FORM 10-Q/A
AMENDMENT NO. 1
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 March 31, 1995
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
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
777 Mariners Island Blvd., San Mateo, CA 94404
(Address of Principal Executive Offices)
(Zip Code)
(415) 312-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past
90 days.
YES X NO ______
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has
filed all documents and reports required to be filed by
Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.
YES _____ NO ______
APPLICABLE ONLY TO CORPORATE ISSUERS:
Outstanding: 80,891,790 shares, common stock, par value
$.10 per share at May 8, 1995.
Exhibit index - See page
Amended in its entirety pursuant to
Regulation Section 240.12b-15,
to correct two typographical errors relating to Class II
shares and shares repurchasable by Registrant.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Franklin Resources, Inc., the parent company, and its
various operating subsidiaries (the "Company") derives
approximately 94% of its revenue from its principal line of
business of providing investment management, administration
and related services to the Franklin Templeton funds,
managed accounts and other investment products. The Company
has a diversified base of assets under management and a full
range of investment management products and services to
meet the needs of a variety of individuals and institutions.
The Company's revenues are derived largely from the amount
and composition of assets under management.
Since September 30, 1994, volatility has continued in global
bond and stock markets. The U.S. Federal Reserve Board has
continued to raise short-term interest rates in an attempt
to control perceived inflationary pressures. In addition, a
major devaluation of the Mexican peso and the Orange County,
California declaration of bankruptcy took place during the
six month period. These events contributed to investor
caution and continued the slowing of investment in mutual
funds. Assets under the Company's management increased
during the quarter from $114.6 billion at December 31, 1994
to $118.8 billion at March 31, 1995 as a result of net sales
and market appreciation. Industry and Company expectations
are for continued growth over the long term. However, the
current capital market and industry environment could have a
negative impact on the Company's results of operations in
the near term.
At March 31, 1995, the Company had offices in 15 countries.
During the six month period ended March 31, 1995, the
Company continued to expand its international distribution
and research capabilities. The following offices were
opened with the specific intent to expand investment
research capabilities and, in some cases, support local
distribution activities:
Moscow, Russia Ho Chi Minh City, Vietnam
Paris, France Sandton, South Africa
Rio de Janeiro, Brazil
Additional foreign offices are planned for the remainder of
the year.
At March 31, 1994, the Company earns approximately 38% of
its investment management fee revenues from investment
advisory services provided by its foreign subsidiaries.
Despite the Company's global presence, its exposure to
changes in currency rates is not considered significant
because a material portion of the foreign offices' revenues
is U.S. dollar denominated. The Company's exposure to
repatriation risks is not material because of the minimal
amount of fixed assets and U.S. dollar deposits in those
foreign locations. The relative geographic contributions to
operating profits and net earnings have not materially
changed since September 30, 1994.
During the six month period ended March 31, 1995, the
Company was a party to financial instruments with off-
balance sheet risks in order to minimize the Company's
exposure to adverse changes in interest rate movements on
the floating rate debt which the Company originally issued
when it purchased the assets of Templeton, Galbraith &
Hansberger Ltd. on October 30, 1992. These financial
instruments are discussed in more detail below.
I. Material Changes in Results of Operations
Three months ended % Six months ended %
Results of operations: March 31 Change March 31 Change
(Dollars in millions) 1995 1994 1995 1994
Operating income $94.7 $103.3 -8% $187.5 $194.8 -4%
Operating margin 45.3% 48.4% 44.1% 47.3%
Net income $63.0 $68.6 -8% $126.3 $127.6 -1%
Decreases in operating income and net income are primarily
attributable to the decreases in operating revenues earned
from net underwriting commissions and increases in operating
expenses. Changes in operating income will continue to be
dependent upon general economic growth, the strength of
capital markets and the Company's ability to meet market
demands with competitive products and services. Operating
revenues will continue to be specifically dependent upon the
amount and composition of assets under management, mutual
fund sales, and the number of mutual fund investors and
institutional clients. Operating expenses are likely to
continue to increase with the Company's continued expansion,
the increase in competition and the Company's continued
commitment to improve its products and services. These
endeavors will likely result in an increase in employment
costs, general and administrative expenses and selling
expenses. Operating margins decreased for the three and six
month periods primarily due to the general slowdown in sales
and to the increase in operating expenses resulting from the
Company's expansion of its products and services.
ASSETS UNDER MANAGEMENT - TABLE 1
Franklin Templeton Group March 31 $ %
(Dollars in millions) 1995 1994 Change Change
Fixed income funds:
Tax-free income $39,296 $39,710 ($414) -1%
U.S. government fixed income 13,738 16,277 (2,539) -16%
Money funds 2,523 2,949 (426) -14%
Global/international fixed income 2,315 2,818 (503) -18%
Total fixed income 57,872 61,754 (3,882) -6%
Equity and income funds:
Global/international equity 28,672 22,705 5,967 26%
U.S. equity/income 18,161 16,737 1,424 9%
Total equity and income 46,833 39,442 7,391 19%
Total Franklin Templeton funds 104,705 101,196 3,509 3%
Franklin Templeton institutional assets 14,083 11,521 2,562 22%
Total Franklin Templeton Group $118,788 $112,717 $6,071 5%
MOVEMENTS IN ASSETS UNDER MANAGEMENT - TABLE 2
Three Months Ended % Six Months Ended %
(Dollars in thousands) 1995 1994 Change 1995 1994 Change
Assets under management - beginning $114,646 $114,172 - $112,900 $107,490 5%
Sales & reinvestments 6,029 11,413 -36% 13,197 22,219 -41%
Redemptions (4,974) (7,661) -19% (11,080) (15,543) 19%
Market appreciation/(depreciation) 3,080 (5,207) 159% 3,771 (1,449) 187%
Assets under management - ending $118,788 $112,717 5% $118,788 $112,717 5%
Average assets under management $116,436 $115,137 $116,386 $114,368
As shown in Table 1, the composition of assets under
management has changed since March 31, 1994, continuing a
trend of the past two years. This development is a result
of movements in relative sales, redemptions and market value
among the specific asset classes. Table 2 highlights these
overall movements in assets under management during the
corresponding three and six month periods. This table also
indicates the volatility that occurred during the periods
reported as evidenced by significant changes in overall
sales, redemptions and value. The Company's operating
revenues and results of operations will continue to be
affected by these factors.
Fixed income funds represent 49% of assets under management
as of March 31, 1995, down from 55% a year ago. Equity and
income funds and institutional assets represent 51% of
assets under management as of March 31, 1995, up from 45% a
year ago. The substantial increase in U.S. interest rates
during the twelve month period ended March 31, 1995 resulted
in a combination of both net redemptions and market
depreciation in various fixed income funds. Assets under
management of the Company's fixed income funds declined 6%
from levels a year ago. Assets under management in the
Company's money funds decreased 14% from levels a year ago.
Assets under management in the Company's equity and income
funds as of March 31, 1995 increased 19% from levels at
March 31, 1994. Global/international equity funds' assets
under management represented most of this increase, up 26%
from levels a year ago.
Institutional assets under management increased 22% from
levels as of March 31, 1994. This increase resulted
principally from an increase in the number of clients as
well as additional investments from existing clients. The
Company is strongly committed to the institutional account
area and intends to continue the expansion of the services
it provides in this area.
Three months ended Six months ended
Operating revenues: March 31 % March 31 %
(Dollars in millions) 1995 1994 Change 1995 1994 Change
Investment management fees $172.6 $161.2 7% $347.2 $313.1 11%
Underwriting commissions, net 9.1 33.2 -73% 22.2 62.8 -65%
Transfer, trust and related fees 15.5 13.0 19% 31.5 25.0 26%
Banking/finance, real estate and
other 12.1 6.2 95% 24.1 11.2 115%
Total operating revenues $209.3 $213.6 -2% $424.9 $412.1 3%
I. - Material Changes in Results of Operations
(continued)
Investment management fees increased as a result of an
increase in and the change in composition of average assets
under management during the current reporting periods as
compared to the corresponding periods in 1994. Table 1
shows the change in asset composition to the higher fee-
based equity and income funds and institutional assets for
the period ended March 31, 1995.
The decreases in net underwriting commissions were due
primarily to the 53% and the 54% decreases in U.S. mutual
fund sales during the three and six month periods
respectively, as compared to the corresponding periods in
the previous year, which was consistent with industry
results. An additional factor causing the decreases was the
change in the composition of sales to fund products with
lower underwriting commission retention rates. Furthermore,
during the quarter ended June 30,1994, the Franklin Group
of Funds implemented a distribution plan pursuant to Rule
12b-1 of the Investment Company Act of 1940 while
simultaneously eliminating fees on fund reinvestments. This
change has made underwriting commissions dependent upon
absolute mutual fund sales levels rather than mutual fund
investor dividend reinvestment rates. The level of
underwriting commission revenues in future periods will
continue to be dependent upon investor purchases.
The boards of directors and/or shareholders of the Franklin
and Templeton funds have approved proposals to adopt
multiple classes of shares for various existing funds. The
Company expects the new class of shares, called Class II, to
be introduced during the third quarter of the current fiscal
year. Class II shares are intended to expand the
distribution of fund shares to a broader audience of
investors who have different pricing preferences, but who
share similar investment objectives. While the new class
of shares will increase distribution expenses to the Company
as compared to the existing class of shares and will utilize
the Company's capital resources over the short term, the
Company believes that Class II shares will result in an
overall increase in assets under management by expanding
distribution of fund shares. The financial impact of Class
II shares is further discussed under Material Changes in
Financial Condition, Liquidity and Capital Resources.
The increases in transfer, trust and related fees is related
principally to the 18% increase to 4.6 million retail fund
shareholder accounts over the twelve month period ended
March 31, 1995. The number of institutional clients
continued to increase but had an immaterial impact on
transfer, trust and related fees because these types of
accounts generally require only investment management
services.
SHAREHOLDER ACCOUNTS - TABLE 3
%
1995 1994 Change
Number of retail fund
shareholder accounts 4.6 million 3.9 million 18%
The increases in banking/finance, real estate and other
revenues were due principally to the 182% and 200% increases
in the average auto and credit card loans outstanding during
the three and six month periods, respectively. The
banking/finance activities are further discussed below.
I. - Material Changes in Results of Operations (continued)
Three months ended Six months ended
Operating expenses: March 31 % March 31 %
(Dollars in millions) 1995 1994 Change 1995 1994 Change
General and administrative $87.5 $86.9 1% $185.0 $171.4 16%
Selling expenses 19.9 16.4 21% 38.1 32.0 19%
Amortization of goodwill 4.6 4.6 0% 9.2 9.1 1%
Banking interest expense 2.6 2.4 8% 5.1 4.8 6%
Total operating expenses $114.6 $110.3 4% $237.4 $217.3 9%
Increases in operating expenses principally resulted from
the general expansion of the Company's business and are
more fully described below.
General and administrative expenses increased during the
periods due to higher employment, technology and facilities
costs related to the expansion of the Company's business.
Employee count increased to 4,392 at March 31, 1995 compared
to 3,915 at March 31, 1994. Employment costs represent
approximately 51% of operating expenses.
Selling expenses increased mainly due to continued increases
in media advertising and additional marketing initiatives.
The Company has evaluated potential impairment of goodwill
on the basis of the expected future operating cash flows
derived from this intangible asset in relation to the
Company's carrying value and has determined that there is no
impairment. The Company will periodically review the
carrying value of goodwill for potential impairment.
Banking interest expense increased due to an increase in the
cost of funds during the periods.
As shown in Table 6, gross loans outstanding increased by
23% since September 30, 1994 to $486,520. As discussed
below under Material Changes in Financial Condition,
Liquidity and Capital Resources, the Company has also
experienced an increase in delinquency rates on dealer auto
loans during the recent growth period which has resulted in
an increase in charge-offs and provisions as shown in Table
4 below.
CHARGE-OFFS AND PROVISIONS - TABLE 4
Three months ended Six months ended
March 31 March 31
(Dollars in thousands) 1995 1994 1995 1994
Combined net charge-offs:
Auto loans $2,581 $194 $3,384 $333
Credit cards 977 661 1,890 1,522
Other 21 15 156 68
Total net charge-offs $3,579 $870 $5,430 $1,923
Combined provisions:
Auto loans $3,272 $181 $5,253 $315
Credit cards 1,069 609 1,470 1,439
Other 61 (4) 245 48
Total provisions $4,402 $786 $6,968 $1,802
Three months ended Six months ended
Other income/(expenses): March 31 % March 31 %
(Dollars in millions) 1995 1994 Change 1995 1994 Change
Investment and other income $5.3 $5.2 2% $12.0 $10.9 10%
Interest expense (7.4 ) (6.5 ) 14% (14.4 ) (14.5 ) -1%
Other income (expense), net ($2.1 ) ($1.3 ) 62% ($2.4 ) ($3.6 ) -33%
The increases in investment income for the three and six
month periods resulted from increases in the average levels
of interest and dividend rates on investments.
Interest expense for the three and six month periods
increased due to increased rates and higher average debt
outstanding. The Company's effective interest rate at March
31, 1995 was 6.23% on $489.0 million of outstanding
commercial paper, medium-term notes and subordinated
debentures compared to 4.85% on $471.0 million of debt
outstanding at March 31, 1994. At March 31, 1995,
commercial paper comprised $259.0 million of total debt
outstanding with an effective interest rate of 5.90%
including swaps and 6.05% excluding swaps. Medium-term notes
comprised $80 million of the debt outstanding with an
effective borrowing rate of 6.50% at March 31, 1995. At
March 31, 1994 bank debt comprised $321 million of debt
outstanding with an effective interest rate of 4.02%
including swaps and 3.58% excluding swaps. Subordinated
6.25% debentures due August 3, 2002, comprised $150 million
of the total debt outstanding at March 31, 1995 and 1994
with an effective interest rate of 6.64% and 6.61%,
respectively.
The Company has entered into interest swap agreements to
exchange variable rate interest payment obligations for
fixed rate interest payment obligations without the exchange
of the underlying principal amounts in order to minimize the
Company's exposure to adverse changes in interest rate
movements. At March 31, 1995, the Company had swap
agreements outstanding with an aggregate notional amount of
$30 million, maturing January 1996, under which the Company
paid a fixed rate of 5.015 percent and received a floating
rate of 5.6875 percent from banks. These financial
instruments are with major financial institutions. The
credit worthiness of the counterparties is subject to
continuing review and full performance is anticipated.
During the period, the Company had the following interest
rate swap agreements outstanding. The interest differential
between the fixed rate and floating rate to be paid or
received is accrued as an increase or decrease to interest
expense over the period of the agreements.
SWAP AGREEMENTS - TABLE 5
Issue Maturity Notional Fixed
Date Date Amount Rate
3/8/93 1/30/95 $75. million 4.44%
3/8/93 1/29/96 $30. million 5.015%
II. Material Changes in Financial Condition, Liquidity
and Capital Resources
Selected balance sheet items: March 31 September 30 $ %
(Dollars in millions) 1995 1994 Change Change
Receivables:
Fees from Franklin Templeton Group $96.9 $88.8 $8.1 9%
Other $21.8 $36.2 ($14.4 ) -40%
Investment securities, available for sale $190.9 $162.4 $28.5 18%
Banking/finance loans receivable, net $481.1 $391.8 $89.3 23%
Premises and equipment, net $102.3 $94.2 $8.1 9%
Trade payables and accrued expenses $85.8 $126.8 ($41.0 ) -32%
Debt payable within one year $109.8 $84.5 $25.3 30%
Retained earnings $964.8 $855.5 $109.3 13%
The increase in fees receivable from the Franklin Templeton
Group primarily resulted from an increase in investment
management fees.
The decrease in other receivables was related primarily to
the payment of advances on deferred sales charges for
Canadian based mutual funds.
The increase in investment securities, available for sale
was the result of increased investment of the Company's cash
from operating activities.
Banking/finance loans receivable, net increased due to a
$92.6 million increase in dealer auto loans as shown in
Table 6 below.
BANKING/FINANCE LOANS OUTSTANDING - TABLE 6
Mar 31 Sep 30
(Dollars in thousands) 1995 1994
Loan portfolio:
Credit cards $89,272 $89,408
Dealer auto 386,611 293,967
Other 10,637 11,619
Gross loans outstanding $486,520 $394,994
Allowance for loan losses (5,424) (3,170)
Net loans outstanding $481,096 $391,824
Loan originator:
Franklin Bank, Inc. loans outstanding 171,381 169,616
Franklin Capital Corp. loans outstanding 315,139 225,378
Gross loans outstanding $486,520 $394,994
DELINQUENCY RATE ANALYSIS - TABLE 7
Days past due:
30-59 days $12,968 $4,767
60-89 days 4,157 1,579
90+ days 3,751 2,359
Total loans past due $20,876 $8,705
Total banking/finance loans outstanding $486,520 $394,994
% of loans outstanding past due 4.29% 2.20%
The auto loan portfolio consists of approximately 50% new
cars and 50% used cars. At March 31, 1995, approximately
50% of the auto loans outstanding were in California, 20% in
New Mexico, and the balance distributed throughout the
United States. The Company has experienced an increase in
delinquency rates since September 30, 1994. In response,
the Company has significantly expanded its auto loan
collection efforts and enhanced the systems supporting those
activities.
The Company anticipates continued increases in its
investment in credit card and dealer auto loan portfolios.
The Company intends to continue funding these investments
through operating cash flows and existing debt facilities.
Additionally, the Company is reviewing the possibility of
alternative funding sources such as securitization of the
auto loan portfolio.
Premises and equipment increased primarily as a result of
investments in new building construction and computer
equipment.
Trade payables and accrued expenses decreased due to the
payment of various employee related accruals since year end.
Debt payable within one year increased primarily due to a
$24.8 million increase in short-term commercial paper.
Retained earnings increased as a result of net income for
the period.
Six months ended
Selected cash flow items: March 31
(Dollars in millions) 1995 1994
Cash flows from operating activities $132.2 $119.7
Cash flows from investing activities ($130.6 ) ($127.3 )
Cash flows from financing activities ($11.8 ) ($35.8 )
The increase in cash flows from operating activities was
primarily the result of the decrease in receivables, prepaid
expenses and other.
The cash flows from investing and financing activities
during the period were affected primarily by the Company's
funding of auto and credit card loans of the banking/finance
group, dividends paid on common stock and purchase of
treasury shares. The Company continues to fund these
activities primarily from operating cash flows while
utilizing the commercial paper and medium-term notes
facilities when appropriate.
During the six month period ended March 31, 1995, the
Company purchased 684,300 Franklin Resources, Inc. shares
for $24.2 million. As of March 31, 1995, the Company had
2,256,520 shares authorized under its repurchase program.
The Company from time to time will continue to purchase its
own shares in the open market and in private transactions
for use in connection with various corporate incentive
programs and when it believes the market price of its shares
merits such action.
The proposed Class II shares will require the Company to
advance a one percent dealer commission which will be
recouped substantially during the subsequent twelve month
period primarily through a .75% and .50% asset based charge
on equity and fixed income funds, respectively. The one per
cent dealer commission will be deferred and amortized on a
straightline basis over the eighteen month contingent
deferred sales charge period. The Company will fund these
advances through operating cash flows and existing debt
facilities.
On December 8, 1994, the Company announced that it had
applied and received approval from the Securities and
Exchange Commission to purchase $7.1 million of unsecured
Orange County obligations from two of its money market
mutual funds. The Company purchased these securities on a
voluntary basis to alleviate any concerns by those funds'
shareholders and does not anticipate any significant losses
as a result of such purchase. The Company has limited
additional exposure to Orange County securities in the
assets under its management and does not anticipate any
additional purchases of Orange County securities from those
assets.
At March 31, 1995, the Company held liquid assets of $519.3
million, including $200.2 million in cash and cash
equivalents as compared to $515.0 million, including $210.4
million in cash and cash equivalents at September 30, 1994.
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: May 18, 1995 /S/ Martin L. Flanagan
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MARTIN L. FLANAGAN
Senior Vice President,
Treasurer and Chief
Financial Officer