FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended December 31, 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 No. 1-9318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2670991
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
One Franklin Parkway, San Mateo, CA 94403
(Address of Principal Executive Offices)
(Zip Code)
(650) 312-2000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
described in Rule 12b-2 of the Exchange Act).
YES X NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding: 257,411,534 shares, common stock, par value $.10 per share at
January 31, 2003.
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
THREE MONTHS ENDED
DECEMBER 31
(in thousands, except per share data) 2002 2001
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OPERATING REVENUES:
Investment management fees $351,412 $356,798
Underwriting and distribution fees 185,937 192,007
Shareholder servicing fees 48,051 47,341
Other, net 20,051 22,061
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TOTAL OPERATING REVENUES 605,451 618,207
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OPERATING EXPENSES:
Underwriting and distribution 168,847 172,267
Compensation and benefits 159,118 160,143
Information systems, technology and occupancy 72,595 74,594
Advertising and promotion 22,644 26,425
Amortization of deferred sales commissions 16,045 16,743
Amortization of intangible assets 4,234 4,375
Other 22,513 20,795
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TOTAL OPERATING EXPENSES 465,996 475,342
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Operating income 139,455 142,865
OTHER INCOME/(EXPENSES):
Investment and other income 12,303 18,329
Interest expense (3,032) (3,168)
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Other income, net 9,271 15,161
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Income before taxes on income 148,726 158,026
Taxes on income 38,966 39,507
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NET INCOME $109,760 $118,519
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Earnings per share:
Basic and diluted $0.43 $0.45
Dividends per share $0.075 $0.070
See accompanying notes to the consolidated financial statements.
2
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FRANKLIN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
DECEMBER 31 SEPTEMBER 30
(in thousands) 2002 2002
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ASSETS:
Current assets:
Cash and cash equivalents $850,949 $829,237
Receivables 291,418 292,325
Investment securities, available-for-sale 1,190,353 1,103,463
Prepaid expenses and other 93,169 97,783
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Total current assets 2,425,889 2,322,808
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Banking/finance assets:
Cash and cash equivalents 200,164 151,367
Loans receivable, net 416,297 444,338
Investment securities, available-for-sale 471,476 449,629
Other 34,078 45,889
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Total banking/finance assets 1,122,015 1,091,223
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Non-current assets:
Investments, other 261,940 263,927
Deferred sales commissions 145,337 130,617
Property and equipment, net 386,785 394,172
Intangible assets, net 693,198 697,246
Goodwill 1,322,635 1,321,939
Receivable from banking/finance group 59,522 100,705
Other 102,006 100,101
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Total non-current assets 2,971,423 3,008,707
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TOTAL ASSETS $6,519,327 $6,422,738
================================================================================================
See accompanying notes to the consolidated financial statements.
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FRANKLIN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
DECEMBER 31 SEPTEMBER 30
(in thousands except share data) 2002 2002
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LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Compensation and benefits $151,818 $228,093
Current maturities of long-term debt 6,015 7,830
Accounts payable and accrued expenses 115,409 117,246
Commissions 79,624 81,033
Income taxes 28,677 12,510
Other 8,273 8,307
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Total current liabilities 389,816 455,019
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Banking/finance liabilities:
Deposits 806,748 733,571
Payable to Parent 59,522 100,705
Other 56,214 49,660
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Total banking/finance liabilities 922,484 883,936
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Non-current liabilities:
Long-term debt 614,447 595,148
Deferred taxes 186,986 175,176
Other 47,793 46,513
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Total non-current liabilities 849,226 816,837
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Total liabilities 2,161,526 2,155,792
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Commitments and contingencies (Note 9)
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;
257,920,769 and 258,555,285 shares issued and outstanding, for
December and September 25,792 25,856
Capital in excess of par value 583,157 598,196
Retained earnings 3,793,053 3,702,636
Accumulated other comprehensive loss (44,201) (59,742)
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Total stockholders' equity 4,357,801 4,266,946
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,519,327 $6,422,738
================================================================================================
See accompanying notes to the consolidated financial statements.
4
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FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED THREE MONTH ENDED
DECEMBER 31
(in thousands) 2002 2001
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Net income $109,760 $118,519
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease in receivables, prepaid expenses and other 18,565 107,148
Net advances of deferred sales commissions (31,008) (34,616)
(Decrease) increase in other current liabilities (25,465) 44,536
Increase in income taxes payable 15,905 2,495
(Decrease) increase in commissions payable (1,409) 484
Decrease in accrued compensation and benefits (47,971) (54,533)
Depreciation and amortization 43,495 45,399
Gains on disposition of assets (252) (3,387)
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Net cash provided by operating activities 81,620 226,045
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Purchase of investments (442,881) (539,109)
Liquidation of investments 329,095 440,932
Purchase of banking/finance investments (72,854) (23,529)
Liquidation of banking/finance investments 136,413 107,906
Net proceeds from securitization of loans receivable 124,989 299,980
Net origination of loans receivable (97,020) (94,983)
Net addition of property and equipment (15,835) (9,656)
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Net cash (used in) provided by investing activities (38,093) 181,541
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Increase (decrease) in bank deposits 73,179 (28,367)
Exercise of common stock options 548 2,009
Proceeds from issuance of put options 2,293 895
Dividends paid on common stock (18,063) (16,891)
Purchase of stock (46,297) (7,688)
Increase in debt 19,955 20,157
Payments on debt (4,633) (1,653)
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Net cash provided by (used in) financing activities 26,982 (31,538)
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Increase in cash and cash equivalents 70,509 376,048
Cash and cash equivalents, beginning of period 980,604 622,775
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Cash and cash equivalents, end of period $1,051,113 $998,823
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SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION:
Value of common stock issued, principally restricted stock $28,306 $23,752
See accompanying notes to the consolidated financial statements.
5
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FRANKLIN RESOURCES, INC.
Notes to Consolidated Financial Statements
December 31, 2002
(Unaudited)
1. BASIS OF PRESENTATION
---------------------
We have prepared these unaudited interim financial statements of Franklin
Resources, Inc. and its consolidated subsidiaries in accordance with the
instructions to Form 10-Q and the rules and regulations of the Securities
and Exchange Commission. Under these rules and regulations, we have
shortened or omitted some information and footnote disclosures normally
included in financial statements prepared under generally accepted
accounting principles. We believe that we have made all adjustments
necessary for a fair statement of the results of operations for the periods
shown. All adjustments are normal and recurring. You should read these
financial statements together with our audited financial statements
included in our Annual Report on Form 10-K for the year ended September 30,
2002. Certain comparative amounts for the prior year have been reclassified
to conform to the financial presentation for and at the three months ended
December 31, 2002.
2. COMPREHENSIVE INCOME
--------------------
The following table shows comprehensive income for the three months ended
December 31, 2002 and 2001.
(in thousands) 2002 2001
------------------------------------------------------------- -------------- ----------
Net income $109,760 $118,519
Net unrealized gain on available-for-sale securities, net of tax 7,784 2,571
Foreign currency translation adjustment 7,757 (6,635)
------------------------------------------------------------- -------------- ----------
Comprehensive income $125,301 $114,455
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3. EARNINGS PER SHARE
------------------
We computed earnings per share as follows:
THREE MONTHS ENDED
DECEMBER 31
(in thousands except per share amounts) 2002 2001
--------------------------------------------------------------------------------------
Net income $109,760 $118,519
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Weighted-average shares outstanding - basic 257,600 260,981
Incremental shares from assumed conversions 618 655
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Weighted-average shares outstanding - diluted 258,218 261,636
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Earnings per share:
Basic and diluted $0.43 $0.45
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4. CASH AND CASH EQUIVALENTS
-------------------------
Cash and cash equivalents at December 31, 2002 and September 30, 2002
consisted of the following:
December 31, September 30,
(in thousands) 2002 2002
----------------------------------------------- ------------------ ---------------------
Cash and due from banks $206,375 $224,214
Federal funds sold and securities purchased under
agreements to resell 80,039 82,150
Other 764,699 674,240
----------------------------------------------- ------------------ ---------------------
Total $1,051,113 $980,604
----------------------------------------------- ------------------ ---------------------
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 both December 31, 2002
and September 30, 2002.
5. SECURITIZATION OF LOANS RECEIVABLE
From time to time, we enter into auto loan securitization transactions with
qualified special purpose entities and record these transactions as sales.
The following table shows details of auto loan securitization transactions
for the quarters ended December 31, 2002 and 2001:
THREE MONTHS ENDED
DECEMBER 31
(in thousands) 2002 2001
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Gross sale proceeds $131,620 $319,616
Net carrying amount of loans sold 126,104 306,260
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Pre-tax gain $5,516 $13,356
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When we sell auto loans in a securitization transaction, we record an
interest-only strip receivable. The interest-only strip receivable
represents our contractual right to receive interest 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:
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THREE MONTHS ENDED
DECEMBER 31
2002 2001
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Excess cash flow discount rate (annual rate) 12% 12%
Cumulative life loss rate 4.27% 3.75%
Pre-payment speed assumption (average monthly rate) 1.76% 1.50%
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We determined these assumptions using data from comparable transactions,
historical information and management's estimate. Interest-only strip
receivables are generally restricted assets and subject to limited recourse
provisions.
We generally estimate the fair value of the interest-only strips at each
period-end based on the present value of future expected cash flows,
consistent with the methodology used at the date of securitization. The
following shows the carrying value and the sensitivity of the interest-only
strip receivables at December 31, 2002 and September 30, 2002 to adverse
changes in the key economic assumptions used to measure fair value, which
are hypothetical:
DECEMBER 31, SEPTEMBER 30,
(in thousands) 2002 2002
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Carrying amount/fair value of interest-only strips $32,166 $29,088
----------------------------------------------------
Excess cash flow discount rate (annual rate) 12% 12%
--------------------------------------------
Impact on fair value of 10% adverse change $(418) $(400)
Impact on fair value of 20% adverse change $(824) $(789)
Cumulative life loss rate 3.97% 3.63%
-------------------------
Impact on fair value of 10% adverse change $(1,440) $(1,787)
Impact on fair value of 20% adverse change $(3,968) $(3,579)
Pre-payment speed assumption (average monthly rate) 1.74% 1.73%
---------------------------------------------------
Impact on fair value of 10% adverse change $(2,987) $(2,632)
Impact on fair value of 20% adverse change $(5,470) $(5,155)
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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, this sensitivity analysis 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% to
2% 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.
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The following is a summary of cash flows received from and paid to
securitization trusts.
THREE MONTHS ENDED
DECEMBER 31
(in thousands) 2002 2001
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Servicing fees received $2,372 $1,306
Other cash flows received 4,867 1,318
Purchase of loans from trusts - 422
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Amounts payable to the trustee for servicing income collected on behalf of
the trusts of $24.4 million at December 31, 2002 and $24.9 million at
September 30, 2002 are included in other banking/finance liabilities.
The securitized loan portfolio that we manage and the related delinquencies
as of December 31, 2002 and September 30, 2002 were as follows:
December September
(in thousands) 31, 2002 30, 2002
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Securitized loans held by securitization trusts $595,931 $530,896
Delinquencies 11,797 9,317
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Net charge-offs on the securitized loan portfolio were $3.0 million and
$1.1 million during the three months ended December 31, 2002 and 2001.
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6. INTANGIBLE ASSETS AND GOODWILL
------------------------------
Intangible assets at December 31, 2002 and September 30, 2002 were as
follows:
GROSS CARRYING ACCUMULATED NET CARRYING
(in thousands) AMOUNT AMORTIZATION AMOUNT
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AS OF DECEMBER 31, 2002
Amortized intangible assets:
Customer base $231,955 $(27,228) $204,727
Other 31,546 (18,549) 12,997
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263,501 (45,777) 217,724
Non-amortized intangible assets:
Management contracts 475,474 - 475,474
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Total $738,975 $(45,777) $693,198
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AS OF SEPTEMBER 30, 2002
Amortized intangible assets:
Customer base $231,935 $(23,358) $208,577
Other 31,546 (18,181) 13,365
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263,481 (41,539) 221,942
Non-amortized intangible assets:
Management contracts 475,304 - 475,304
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Total $738,785 $(41,539) $697,246
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Estimated amortization expense for each of the 5 succeeding fiscal years is
as follows:
For the fiscal years ending
(in thousands) September 30,
---------------------------------------- ----------------------------------
2003 $16,934
2004 16,934
2005 16,934
2006 16,934
2007 16,934
---------------------------------------- ----------------------------------
The change in the carrying value of goodwill was as follows:
(in thousands)
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Goodwill as of September 30, 2002 $1,321,939
Foreign currency movements 696
---------------------------------------------------------------------------
Goodwill as of December 31, 2002 $1,322,635
---------------------------------------------------------===---------------
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We adopted Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets" ("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, are not
amortized but are tested for impairment at least annually. Accordingly, on
October 1, 2001, we ceased to amortize goodwill and indefinite-lived
assets. Our goodwill and intangible assets are mainly attributable to our
investment management operating segment. Indefinite-lived intangible assets
represent the value of management contracts related to our mutual funds and
other investment products.
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. Our fiscal 2003 annual goodwill impairment assessment will be
performed as of the quarter ending March 31, 2003.
7. SEGMENT INFORMATION
We have two operating segments: investment management and banking/finance.
We based our operating segment selection process primarily on services
offered. The investment management segment derives substantially all its
revenues and net income from providing investment advisory, administration,
distribution and related services to the Franklin, Templeton, Mutual
Series, Fiduciary Trust and Bissett funds, and institutional, high
net-worth and private accounts and other 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 quarters ended
December 31, 2002 and 2001 is presented in the table below. Operating
revenues of the banking/finance segment are reported net of interest
expense and provision for loan losses.
OPERATING INCOME BEFORE
(in thousands) ASSETS REVENUES TAXES
-------------------------------------- ---------------- -------------- ----------------
AS OF AND FOR THE QUARTER ENDED
DECEMBER 31, 2002
Investment management $5,397,312 $589,295 $138,935
Banking/finance 1,122,015 16,156 9,791
-------------------------------------- ---------------- -------------- ----------------
Totals $6,519,327 $605,451 $148,726
-------------------------------------- ---------------- -------------- ----------------
AS OF AND FOR THE QUARTER ENDED
DECEMBER 31, 2001
Investment management $5,104,888 $598,959 $142,681
Banking/finance 984,715 19,248 15,345
-------------------------------------- ---------------- -------------- ----------------
Totals $6,089,603 $618,207 $158,026
-------------------------------------- ---------------- -------------- ----------------
Operating revenues of the banking/finance segment included above were as
follows:
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THREE MONTHS ENDED
DECEMBER 31
(in thousands) 2002 2001
---------------------------------------------------------------------------------------
Interest and loan fees $7,824 $11,315
Interest and dividends on investment securities 5,250 5,395
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Total interest income 13,074 16,710
Interest on deposits (1,807) (2,737)
Interest on short-term debt (35) (218)
Interest expense - inter-segment (804) (2,145)
---------------------------------------------------------------------------------------
Total interest expense (2,646) (5,100)
Net interest income 10,428 11,610
Other income 8,945 14,811
Provision for loan losses (3,217) (7,173)
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Total operating revenues $16,156 $19,248
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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. Inter-segment interest income and expense are not
eliminated in our Consolidated Statements of Income.
8. DEBT
----
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"). At December
31, 2002, long-term debt included $501 million in principal and $15.6
million of accrued interest related to 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. The amount
of convertible notes that will be redeemed depends on, among other factors,
the performance of our common stock.
We did not have any commercial paper outstanding or medium term notes
issued at December 31, 2002 and at September 30, 2002.
9. COMMITMENTS AND CONTINGENCIES
-----------------------------
GUARANTEES
Under Financial Accounting Standards Board Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others", we are required
to make additional disclosures about our guarantees. In addition, we will
be required, on a prospective basis, to recognize in our financial
statements a liability for the fair value of any guarantees issued or
modified after December 31, 2002 (see Note 12). The
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following are guarantees issued as of December 31, 2002. At December 31,
2002 there was no liability recognized in our balance sheet for these
guaranteed amounts as the transactions were entered into before the
effective date of the fair value provision of the interpretation.
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. We would become liable under the
residual guarantee of $145 million if we were unable or unwilling to
exercise our renewal option to extend the lease term or buy the corporate
headquarter buildings, or if we were unable to arrange for the sale of the
building for more than $145 million.
We are also contingently liable to purchase the corporate headquarter
buildings for an amount equal to the final construction costs of $170
million if an event of default occurs under the agreement. An event of
default includes, but is not limited to, failure to make lease payments
when due and failure to maintain required insurance. Management considers
the possibility of default under the provisions of the agreement to be
remote. 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" was met at the inception of the lease.
In relation to the auto loan securitization transactions that we have
entered into with a number of qualified special purpose entities, we are
obligated to cover shortfalls in amounts due to the holders of the notes up
to certain levels as specified under the related agreements. As of December
31, 2002 the maximum potential amount of future payments was $11.9 million.
At December 31, 2002, our banking/finance operating segment had issued
financial standby letters of credit totaling $9.7 million on which
beneficiaries would be able to draw upon in the event of non-performance by
our customers, primarily in relation to lease and lien obligations of these
customers. These standby letters of credit were secured by marketable
securities with a fair value of $21.3 million and commercial real estate
with a fair value of $9.1 million as of December 31, 2002 and have various
expiration dates from March 2003 through December 2004.
From time to time, we sell put options giving the purchaser the right to
sell shares of our common stock to us at a specified price upon exercise of
the options on the designated expiration dates if certain conditions are
met. These put options are treated as equity instruments and the related
premium received is recorded in Stockholders' Equity as Capital in excess
of par value. The likelihood that we will have to purchase our stock and
the purchase price is contingent on the market value of our stock when the
put option contract becomes exercisable. At December 31, 2002, there were
4.0 million put options outstanding with various expiration dates from
January through December 2003.
OTHER COMMITMENTS AND CONTINGENCIES
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 before our termination of the agreement, and costs
incurred to wind down the services. Based on December 31, 2002 service
levels, this termination fee would approximate $37.2 million. We do not
consider it likely that we will incur
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this cost. Under the terms of the agreement, we must also pay an additional
transition charge of approximately $2.7 million in March 2003.
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.
At December 31, 2002, our banking/finance operating segment had commitments
to extend credit aggregating $302.8 million, mainly under credit card
lines. We lease office space and equipment under long-term operating
leases. Future minimum lease payments under non-cancelable leases are not
material.
10. TRANSACTIONS WITH VARIABLE INTEREST ENTITIES
--------------------------------------------
Variable interest entities ("VIEs") consist of corporations, trusts,
partnerships and other entities where the equity investment holders have
not contributed sufficient capital to finance the activities of the VIEs or
the equity investment holders do not have defined rights and obligations
normally associated with equity investments. At December 31, 2002, we were
engaged in financial transactions with the following VIEs.
LESSOR TRUST. We lease our corporate headquarters in San Mateo, California
from a lessor trust under an operating lease as described in Note 9. Our
maximum exposure arising from this arrangement is approximately $170
million at December 31, 2002. At this time, we believe that it is probable
that we will have to consolidate the lessor trust in our financial
statements as of September 30, 2003 (see Note 12).
COLLATERALIZED DEBT OBLIGATIONS. We provide investment management services
to, and have made investments in, a number of Collateralized Debt
Obligation ("CDO") entities. These CDOs were established as investment
vehicles for our clients and invest mainly in debt instruments. Our equity
ownership interest in the CDOs is currently not sufficient to meet
consolidation requirements and they are reported at fair value. We earn
investment management fees, including subordinated management fees in some
cases, for managing the CDOs, as well as incentive fees that are contingent
on certain performance conditions. At December 31, 2002, combined assets
under management in these CDOs were approximately $1.7 billion, and our
maximum exposure to loss as a result of these investments was approximately
$20.3 million. At this time, we believe that it is reasonably possible that
we will have to either make additional disclosures about or consolidate one
or more of these entities in our financial statements as of September 30,
2003.
11. 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. We must meet specific capital adequacy guidelines that involve
quantitative measures of our assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. Our
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
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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 December 31, 2002, we exceeded the capital adequacy
requirements applicable to us as listed below.
THREE MONTHS ENDED MINIMUM FOR OUR CAPITAL
(in thousands) DECEMBER 31, 2002 ADEQUACY PURPOSES
------------------------------------- --------------------- ---------------------------
Tier 1 capital $2,255,015 N/A
Total risk-based capital $2,263,286 N/A
Tier 1 leverage ratio 47% 4%
Tier 1 risk-based capital ratio 70% 4%
Total risk-based capital ratio 70% 8%
------------------------------------- --------------------- ---------------------------
12. NEW ACCOUNTING STANDARDS
------------------------
In November 2002, Financial Accounting Standards Board Interpretation No.
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"), was
issued. FIN 45 addresses financial accounting and reporting for companies
that issue certain guarantees. Under FIN 45, a company must recognize a
liability at fair value for all guarantees entered into or modified after
December 31, 2002, even when the likelihood of making any payments under
the guarantee is remote. FIN 45 also requires enhanced disclosures for
guarantees existing at December 31, 2002. The impact of the adoption of FIN
45 on our reported operating results and financial position is not expected
to be material. See Note 9 for additional disclosures.
In December 2002, Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure" ("SFAS
148"), was issued. SFAS 148 amends Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition to the fair value method of accounting
for stock-based compensation when companies elect to expense stock options
at fair value at the time of grant. SFAS 148 also requires additional
interim disclosure for all companies with stock-based employee
compensation. As we adopted the intrinsic value method described in APB
Opinion No. 25, "Accounting for Stock Issued to Employees", the transition
provision of SFAS 148 will not apply to us. The disclosure requirements
will be effective for interim periods starting after December 15, 2002 and
we will adopt these in our March 31, 2003 interim financial statements.
In January 2003, Financial Accounting Standards Board Interpretation No.
46, "Consolidation of Variable Interest Entities" ("FIN 46"), was issued.
FIN 46 addresses reporting and disclosure requirements for VIEs. It defines
a VIE as an entity that either does not have equity investors with voting
rights or has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires
consolidation of a VIE by the enterprise that has the majority of the risks
and rewards of ownership, referred to as the primary beneficiary. It also
requires additional disclosures for an enterprise that holds a significant
variable interest in a VIE, but is not the primary beneficiary. The
consolidation and disclosure provisions of FIN 46 are effective immediately
for VIEs created after January 31, 2003, and for interim or annual
15
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reporting periods beginning after June 15, 2003 for VIEs created before
February 1, 2003. FIN 46 also requires interim disclosures in all financial
statements issued after January 31, 2003, regardless of the date on which
the VIE was created, if it reasonably possible that an enterprise will
consolidate or disclose information about a VIE when FIN 46 becomes
effective. We do not expect that the adoption of FIN 46 will have a
material impact on our results of operations or financial condition. See
Note 10 for interim disclosures under FIN 46.
16
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, we also make some statements relating to
the future, which are called "forward-looking" statements. These forward-looking
statements involve a number of risks, uncertainties and other important factors,
that could cause our actual results and outcomes to differ materially from any
future results or outcomes expressed or implied by such forward-looking
statements. Forward-looking statements are our best prediction at the time they
are made, and for this reason, you should not rely too heavily on them and
review the "Risk Factors" section set forth below and in our recent filings with
the U.S. Securities and Exchange Commission, which describes these risks,
uncertainties and other important factors in more detail.
GENERAL
We derive the majority of our operating revenues, operating expenses and net
income from providing investment advisory and related services to retail mutual
funds, institutional, high net-worth, private accounts and other investment
products. This is our 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, balanced/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 consumer lending and selected retail-banking
services to high net-worth individuals, foundations and institutions.
17
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RESULTS OF OPERATIONS
THREE MONTHS ENDED
DECEMBER 31 PERCENT
(in millions except per share amounts) 2002 2001 CHANGE
- -----------------------------------------------------------------------------------------------
NET INCOME $109.8 $118.5 (7)%
EARNINGS PER COMMON SHARE
Basic and diluted $0.43 $0.45 (4)%
OPERATING MARGIN 23% 23% -
EBITDA MARGIN (1) 29% 30% -
- -----------------------------------------------------------------------------------------------
(1) EBITDA margin is earnings before interest, taxes on income, depreciation,
amortization of intangibles divided by total revenues. EBITDA margin is
presented because we consider it an important indicator of the operational
strength and performance. However, it should be noted that EBITDA is not a
substitute for operating income, net income, cash flows and other measures of
financial performance and EBITDA may not be comparable to similarly titled
measures widely used in the United States of America or reported by other
companies.
Net income decreased 7% during the quarter ended December 31, 2002 compared to
the same quarter last year. This decrease was mainly due to lower operating
revenues and investment and other income, partially offset by lower operating
expenses.
ASSETS UNDER MANAGEMENT
DECEMBER 31 DECEMBER 31
(in billions) 2002 2001
- -----------------------------------------------------------------------------------------------
Equity:
Global/international $81.4 $89.4
Domestic (U.S.) 43.5 51.7
- -----------------------------------------------------------------------------------------------
Total equity 124.9 141.1
- -----------------------------------------------------------------------------------------------
Balanced/hybrid 38.3 38.6
Fixed-income:
Tax-free 52.1 48.3
Taxable
Domestic 27.3 25.1
Global/international 9.1 7.4
- -----------------------------------------------------------------------------------------------
Total fixed-income 88.5 80.8
- -----------------------------------------------------------------------------------------------
Money 6.0 5.8
- -----------------------------------------------------------------------------------------------
Total $257.7 $266.3
- -----------------------------------------------------------------------------------------------
Simple monthly average for the three-month period (2) $254.8 $256.4
- -----------------------------------------------------------------------------------------------
(2) Investment management fees from approximately 50% of our assets under
management at December 31, 2002 are calculated using a daily average.
Our assets under management at December 31, 2002 were $257.7 billion, 3% lower
than they were a year ago primarily due to market depreciation in the latter
half of fiscal 2002. Simple monthly average assets during the quarter ended
December 31, 2002 decreased 1% over the same period a year ago.
18
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The mix of assets under management is shown below.
AS OF DECEMBER 31, 2002 2001
- -----------------------------------------------------------------------------------------------
PERCENTAGE OF TOTAL ASSETS UNDER MANAGEMENT
Equity 49% 53%
Fixed-income 34% 30%
Balanced/hybrid 15% 15%
Money 2% 2%
- -----------------------------------------------------------------------------------------------
Total 100% 100%
- -----------------------------------------------------------------------------------------------
The change in the composition of assets under management resulted from market
depreciation in equity assets in the latter half of fiscal 2002. This shift in
asset mix led to a decrease in our effective investment management fee rate
(investment management fees divided by simple monthly average assets under
management). In the quarter ended December 31, 2002, the effective investment
management fee rate declined to 0.55% compared to 0.56% in the same period last
year.
Assets under management by shareholder location were as follows:
DECEMBER 31
(in billions) 2002 2001
- ------------------------------------------------------------------------ ----------- ----------
United States $215.5 $227.6
Canada 18.1 21.0
Europe 11.1 9.6
Asia/Pacific and other 13.0 8.1
- ------------------------------------------------------------------------ ----------- ----------
Total $257.7 $266.3
- ------------------------------------------------------------------------ ----------- ----------
The change in our assets under management was as follows:
THREE MONTHS ENDED
DECEMBER 31 PERCENT
(in billions) 2002 2001 CHANGE
- ----------------------------------------------------- --------------- ------------ ------------
Beginning assets under management $247.8 $246.4 1%
Sales 17.1 18.9 (10)%
Reinvested distributions 1.4 2.6 (46)%
Redemptions (16.0) (15.5) 3%
Distributions (2.1) (3.7) (43)%
Appreciation 9.5 17.6 (46)%
- ----------------------------------------------------- --------------- ------------ ------------
Ending assets under management $257.7 $266.3 (3)%
- ----------------------------------------------------- --------------- ------------ ------------
For the quarter ended December 31, 2002, sales exceeded redemptions complex-wide
by $1.1 billion, compared to $3.4 billion in the same period last year. Market
appreciation of $9.5 billion in the quarter ended December 31, 2002 related
primarily to equity and balanced/hybrid investment products.
19
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OPERATING REVENUES
THREE MONTHS ENDED 2002 2001
DECEMBER 31 PERCENT PERCENT OF PERCENT OF
(in millions) 2002 2001 CHANGE TOTAL TOTAL
- ----------------------------------------------------------------------------------------------------
Investment management fees $351.4 $356.8 (2)% 58% 58%
Underwriting and distribution fees 185.9 192.0 (3)% 31% 31%
Shareholder servicing fees 48.1 47.3 2% 8% 8%
Other, net 20.1 22.1 (9)% 3% 3%
- ----------------------------------------------------------------------------------------------------
Total operating revenues $605.5 $618.2 (2)% 100% 100%
- ----------------------------------------------------------------------------------------------------
SUMMARY
Total operating revenues for the quarter ended December 31, 2002 decreased 2%
over the same period last year. This decrease was mainly due to lower investment
management and underwriting and distribution revenues related to a decline in
simple monthly average assets under management.
INVESTMENT MANAGEMENT FEES
Investment management fees account for 58% of our operating revenues in the
quarter ended December 31, 2002. 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 for the quarter ended December 31, 2002 decreased 2%
over the same period last year mainly due to a 1% decrease in simple monthly
average assets under management and a shift in our asset mix toward fixed-income
investment products, which caused a decline in our effective investment
management fee rate.
UNDERWRITING AND DISTRIBUTION FEES
We earn underwriting fees from the sale of some classes of sponsored investment
products on which investors pay a sales commission at the time of purchase.
Sales at reduced or zero commissions are offered on some classes of shares and
for sales to shareholders or intermediaries that exceed specified minimum
amounts. Therefore, underwriting fees will change with the overall level of
gross sales and the relative mix of sales between different share classes.
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 for the quarter ended December 31,
2002 decreased 3% over the same period last year. Commission revenues decreased
3% over the same period last year mainly due
20
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to a 10% decrease in product sales partially offset by a more favorable sales
mix. Distribution fees decreased 4% over the same period last year primarily due
to lower 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 increased 2% in the quarter ended December 31, 2002
over the same period in the prior year mainly as a result of an increase in the
total number of shareholder accounts, including 0.7 million shareholder accounts
added in the acquisition of Pioneer ITI AMC Limited ("Pioneer"), in July 2002.
Under revised shareholder service fee agreements negotiated by our U.S. transfer
agent, we expect that shareholder servicing fees will increase beginning in the
quarter ending March 31, 2003.
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.
In the quarter ended December 31, 2002, other, net decreased 9% over the same
period last year. This decrease was primarily due to the net effect of a $5.5
million gain resulting from the sale of a portion of our auto loan portfolio in
December 2002, as compared to a $13.4 million gain on the sale of auto loans
recognized in December 2001, offset by an decrease in the allowance for loan
losses of our banking/finance operating segment.
21
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OPERATING EXPENSES
THREE MONTHS ENDED 2002 2001
DECEMBER 31 PERCENT PERCENT OF PERCENT OF
(in millions) 2002 2001 CHANGE TOTAL TOTAL
- -----------------------------------------------------------------------------------------------------
Underwriting and distribution $168.9 $172.3 (2)% 36% 36%
Compensation and benefits 159.1 160.1 (1)% 34% 34%
Information systems, technology and
occupancy 72.6 74.6 (3)% 16% 16%
Advertising and promotion 22.6 26.4 (14)% 5% 6%
Amortization of deferred sales
commissions 16.1 16.7 (4)% 3% 3%
Amortization of intangible assets 4.2 4.4 (5)% 1% 1%
Other 22.5 20.8 8% 5% 4%
- ------------------------------------------------------------------------------------------------------
Total operating expenses $466.0 $475.3 (2)% 100% 100%
- ------------------------------------------------------------------------------------------------------
SUMMARY
Operating expenses for the quarter ended December 31, 2002 decreased 2% over the
same period last year. This decrease was primarily due to a decrease in
underwriting and distribution, compensation and benefits and advertising and
promotion expenses.
UNDERWRITING AND DISTRIBUTION
Underwriting and distribution includes sales commissions and distribution fees
paid to brokers and other third parties for selling, distributing and providing
ongoing services to investors in our sponsored investment products. During the
quarter ended December 31, 2002, underwriting and distribution expense decreased
2% over the same period last year consistent with similar trends in underwriting
and distribution revenue.
COMPENSATION AND BENEFITS
Compensation and benefits for the quarter ended December 31, 2002 decreased 1%
over the same period last year primarily related to efficiencies realized in our
U.S. operations. We employed approximately 6,700 at December 31, 2002 as
compared to about 6,600 at the same time last year. Our acquisition of Pioneer
in July 2002 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.
INFORMATION SYSTEMS, TECHNOLOGY AND OCCUPANCY
Information systems, technology and occupancy costs for the quarter ended
December 31, 2002 decreased 3% compared to the same period last year. While
continuing work on new technology initiatives and investment in our technology
infrastructure, expenditures have declined from the prior year as we slowed down
a number of initiatives and delayed the start of other technology projects given
the current economic slowdown and our focus on cost control and management.
22
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Details of capitalized information systems and technology costs were as follows:
THREE MONTHS ENDED
DECEMBER 31
(in thousands) 2002 2001
- -----------------------------------------------------------------------------------------------
Net book value at beginning of period $121,486 $162,857
Additions during period, net of disposals and other adjustments 6,917 7,526
Amortization during period (18,358) (19,062)
- -----------------------------------------------------------------------------------------------
Net book value at end of period $110,045 $151,321
- -----------------------------------------------------------------------------------------------
ADVERTISING AND PROMOTION
Advertising and promotion for the quarter ended December 31, 2002 decreased 14%
compared to the same period last year. During the quarter ended December 31,
2001, we incurred increased promotion to assist in educating the sales channels
and the investing public about the strong relative investment performance of our
sponsored investment products. We are committed to invest in advertising and
promotion in response to changing business conditions, which means that the
level of advertising and promotion expenditures may increase more rapidly or
decrease more slowly than our revenues.
AMORTIZATION OF DEFERRED SALES COMMISSIONS
Certain fund share classes, including class B, are sold without a front-end
sales charge to shareholders, 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 these sales. Class C shares are sold with a front-end sales charge
that is lower than the commission paid by the U.S. distributor. We defer and
amortize all up-front commissions paid by our distribution subsidiaries.
We have arranged to finance some 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 did not sell any U.S. DCA in either the 3 months ended
December 31, 2002 or the 3 months ended December 31, 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.
Amortization of deferred sales commissions decreased 4% for the quarter ended
December 31, 2002 compared to the same period last year mainly as a result of
changes in sales mix and our current financing arrangements.
23
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OTHER INCOME (EXPENSE)
Other income (expense) includes investment and other income and interest
expense. Investment and other income is comprised mainly 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) for the quarter ended December 31, 2002 decreased 39%
compared to the same period last year. This decrease was mainly due to lower
dividend income and realized gains on sale of investments in the current
quarter.
TAXES ON INCOME
Our effective income tax rate in the quarter ended December 2002 increased to
26% compared to 25% in the same period last year. 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 (mainly 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 reflect the relative
contributions of foreign earnings that are subject to reduced tax rates and that
are not currently included in U.S. taxable income.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, we had $1,051.1 million in cash and cash equivalents, as
compared to $980.6 million at September 30, 2002. Cash and cash equivalents
include cash, U.S. Treasury bills and other debt instruments with original
maturities of three months 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 period. Liquid assets, which
consist of cash and cash equivalents, investments available-for-sale and current
receivables increased to $3,004.4 million at December 31, 2002 from $2,826.0
million at September 30, 2002.
At December 31, 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 December 31, 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. 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,
24
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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 $620.5 million at December 31, 2002 compared to
$603.0 million at September 30, 2002. As of December 31, 2002, outstanding debt
consists of $516.6 million in principal and accrued interest related to
outstanding convertible notes that we issued in May 2001 and $103.9 million of
other long-term debt. As of September 30, 2002, outstanding debt included $514.2
million related to the convertible notes and $88.8 million of other long-term
debt. 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. Redemption of the
convertible notes may require us to obtain alternative financing, which may
increase future interest expense. Other long-term debt consists mainly 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 from September 30, 2002 is due to U.S. DCA financed
by LFL and the accretion of interest on the convertible notes.
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 the quarter ended December 31, 2002 were
approximately $32.0 million compared to $29.4 million over the same period last
year.
Our banking/finance operating segment periodically enters into auto loan
securitization transactions with qualified special purpose entities, which then
issue asset-backed securities to private investors. The outstanding loan
balances held by these special purpose entities were $595.9 million as of
December 31, 2002 and $530.9 million as of September 30, 2002. Our ability to
access the securitization market will directly affect our plans to finance the
auto loan portfolio in the future.
At December 31, 2002, the banking/finance operating segment had commitments to
extend credit aggregating $302.8 million, mainly under its credit card lines,
and had issued financial standby letters of credit totaling $9.7 million that
expire through December 2004. The standby letters of credit are secured by
marketable securities and commercial real estate.
During the quarter ended December 2002, we purchased approximately 1.5 million
shares of our common stock at a cost of $46.3 million. In January 2003, we
increased the number of shares of our common stock authorized for purchase by 10
million shares.
We also sold put options giving the purchaser the right to sell 1.0 million
shares of our common stock to us at a specified price upon exercise of the
options on the designated expiration dates if certain conditions are met. At
December 31, 2002, there were 4.0 million put options outstanding with various
expiration dates from January 2003 through December 2003.
We expect that the main uses of cash will be to:
* expand our core business
* make strategic acquisitions
* acquire shares of our common stock
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* 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.
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.
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with
generally accepted accounting principles in the United States. The preparation
of these financial statements requires us to make estimates and assumptions that
impact our financial position and results of operations. These estimates and
assumptions are affected by our application of accounting policies. Below we
describe certain critical accounting policies that we believe are important to
understanding our results of operations and financial position.
In addition, please refer to Note 1 to the financial statements contained in our
Annual Report on Form 10-K for the fiscal year ended September 30, 2002 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 December 31, 2002 our assets included intangible assets as follows:
(in thousands) NET CARRYING AMOUNT
- ------------------------------------------------------- ------------------------
Goodwill $1,322,635
Intangible assets - definite-lived 217,724
Intangible assets - indefinite-lived 475,474
- ------------------------------------------------------- ------------------------
Total $2,015,833
- ------------------------------------------------------- ------------------------
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 initial impairment testing of goodwill and
26
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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. 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. Our fiscal 2003 annual goodwill impairment assessment will be
performed as of the quarter ending March 31, 2003.
INCOME TAXES
As a multinational corporation, we operate in various locations outside the
United States. We have not made a provision for U.S. taxes on the cumulative
undistributed earnings of foreign subsidiaries as those earnings are intended to
be reinvested for an indefinite period of time. These earnings approximated $2.0
billion at December 31, 2002. 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 on a
periodic basis. This may exist when the fair value of an investment security has
been below the current value for an extended period of time. As most of our
investments are carried at fair value, if an other-than-temporary decline in
value is determined to exist, the unrealized investment loss recorded net of tax
in accumulated other comprehensive income is realized as a charge to net income,
in the period in which the other-than-temporary decline in value is determined.
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.
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 December 31, 2002 to provide for any losses that may arise from these
matters.
VARIABLE INTEREST ENTITIES
In the United States, the Financial Accounting Standards Board ("FASB") has
recently issued Interpretation No. 46 "Consolidation of Variable Interest
Entities" ("FIN 46") which defines a variable interest entity ("VIE") as an
entity that either does not have equity investors with voting rights or has
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equity investors that do not provide sufficient financial resources for the
entity to support its activities. This interpretation requires consolidation of
a VIE by the enterprise that has the majority of the risks and rewards of
ownership, referred to as the primary beneficiary. It also requires additional
disclosures for an enterprise that holds a significant variable interest in a
VIE, but is not the primary beneficiary. FIN 46 is effective for our fiscal year
ending September 30, 2003 in relation to entities created prior to February 1,
2003 and we are currently evaluating its impact on our existing investments.
This evaluation requires us to make certain assumptions and estimates in
calculating the extent of our interest in such entities, which may impact our
treatment of a lessor trust and certain collateralized debt obligations
described below.
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 (see Note 10
to the financial statements). At this time, we believe that it is probable that
we will have to consolidate the lessor trust in our financial statements as of
September 30, 2003.
COLLATERALIZED DEBT OBLIGATIONS. We provide investment management services to,
and have made investments in, a number of Collateralized Debt Obligation ("CDO")
entities (see Note 10 to the financial statements). At this time, we believe
that it is reasonably possible that we will have to either make additional
disclosures about or consolidate one or more of these entities in our financial
statements as of September 30, 2003.
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RISK FACTORS
WE FACE STRONG COMPETITION FROM NUMEROUS AND SOMETIMES LARGER COMPANIES. We
compete with numerous investment management companies, stock brokerage and
investment banking firms, insurance companies, banks, savings and loan
associations and other financial institutions. Continuing consolidation in the
financial services industry has created stronger competitors with greater
financial resources and broader distribution channels than our own.
Additionally, competing securities dealers whom we rely upon to distribute our
mutual funds also sell their own proprietary funds and investment products,
which could limit the distribution of our investment products. To the extent
that existing or potential customers, including securities dealers, decide to
invest in or distribute the products of our competitors, the sales of our
products as well as our market share, revenues and net income could decline.
CHANGES IN THE DISTRIBUTION CHANNELS ON WHICH WE DEPEND COULD REDUCE OUR
REVENUES AND HINDER OUR GROWTH. We derive nearly all of our fund sales through
broker/dealers and other similar investment advisors. Increasing competition for
these distribution channels has caused our distribution costs to rise and could
cause further increases in the future. Higher distribution costs lower our net
revenues and earnings. Additionally, if one of the major financial advisors who
distribute our products were to cease their operations, it could have a
significant adverse impact on our revenues and earnings. Moreover, our failure
to maintain strong business 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.
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.
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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
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believes that we do not have the appropriate financial and managerial resources
to commence or conduct an activity or make an acquisition. The Federal Reserve
Board may also take actions as appropriate to enforce applicable federal law.
TECHNOLOGY AND OPERATING RISK COULD CONSTRAIN OUR OPERATIONS. We are highly
dependent on the integrity of our technology, operating systems and premises.
Although we have in place certain disaster recovery plans, we may experience
system delays and interruptions as a result of natural disasters, power
failures, acts of war, and third party failures, which could negatively impact
our operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, our financial position is subject to market
risk: the potential loss due to changes in the value of investments resulting
from adverse changes in interest rates, foreign exchange and/or equity prices.
Management is responsible for managing this risk. Our Enterprise Risk Management
Committee is responsible for providing a framework to assist management to
identify, assess and manage market and other risks.
We are exposed to changes in interest rates mainly through our debt transactions
and portfolio debt holdings available-for-sale, which are carried at fair value
in our financial statements. As of December 31, 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 as of December 31, 2002. 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.
ITEM 4. 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 Quarterly Report on Form 10-Q,
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 Quarterly Report on Form 10-Q.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the litigation previously reported
in our Annual Report on Form 10-K for the fiscal year ended September 30, 2002
as filed with the Securities and Exchange Commission on December 18, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of the report:
Exhibit 3(i)(a) Registrant's Certificate of Incorporation, as filed November
28, 1969, incorporated by reference to Exhibit (3)(i) to
the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994 (the "1994 Annual Report")
Exhibit 3(i)(b) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1, 1985, incorporated by
reference to Exhibit (3)(ii) to the 1994 Annual Report
Exhibit 3(i)(c) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1, 1987, incorporated by
reference to Exhibit (3)(iii) to the 1994 Annual Report
Exhibit 3(i)(d) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated by
reference to Exhibit (3)(iv) to the 1994 Annual Report
Exhibit 3(ii) Registrant's Amended and Restated By-Laws incorporated by
reference to Exhibit 3(ii) to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 2002
Exhibit 4.1 Indenture between Franklin Resources, Inc. and The Bank of
New York dated May 11, 2001 incorporated by reference
to Exhibit 4.2 to the Registrant's Registration Statement on
Form S-3, filed on August 6, 2001
Exhibit 4.2 Registration Rights Agreement between Franklin Resources,
Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") dated May 11, 2001 incorporated by
reference to Exhibit 4.4 to the Registrant's Registration
Statement on Form S-3, filed on August 6, 2001
Exhibit 4.3 Form of Liquid Yield Option Note due 2031 (Zero Coupon-
Senior) (included in Exhibit 4.2 hereto)
Exhibit 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
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Exhibit 10.68 2002 Universal Stock Incentive Plan as approved by the Board
of Directors on October 10, 2002 and the Stockholders at the
Annual Meeting held on January 30, 2003
Exhibit 12 Computations of ratios of earnings to fixed charges
Exhibit 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
Exhibit 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
(b) Reports on Form 8-K:
(i) Form 8-K filed on October 24, 2002 reporting under Item 5 "Other
Events" an earnings press release, dated October 24, 2002, and
including said press release as an Exhibit under Item 7 "Financial
Statements and Exhibits"
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN RESOURCES, INC.
------------------------
Registrant.
Date: February 13, 2003 /s/ Martin L. Flanagan
----------------------
Martin L. Flanagan
President and Chief Financial Officer
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CERTIFICATIONS
I, Charles B. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Franklin Resources,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c. presented in this quarterly 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
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6. The registrant's other certifying officers and I have indicated in this
quarterly 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: February 13, 2003 /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 quarterly report on Form 10-Q of Franklin Resources,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c. presented in this quarterly 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
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6. The registrant's other certifying officers and I have indicated in this
quarterly 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: February 13, 2003 /s/ Martin L. Flanagan
----------------------
Martin L. Flanagan
Chief Financial Officer
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