin/Templeton Investor Services, Inc., incorporated by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1993 (the "1993 Annual Report")
10.2 Representative Transfer Agent Agreement between Templeton Growth Fund,
Inc. and Franklin/Templeton Investor Services, Inc., incorporated by
reference to the 1993 Annual Report
10.3 Representative Investment Management Agreement between Templeton
Growth Fund, Inc. and Templeton, Galbraith & Hansberger Ltd.,
incorporated by reference to the 1993 Annual Report
10.4 Representative Management Agreement between Advisers and the Franklin
Group of Funds, incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1992 (the
"1992 Annual Report")
10.5 Representative Distribution 12b-1 Plan between FTDI and the Franklin
Group of Funds, incorporated by reference to the 1992 Annual Report
10.6 Amended Annual Incentive Compensation Plan approved January 24, 1995,
incorporated by reference to the Company's Proxy Statement filed under
cover of Schedule 14A on December 28, 1994 in connection with its
Annual Meeting of Stockholders held on January 24, 1995 *
10.7 Universal Stock Plan approved January 19, 1994, incorporated by
reference to the Company's 1995 Proxy Statement filed under cover of
Schedule 14A on December 29, 1993 in connection with its Annual
Meeting of Stockholders held on January 19, 1994 *
77
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10.8 Representative Amended and Restated Distribution Agreement between
Franklin/Templeton Distributors, Inc. and Franklin Federal Tax-Free
Income Fund, incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1995 (the
"June 1995 Quarterly Report")
10.9 Distribution 12b-1 Plan for Class II shares between Franklin/Templeton
Distributors, Inc. and Franklin Federal Tax-Free Income Fund,
incorporated by reference to the June 1995 Quarterly Report
10.10 Representative Investment Management Agreement between Templeton
Global Strategy SICAV and Templeton Investment Management Limited,
incorporated by reference to the June 1995 Quarterly Report
10.11 Representative Sub-Distribution Agreement between Templeton,
Galbraith & Hansberger Ltd. and BAC Corp. Securities, incorporated by
reference to the June 1995 Quarterly Report
10.12 Representative Dealer Agreement between Franklin/Templeton
Distributors, Inc. and Dealer, incorporated by reference to the June
1995 Quarterly Report
10.13 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (ERISA), incorporated by reference
to the June 1995 Quarterly Report
10.14 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (NON-ERISA), incorporated by
reference to the June 1995 Quarterly Report
10.15 Representative Amended and Restated Transfer Agent and Shareholder
Services Agreement between Franklin/Templeton Investor Services, Inc.
and Franklin Custodian Funds, Inc., dated July 1, 1995, incorporated
by reference to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1995 (the "1995 Annual Report")
10.16 Representative Amended and Restated Distribution Agreement between
Franklin/Templeton Distributors, Inc. and Franklin Custodian Funds,
Inc., incorporated by reference to the 1995 Annual Report
10.17 Representative Class II Distribution Plan between Franklin/Templeton
Distributors, Inc. and Franklin Custodian Funds, Inc., on behalf of
its Growth Series, incorporated by reference to the 1995 Annual Report
10.18 Representative Dealer Agreement between Franklin/Templeton
Distributors, Inc. and Dealer, incorporated by reference to the 1995
Annual Report
10.19 Representative Mutual Fund Purchase and Sales Agreement for Accounts
of Bank and Trust Company Customers, effective July 1, 1995,
incorporated by reference to the 1995 Annual Report
10.20 Representative Management Agreement between Franklin Value Investors
Trust, on behalf of Franklin MicroCap Value Fund, and Franklin
Advisers, Inc., incorporated by reference to the 1995 Annual Report
10.21 Representative Sub-Distribution Agreement between Templeton,
Galbraith & Hansberger Ltd. and Sub-Distributor, incorporated by
reference to the 1995 Annual Report
10.22 Representative Non-Exclusive Underwriting Agreement between Templeton
Growth Fund, Inc. and Templeton Franklin Investment Services (Asia)
Limited, dated September 18, 1995, incorporated by reference to the
1995 Annual Report
10.23 Representative Shareholder Services Agreement between
Franklin/Templeton Investor Services, Inc. and Templeton Franklin
Investment Services (Asia) Limited, dated September 18, 1995,
incorporated by reference to the 1995 Annual Report
78
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10.24 Agreement to Merge the Businesses of Heine Securities Corporation,
Elmore Securities Corporation and Franklin Resources, Inc., dated June
25, 1996, incorporated by reference to the Company's Report on Form
8-K dated June 25, 1996
10.25 Subcontract for Transfer Agency and Shareholder Services dated
November 1, 1996 by and between Franklin Investor Services, Inc. and
PFPC Inc., incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1996 (the "1996
Annual Report")
10.26 Representative Sample of Franklin/Templeton Investor Services, Inc.
Transfer Agent and Shareholder Services Agreement, incorporated by
reference to the 1996 Annual Report
10.27 Representative Administration Agreement between Templeton Growth
Fund, Inc. and Franklin Templeton Services, Inc., incorporated by
reference to the 1996 Annual Report
10.28 Representative Sample of Fund Administration Agreement with Franklin
Templeton Services, Inc., incorporated by reference to the 1996 Annual
Report
10.29 Representative Subcontract for Fund Administrative Services between
Franklin Advisers, Inc. and Franklin Templeton Services, Inc.,
incorporated by reference to the 1996 Annual Report
10.30 Representative Investment Advisory Agreement between Franklin Mutual
Series Fund Inc. and Franklin Mutual Advisers, Inc., incorporated by
reference to the 1996 Annual Report
10.31 Representative Management Agreement between Franklin Valuemark Funds
and Franklin Mutual Advisers, Inc., incorporated by reference to the
1996 Annual Report
10.32 Representative Investment Advisory and Asset Allocation Agreement
between Franklin Templeton Fund Allocator Series and Franklin
Advisers, Inc., incorporated by reference to the 1996 Annual Report
10.33 Representative Management Agreement between Franklin New York
Tax-Free Income Fund, Inc. and Franklin Investment Advisory Services,
Inc., incorporated by reference to the 1996 Annual Report
10.34 1998 Employee Stock Investment Plan approved January 20, 1998,
incorporated by reference to the Company's Proxy Statement filed under
cover of Schedule 14A on December 17, 1997 in connection with its
Annual Meeting of Stockholders held on January 20, 1998
10.35 System Development and Services Agreement dated as of August 29, 1997
by and between Franklin/Templeton Investor Services, Inc. and Sungard
Shareholder Systems, Inc., incorporated by reference to the 1997
Annual Report
10.36 1998 Universal Stock Incentive Plan approved October 16, 1998 by the
Board of Directors, incorporated by reference to the Company's Proxy
Statement filed under cover of Schedule 14A on December 23, 1998 in
connection with its Annual Meeting of Stockholders held on January 28,
1999*
10.37 Amendment No. 3 to the Agreement to Merge the Businesses of Heine
Securities Corporation, Elmore Securities Corporation and Franklin
Resources, Inc., dated December 17, 1997, incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended December 31, 1997
10.38 Representative Agreement for the Supply of Investment Management and
Administration Services, dated February 16, 1998, by and between
Templeton Funds and Templeton Investment Management Limited,
incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1998
79
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10.39 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (ERISA), as amended, incorporated
by reference to the Company's Annual Report on Form 10-K/A for the
fiscal year ended September 30, 1998 (the "1998 Annual Report")
10.40 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (NON-ERISA), as amended,
incorporated by reference to the 1998 Annual Report
10.41 Representative Variable Insurance Fund Participation Agreement among
Templeton Variable Products Series Fund or Franklin Valuemark Fund,
Franklin/Templeton Distributors, Inc. and an insurance company,
incorporated by reference on Form 10-Q for the quarter ended December
31, 1998
10.42 Purchase Agreement between Mariners Island Co-Tenancy and Keynote
Systems, Inc. dated April 25, 2000, incorporated by reference to the
Company's Report on Form 10-Q for the quarterly period ended June 30,
2000
10.43 Acquisition Agreement dated July 26, 2000 among Franklin Resources,
Inc., FTI Acquisition and Bissett & Associates Investment Management,
Ltd., incorporated by reference to the Company's Report on Form 8-K
dated August 1, 2000
10.44 Agreement and Plan of Share Acquisition between Franklin Resources,
Inc. and Fiduciary Trust Company International dated October 25, 2000,
incorporated by reference to the Company's Report on Form 8-K/A
(Amendment No. 1) dated October 25, 2000 and filed on October 26, 2000
10.45 Representative Amended and Restated Distribution Agreement among
Templeton Emerging Markets Fund, Templeton Canadian Bond Fund,
Templeton International Stock Fund, Templeton Canadian Stock Fund,
Templeton Global Smaller Companies Fund, Templeton Global Bond Fund,
Templeton Treasury Bill Fund, Templeton Global Balanced Fund,
Templeton International Balanced Fund, Templeton Canadian Asset
Allocation Fund, Mutual Beacon Fund, Franklin U.S. Small Cap Growth
Fund, Templeton Balanced Fund, Templeton Growth Fund, Ltd., Templeton
Management Limited and FEP Capital, L.P. dated December 31, 1998,
incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 2000 (the "2000 Annual
Report")
10.46 Representative Purchase and Sales Agreement by and among
Franklin/Templeton Distributors, Inc., Franklin Resources, Inc. and
Lightning Finance Company Limited dated August 1, 1999, incorporated
by reference to the 2000 Annual Report
10.47 Representative Advisory Agreement between Templeton Global Advisers
Limited and Templeton Asset Management Limited dated December 21,
1999, incorporated by reference to the 2000 Annual Report
10.48 Representative Amended and Restated Commission Paying Agreement
between Templeton Global Strategy Funds, Templeton Global Advisors
Limited, Templeton Global Strategic Services S.A., and Lightning
Finance Company Limited dated January 31, 2000, incorporated by
reference to the 2000 Annual Report
10.49 Representative Variable Insurance Fund Participation Agreement among
Franklin Templeton Variable Insurance Products Trust (formerly
Franklin Valuemark Funds), Franklin/Templeton Distributors, Inc. and
CUNA Mutual Life Insurance Company dated May 1, 2000, incorporated by
reference to the 2000 Annual Report
10.50 Stock Purchase Agreement between Good Morning Securities Co., Ltd.
and Templeton Investment Counsel, Inc. dated June 29, 2000,
incorporated by reference to the 2000 Annual Report
80
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10.51 Agreement entered into between NEDCOR Investment Bank Holdings
Limited, NEDCOR Investment Bank Limited, Templeton International,
Inc., Franklin Templeton Asset Management (Proprietary) Limited and
Templeton Global Advisors Limited dated August 1, 2000, incorporated
by reference to the 2000 Annual Report
10.52 Representative Amended and Restated Distribution Agreement between
Franklin/Templeton Distributors, Inc. and Franklin Growth and Income
Fund dated August 10, 2000, incorporated by reference to the 2000
Annual Report
10.53 Employment Agreement entered into on December 22, 2000 by and among
Anne M. Tatlock, Fiduciary Trust Company International and Franklin
Resources, Inc., incorporated by reference to the Company's Report on
Form 10-Q for the quarterly period ended December 31, 2000*
10.54 Amended and Restated 1998 Universal Stock Incentive Plan as approved
by the Board of Directors on October 28, 2000 and the Stockholders at
the Annual Meeting held on January 25, 2001, incorporated by reference
to the Company's Report on Form 10-Q for the quarterly period ended
December 31, 2000*
10.55 Representative Sub-Advisory Agreement between FTTrust Company, on
behalf of Templeton International Smaller Companies Fund, Templeton
Investment Counsel, LLC and Templeton Asset Management Limited, dated
January 23, 2001, incorporated by reference to the Company's Report on
Form 10-Q for the quarterly period ended March 31, 2001
10.56 Managed Operations Services Agreement between Franklin Templeton
Companies, LLC, and International Business Machines Corporation dated
February 6, 2001, incorporated by reference to the Company's Report on
Form 10-Q for the quarterly period ended March 31, 2001
10.57 Representative Agency Agreement between FTTrust Company and
Franklin/Templeton Investor Services, LLC, dated April 1, 2001,
incorporated by reference to the Company's Report on Form 10-Q for the
quarterly period ended March 31, 2001
10.58 Lease between RCPI Landmark Properties, L.L.C. and Franklin Templeton
Companies, LLC dated September 30, 2001, incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2001 (the "2001 Annual Report")
10.59 Synthetic Lease Financing Facility Agreements dated September 27,
1999, incorporated by reference to the 2001 Annual Report
10.60 Representative Amended and Restated Master Management Agreement
between Franklin Templeton Investment Corp., as Trustee of Mutual
funds and Franklin Templeton Investment Corp., as Manager, dated May
31, 2001, incorporated by reference to the 2001 Annual Report
10.61 Representative Master Management Agreement dated May 31, 2001 between
Franklin Templeton Tax Class Corp. and Franklin Templeton Investments
Corp., incorporated by reference to the 2001 Annual Report
10.62 Deferred Compensation Agreement for Director's Fees, as amended on
April 15, 2002, incorporated by reference to the Company's Report on
Form 10-Q for the quarterly period ended March 31, 2002
10.63 Franklin Resources, Inc. 1998 Employee Stock Investment Plan as
amended by the Board of Directors on October 10, 2002, incorporated by
reference to the Company's Report on Form S-8 filed on October 28,
2002
10.64 Amended and Restated Five Year Facility Credit Agreement dated June
5, 2002 between Franklin Resources, Inc. and The Several Banks Parties
Thereto, Bank of America, N.A. and The Bank of New York, as
Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas as
Co-Documentation Agents and JP Morgan Chase Bank, as Administrative
Agent
81
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10.65 Amended and Restated 364 Day Facility Credit Agreement dated June 5,
2002 between Franklin Resources, Inc. and The Several Banks Parties
Thereto, Bank of America, N.A. and The Bank of New York, as
Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas as
Co-Documentation Agents and JP Morgan Chase Bank, as Administrative
Agent
10.66 Settlement Agreement and Release of All Claims dated July 7, 2002
between Franklin Resources, Inc. and Allen J. Gula, Jr.
10.67 Stock Purchase Agreements dated July 23, 2002 between Templeton Asset
Management (India) Private Limited and Investment Trust of India
Limited, Pioneer Investment Management, Inc. and various employee
shareholders*
12 Computation of Ratios of Earnings to Fixed Charges
21 List of Subsidiaries
23 Consent of Independent Auditors
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
* Management Contract or Compensatory Plan or Arrangement
82
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