UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended SEPTEMBER 30, 1996 OR [ ] [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-9318 FRANKLIN RESOURCES, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-2670991 State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including Area Code (415 312-2000) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered COMMON STOCK, PAR VALUE $.10 PER SHARE NEW YORK STOCK EXCHANGE COMMON STOCK, PAR VALUE $.10 PER SHARE PACIFIC STOCK EXCHANGE COMMON STOCK, PAR VALUE $.10 PER SHARE LONDON STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.10 PER SHARE (Title of class) (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) or 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 the filing requirements for at least the past 90 days. YES X NO ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing price of $64.750 on December 13, 1996 on the New York Stock Exchange was $2,684,730,286. Calculation of holdings by non-affiliates is based upon the assumption, for these purposes only, that officers, directors, nominees, Registrant's Profit Sharing Plan and persons holding 5% or more of Registrant's Common Stock are affiliates. Number of shares of the registrant's common stock outstanding at December 13, 1996: 83,739,711. DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the registrant's proxy statement for its Annual Meeting of Stockholders to be held January 23, 1997, which will be filed with the Commission before, on or subsequent to the date hereof, are incorporated by reference into Part III of this report. PART I ITEM 1. BUSINESS (A) GENERAL DEVELOPMENT OF BUSINESS Franklin Resources, Inc. ("FRI") and its predecessors have been engaged in the financial services business since 1947. FRI was organized in Delaware in November 1969. The term "Company" as used herein, unless the context otherwise requires, refers to Franklin Resources, Inc. and its subsidiaries. The Company's principal executive and administrative offices are at 777 Mariners Island Boulevard, San Mateo, California 94404. As of September 30, 1996, the Company employed approximately 4,960 employees on a worldwide basis, consisting of officers, investment management, distribution, administrative, sales and clerical support staff. The Company also employs additional temporary help as necessary to meet unusual requirements. Management believes that its relations with its employees are excellent. On October 30, 1992, the Company and certain of its direct and indirect subsidiaries consummated the Templeton acquisition (the "Templeton Acquisition") of substantially all of the assets and liabilities of Templeton, Galbraith & Hansberger Ltd., a corporation organized under the laws of the Cayman Islands and based in Nassau, Bahamas ("Old TGH"), which provided diversified investment management and related services on a worldwide basis directly and through subsidiaries to various domestic open-end and closed-end investment companies as well as to a variety of international investment portfolios and to domestic and international private and institutional accounts. Unless the context otherwise requires, references herein to "Templeton" are deemed to refer to the business operations acquired by the Company in connection with the Templeton Acquisition. Subsequent to the Templeton Acquisition, the Company has operated the Franklin and Templeton businesses on a unified basis. In November 1993, the Company consummated an agreement to manage and advise the Huntington Funds of Pasadena, California, now called the Franklin Templeton Global Trust. This open-end investment company of several currency portfolio series includes the Franklin Templeton Global Currency Fund, the Franklin Templeton Hard Currency Fund and the Franklin Templeton High Income Currency Fund, which invests in high quality foreign equivalent money market instruments in various global currencies, as well as the Franklin Templeton German Government Bond Fund, which invests in German government bonds and equivalents. In November 1996, after the close of the fiscal year, the Company and its wholly-owned subsidiary, Franklin Mutual Advisers, Inc. ("FMAI") acquired (the "Mutual Acquisition") certain assets and liabilities of Heine Securities Corporation ("Heine"). FMAI became the investment adviser to Heine's principal client, Mutual Series Fund Inc., an open-end investment company with five (5) series funds ("Mutual Series"). The base purchase price consisted of a $400 million cash payment, the delivery of 1.1 million shares (the "Shares") of the Company's Common Stock and the deposit into escrow of $150 million to be invested in shares of Mutual Series., which shares will be released over a five year period, with a minimum $100 million retention for the full five year period. In addition to the base purchase price, the transaction included a contingent payment ranging from $96.25 million to $192.5 million if certain agreed upon growth targets are met over the next five years. For a two-year period following the closing of the Mutual Acquisition, Heine and its chief executive officer, Michael F. Price must limit their ownership of the Company's common stock to no more than 4.9% and have also agreed to certain limitations on the transferability of the Shares. In addition, the Shares must be voted in accordance with the recommendations of the Company's Board of Directors. The Company has also granted certain registration rights with respect to the Shares. Mr. Price and five senior executives of Heine entered into employment agreements assumed by FMAI upon the consummation of the transaction. The purchase price paid at the closing, which took place effective as of November 1, 1996, was funded through a combination of the Company's available cash, securities and the sale of commercial paper. The description of the Company's business does not include matters relating to the Mutual Acquisition which occurred after the close of the fiscal year. FRI is principally a parent company primarily engaged, through various subsidiaries, in providing investment management, marketing, distribution, transfer agency and administrative services to the open-end investment companies of the Franklin Templeton Group of Funds and to domestic and international managed and institutional accounts. The Company also provides investment management and related services to a number of Franklin and Templeton closed-end investment companies whose shares are traded on various major domestic and some international stock exchanges. In addition, the Company provides investment management, marketing and distribution services to certain sponsored investment companies organized in the Grand Duchy of Luxembourg (hereinafter referred to as "SICAV Funds"), which are distributed in marketplaces outside of North America and to certain investment funds and portfolios in Canada (hereinafter referred to as "Canadian Funds") as well as to certain other international portfolios in the United Kingdom and elsewhere. The Franklin Group of Funds("R") consists of thirty-five (35) open-end investment companies (mutual funds) with multiple portfolios. The Templeton Family of Funds includes fourteen (14) open-end investment companies (mutual funds) with multiple portfolios. The Franklin Group of Funds and the Templeton Family of Funds are hereinafter referred to individually as a "Franklin fund" or a "Templeton fund" and collectively as the "Franklin funds" or the "Templeton funds", or, when applicable to both fund groups, individually as a "Fund" and collectively as the "Franklin and Templeton funds" or the "Funds". The closed-end investment companies, the foreign based funds and the other domestic and international managed and institutional accounts are collectively referred to as the "Other Assets". The Franklin and Templeton funds along with the Other Assets are collectively referred to as the "Franklin Templeton Group". As of September 30, 1996, (which excludes assets under management after the close of the fiscal year resulting from the Mutual Acquisition) total assets under management in the Franklin Templeton Group were $151.6 billion, the make-up of which was approximately as follows: for the open-end investment companies in the Franklin Group of Funds (excluding variable annuities), $73.5 billion; for the open-end investment companies in the Templeton Family of Funds (excluding variable annuities), $41.7 billion; for all the Other Assets (including variable annuities), $36.4 billion. This makes the Franklin Templeton Group one of the largest investment management complexes in the United States. The mix of assets under management by a large financial services complex such as the Franklin Templeton Group can be segregated by type of assets, type of investment vehicle, type of investor or geographic location of assets held. International and domestic equity assets under management, whether held for growth potential, income potential or various combinations thereof by all types of investors, including institutional and separate accounts on a worldwide basis, were approximately $86.7 billion at September 30, 1996 and represent approximately 57% of total assets under management. Fixed-income assets (both long and short-term), including money market fund assets, held by all types of investors on a worldwide basis were approximately $64.9 billion and represented 43% of total assets under management at fiscal year end. Equity growth and equity income assets in funds primarily sold to non institutional investors were $66.4 billion and represented 44% of total assets under management at fiscal year end. A significant portion of these equity assets ($47.2 billion) held in funds sold primarily to non institutional investors were in global and international equity funds. Assets under management for institutional accounts, whether in institutional mutual funds, separate accounts or other types of investment products, were approximately $21.3 billion or 14% of total assets under management at fiscal year end and were primarily invested in global and international equities. Assets under management by U.S. based closed-end funds were $4.2 billion at September 30, 1996. The Company, through certain subsidiaries, also provides advisory services, variable annuity products, and sponsors and manages public and private real estate programs. Other subsidiaries offer consumer banking services, insured deposits, dealer auto loans, and credit cards. The Company also provides custodial, trustee and fiduciary services to IRA and profit sharing or money purchase plans and to qualified retirement plans and private trusts. From time to time, the Company also participates in various investment management joint ventures. On a consolidated worldwide basis, the Company provides domestic and international individual and institutional investors with a broad range of investment products and services designed to meet varying investment objectives, which affords its clients the opportunity to allocate their investment resources among various alternative investment products as changing worldwide economic and market conditions warrant. SUBSIDIARIES-INVESTMENT MANAGEMENT, ADMINISTRATION, DISTRIBUTION AND RELATED SERVICES The Company's principal line of business is providing investment management, administration, distribution and related services for the Franklin and Templeton funds and for the Other Assets. This business is primarily conducted through the principal wholly-owned direct and indirect subsidiary companies described below. Revenues are generated primarily by subsidiaries that provide advisory and management services. Revenues are derived primarily from investment management fees calculated on a sliding scale fund-by-fund basis in relation to fund assets under management. FRANKLIN ADVISERS, INC. Franklin Advisers, Inc. ("Advisers") is a California corporation formed in 1985 and is based in San Mateo, California. Advisers is registered as an investment advisor with the Securities and Exchange Commission ( the "SEC") under the Investment Advisers Act of 1940 (the "Advisers Act") and is also registered as an investment advisor in the States of California and New Jersey. Advisers provides investment advisory, portfolio management and administrative services under management agreements with most of the Funds in the Franklin Group of Funds. Advisers manages approximately $81.3 billion, representing approximately 54% of the Company's total assets under management, and generates approximately 25% of total Company revenues. FRANKLIN ADVISORY SERVICES, INC. Franklin Advisory Services, Inc. ("FASI") is a Delaware corporation formed in 1996 and is based in Fort Lee, New Jersey. FASI is registered as an investment advisor with the SEC under the Advisers Act and is also registered as an investment advisor in the State of New Jersey. FASI provides investment advisory and portfolio management services under management agreements with certain funds in the Franklin Group of Funds. TEMPLETON GLOBAL ADVISORS LIMITED. Templeton Global Advisors Limited "TGAL" is a Bahamian corporation located in Nassau, Bahamas formed in connection with the Templeton Acquisition and is the successor company to Old TGH. TGAL is registered as an investment advisor with the SEC under the Advisers Act. TGAL provides investment advisory, portfolio management and administrative services under various agreements with certain of the Templeton funds and Other Assets. TGAL is the principal investment advisor to the Templeton funds and manages approximately $34.8 billion, representing approximately 23% of the Company's total assets under management. FRANKLIN INVESTMENT ADVISORY SERVICES, INC. Franklin Investment Advisory Services, Inc. ("FIASI") is a Delaware corporation formed in 1996 and is based in Norwalk, Connecticut. FIASI is registered as an investment advisor with the SEC under the Advisers Act. FRANKLIN TEMPLETON SERVICES, INC. Franklin Templeton Services, Inc. ("FTSI") is a Delaware corporation formed in 1996 and is based in San Mateo, California. FTSI provides business management services, including fund accounting, securities pricing, trading, compliance and other related administrative activities under various management agreements to certain of the Franklin and Templeton funds. TEMPLETON INVESTMENT COUNSEL, INC. Templeton Investment Counsel, Inc. ("TICI") is a Florida corporation formed in October, 1979, based in Ft. Lauderdale, Florida TICI is the principal investment advisor to managed and institutional accounts. In addition, it provides investment advisory portfolio management services to certain of the Templeton funds and subadvisory services to certain of the Franklin funds. TICI manages approximately $13.9 billion, representing 9% of the Company's total assets under management. TEMPLETON ASSET MANAGEMENT LTD. Templeton Asset Management Ltd. ("Templeton Singapore") is a corporation organized under the laws of and based in Singapore. It is registered as the foreign equivalent of an investment advisor in Singapore with the Monetary Authority of Singapore and is also registered with the SEC under the Advisers Act. A representative office of Templeton Singapore is registered as the foreign equivalent of an investment advisor in Hong Kong. Templeton Singapore provides investment advisory and related services to certain Templeton funds and portfolios. Templeton Singapore is principally an investment advisor to emerging market equity portfolios. TEMPLETON/FRANKLIN INVESTMENT SERVICES (ASIA) LIMITED Templeton/Franklin Investment Services (Asia) Limited is a corporation organized under the laws of, and is based in, Hong Kong. It was formed in late 1993 to distribute and service the Company's financial products in Asia. TEMPLETON MANAGEMENT LIMITED Templeton Management Limited is a Canadian corporation formed in October 1982, and is registered in Canada as the foreign equivalent of an investment advisor and a mutual fund dealer with the Ontario Securities Commission. It provides investment advisory, portfolio management, distribution and administrative services under various management agreements with the Canadian Funds and with private and institutional accounts. FRANKLIN/TEMPLETON DISTRIBUTORS, INC. Franklin/Templeton Distributors, Inc. ("Distributors") is a New York corporation formed in 1947. It is registered with the SEC as a broker-dealer and as an investment advisor and is a member of the National Association of Securities Dealers, Inc. (the "NASD"). As the underwriter of the shares of most of the Franklin and Templeton funds, it earns underwriting commissions on the distribution of shares of the Funds. TEMPLETON/FRANKLIN INVESTMENT SERVICES, INC. Templeton/Franklin Investment Services, Inc. ("TFIS") is a Delaware corporation formed in October 1987 and is registered with the SEC as a broker-dealer and an investment advisor. Its principal business activities include: (i) through its Templeton Portfolio Advisory division, serving as a sponsor of a comprehensive fee (wrap account) program, in which it provides investment advisory and broker-dealer services, as well as serving as investment adviser in other broker-dealer wrap account programs and directly as an adviser for separate accounts; and (ii) serving as a direct marketing broker-dealer for institutional investors in Franklin Templeton Funds. FRANKLIN/TEMPLETON INVESTOR SERVICES, INC. Franklin/Templeton Investor Services, Inc. ("FTIS") is a California corporation formed in 1981 which provides shareholder record keeping services and acts as transfer agent and dividend-paying agent for the Franklin and Templeton funds. FTIS is registered with the SEC as a transfer agent under the Securities Exchange Act of 1934 (the "Exchange Act"). FTIS is compensated under an agreement with each Franklin and Templeton open-end mutual fund on the basis of a fixed annual fee per account, which varies with the Fund and the type of services being provided. OTHER TEMPLETON INVESTMENT ADVISORY, DISTRIBUTION, RESEARCH AND RELATED SUBSIDIARIES are organized and/or located in California, Florida, Australia, the Bahamas, France, Germany, India, Italy, Luxembourg, and the United Kingdom, and provide investment advisory and related services to other subsidiaries of the Company and to various domestic and foreign portfolios and private and institutional accounts. In addition, the Company, through various Templeton subsidiaries, has opened or is in the process of opening branch offices or in some instances forming subsidiaries in various other international locations, including Argentina, Cyprus, Hungary, Japan, Mauritius, Russia, South Africa, and Vietnam. FRANKLIN TEMPLETON TRUST COMPANY Franklin Templeton Trust Company ("FTTC"), a California corporation formed in October 1983, is a trust company licensed by the California Superintendent of Banks. FTTC serves primarily as custodian for Individual Retirement Accounts and profit sharing or money purchase plans whose assets are invested in the Franklin and Templeton funds, and as trustee or fiduciary of private trusts and retirement plans. TEMPLETON FUNDS TRUST COMPANY Templeton Funds Trust Company ("TFTC"), a Florida corporation formed in December, 1985, is a trust company licensed by the Florida Office of the Comptroller. TFTC provides sub-administration services through Franklin Templeton Trust Company to Individual Retirement Accounts and profit sharing or money purchase whose assets are invested in the Templeton Family of Funds, and serves as trustee of commingled trusts for qualified retirement plans. FRANKLIN MANAGEMENT, INC. Franklin Management, Inc. ("FMI"), a California corporation organized in February 1978, is a registered investment advisor for private accounts. FMI also provides advisory services to third party broker-dealer wrap fee programs. FRANKLIN INSTITUTIONAL SERVICES CORPORATION Franklin Institutional Services Corporation ("FISCO") is a California corporation organized in August 1991. FISCO is a registered investment advisor and provides services to bank trust departments, municipalities, corporate and public pension plans and pension consultants. FRANKLIN AGENCY, INC. Franklin Agency, Inc. ("Agency") is a California corporation organized in December 1971. Agency provides insurance agency services for the Franklin Valuemark annuity products. TEMPLETON FUNDS ANNUITY COMPANY Templeton Funds Annuity Company ("TFAC") is a Florida corporation formed in January 1984 which offers variable annuity products. TFAC is principally regulated by the Florida Department of Insurance and Treasurer. TEMPLETON WORLDWIDE, INC. Templeton Worldwide, Inc. is a Delaware corporation organized in July 1992 as the parent holding company for all of the Templeton companies . SUBSIDIARIES-OTHER FINANCIAL SERVICES In addition to its principal business activity of providing investment management and related services, during all or portions of the fiscal year, the Company was also engaged in two (2) other lines of business in the financial services marketplace conducted through the subsidiaries described below: consumer lending services and the management of public and private real estate programs. Consumer Lending Services FRANKLIN BANK (the "Bank"), a 98.2%-owned subsidiary of the Company, is a non-Federal Reserve member California State chartered bank. The Bank was formed in 1974 and was acquired by the Company in December 1985. The Bank, with total assets of $152.3 million as of September 30, 1996, provides consumer banking products and services such as credit cards, auto loans, deposit accounts and consumer loans. The Bank does not exercise its commercial lending powers in order to maintain its status as a "non-bank bank" pursuant to the provisions of the Competitive Equality Banking Act of 1987 ("CEBA") which permits the Company, a "non banking company" prior to CEBA, to remain exempt from the Bank Holding Company Act under the "grandfathering" provisions of CEBA. As a non-bank bank, it is subject to various regulatory limitations, including limits on the increase in its asset growth to 7% on an annual basis as well as a prohibition on engaging in any activity in which it was not engaged in March of 1987. FRANKLIN CAPITAL CORPORATION Franklin Capital Corporation ("FCC") is a Utah corporation formed in June 1993 to expand the Company's auto lending activities. FCC conducts its business primarily in the Western region of the United States and originates its loans through a network of auto dealerships representing a wide variety of makes and models. FCC offers several different loan programs to finance new and used vehicles. FCC also acquires credit card receivables from the Bank. As of September 30, 1996, FCC's total assets included $174.6 million of gross automobile contracts and $70.4 million of gross credit card receivables. Real Estate Subsidiaries The Company's real estate related line of business is conducted primarily through two (2) principal subsidiary corporations. Franklin Properties, Inc. ("FPI") is a real estate investment and management company organized in California in April 1988, which managed three (3) publicly traded real estate investment trusts, until May 7, 1996, at which time two of the real estate investment trusts were merged into the third real estate investment trust, and renamed Franklin Select Realty Trust, Inc. Franklin Select Realty Trust, Inc. continues to be managed by FPI under an advisory agreement and is publicly traded on the American Stock Exchange Property Resources, Inc. ("PRI"), a California corporation organized in April 1967 and acquired by the Company in December 1985, serves as general partner or advisor for certain other real estate investment programs. INVESTMENT MANAGEMENT The Franklin Templeton Group accommodates a variety of investment objectives, including, capital appreciation, growth and income, income, tax-free income and stability of principal. In seeking to achieve such objectives, each portfolio emphasizes different investment securities. Portfolios seeking income focus on taxable and tax-exempt money market instruments, tax-exempt municipal bonds, fixed-income debt securities of corporations and of the United States government and its agencies and instrumentalities such as the Government National Mortgage Association ("GNMA" or "Ginnie Mae"), the Federal National Mortgage Association ("Fannie Mae"), and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). Portfolios that seek capital appreciation invest primarily in equity securities in a wide variety of international and domestic markets, some seek broad national market exposure, while others focus on narrower sectors such as precious metals, health care, emerging technology, mid-cap companies, small-cap companies, real estate securities and utilities. Still others focus on investments in particular emerging market countries and regions. A majority of the assets managed are equity oriented. In addition to closed-end funds, many of which are described below, the Other Assets include portfolios managed for the world's largest corporations, endowments, charitable foundations, pension funds, wealthy individuals and other institutions. Investment management services for such portfolios focus on specific client objectives utilizing the various investment techniques offered by the Franklin Templeton Group. During the fiscal year ended September 30, 1996, except for the Company's money market funds, and funds specifically designed for institutional investors, whose shares are sold without a sales charge at all purchase levels, shares of the open-end funds in the Franklin and Templeton funds were generally sold at their respective net asset value per share plus a sales charge, which varies depending upon the type of share, the individual fund and the amount purchased. In accordance with certain terms and conditions described in the prospectuses for such Funds, certain investors are eligible to purchase shares at net asset value or at reduced sales charges, and investors may generally exchange their shares of a fund at net asset value for shares of another fund in the Franklin Templeton Group when they believe such an investment decision is appropriate without the payment of additional sales charges. As of September 30, 1996, the net asset holdings of the five largest funds in the Franklin Templeton Group (some of which are investment companies and some of which are series of other investment companies) were Franklin California Tax-Free Income Fund, Inc. ($13.6 billion), Franklin U.S. Government Securities Fund ($10.2 billion), Templeton Foreign Fund ($10.5 billion), Templeton Growth Fund ($9.0 billion) and the Franklin Federal Tax-Free Income Fund ($7.1 billion). At September 30, 1996, these five mutual funds represented, in the aggregate, 33% of all assets under management in the Franklin Templeton Group. General Fund Description Set forth in the tables below is a brief description of the Funds and of the principal investments and investment strategies of such Funds or portfolios comprising most of the principal Funds or portfolios in the Franklin Templeton Group separated into 21 different general categories as follows: (i) Franklin Funds Seeking Preservation of Capital and Income (ii) Franklin Funds Seeking Current Income (iii) Franklin Funds Seeking Tax-Free Income (iv) Franklin Funds Seeking Growth and Income (v) Franklin Funds Seeking Capital Growth (vi) Franklin Funds for Tax-Deferred Investments (Valuemark variable annuity) (vii) Franklin Closed-End Funds (viii)Franklin Funds for Institutional Investors (ix) Franklin Templeton International Currency Funds (x) Templeton Funds Seeking Preservation of Capital and Income (xi) Templeton Funds Seeking Capital Growth from Global Portfolios (xii) Templeton Funds Seeking Capital Growth from Domestic Portfolios (xiii)Templeton Funds Seeking High Current Income from Global Portfolios (xiv) Templeton Funds Seeking High Total Return from Global Portfolios (xv) Templeton Funds for Tax-Deferred Investments (xvi) Templeton Contractual Plans (xvii)Templeton SICAV Funds (xviii)Templeton Canadian Funds (xix) Templeton Closed-End Funds (xx) Templeton Funds for Institutional Investors (xxi) Representative Templeton International Portfolios (i) Franklin Funds Seeking Preservation of Capital and Income Name of Fund Inception Principal Date Investments/Strategy Franklin California 9/3/85 Seeks double tax-free income Tax-Exempt Money Fund (free from federal and state personal income taxes) by investing in short-term California municipal securities. Franklin Federal 5/13/80 Seeks high current income by Money Fund investing in short-term instruments backed by U.S. government securities. Franklin Money Fund 5/1/76 Seeks capital preservation, liquidity and dividends by investing in short-term securities (money market instruments). Franklin New York 9/3/85 Seeks triple tax-free income Tax-Exempt Money Fund (free from federal, N.Y. state and N.Y. city taxes) by investing in short-term New York municipal securities. Franklin Tax-Exempt 2/18/82 Seeks income free from federal Money Fund taxes by investing in short-term municipal securities. Franklin Templeton 5/1/95 Seeks capital preservation, Money Fund II liquidity and dividends, by investing in short-term securities. Open only to shareholders exchanging out of Class II shares in other Franklin Templeton Funds. (ii) Franklin Funds Seeking Current Income Name of Fund Inception Principal Date Investments/Strategy Franklin Adjustable 12/26/91 Seeks high current income and Rate Securities Fund increased price stability by investing in Double A rated mortgage-backed securities: ARMS created by private issuers as well as Ginnie Mae, Fannie Mae and Freddie Mac. Franklin Adjustable 10/20/87 Seeks income with lower U.S. Government volatility of principal by Securities Fund investing in government or government agency guaranteed adjustable rate mortgage-backed securities. Franklin Corporate 1/14/87 Seeks high after-tax income for Qualified Dividend corporations by investing in Fund preferred securities and by maximizing the amount of dividend income it receives that qualifies for the dividends-received deduction. Franklin Global 3/15/88 Seeks high current income by Government Income investing primarily in Fund fixed-income securities issued by both domestic and foreign governments. Franklin Investment 1/14/87 Seeks high current income by Grade Income Fund investing in debt securities, most of which will be intermediate term investment grade issues and dividend paying common and preferred stocks. Franklin 4/15/87 Seeks income and relative Short-Intermediate stability of principal by U.S. Government investing in less volatile, Securities Fund shorter term securities of U.S. government securities carrying the full faith and credit guarantee of the U.S. government. Franklin Tax- 5/4/87 Seeks high current income by Advantaged U.S. investing in a portfolio limited Government to securities that are Securities Fund obligations of the U.S. government, exempt from non-resident alien taxation (Ginnie Mae securities). Designed for non-U.S. investors. Franklin 5/4/87 Seeks high current income by Tax-Advantaged High investing in high yield Yield Securities Fund corporate bonds, exempt from non-resident alien taxation. Designed for non-U.S. investors. Franklin 6/9/90 Seeks high current income by Tax-Advantaged investing in qualifying debt International Bond securities and foreign currency Fund denominated debt securities of non-U.S. issuers, not subject to U.S. federal income tax or U.S. tax withholding requirements. Designed for non-U.S. investors. Franklin Templeton 12/31/92 Seeks total return by investing German Government in a managed portfolio of German Bond Fund government bonds. Franklin's AGE High 12/31/69 Seeks high current income by Income Fund investing in high yielding lower rated corporate bonds. U.S. Government 5/31/70 Seeks high current income by Securities Series (a investing in a portfolio limited series of Franklin to securities that are Custodian Funds, obligations of the U.S. Inc.) government or its instrumentalities (Ginnie Mae securities). (iii) Franklin Funds Seeking Tax-Free Income Federal Tax-Free Funds Name of Fund Inception Principal Date Investments/Strategy Franklin Federal 9/21/92 Seeks high current income by Intermediate-Term investing in nationally Tax-Free Income Fund diversified municipal bonds with an average maturity of three to ten years. Franklin Federal 10/7/83 Seeks federal tax-free income by Tax-Free Income Fund investing in nationally diversified, investment quality municipal bonds. Franklin High Yield 3/18/86 Seeks federal tax-free income by Tax-Free Income Fund investing in nationally diversified, high yield, medium and lower rated municipal bonds. Franklin Insured 4/1/85 Seeks federal tax-free income by Tax-Free Income Fund investing in nationally diversified, insured municipal bonds. Franklin Puerto Rico 8/3/85 Seeks to provide a maximum level Tax-Free Income Fund of income exempt from federal income tax and the personal income taxes of the majority of the states by investing in municipal securities. For U.S. citizens and residents. State Tax-Free Funds The Company manages insured state tax-free funds established from 1985 to 1996 in the states of Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New York and Ohio whose principal investments and strategy are the purchase of insured municipal bonds exempt from federal and specified state personal income taxes providing an investment vehicle for double tax-free income from long-term municipal securities. In addition, the Company manages 26 non-insured state tax-free income funds established from 1977 to 1996 providing double tax-free income from long-term municipal securities to residents of 21 states. (iv) Franklin Funds Seeking Growth and Income Name of Fund Inception Principal Date Investments/Strategy Franklin Asset 12/5/51 Seeks total return by investing Allocation Fund in common stocks, investment grade corporate and U.S. government bonds, short-term money market instruments, securities of foreign issuers and real estate securities. Franklin Balance 4/2/90 Seeks high total return by Sheet Investment Fund investing in common and preferred stocks, secured or unsecured bonds, and commercial paper or notes, which have per-share current market values believed to be below their net asset or book values. Franklin Convertible 4/15/87 Seeks to maximize total return Securities Fund by investing in convertible bonds and convertible preferred stock. Franklin Equity 3/15/88 Seeks capital appreciation and Income Fund high current dividend income by investing in high yielding common stocks for greater price stability. Franklin Global 7/2/92 Seeks total return by investing Utilities Fund in equity and debt securities issued by foreign and domestic utilities companies. Franklin MicroCap 12/12/95 Seeks high total return by Value Fund investing primarily in securities of companies with market capitalization under $100 million at the time of purchase and which are believed to be undervalued in the marketplace. Franklin Natural 6/5/95 Seeks high total return by Resources Fund investing primarily in stocks of companies that own, produce, refine, process and market natural resources. Franklin Rising 4/2/90 Seeks capital appreciation by Dividends Fund investing in stocks with consistent, substantial dividend increases for capital growth. Franklin Strategic 5/24/94 Seeks high current income and Income Fund capital appreciation, by investing in domestic and foreign fixed-income securities. Franklin Value Fund 3/11/96 Seeks total return by investing in equity and debt securities of undervalued companies worldwide. Income Series (a 3/31/48 Seeks to maximize income by series of Franklin investing in a diversified Custodian Funds, portfolio of high yielding lower Inc.) rated corporate bonds, preferred stocks and dividend paying common stocks. Utilities Series (a 9/30/48 Seeks capital appreciation and series of Franklin current income by investing in Custodian Funds, utility companies located in Inc.) high growth areas. (v) Franklin Funds Seeking Capital Growth Name of Fund Inception Principal Date Investments/Strategy DynaTech Series (a 1/1/68 Seeks capital appreciation by series of Franklin investing in the volatile stocks Custodian Funds, of companies engaged in dramatic Inc.) break-through areas such as medicine, telecommunications and electronics or who have proprietary advantages in their field. Franklin Blue Chip 5/28/96 Seeks capital appreciation by Fund investing in securities of well-established,large capitalization companies ("blue chip companies") with a long record of revenue growth and profitability. Franklin California 10/30/91 Seeks capital appreciation by Growth Fund investing primarily in growth stocks or securities of companies headquartered in or conducting a majority of operations in California. Franklin Equity Fund 1/1/33 Seeks capital appreciation and current income by investing primarily in common stocks of seasoned companies with low prices in relation to earnings growth. Franklin Global 2/14/92 Seeks capital appreciation by Health Care Fund investing primarily in equity securities of health care companies worldwide with potential for above average growth. Franklin Gold Fund 5/19/69 Seeks capital appreciation and current income by investing in securities of companies engaged in mining, processing or dealing in gold or other precious metals. Franklin MidCap 6/1/96 Seeks long-term capital growth Growth Fund by investing in equity securities of medium capitalization companies believed to be positioned for rapid growth. Franklin Real Estate 1/3/94 Seeks to maximize total return Securities Fund by investing primarily in the equity securities of companies operating in the real estate industry. Franklin Small Cap 2/14/92 Seeks long-term capital growth Growth Fund by investing primarily in equity securities of small capitalization growth companies. Growth Series (a 3/31/48 Seeks capital appreciation by series of the investing in well-known Franklin Custodian companies with demonstrated Funds, Inc.) growth characteristics. (vi) Franklin Funds for Tax-Deferred Investments Franklin Valuemark Funds is an open-end management investment company currently consisting of twenty-three (23) separate series or portfolios which offer a wide range of investment objectives, strategies, and risks. Shares are currently sold only to separate accounts of the Allianz Life Insurance Company of North America and its affiliates to fund the benefits under variable life insurance policies and variable annuity contracts. Products presently offered include two flexible premium deferred variable annuities ("Valuemark II" in New York and "Valuemark III" in all other states), an immediate variable annuity ("Valuemark Income Plus"), single premium variable life insurance ("Franklin Valuemark Life"), and flexible premium variable life insurance ("ValueLife"). The portfolios are managed by Advisers, Franklin Advisory Services, Inc., Franklin Mutual Advisers, Inc., TICI, TGAL, and Templeton Singapore. The investment objectives and policies of most of the portfolios are similar to those of corresponding Franklin and Templeton funds, although differences in portfolio size, investments held, and insurance and expense related differences will cause the performance of the Valuemark portfolio to differ. (vii) Franklin Closed-End Funds Name of Fund Inception Principal Date Investments/Strategy Franklin 10/24/89 Seeks high current income by Multi-Income Trust investing primarily in high (listed on the NYSE) yielding, fixed-income corporate securities as well as dividend-paying stocks of companies engaged in the public utilities industry. Franklin Universal 9/23/88 Seeks high current income by Trust (listed on the investing in fixed-income debt NYSE) securities and dividend paying stocks and securities of precious metals and natural resources companies. Principal Maturity 1/19/89 Seeks to return investors' original Trust (listed on the capital of $10 per share on or before May 31, New York Stock Exchange 2001, while providing high monthly ("NYSE") income by investing in mortgage-backed securities, zero coupon securities and high income producing debt securities. (viii) Franklin Funds for Institutional Investors Name of Fund Inception Principal Date Investments/Strategy Adjustable Rate 11/5/91 Seeks high current income by Securities Portfolio investing (sold only to other in mortgage-backed securities investment companies) (ARMS). Franklin Cash 7/1/94 Seeks high current income by Reserves Fund investing in domestic and foreign short-term securities. Franklin 1/2/92 Seeks high current income by Institutional investing Adjustable Rate in a portfolio of Securities Fund mortgage-backed securities, pooled adjustable rate mortgage securities. Franklin 11/1/91 Seeks high current income and Institutional increased price stability by Adjustable U.S. investing Government in a portfolio of adjustable Securities Fund U.S. government or guaranteed agency mortgage-backed securities, (ARMS created by Ginnie Mae, Fannie Mae and Freddie Mac). Franklin Strategic 2/1/93 Seeks a high level of total Mortgage Portfolio return by investing primarily in mortgage-backed securities, pooled mortgages issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. Franklin U. S. 2/8/94 Seeks high current income Government Agency consistent with capital Money Market Fund preservation and liquidity by investing in short-term instruments backed by U.S. government securities. Franklin U.S. 1/19/88 Seeks high current income Government consistent with capital Securities Money preservation and liquidity by Market Portfolio investing in short-term instruments backed by U.S. government securities. Franklin U.S. 8/20/91 Seeks high current income Treasury Money consistent with capital Market Portfolio preservation and liquidity by investing in short-term U.S. Treasury obligations. Money Market 7/17/85 Seeks high current income Portfolio consistent with capital preservation and liquidity by investing all of its assets in money market instruments. The Money Market 7/28/92 Seeks high current income Portfolio (sold only consistent with capital to other investment preservation and liquidity by companies) investing all of its assets in money market instruments. The U.S.Government 7/28/92 Seeks high current income Securities Money consistent with capital Market Portfolio preservation and liquidity by (sold only to other investing in short-term investment companies) instruments backed by U.S. government securities. U.S. Government 5/20/91 Seeks high current income and Adjustable Rate increased price stability by Mortgage Portfolio investing (sold only to other in mortgage-backed securities, investment companies) (ARMS created by Ginnie Mae, Fannie Mae and Freddie Mac). (ix) Franklin Templeton International Currency Funds Name of Fund Inception Principal Date Investments/Strategy Franklin Templeton 6/30/86 Seeks to maximize total return, Global Currency Fund by investing in interest-earning money market instruments denominated in three or more of 16 major world currencies. Franklin Templeton 11/17/89 Seeks to protect against U.S. Hard Currency Fund dollar depreciation by investing in high-quality money market instruments denominated in three or more of the five major currencies of lowest inflation countries and the Swiss Franc. Franklin Templeton 11/17/89 Seeks current income higher than High Income Currency that of U.S. dollar money market Fund instruments by investing in interest-bearing money market instruments denominated in Major and Non-Major Currencies. (x) Templeton Funds Seeking Preservation of Capital and Income Name of Fund Inception Principal Date Investments/Strategy Templeton Money Fund 10/2/87 Seeks current income, stability of principal and liquidity by investing in high quality money market instruments with maturities not exceeding 397 days, consisting primarily of short-term U.S. Government Securities, bank certificates of deposit, time deposits, bankers' acceptances, commercial paper and repurchase agreements. (xi) Templeton Funds Seeking Capital Growth from Global Portfolios Name of Fund Inception Principal Date Investments/Strategy Franklin Templeton 7/28/94 Seeks long-term capital growth Japan Fund by investing primarily in the equity securities of companies domiciled in Japan and traded in Japanese securities markets. Templeton Developing 10/17/91 Seeks long-term capital Markets Trust appreciation by investing primarily in equity securities of issuers in countries with developing markets. Templeton Foreign 10/5/82 Seeks long-term capital growth Fund by investing in stocks and debt obligations of companies and governments outside the U.S. Templeton Foreign 9/20/91 Seeks long-term capital growth Smaller Companies by investing in a diverse Fund portfolio of equity securities that trade on markets in countries other than the U.S. Templeton Global 3/14/94 Seeks long-term capital growth Infrastructure Fund by investing in securities of domestic and foreign companies that are principally engaged in or related to the development, operation or rehabilitation of the physical and social infrastructures of various nations throughout the world. Templeton Global 2/28/90 Seeks long-term capital growth Opportunities Trust by investing in securities issued by companies and governments of any nation. Templeton Greater 5/8/95 Seeks long-term capital European Fund appreciation by investing primarily in equity securities of companies Western, Central and Eastern Europe and in Russia. Templeton Growth Fund 11/29/54 Seeks long-term capital growth by investing in stocks and bonds issued by companies and governments of any nation. Templeton Latin 5/8/95 Seeks long-term capital America Fund appreciation by investing primarily in equity securities and debt obligations of issuers in Latin American countries. Templeton Pacific 9/20/91 Seeks long-term capital growth Growth Fund by investing primarily in equity securities that trade on markets in the Pacific Rim. Templeton Global 9/18/89 Seeks long-term capital growth Real Estate Fund by investing in securities of domestic and foreign companies engaged in or related to the real estate industry.. Templeton Global 6/1/81 Seeks long-term capital growth Smaller Companies by investing in common and Fund, Inc. preferred stocks, rights and warrants of companies of various nations throughout the world. Templeton World Fund 1/17/78 Seeks long-term capital growth by investing in stocks and debt obligations of foreign and domestic companies. (xii) Templeton Funds Seeking Capital Growth From Domestic Portfolios Name of Fund Inception Principal Date Investments/Strategy Templeton American 3/27/91 Seeks long-term total return by Trust investing no less than 65% of assets in stocks and debt obligations of U.S. companies and the U.S. government. (xiii) Templeton Funds Seeking High Current Income from Global Portfolios Name of Fund Inception Principal Date Investments/Strategy Templeton Americas 6/27/94 Seeks high current income, with Government total return as a secondary Securities Fund objective, by investing primarily in debt securities issued or guaranteed by governments, government agencies, political subdivisions, and other government entities of countries located in North, South and Central America and the surrounding waters. Templeton Income Fund 9/24/86 Seeks current income by investing primarily in debt securities, preferred stock, common stocks which pay dividends and income producing securities convertible into common stock of companies, governments and government agencies of various nations throughout the world. (xiv) Templeton Funds Seeking High Total Return from Global Portfolios Name of Fund Inception Principal Date Investments/Strategy Templeton Growth and 3/14/94 Seeks high total return by Income Fund investing primarily in equity (formerly Templeton and debt securities of domestic Global Rising and foreign companies. Dividends Fund) (xv) Templeton Funds for Tax-Deferred Investments Name of Fund Inception Principal Date Investments/Strategy Templeton Asset 8/31/88 Seeks a high level of total Allocation Fund return by investing in stocks of companies in any nation, debt obligations of companies and governments of any nation, and in money market instruments. Templeton Bond Fund 8/31/88 Seeks high current income by investing primarily in debt securities of companies, governments and government agencies of various nations throughout the world, and in debt securities which are convertible into common stock of such companies. Templeton 5/1/92 Seeks long-term capital growth International Fund by investing in stocks and debt obligations of companies and governments outside the United States. Templeton Money 8/31/88 Seeks current income, stability Market Fund of principal and liquidity by investing in money market instruments with maturities not exceeding 397 days, consisting primarily of short-term U.S. Government securities, certificates of deposit, time deposits, bankers' acceptances, commercial paper and repurchase agreements. Templeton Stock Fund 8/31/88 Seeks capital growth by investing primarily in common stocks issued by companies, large and small, in various nations throughout the world. Templeton Variable 2/16/88 Seeks long-term capital growth Annuity Fund by investing primarily in stocks and debt obligations of companies and governments of any nation, including the United States. (xvi) Templeton Contractual Plans Name of Fund Inception Principal Date Investments/Strategy Templeton Capital 3/1/91 Seeks long-term capital growth Accumulator Fund, by investing in stocks and debt Inc. obligations of companies and governments of any nation. (xvii) Templeton SICAV Funds Templeton Global Strategy SICAV) Equity Funds (denominated in U.S. Dollars unless otherwise noted) Name of Fund Inception Principal Date Investments/Strategy Templeton 4/26/91 Seeks long-term capital growth Deutschemark Global by investing mainly in shares of Growth Fund companies of any size found in any nation (denominated in Deutschemarks). Templeton Emerging 2/28/91 Seeks long-term capital growth Markets Fund by investing in the shares and debt obligations of corporations and governments of developing or emerging nations. Templeton European 4/17/91 Seeks long-term capital growth Fund by investing mainly in shares of companies of all sizes based in European countries (denominated in Swiss francs). Templeton Far East 6/30/91 Seeks long-term capital growth Fund by investing mainly in shares of companies of all sizes which are based in or which derive significant profits from the Far East. Templeton Global 2/28/91 Seeks long-term capital growth Growth Fund by investing primarily in the shares of companies of any size found in any nation. Templeton Pan 2/28/91 Seeks long-term capital growth American Fund by investing primarily in shares of companies of all sizes based in the North or South American continents. Templeton Smaller 7/8/91 Seeks long-term capital growth Companies Fund by investing primarily in shares of companies with a market capitalization of less than $1 billion found in any nation. Fixed Income Funds (denominated in U.S. Dollars unless otherwise noted) Name of Fund Inception Principal Date Investments/Strategy Templeton 2/28/91 Seeks to maximize total Deutschemark Global investment return by investing Bond Fund in a wide variety of fixed-interest securities, including those issued by supranational bodies such as The World Bank (denominated in Deutschemarks). Templeton Emerging 7/5/91 Seeks to maximize total Markets Fixed Income investment return by investing Fund primarily in dollar and non-dollar denominated debt obligations of emerging markets. Templeton Global 2/28/91 Seeks to maximize current income Income Fund by investing primarily in fixed-interest securities of governments and companies worldwide. Templeton Haven Fund 7/8/91 Seeks to maintain a stable share price by investing in short-term high quality transferable debt securities (denominated in Swiss francs). Templeton US 2/28/91 Seeks security of capital and Government Fund income by investing in bonds issued by the U.S. government and its agencies. Templeton Worldwide Investments SICAV Growth Portfolio 8/21/89 Seeks long term capital growth by investing in all types of securities issued by companies or governments of any nation. Income Portfolio 8/21/89 Seeks high current income and relative stability of net asset value by investing in high quality money market instruments and debt securities with remaining maturities in excess of two years. (xviii) Templeton Canadian Funds Non-Institutional Funds Name of Fund Inception Principal Date Investments/Strategy Templeton Balanced 04/07/83 Seeks long-term capital Fund appreciation by investing primarily in a combination of Canadian common and preferred shares, bonds, and debentures; managed to comply with eligibility requirements under Canadian law regarding retirement and other tax deferred plans. Templeton Canadian 9/14/94 Seeks high level of total return Asset Allocation Fund by investing primarily in Canadian shares, debt obligations and short-term instruments; managed to comply with eligibility requirements under Canadian law regarding retirement and other tax-deferred plans. Templeton Canadian 01/02/90 Seeks high current income and Bond Fund capital appreciation by investing primarily in publicly traded debt securities issued or guaranteed by Canadian governments or their agencies, or issued by Canadian municipalities or corporations. Templeton Canadian 01/03/89 Seeks capital appreciation by Stock Fund investing in a diversified portfolio of Canadian equity securities primarily managed to comply with eligibility requirements of the Canadian law regarding retirement and other tax deferred plans. Templeton Emerging 09/20/91 Seeks long-term capital Markets Fund appreciation by investing primarily in emerging country equity securities. Templeton Global 9/14/94 Seeks high level of total return Balanced Fund by investing in shares, debt obligations and short-term instruments of companies and governments of any nation, including Canada and the United States. Templeton Global 06/07/88 Seeks high current income by Bond Fund investing primarily in a portfolio of fixed income securities of issuers throughout the world. Templeton Global 01/03/89 Seeks capital appreciation by Smaller Companies investing primarily in equity Fund securities of emerging growth companies throughout the world. Templeton Growth 09/01/54 Seeks long-term capital growth Fund, Ltd. by investing in stock and debt obligations of companies and governments of any nation. Templeton 9/14/94 Seeks high level of total return International by investing in shares, debt Balanced Fund obligations and short-term instruments of companies and governments of any nation other than Canada and the United States. Templeton 01/03/89 Seeks long-term total return by International Stock investing in shares and debt Fund obligations of companies and governments outside of Canada and the United States. Templeton Treasury 02/29/88 Seeks a high level of current Bill Fund income consistent with preservation of capital and liquidity by investing in Canadian government or agency debt obligations and high quality short-term money market instruments. Funds for Institutional Investors Name of Fund Inception Principal Date Investments/Strategy Templeton Global 07/06/90 Seeks long-term capital Equity Trust appreciation by investing in (non-taxable) stocks and bonds issued by companies and governments of any nation. Templeton 07/06/90 Seeks long-term capital International Equity appreciation by investing in Trust(non-taxable) stocks and bonds issued by companies and governments outside of Canada and the United States. Templeton 07/06/90 Seeks long-term total return by International Stock investing in stocks and bonds Trust (taxable) issued by companies and governments outside of Canada and the United States. Closed-End Funds Name of Fund Inception Principal Date Investments/Strategy Templeton Emerging 6/21/94 Seeks long-term capital Markets Appreciation appreciation, by investing in Fund (listed on equity securities and debt Toronto Stock obligations of issuers in Exchange and emerging market countries. Montreal Stock Exchange) (xix) Templeton Closed-End Funds Name of Fund Inception Principal Date Investments/Strategy Templeton China 9/9/93 Seeks long-term capital World Fund, Inc. appreciation, by investing (listed on the NYSE) primarily in equity securities of companies organized under the laws of or with a principal office in the People's Republic of China ("PRC"), Hong Kong or Taiwan collectively "Greater China", for which the principal trading market is in Greater China, and which derive at least 50% of their revenues from goods or services sold or produced in, or have at least 50% of their assets in, the PRC. Templeton Dragon 9/21/94 Seeks long-term capital Fund, Inc. (Listed appreciation by investing at on NYSE and Osaka least 45% of its total assets in Securities Exchange) the equity securities of companies (i) organized under the laws of, or with a principal office in, the People's Republic of China or Hong Kong, or the principal business activities of which are conducted in China or Hong Kong or for which the principal equity securities trading market is in China or Hong Kong, and (ii) that derive at least 50% of their revenues from goods or services sold or produced, or have at least 50% of their assets in China or Hong Kong. Templeton Emerging 4/29/94 Seeks capital appreciation by Markets Appreciation investing substantially all of Fund, Inc. (Listed its assets in a portfolio of on NYSE) equity securities and debt obligations of issuers in emerging market countries. Templeton Emerging 2/26/87 Seeks long-term capital Markets Fund, Inc. appreciation by investing (listed on the NYSE primarily in emerging markets and Pacific Stock equity securities. Exchange "PSE") Templeton Emerging 9/23/93 Seeks high current income, with Markets Income Fund, a secondary investment objective Inc. (listed on the of capital appreciation, by NYSE) investing primarily in a portfolio of high yielding debt obligations of sovereign or sovereign-related entities and private sector companies in emerging market countries. Templeton Global 11/22/88 Seeks high current income Governments Income consistent with the preservation Trust (listed on the of capital achieved by investing NYSE) at least 65% of its total assets in debt securities issued or guaranteed by governments, government agencies supranational entities, political subdivisions and other government entities of various nations throughout the world. Templeton Global 3/17/88 Seeks high current income, with Income Fund, Inc. a secondary investment objective (listed on the NYSE of capital appreciation, by and PSE) investing primarily in a portfolio of fixed-income securities (including debt securities and preferred stock) of U.S. and foreign issuers. Templeton Global 5/23/90 Seeks high level of total return Utilities, Inc. (income plus capital (listed on the AMEX appreciation),without undue and the Midwest risk, by investing at least 65% Stock Exchange) of its total assets in equity and debt securities issued by domestic and foreign companies in the utility industries. Templeton Russia 6/15/95 Seeks long-term capital Fund, Inc. (Listed appreciation by investing on NYSE) primarily in equity securities of Russian Companies. Templeton Vietnam 9/15/94 Seeks long-term capital Opportunities Fund, appreciation by investing in the Inc. (Listed on equity securities of Vietnam NYSE) Companies. (xx) Templeton Funds for Institutional Investors Name of Fund Inception Principal Date Investments/Strategy Templeton Emerging 5/3/93 Seeks long-term capital growth Markets Series by investing in securities of issuers of countries having emerging markets. Templeton Foreign 10/18/90 Seeks long-term capital growth Equity Series by investing in stocks and debt obligations of companies and governments outside the United States. Templeton Foreign 5/3/93 Seeks long-term capital growth Equity (South Africa by investing in stocks and debt Free) Series obligations of companies and governments outside both the U.S. and South Africa. Templeton Growth 5/3/93 Seeks long-term capital growth Series by investing in stocks and debt obligations of companies and governments of any nation. (xxi) Representative Templeton International Portfolios Name of Fund Inception Principal Date Investments/Strategy Asian Development 01/22/88 Seeks to maximize overall Equity Fund long-term return by investing, directly or indirectly, primarily in shares, convertible bonds, warrants, and other equity related securities of entities in the Asian developing countries. Templeton Asia Fund 11/14/89 Seeks to achieve long-term capital appreciation by investing primarily in equity securities of entities which either are listed on recognized exchanges in capital markets of the Asia/Oceania Region or which have their area of primary activity in those same capital markets. Templeton Emerging 06/24/93 Seeks to achieve long-term Asia Fund capital appreciation by investing primarily in equity securities of companies which are either listed on recognized exchanges in capital markets in emerging Asian countries or companies which have their primary activity in those same capital markets. Templeton Emerging 06/19/89 Seeks long term capital Markets Investment appreciation by investing in Trust Plc. companies operating or trading in emerging market countries. (Closed End) Templeton Global 08/29/88 Seeks to provide income by Balanced Trust investing in an internationally diversified portfolio of equities, fixed interest, and convertible stocks. (Unit Trust) Templeton Global 08/29/88 Seeks to maximize total Growth Trust investment return by investing in an internationally diversified portfolio of equity shares and convertible stocks. (Unit Trust) Templeton Global 07/13/88 Seeks to achieve high current Income Portfolio, income by investing primarily in Ltd. a portfolio of fixed income securities (including debt securities and preferred stock) of issuers throughout the world. Templeton Latin 5/3/94 Seeks long-term capital growth America Investment by investing in companies listed Trust Plc. on stock exchanges in Latin America or that have substantial trading interests in that region. (Closed End) Templeton Value Trust 06/08/89 Seeks maximum total investment return by investing in all geographic and economic sectors. Templeton/National 04/06/93 Growth Portfolio - Seeks long Bank of Greece term capital growth by investing Trans-European Fund in stock and debt securities of companies and governments primarily located in the European Economic Community. Income Portfolio - Seeks high current income and relative stability of principal by investing in debt securities of companies and governments located primarily in the European Economic Community. Recent Fund Introductions The funds referenced above include three (3) new funds introduced by the Franklin Templeton Group during the fiscal year ended September 30, 1996: Franklin Blue Chip Fund, Franklin MidCap Growth Fund and Franklin Value Fund. (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Information on the Company's operations in various geographic areas of the world and a breakout of business segment information is contained in Footnote 5 to the Consolidated Financial Statements contained in Item 8. herein. (C) NARRATIVE DESCRIPTION OF BUSINESS INVESTMENT MANAGEMENT AND ADMINISTRATIVE SERVICES The Company, through its various subsidiaries described above, provides investment advisory, portfolio management, transfer agency, business management agent and administrative services to the Franklin Templeton Group. Such services are provided pursuant to agreements in effect with each of the U.S. registered Franklin and Templeton open and closed-end investment companies. Comparable agreements are in effect with foreign registered Funds and with other managed accounts. The management agreements for the U.S. registered Franklin and Templeton funds continue in effect for successive annual periods, providing such continuance is specifically approved at least annually by a majority vote cast in person at a meeting of such Funds' Boards of Trustees or Directors called for that purpose, or by a vote of the holders of a majority of the Funds' outstanding voting securities, and in either event, by a majority of such Funds' trustees or directors who are not parties to such agreement or interested persons of the Funds or the Company within the meaning of the Investment Company Act of 1940 (the "40 Act"). Trustees and directors of Funds' boards are hereinafter referred to as "directors". Foreign registered Funds have various termination rights and provisions. Each such agreement automatically terminates in the event of its "assignment" (as defined in the 40 Act) and either party may terminate the agreement without penalty after written notice ranging from 30 to 60 days. "Assignment" is defined in the 40 Act as including any direct or indirect transfer of a controlling block of voting stock. Control is defined as the power to exercise a controlling influence over the management or policies of a company. If there were to be a termination of a significant number of the management agreements between the Franklin and Templeton funds and the Company's subsidiaries or with respect to a significant portion of the Other Assets, such termination would have a material adverse impact upon the Company. To date, no management agreements of the Company or any of its subsidiaries with any of the Franklin and Templeton funds have been involuntarily terminated. Changes in the customer base of institutional investors occur on a regular basis. Since the Templeton Acquisition to date, assets under management in the category of Other Assets set forth above have in the aggregate continued to grow. As of September 30, 1996, substantially all of the shares of the various directly and indirectly owned subsidiary companies were owned directly by the Company or subsidiaries thereof, except for nominal numbers of shares with respect to certain foreign entities required to be owned by nationals of such countries in accordance with foreign law and certain other limited minority ownership of and Franklin Bank. As of December 13, 1996, Charles B. Johnson, Rupert H. Johnson, Jr. and R. Martin Wiskemann beneficially owned approximately 19.2%, 15.3% and 9.4%, respectively, of the outstanding voting common stock of the Company. Charles B. Johnson and his brother Rupert H. Johnson, Jr. serve on the Board of Directors of the Company as well as on most of the Franklin funds' boards and some of the Templeton funds' boards. Charles E. Johnson, the son of Charles B. Johnson and the nephew of Rupert H. Johnson, Jr. serves on the Board of Directors of the Company and on some of the Franklin and Templeton funds' boards. Under the terms of the management agreements with the Franklin and Templeton funds, the various subsidiary companies described above generally supervise and implement such Funds' investment activities and provide the administrative services and facilities which are necessary to the operation of such Funds' business. Such subsidiary companies also conduct research and provide investment advisory services and, subject to and in accordance with any directions such Funds' boards may issue from time to time, such subsidiary companies determine which securities such Funds will purchase, hold or sell. In addition, such subsidiary companies take all steps necessary to implement such decisions, including the selection of brokers and dealers to execute transactions for such Funds, in accordance with detailed criteria set forth in the management agreement for such Funds and applicable law and practice. Similar services are rendered with respect to the Other Assets. Generally, the Company or a subsidiary provides and pays the salaries of personnel who serve as officers of the Franklin and Templeton funds, including the President and such other administrative personnel as are necessary to conduct such Funds' day-to-day business operations, including maintaining a Fund's portfolio records, answering shareholder inquiries, providing information, creating and publishing literature, compliance with securities regulations, accounting systems and controls, preparation of annual reports and other administrative activities. The Funds generally pay their own expenses such as legal and auditing fees, reporting and board and shareholder meeting costs, SEC and state registration and similar expenses. Generally, the Funds pay advisory companies a fee payable monthly based upon a Fund's net assets. Annual rates under the various investment management agreements range from .15% to a maximum of 2.00% and are generally reduced as average net assets exceed various threshold levels. The investment management agreements permit advisory companies to act as an advisor to more than one Fund so long as such companies' ability to render services to each of such Funds is not impaired, and so long as purchases and sales appropriate for all such Funds are made on a proportionate or other equitable basis. Management of the Company and the directors of the Funds regularly review the Fund fee structures in light of Fund performance, the level and range of services provided, industry conditions and other relevant factors. Advisory fees are generally waived or voluntarily reduced when a new Fund is first established and then increased to contractual levels with the growth in net assets. The investment advisory services provided by such advisory companies include fundamental investment research and valuation analyses, encompassing original country, industry and company research, company visits and inspections, and the utilization of such sources as company public records and activities, management interviews, company prepared information, and other publicly available information, as well as analyses of suppliers, customers and competitors. In addition, research services provided by brokerage firms are used to support other research. In this regard, some brokerage business from the Funds is allocated in recognition of value-added research services received. Fixed-income research includes economic analysis, credit analysis and value analysis. The economic analysis function monitors and evaluates numerous factors that influence the supply and demand for credit on a worldwide basis. Credit analysts research the credit worthiness of debt issuers and their individual short-term and long-term debt issues. Yield spread differential analysis reviews the relative value of market sectors that represent buying and selling opportunities. Additional shareholder administrative services are provided by FTIS, which receives administrative fees from the Funds for providing shareholder record keeping services and for acting as transfer and dividend-paying agent for the Funds. As of September 30, 1996, such compensation was based upon an annual fee per shareholder account, ranging between $10.00 and $23.50, a pro-rated portion of which was paid monthly. DISTRIBUTION AND MARKETING Distributors acts as the principal underwriter and distributor of shares of the Franklin and Templeton open-end funds. Pursuant to underwriting agreements with the Funds, Distributors generally pays the expenses of distribution of Fund shares. Although the Company does significant advertising and sales promotions through media sources, Fund shares are sold primarily through a large network of independent participating securities dealers. As of September 30, 1996, approximately 3,674 local, regional and national securities brokerage firms offered shares of the Franklin and Templeton funds for sale to the investing public. The Company has approximately 55 "wholesalers" who interface with the broker-dealer community. Fund shares are offered to individual investors, qualified groups, trustees, IRA and profit sharing or money purchase plans, employee benefit plans, trust companies, bank trust departments and institutional investors. In addition, various management and advisory services, commingled and pooled accounts, wrap fee arrangements and various other private investment management services are offered to certain private and institutional investors. Broker-dealers are paid various fees for services in matching investors with Funds whose investment objectives match such investors' goals. Broker-dealers also assist in explaining the operations of the Funds, in servicing the account and in various other distribution services. Most of the Franklin and Templeton Funds have a multi-class share structure whereby Class I shares are sold with a maximum front-end sales charge which ranges from a low of 1.50% to a high of 5.75%. Reductions in the maximum sales charges may be available depending upon the amount invested and the type of investor. Class II shares, which were introduced during the 1995 fiscal year, have a hybrid, level load structure combining aspects of conventional front-end, back-end and level-load pricing. Class II shares are subject to an initial sales charge of 1% and are generally subject to a 1% contingent deferred sales charge on redemptions within 18 months of purchase and to higher on-going Rule 12b-1 fees described below. The multi-class structure was adopted to provide investors greater payment alternatives in implementing their investment programs. The Company's money market and institutional funds are sold to investors without a sales charge. Most of the U.S registered Templeton funds and most of the U.S. registered Franklin funds, with the exception of certain Franklin and Templeton money market funds, have also adopted distribution plans (the "Plans") under Rule 12b-1 promulgated under the 40 Act ("Rule 12b-1"). Class II shares generally have higher on-going Rule 12b-1 fees. The Plans are established for an initial term of one year and, thereafter, must be approved annually by the Fund boards and by a majority of disinterested directors. All such Plans are subject to termination at any time by a majority vote of the disinterested directors or by the Funds' shareholders. The Plans permit the Funds to bear certain expenses relating to the distribution of their shares. Fees under the Plans for Class I shares range in amount from a low of .10% per annum of average daily net assets to a high of .50% while Class II share fees range between .65% to 1 %. The implementation of the Plans provided for a lower fee on Class I shares acquired prior to the adoption of such Plans. Fees from the Plans are paid primarily to third party dealers who provide service to their shareholder accounts, as well as engage in distribution activities. Distributors may also receive reimbursement from the Funds for expenses involved in distributing the Funds, such as advertising and reimbursement for a 1% payment to dealers on sales of Class II shares, subject to the Plans' limitations on amounts. The financial effects on the Company of the distribution of the new class of shares is discussed in more detail under Item 7, "Management's Discussion of Analysis of Financial Condition and Results of Operation" (the "MD&A"), below. As of September 30, 1996, there were approximately 5.4 million shareholder accounts in the Franklin and Templeton Funds. REVENUES As shown in the table below, the Company's revenues are derived primarily from its investment management activities. Total operating revenues are set forth in the table below. Revenues from investment management fees have comprised approximately 58%, 58% and 48% in 1996, 1995 and 1994 respectively, of total operating revenue for each of the three fiscal years reported. Underwriting commissions, from gross sales and reinvestments of products subject to commissions contributed to revenues approximately 36%, 36% and 47% in 1996, 1995 and 1994 respectively. Shareholder servicing fees from mutual fund activities contributed 6%, 5% and 4% in 1996, 1995 and 1994 respectively. OPERATING REVENUES YEARS ENDED SEPTEMBER 30, ($ IN MILLIONS) 1996 1995 1994 Investment management fees $883.8 $731.3 $647.7 Underwriting and distribution fees 545.0 449.1 626.3 Shareholder servicing fees 88.7 68.7 54.6 Banking/finance, net and other 5.0 8.7 13.9 -------- --------- -------- Totals $1,522.6 $1,257.8 $1,342.5 ======== ========= ======== OTHER FINANCIAL SERVICES The Company's consumer lending, dealer auto loan and real estate businesses do not as yet contribute significantly to either the revenues or the net income of the Company. Franklin Bank's operations are limited by national banking laws and no immediate significant increase in revenues is anticipated. The real estate operations have incurred net losses since inception and the Company does not anticipate any immediate improvement in this line of business. The Company's dealer auto loan business has required the infusion of significant working capital during the prior two fiscal years, either in the form of inter-company loans or by contributions to the capital of FCC by the Company. During portions of this period, the Company experienced an increase in delinquency rates in such loans and, in response, expanded its auto loan collection efforts and tightened its underwriting policies. Delinquency rates were reduced between fiscal 1995 and 1996. A more detailed financial analysis of the financial effects of loan losses and delinquency rates, as well as the funding of this activity, is contained in the MD&A. REGULATORY CONSIDERATIONS Virtually all aspects of the Company's businesses are subject to various foreign, federal and state laws and regulations. As discussed above, the Company and a number of its subsidiaries are registered with various foreign, federal and state governmental agencies. Foreign, federal and state laws and regulations grant such supervisory agencies broad administrative powers, including the power to limit or restrict the Company from carrying on its business if it fails to comply with such laws and regulations. In such event, the possible sanctions which may be imposed include the suspension of individual employees, limitations on the Company's (or a subsidiary's) engaging in business for specified periods of time, the revocation of the investment advisor or broker-dealer registrations of subsidiaries and censures and fines. The Company's officers, directors and employees may from time to time own securities which are also held by the Funds. The Company's internal policies with respect to individual investments require prior clearance and reporting of transactions and restrict certain transactions so as to reduce the possibility of conflicts of interest. To the extent that existing or future regulations affecting the sale of Fund shares or other investment products or their investment strategies cause or contribute to reduced sales of Fund shares or investment products or impair the investment performance of the Funds or such other investment products, the Company's aggregate assets under management and its revenues might be adversely affected. Changes in regulations affecting free movement of international currencies might also adversely affect the Company. In 1993, the NASD received SEC approval for a new Rule of Fair Practice which limits the amount of aggregate sales charges which may be paid in connection with the purchase and holding of investment company shares sold through brokers. The Rule provides that funds with an asset-based sales charge (most commonly provided in Distribution Plans pursuant to SEC 40 Act Rule 12b-1) may impose no more than 6.25% - 7.25% (depending upon whether or not the fund also pays "service fees") in combined front-end, deferred sales charges and asset-based sales charges. The effect of that Rule might be to limit the amount of fees that could be paid pursuant to a fund's 12b-1 Plan in a situation where a fund has no, or limited new sales for a prolonged period of time. In that event, it is possible that a fund which was experiencing weak sales would have the situation exacerbated by the fact that it would have to limit fees to brokers under its 12b-1 Plan, or reduce its up front sales charge. None of the Franklin or Templeton funds are in, or close to, that situation at the present time. COMPETITION The financial services industry is highly competitive. In the United States, there are over 6,100 mutual funds of varying sizes, investment policies and objectives whose shares are being offered to the public. During the past three fiscal years, assets under management in the mutual fund industry increased by over $1.35 trillion, a 68.5% growth rate. Over this same time period, the Company experienced an approximate approximately 1.13% decline in overall market share. While the Company's assets and associated revenues still grew substantially during this time period, substantial asset under management growth occurred for other fund management companies whose asset bases were more heavily oriented to domestic equities. Such growth was due to record domestic equity market appreciation during this period as well as increased asset flows into domestic equity products. The substantial returns available in the domestic equity marketplace had a negative effect on sales of fixed-income products. The combined effect of these two events were a significant factor in the Company's market share decline. The Company believes that its strong fixed-income base coupled with its strong global presence will serve its competitive needs well over time. The Company continues its focus on service to customers, performance on investments and extensive marketing activities with its strong broker-dealer and other financial institution distribution network. The Company advertises the Franklin Templeton Group in major national financial publications, as well as on radio and television to promote name recognition and to assist its distribution network. Such activities included purchasing network and cable programming, sponsorship of sporting events, sponsorship of The Nightly Business Report on public television and extensive newspaper and magazine advertising. Competition for sales of Fund shares is influenced by various factors, including general securities market conditions, government regulations, global economic conditions, portfolio performance, advertising and sales promotional efforts, share distribution channels and the type and quality of dealer and shareholder services. Many securities dealers, whose large retail distribution systems play an important role in the sale of shares in the Franklin and Templeton funds, also sponsor competing proprietary mutual funds. The Company believes that such securities dealers value the ability to offer customers a broad selection of investment alternatives and will continue to sell Franklin and Templeton funds, notwithstanding the availability of proprietary products. However, to the extent that these firms limit or restrict the sale of Franklin and Templeton funds shares through their brokerage systems in favor of their proprietary mutual funds, assets under management might decline and the Company's revenues might be adversely affected. Although the Company believes that it has substantially improved its competitive position and has substantially benefited from the Templeton Acquisition and the wide variety of global investment products now available to its customers, the shift in asset mix from primarily a fixed-income base to a combination of fixed-income and global equities has increased the possibility of volatility in the Company's managed portfolios due to the increased percentage of equity investments held. Another element of competition among mutual funds is the rates at which fees and sales charges are imposed. The Company believes that its investment management and other fee structures are already relatively competitive and does not presently anticipate significant competitive pressures for further reductions. However, a number of mutual fund sponsors presently market their funds without sales charges. As investor interest in the mutual fund industry has increased, competitive pressures have increased on sales charges of broker-dealer distributed funds. The Company believes that, although this trend will continue, a significant portion of the investing public still relies on the services of the broker-dealer community, particularly during weaker market conditions. However, in response to competitive pressures or for other similar reasons, the Company might be forced to lower or further adjust sales charges which are currently substantially reallowed to broker-dealers. The reduction in such sales charges could make the sale of shares of the Franklin and Templeton funds somewhat less attractive to the broker-dealer community, which could in turn have a material adverse effect on the Company's revenues. The Company believes that it is well positioned to deal with such changes in marketing trends as a result of its already extensive advertising activities and broad based marketplace recognition. In addition to competition from other investment company managers and investment advisors, the Company and the investment company industry are in competition with the financial services and other investment alternatives offered by stock brokerage and investment banking firms, insurance companies, banks, savings and loan associations and other financial institutions. Many of these competitors have substantially greater resources than the Company. Although the banking industry continues to expand its sponsorship of proprietary funds distributed through third party distributors, the Company has and continues to actively pursue sales relationships with banks and insurance companies to broaden its distribution network in response to such competitive pressures. However, as with proprietary products offered by the Company's broker-dealer network, to the extent that banks limit or restrict the sale of Franklin and Templeton share through their distribution systems in favor of their proprietary mutual funds, assets under management might decline and the Company's revenues might be adversely affected. In addition, competitive pressures have led to increased demands for distribution costs for broker-dealer distributed funds, which could have a negative impact on the Company's profit margins and net income. SPECIAL CONSIDERATIONS GENERAL As discussed above, the Company's revenues are derived primarily from investment management activities. Broadly speaking, the direction and amount of change in the net assets of the Funds are dependent upon two factors: (1) the level of sales of shares of the funds as compared to redemptions of shares of the funds; and (2) the increase or decrease in the market value of the securities owned by the Funds. A significant portion of the Company's assets under management are fixed-income securities. Fluctuations in interest rates and in the yield curve will have an effect on fixed-income assets under management as well as on the flow of monies to and from fixed-income funds and, therefore, on the Company's revenues from such funds. In addition, the impact of changes in the equity marketplace may significantly affect assets under management. Management believes, however, that diversity of the Franklin Templeton Group is more competitive as a result of a greater diversity of product mix available to its customers. Market values are affected by many things, including the general condition of national and world economics and the direction and volume of changes in interest rates and/or inflation rates. The effects of these factors on equity funds and fixed-income funds often operate inversely and it is, therefore, difficult to predict the net effect of any particular set of conditions on the level of assets under management. Although the Company and its assets under management are subject to political and currency risks, due to its international activities, as is discussed in more detail in the MD&A, its exposure to fluctuations in foreign currency markets and to fixed-asset value depreciation is limited. ITEM 2. PROPERTIES GENERAL The Company owns or leases offices and facilities in nine (9) locations in the immediate vicinity of its principal executive and administrative offices located at 777 Mariners Island Boulevard, San Mateo, California. In addition, the Company owns four (4) buildings near Sacramento, California, as well as two (2) buildings in St. Petersburg, Florida, one (1) building in Phoenix, Arizona, one (1) building in Nassau, Bahamas and a floor of a high rise office building in Singapore. The Company also is currently in the process of constructing three (3) new buildings in St. Petersburg, Florida and one (1) new building in Nassau, Bahamas. The Company also leases facilities in various locations on a national and worldwide basis. Since the Company is operated on a unified basis, corporate activities, fund related activities, accounting operations, sales, real estate and banking operations, auto loans and credit cards, management information system activities, publishing and printing operations, shareholder service operations and other business activities and operations take place in a variety of such locations. The Company or its subsidiaries lease office space in Florida, New York, and Utah and in several other states. In addition, the Company or its subsidiaries lease office space in Argentina, Australia, Bermuda, Canada, France, Germany, Hong Kong, India, Italy, Japan, Luxembourg, Poland, Russia, Scotland, South Africa, and Vietnam. The Company is in the process of leasing new office space in Hungary. PROPERTY DESCRIPTION LEASED The Company leases properties at the locations set forth below: Approxi-mate Approxi-mate LOCATION SQUARE FOOTAGE MONTHLY RENTAL EXPIRATION DATE ---------------------- ----------- ----------- ---------------- 777 Mariners Island Blvd. San Mateo, CA 94404 177,000 $433,000 February 16, 2001 1147 & 1149 Chess Drive Foster City, CA 94404 121,000 $132,000 June, 2000 1810 Gateway Drive San Mateo, CA 49,000 $79,000 Late 1997 901 & 951 Mariners Island Blvd. Between March, 1999 San Mateo, CA 34,000 $60,000 & April, 2000 2 Waters Drive San Mateo, CA 49,000 $74,000 July, 1999 1850 Gateway Drive San Mateo, CA 23,000 $34,000 July, 2000 Ft. Lauderdale, FL (Templeton) 83,000 $185,000 December, 2000 Other U.S. Locations 47,000 Foreign Operations 110,000 OWNED The Company maintains a customer service facility in the property that it owns at 10600 White Rock Road, Rancho Cordova, California, near Sacramento, California. The Company occupies 75,000 square feet in this property and has leased out 46,000 square feet to a third party until February, 2000 at an approximate monthly rental of $65,000. The Company owns an additional twenty-seven acres of adjoining land on which it has constructed two office buildings of approximately 67,000 square feet each and a data center/warehouse facility of approximately 162,000 square feet. The Company plans to develop additional facilities on this property, but has not yet commenced construction. The Company also owns and occupies an office building with approximately 69,000 square feet of office space at 1800 Gateway Drive, San Mateo, California. The Company owns two facilities in St. Petersburg, Florida: an approximately 90,000 square foot office building primarily devoted to shareholder servicing activities; and an approximately 117,000 square foot facility devoted to a computer data center and training and mailing operations. The Company has purchased approximate twenty-eight acres of land in St. Petersburg on which it has commenced construction of three office buildings of approximately 70,000 square feet each. The Company plans to develop additional facilities on this property in the future. The Company also owns an approximately 14,000 square foot office building in Nassau, Bahamas, as well as a nearby condominium residence. The Company has commenced construction of a second office building, adjacent to the existing office building, of approximately 25,000 square feet. Completion of the building is expected by early 1997. OTHER The Company is the sole limited partner with a 60% partnership interest in Mariner Partners, a California limited partnership formed in 1984 to develop, operate and hold the property occupied by the Company at 777 Mariners Island Boulevard. Mariner Partners obtained 30 year non-recourse financing for the property from Metropolitan Life Insurance Company at an interest rate of 8-7/8%. The principal balance outstanding as of September 30, 1996, was $25.6 million. The loan was due in November, 1996. In December, 1996, Mariner Partners extended the loan with Metropolitan Life Insurance Company until November, 2002. Interest rate on the loan during the extension period is 8.10% per annum. ITEM 3. PENDING LEGAL PROCEEDINGS There are no material pending legal proceedings which the Company or any of its subsidiaries was a party, or of which any of their property is the subject; nor are any such proceedings known to be contemplated by any governmental authorities. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY OWNERS During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of security holders. EXECUTIVE OFFICERS OF REGISTRANT The executive officers of the Company are: NAME AGE PRINCIPAL OCCUPATION Charles B. Johnson 63 President, Chief Executive Officer and Director of the Company; Chairman and Director, Franklin Advisers, Inc. and Franklin/Templeton Distributors, Inc.; Director, Templeton Worldwide, Inc., Franklin Bank, Franklin/Templeton Investor Services, Inc., Franklin Mutual Advisers, Inc. and General Host Corporation; officer and/or director, as the case may be, of most other principal domestic subsidiaries of the Company; officer and/or director, trustee or managing general partner, as the case may be, of 56 of the investment companies in the Franklin Templeton Group of Funds. Harmon E. Burns 51 Executive Vice President, Director and Secretary of the Company; Executive Vice President and Director of Franklin/Templeton Distributors, Inc., Executive Vice President of Franklin Advisers, Inc.; Director, Templeton Worldwide, Inc., Franklin/Templeton Investor Services, Inc., Franklin Bank and Franklin Mutual Advisers, Inc.; officer and/or director, as the case may be, of most other principal domestic subsidiaries of the Company; officer and/or director, trustee or managing general partner, as the case may be, of 60 of the investment companies in the Franklin Templeton Group of Funds. Rupert H. Johnson, Jr. 56 Executive Vice President and Director of the Company; Director and President, Franklin Advisers, Inc.; Director and Executive Vice President, Franklin/Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services, Inc., Templeton Worldwide, Inc., Franklin Bank and Franklin Mutual Advisers, Inc.; officer and/or director, trustee or managing partner, as the case may be, of most other principal domestic subsidiaries of the Company; and of 60 of the investment companies in the Franklin Templeton Group of Funds. Kenneth V. Domingues 64 Senior Vice President of the Company, Franklin Advisers, Inc. and Franklin/Templeton Distributors, Inc.; Chief Financial Officer and Chief Accounting Officer from August 1986 to March 1993; officer and/or director, as the case may be, of other subsidiaries of the Company; and officer and/or managing general partner, as the case may be, of 37 of the investment companies in the Franklin Templeton Group of Funds. Martin L. Flanagan 36 Senior Vice President, Chief Financial and Accounting Officer and Treasurer of the Company; Senior Vice President of Franklin Advisers, Inc., Executive Vice President and Director of Templeton Worldwide, Inc.; President, Chief Executive Officer and Director of Templeton Global Investors, Inc.; officer of most of the subsidiaries of the Company since March, 1993; and officer and/or director, trustee or managing partner, as the case may be, of most other principal domestic subsidiaries of the Company; and of 60 of the investment companies in the Franklin Templeton Group of Funds. Deborah R. Gatzek 48 Senior Vice President of the Company since March 1990; General Counsel since January 1996; Vice President of the Company from March, 1986 to March 1990; Senior Vice President, Franklin/Templeton Distributors, Inc.; Vice President, Franklin Advisers, Inc.; and an officer of most other principal domestic subsidiaries of the Company; and officer of 60 of the investment companies in the Franklin Templeton Group of Funds. Charles E. Johnson 40 Senior Vice President of the Company; President and Director, Templeton Worldwide, Inc.; President, Franklin Institutional Services Corporation and Franklin Mutual Advisers, Inc.; Senior Vice President, Franklin/Templeton Distributors Inc.; Chairman, Franklin Agency, Inc.; Vice President, Franklin Advisers, Inc.; officer and/or director, as the case may be, of other domestic and international subsidiaries of the Company; officer, director, trustee or managing general partner, as the case may be, of 39 of the investment companies in the Franklin Templeton Group of Funds. William J. Lippman 71 Senior Vice President since March 1990; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee of seven of the investment companies in the Franklin Group of Funds. Until June 1988, President, Chief Executive Officer, and Director of L.F. Rothschild Fund Management, Inc., Director of L.F. Rothschild Asset Management, Inc., Administrative Managing Director and Director of L.F. Rothschild & Co., Incorporated. Jennifer J. Bolt 32 Vice President of the Company since June 1994; Executive Vice President, Franklin Bank since August 1993; President, Franklin Capital Corporation, since November 1993; employed by the Company in various other capacities for more than the past five (5) years. Loretta Fry 64 Vice President of the Company; Vice President, Franklin Advisers, Inc. and Franklin/Templeton Distributors, Inc.; employed by the Company in various administrative and operations capacities for more than five years. Donna S. Ikeda 40 Vice President since October 1993; re-joined the Company in August 1993. Previously employed from 1982 to 1990 as Director of Human Resources and also held position as Manager/AVP of Shareholder Services, Retirement Plan Phone Service and Customer New Accounts. From 1990 until August 1993, Vice President, Human Resources for G.T. Capital Management, Inc. and G.T. Global Financial Services, Inc., mutual fund management and financial services companies. Gregory E. Johnson 35 Vice President of the Company since June 1994; President, Franklin/Templeton Distributors, Inc. since September 1994; Vice President, Franklin Advisers, Inc. Prior to that time, Senior Vice President and Assistant National Sales Manager, Franklin/Templeton Distributors, Inc.; Employee of Franklin Resources, Inc. and its subsidiaries in administrative and portfolio management capacities since January 1986; officer of one investment company in the Franklin Group of Funds. Gordon F. Jones 49 Vice President and Chief Information Officer of the Company since March 1995. From March 1990 to March 1995, Vice President of Novell, Inc., a worldwide network systems company; Vice President and Chief Information Officer of Novell, Inc. from March 1994 to March 1995. Leslie M. Kratter 51 Vice President of the Company since March 1993. Employed by the Company since January 1992. Secretary of Franklin Advisers, Inc., Franklin/Templeton Distributors, Inc., Templeton Worldwide, Inc., and a number of the Company's subsidiaries. For more than five (5) years prior to that time, Mr. Kratter served as Executive Vice President and General Counsel of IASCO, a privately held company engaged in providing aviation services, municipal governmental services and agricultural investments. Kenneth A. Lewis 35 Vice President and Corporate Controller of the Company, Senior Vice President and Controller of Templeton Worldwide, Inc., and an officer of several other domestic subsidiaries of the Company. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Peter M. Sacerdote, a director of the Company, is a brother-in-law of Charles B. Johnson and Rupert H. Johnson, Jr. Charles E. Johnson is the son of Charles B. Johnson and the nephew of Rupert H. Johnson, Jr. and Peter Sacerdote. Gregory E. Johnson is the son of Charles B. Johnson, the nephew of Rupert H. Johnson, Jr. and Peter Sacerdote and the brother of Jennifer Bolt and Charles E. Johnson. Jennifer Bolt is the daughter of Charles B. Johnson, the niece of Rupert H. Johnson, Jr. and Peter Sacerdote, and the sister of Charles E. Johnson and Gregory E. Johnson. Leslie M. Kratter is the spouse of Deborah R. Gatzek. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information About the Company`s Common Stock The Company's common stock is traded on the New York Stock Exchange ("NYSE") and the Pacific Stock Exchange under the ticker symbol BEN and the London Stock Exchange under the ticker symbol FKR. On September 30, 1996, the closing price of the Company's common stock on the NYSE was $66 3/8 per share. At December 2, 1996, there were approximately 2,000 shareholders of record. In addition, the Company estimates that there are approximately 15,000 beneficial shareholders whose shares are held in street name. The high and low sales prices by quarter for the 1996 and 1995 fiscal years, as traded on the NYSE Composite Tape, were as follows: 1996 Fiscal Year 1995 Fiscal Year Quarter High Low High Low - ------------------- -------- -------- -------- --------- October-December 58 46 3/4 41 3/8 34 January-March 59 1/8 46 3/8 40 33 April-June 61 3/4 53 5/8 46 1/8 38 1/4 July-September 68 5/8 51 3/4 58 42 1/2 The Company declared dividends of $0.44 per share in fiscal 1996 and $0.40 per share in fiscal 1995. The Company expects to continue paying dividends on a quarterly basis to common stockholders depending upon earnings and other relevant factors. ITEM 6. SELECTED FINANCIAL HIGHLIGHTS (in 000's, except Assets under Management and per share amounts ) SELECTED FINANCIAL HIGHLIGHTS As of and for the years ended September 30, In thousands,except assets under management and per share amounts 1996 1995 1994 1993 1992 - ------------------- ----------- ----------- ---------- ----------- ---------- Summary of Operations Operating revenues $1,522,568 $1,257,797* $1,342,541* $1,176,519* $ 749,974* Net income $ 314,730 $ 268,945 $251,308 $ 175,522 $ 124,051 Financial Data Total assets $2,374,167 $2,244,681 $1,968,758 $1,581,534 $ 834,287 Long-term debt $ 399,462 $ 382,367 $383,668 $ 454,820 $ 155,541 Stockholders' equity $1,400,591 $1,161,043 $930,815 $ 720,378 $ 467,209 Assets Under Management (in millions) $ 151,552 $ 130,837 $ 118,172 $ 170,490 $ 69,218 Per Common Share Earnings Primary $3.78 $3.24 $3.00 $2.12 $1.59 Fully diluted $3.76 $3.20 $3.00 $2.10 $1.59 Cash dividends $0.44 $0.40 $0.32 $0.28 $0.26 Average stockholders' equity $15.92 $13.82 $11.09 $8.77 $5.99 *Reflects reclassification of underwriting and distribution expense. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Franklin Resources, Inc. and its majority-owned subsidiaries (the "Company") derives substantially all of its revenue and net income from providing investment management, administration, distribution and related services to the Franklin Templeton funds, institutional accounts and other investment products. The Company's revenues are derived largely from the amount and composition of assets under its management. The Company has a diversified base of assets under management and a full range of investment products and services to meet the needs of most individuals and institutions. During 1996, assets under the Company's management grew to $151.6 billion, an increase of $20.8 billion (16%) over September 30, 1995, as a result of both net sales and market appreciation. The Company operates in five geographic areas of the world: the United States, Canada, the Bahamas, Europe and Asia/Pacific. At September 30, 1996, the Company had offices in 17 countries. The contributions to the Company's operating profits from non-U.S. operations increased in 1996 principally as a result of an increase in fee revenue from investment management services provided by its foreign subsidiaries. In the future, the contribution to operating revenue and operating profit from non-U.S. operations will be dependent upon the amount and composition of assets managed by the Company's non-U.S. subsidiaries. Despite the Company's global presence, its exposure to adverse fluctuations in foreign currency markets is limited because a material portion of the foreign subsidiaries' revenues and the majority of their monetary assets are U.S. and Canadian dollar denominated. Furthermore, custody of a material portion of the foreign subsidiaries' monetary assets are held with U.S. financial institutions. Approximately 98% of the Company's operating revenues were earned in U.S. and Canadian dollars in both 1996 and 1995. The Company has not deemed it necessary to enter into foreign currency hedging transactions. The Company participates in the financial derivatives markets to manage its exposure to interest-rate fluctuations. The Company has entered into interest-rate swap agreements to convert interest payment obligations under-variable rate debt instruments to fixed-rate interest payment obligations. (See Note 6 to the financial statements.) Results of Operations For the years ended September 30, In millions, except per share amounts % % and percentages 1996 1995 change 1995 1994 change - ------------------- ------ ------ ------ ------- ------ ----- Net income $314.7 $268.9 17% $268.9 $251.3 7% Earnings per share: Primary $3.78 $3.24 17% $3.24 $3.00 8% Fully-diluted $3.76 $3.20 18% $3.20 $3.00 7% Operating margin 27% 29% - 29% 27% - Net income for 1996 increased 17% primarily due to a 21% increase in investment management, underwriting and distribution fee revenue generated by increased assets under management. Operating expenses increased at a higher rate than operating revenues during 1996, resulting in a decline in the operating margin. Underwriting and distribution expenses increased 32%, reflecting increased sales of retail mutual funds as well as overall increases in costs associated with distributing the Company's products. Employment costs increased 25%, reflecting the Company's commitment to reward excellent performance of its employees. Net income for 1995 increased 7% primarily as a result of a 13% increase in investment management fee revenue. Results of operations 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 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 expected to increase with the Company's continued expansion, the increase in competition and the Company's continued commitment to improving its products and services. These endeavors will likely result in an increase in selling expenses, employment costs, and other general and administrative expenses. ASSETS UNDER MANAGEMENT As of the years ended September 30, In billions 1996 1995 1994 - ---------------------------------- ------- -------- ------- Franklin Templeton Group: Fixed-income funds: Tax-free income $42.5 $40.4 $39.4 U.S. government fixed-income (primarily GNMAs) 15.6 14.7 14.7 Taxable and tax-free money funds 2.8 2.8 2.6 Global/international fixed-income 2.9 2.8 2.5 - ---------------------------------- ------- -------- ------- Total fixed-income funds 63.8 60.7 59.2 Equity/income funds: Global/international equity 47.2 36.0 28.1 U.S. equity/income 19.2 17.2 17.5 - ---------------------------------- ------- -------- ------- Total equity/income funds 66.4 53.2 45.6 Total Franklin Templeton fund assets 130.2 113.9 104.8 Franklin Templeton institutional assets 21.4 16.9 13.4 - ---------------------------------- ------- -------- ------- Total Franklin Templeton Group $151.6 $130.8 $118.2 Changes in Assets Under Management As of and for the years ended September 30, In billions 1996 1995 1994 - ---------------------------------- ------- -------- ------- Assets under management - beginning $130.8 $118.2 $107.5 Sales and reinvestments, net of underwriting commissions 35.7 27.9 41.1 Redemptions (21.5) (22.5) (28.8) Market appreciation/(depreciation) 6.6 7.2 (1.6) - ---------------------------------- ------- -------- ------- Assets under management - ending $151.6 $130.8 $118.2 Assets under the Company's management increased by $20.8 billion (16%) in fiscal 1996, $12.6 billion (11%) in fiscal 1995 and $10.7 billion (10%) in fiscal 1994, respectively. As shown in the previous table, the composition of assets under management has changed over the past three years. This development is a result of changes in relative sales, redemptions and market value among the specific asset classes. Fixed-income funds represented 42% of assets under management at September 30, 1996 as compared to 46% and 50% at September 30, 1995 and 1994, respectively. This trend reflects investors' recent preference for equity/income funds and the relatively higher level of market appreciation of those funds during the periods under review. Equity/income funds represented 44% of assets under management at September 30, 1996, as compared to 41% and 39% at September 30, 1995 and 1994, respectively. Institutional assets under management, comprised of predominantly global/international equity portfolios, represented 14%, 13% and 11% of the Company's assets under management at September 30, 1996, 1995 and 1994, respectively, and is consistent with the growth rate experienced with the Company's other equity products. The Company continues to expand the services it provides in this area. Operating Revenues Investment management fees: For the years ended September 30, In millions 1996 1995 1994 - --------------------------- -------- --------- -------- Revenues $883.8 $731.3 $647.7 12- month average assets under management $141,078 $121,666 $115,443 The Company's revenues from investment management fees are derived primarily from contractual fixed-fee arrangements that are based upon the level of assets under management with open-end and closed-end investment companies and managed accounts. Under the various investment management agreements, annual rates vary and generally decline as the average net assets of the portfolios exceed certain threshold levels. Investment management services provided to Franklin Templeton funds are reviewed and approved annually by each fund's Board of Directors/Trustees. There have been no significant changes in the investment management fee structures for the Franklin Templeton funds in the periods under review. Investment management fees for 1996 increased $152.5 million (21%) over 1995, which increased $83.6 million (13%) over 1994. Management fees grew at a faster rate than average assets under management in both 1996 and 1995. This was the result of a shift in composition of average assets under management to higher fee equity and income funds during the years under consideration. Underwriting and distribution fees: For the years ended September 30, In millions 1996 1995 1994 Revenues $545.0 $449.1 $626.3 Gross fund sales of products subject to commissions $23,018 $15,458 $22,460 Revenues from underwriting commissions are earned primarily from fund sales. Most sales of Franklin Templeton funds include a sales commission, of which a significant portion is reallowed to selling intermediaries. Certain subsidiaries of the Company act as distributors for its sponsored mutual funds and receive distribution fees, including 12b-1 fees, from those funds in reimbursement for distribution expenses incurred. A significant portion of distribution fees are reallowed to selling intermediaries. Distribution fees are generally based on the level of assets under management. Underwriting and distribution fees increased 21% in 1996 largely due to increased retail mutual fund sales partially offset by a decrease in effective commission rates. Effective commission rates declined as relative sales of products with lower commission rates such as Class II shares and annuity products increased. Underwriting and distribution fees for 1995 decreased 28% due to lower retail mutual fund sales and changes made to fund commission structures. Shareholder servicing fees: For the years ended September 30, In millions 1996 1995 1994 - ----------------------------- -------- -------- -------- Revenues $88.7 $68.7 $54.6 Number of accounts 5.4 4.7 4.4 Shareholder servicing fees are generally fixed charges per account which vary with the particular type of fund and the service being rendered. Shareholder servicing fees for 1996 increased $20.0 million (29%). This increase was in part the result of a 15% increase in retail fund shareholder accounts. Also, effective July 1, 1995, approximately 85 of the Company's U.S. mutual funds consisting of approximately 2.5 million shareholder accounts implemented an average annual increase of $4 per shareholder account. Shareholder servicing fees for 1995 increased $14.1 million (26%). The increase was due to an increase in retail shareholder accounts and the fee increase described above. Banking/finance, net and other: For the years ended September 30, In millions, except percentages 1996 1995 1994 - ----------------------------------- ------- ------- -------- Revenues $ 47.3 $ 54.5 $ 31.5 Provision for loan losses (16.7) (17.2) (5.4) Interest expense (25.6) (28.6) (12.2) - ----------------------------------- ------- ------- -------- $ 5.0 $ 8.7 $ 13.9 Yield on average earning assets 8.8% 9.0% 9.6% Cost of average interest-bearing liabilities 6.4% 5.9% 4.7% Banking/finance, net and other decreased 43% in 1996 as compared to a 37% decrease in 1995. 1996 revenues and related interest expense decreased in large part due to a 23% reduction in the net loan receivable balance as the Company's more stringent underwriting policies have resulted in a decrease in the number of new loans written. The provision for loan losses has decreased in 1996 due to a reduction in delinquency rates, with 4.0% past due at the end of 1996 as compared to 5.3% at the end of 1995. Actual charge-offs have increased 24% in 1996 as the Company has aggressively written off accounts it deems uncollectible. The Company substantially increased its auto loan portfolio during fiscal year 1994 as it expanded this business activity. Because a substantial portion of the portfolio was new, the impact of delinquency and loss trends was not fully reflected in the financial performance of the Company until fiscal 1995. The decrease in banking/finance, net and other in 1995 was due primarily to an increase in the provision for loan losses and interest expense attributable to the banking/finance group. Commencing in 1994, a portion of the banking/finance group's loans receivable were financed through the Company. The interest expense on the amount funded by the Company was $8.5 million and $18.3 million in 1996 and 1995, respectively. The decrease during 1996 was a result of decreased borrowings needed to fund the auto loan and credit card portfolios. Operating Expenses For the years ended September 30, In millions 1996 1995 1994 - ------------------------------ --------- -------- -------- Underwriting and distribution $542.4 $412.0 $529.8 Employee related 325.1 260.1 251.3 General and administrative 148.0 129.1 107.3 Advertising and promotion 71.7 70.1 69.1 Amortization of intangible assets 18.3 18.3 18.3 - ------------------------------ --------- -------- -------- $1,105.5 $889.6 $975.8 Underwriting and distribution includes sales commissions and distribution fees paid to brokers and other third party intermediaries. During 1995, many of the U.S. Franklin and Templeton funds introduced a new class of shares, called Class II shares, which pay brokers sales commissions and distribution fees that are only partially recovered by the Company through distribution fee revenues. During 1996, distribution expenses increased at a greater rate than distribution revenues because of the relatively higher growth in the sales of Class II shares and similar products sold primarily by the Company's Canadian subsidiary. In 1995, underwriting and distribution expenses decreased primarily due to the decrease in the sales of retail mutual fund shares. While Class II shares will increase distribution expenses of the Company 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. Sales of Class II shares represented 12% and 8% of total U.S.-based long-term mutual fund new sales for 1996 and 1995, respectively. In 1994, the Company implemented an annual incentive plan which provides eligible employees payment of both cash and restricted stock. The value of the stock associated with the annual incentive plan is charged to income currently and is determined by the Company's Board of Directors based on individual performance and the Company's profit. Costs associated with restricted stock awards granted prior to the adoption of the annual incentive plan are amortized over the contract period. These deferred incentives vest through 1997. Employee related costs increased 25% and 4% in 1996 and 1995, respectively, reflecting changes in profitability of the corporation and in the number of full-time employees. The number of full-time employees increased 9% and 10% in 1996 and 1995, respectively. General and administrative expense increased in all periods under review due principally to higher technology and occupancy costs related to the general expansion of the business. Other Income (Expenses) The 1996 and 1995 increases in investment and other income resulted from increases in the average levels of interest-bearing assets, as well as $17.3 million and $2.5 million in capital gains realized on the sale of investments, in 1996 and 1995, respectively. The Company's effective interest rate at September 30, 1996, including interest on the banking/finance group debt, was 6.53% on $399.2 million of outstanding commercial paper, medium-term notes and subordinated debentures as compared to 6.17% on $465.9 million of debt outstanding at September 30, 1995. Taxes on Income The Company's effective tax rate was 31%, 30% and 31% in 1996, 1995 and 1994, respectively. The Company's effective tax rate differs from the U.S. statutory rates due to the Company's non-U.S. subsidiaries' relative contributions to taxable income. The Company does not provide taxes on these earnings, as they have been reinvested and are not expected to be remitted to the parent Company. The effective tax rate will continue to be reflective of the relative contribution of foreign earnings which are subject to reduced tax rates and are not currently included in U.S. taxable income. Financial Condition, Liquidity and Capital Resources As of September 30, 1996, stockholders' equity approximated $1.4 billion, double that of three years earlier, principally as the result of increased net income. Cash provided by operating activities increased to $359.6 million in 1996, up from $296.5 million and $274.8 million in 1995 and 1994, respectively, primarily from increased net income. Net cash provided by investing activities in 1996 increased principally due to a decrease in loan originations, an increase in the collections of banking/finance loans receivable and from proceeds from the liquidation of investments in preparation for the acquisition of the assets and liabilities of Heine Securities Corporation as discussed below. The Company used net cash of $193.7 million in 1996 for financing activities. The issuance of $134.4 million in medium-term notes and commercial paper was offset by $203.1 million in payments on debt. The Company paid $34.7 million in dividends to stockholders. During the year, the Company purchased 1.0 million shares of its common stock for $53.4 million. As of September 30, 1996, the Company had 3.9 million shares remaining under its authorized repurchase program. The Company will continue from time to time to purchase its own shares in the open market and in private transactions for use in connection with various corporate employee incentive programs and when it believes the market price of its shares merits such action. The Company's auto loan and credit card receivables business activities are subject to significant fluctuations in those consumer market places as well as to significant competition from companies with much larger receivable portfolios. Auto loan and credit card portfolio losses can also be influenced significantly by trends in the economy and credit markets which negatively impact borrowers' ability to repay loans. As of September 30, 1996, banking/finance loans receivable decreased due to net paydowns of existing loans and a decrease in funding of new loans. A portion of the proceeds from net paydowns of loans was used to reduce the receivable from the banking/finance group. As of September 30, 1996, the auto loan portfolio consisted of approximately 55% new and 45% used cars. Approximately 75% of the auto loans outstanding were in California, approximately 10% in New Mexico and the balance distributed throughout the western United States. The Company has experienced a decrease in delinquency rates since September 30, 1995, in response to its expanded auto loan collection efforts and enhanced systems supporting those activities. Future increases in the Company's investment in dealer auto loan and credit card portfolios will be funded through existing debt facilities and operating cash flows. At September 30, 1996, the Company held liquid assets of $889.9 million, including $502.2 million of cash and cash equivalents, as compared to $643.2 million and $261.7 million, respectively, at September 30, 1995. During 1996 the Company maintained a $400 million commercial paper program and a $300 million medium-term note program. The Company has also established two revolving credit and competitive auction facilities as back-up for the commercial paper program. At September 30, 1996, total back-up credit facilities were $400 million of which, $150 million was under a 364-day revolving credit facility. The remaining $250 million back-up facility has a five-year term. At September 30, 1996, approximately $750 million was available to the Company under unused credit facilities. In October 1996, the Company increased the amounts available for issuance under its medium-term note program from $100 million to $500 million. In November 1996, the holders of the subordinated debentures exercised their option to receive approximately 2.4 million shares of the Company's common stock in return for the surrender of approximately $75 million of debentures. The holders of the subordinated debentures also agreed to sell to the Company the remaining option rights and surrender the remaining debentures for cash of approximately $170 million. The transaction will be funded through available cash and the issuance of medium-term notes. On November 1, 1996, the Company and Heine Securities Corporation announced they had merged their businesses in a transaction with an approximate aggregate value of $615 million. The Company financed the transaction with 1.1 million shares of the Company's common stock and a cash payment of $550 million from cash and securities on hand, as well as its available commercial paper. In addition to the aforementioned Heine Securities Corporation acquisition and subordinated debenture option exercise, management expects that the principal needs for cash will be to fund increased property and equipment acquisitions, pay shareholder dividends, repurchase shares of the Company's common stock and repay debt and advance sales commissions for Class II shares and Canadian products. Management believes that the Company's existing liquid assets, together with the expected continuing cash flow from operations, its ability to issue stock, and its borrowing capacity under current credit facilities, will be sufficient to meet its present and reasonably foreseeable cash needs. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index Of Consolidated Financial Statements for the years ended September 30, 1996, 1995 and 1994 CONTENTS Consolidated Financial Statements of Franklin Resources, Inc.: Pages Report of Independent Accountants Consolidated Balance Sheets September 30, 1996 and 1995 Consolidated Statements of Income, for the years ended September 30, 1996, 1995, and 1994 Consolidated Statements of Stockholders' Equity, for the years ended September 30, 1996, 1995 and 1994 Consolidated Statements of Cash Flows, for the years ended September 30, 1996, 1995 and 1994 Notes to Consolidated Financial Statements All schedules have been omitted as the information is provided in the financial statements or in related notes thereto or is not required to be filed as the information is not applicable. REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Franklin Resources, Inc.: We have audited the accompanying consolidated balance sheets of Franklin Resources, Inc. and subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Franklin Resources, Inc. and subsidiaries as of September 30, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. San Francisco, California October 23, 1996, except for Note 14, for which the date is November 26, 1996 CONSOLIDATED STATEMENTS OF INCOME For the years ended September 30, - ----------------------------------------------- ------------------ ----------------- ------------------ In thousands, except share data 1996 1995 1994 - ----------------------------------------------- ------------------ ----------------- ------------------ Operating Revenues: Investment management fees $883,779 $731,252 $647,675 Underwriting and distribution fees 545,039 449,141 626,341 Shareholder servicing fees 88,715 68,701 54,613 Banking/finance, net and other 5,035 8,703 13,912 - ----------------------------------------------- ------------------ ----------------- ------------------ Total operating revenues 1,522,568 1,257,797 1,342,541 - ----------------------------------------------- ------------------ ----------------- ------------------ Operating Expenses: Underwriting and distribution 542,359 411,994 529,771 Employee related 325,135 260,097 251,337 General and administrative 147,963 129,122 107,348 Advertising and promotion 71,655 70,138 69,073 Amortization of intangible assets 18,348 18,305 18,311 - ----------------------------------------------- ------------------ ----------------- ------------------ Total operating expenses 1,105,460 889,656 975,840 - ----------------------------------------------- ------------------ ----------------- ------------------ Operating income 417,108 368,141 366,701 Other Income (Expenses): Investment and other income 50,458 29,673 22,703 Interest expense (11,336) (11,159) (26,883) - ----------------------------------------------- ------------------ ----------------- ------------------ Other income (expenses), net 39,122 18,514 (4,180) - ----------------------------------------------- ------------------ ----------------- ------------------ Income before taxes on income 456,230 386,655 362,521 Taxes on income 141,500 117,710 111,213 - ----------------------------------------------- ------------------ ----------------- ------------------ Net income $314,730 $268,945 $251,308 - ----------------------------------------------- ------------------ ----------------- ------------------ Earnings per Share: Primary $3.78 $3.24 $3.00 Fully diluted $3.76 $3.20 $3.00 The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED BALANCE SHEETS As of the years ended September 30, - ------------------------------------------------------------ ------------------- In thousands 1996 1995 - ------------------------------------------------------------- --------------- Assets Current Assets: Cash and cash equivalents $483,975 $246,184 Receivables: Fees from Franklin Templeton funds 133,453 110,972 Other 54,727 38,407 Investment securities, available-for-sale 174,156 208,478 Prepaid expenses and other 9,952 7,167 - ------------------------------------------------------------- --------------- Total current assets 856,263 611,208 - ------------------------------------------------------------- --------------- Banking/Finance Assets: Cash and cash equivalents 18,214 15,515 Loans receivable, net 345,399 450,013 Investment securities, available-for-sale 25,325 23,655 Other 4,660 6,876 - ------------------------------------------------------------- --------------- Total banking/finance assets 393,598 496,059 - ------------------------------------------------------------- --------------- Other Assets: Deferred sales commissions, net 24,316 8,473 Property and equipment, net 161,613 118,628 Intangible assets, net of $74,027 and $56,375 accumulated amortization, respectively 641,983 660,363 Receivable from banking/finance group 236,532 302,273 Other 59,862 47,677 Total other assets 1,124,306 1,137,414 - ------------------------------------------------------------- --------------- Total assets $2,374,167 $2,244,681 - ------------------------------------------------------------- --------------- The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED BALANCE SHEETS As of the years ended September 30, In thousands 1996 1995 - ------------------------------------- --------- ---------- Liabilities and Stockholders' Equity Current Liabilities: Accrued employee related $77,935 $53,238 Commissions payable 28,067 21,280 Income taxes payable 27,673 8,221 Short-term debt 427 87,204 Other 48,099 43,128 - ----------------------------------------- ---------- ----------- Total current liabilities 182,201 213,071 - ----------------------------------------- ---------- ----------- Banking/Finance Liabilities: Deposits: Interest bearing 125,124 159,627 Non-interest bearing 6,095 9,747 Payable to parent 236,532 302,273 Other 1,725 2,076 - ----------------------------------------- ---------- ----------- Total banking/finance liabilities 369,476 473,723 - ----------------------------------------- ---------- ----------- Other Liabilities: Long-term debt 399,462 382,367 Other 22,437 14,477 - ----------------------------------------- ---------- ----------- Total other liabilities 421,899 396,844 - ----------------------------------------- ---------- ----------- Total liabilities 973,576 1,083,638 - ----------------------------------------- ---------- ----------- Stockholders' Equity: Preferred stock, $1.00 par value, 1,000,000 shares authorized; none issued - - Common stock, $.10 par value, 500,000,000 shares authorized; 82,264,982 shares issued in both years; and 80,272,131 and 80,939,611 shares outstanding, for 1996 and 1995, respectively 8,226 8,226 Capital in excess of par value 101,226 92,190 Retained earnings 1,370,513 1,091,204 Less cost of treasury stock (90,301) (48,519) Other 10,927 17,942 - ----------------------------------------- ---------- ----------- Total stockholders' equity 1,400,591 1,161,043 - ----------------------------------------- ---------- ----------- Total liabilities and stockholders' equity $2,374,167 $2,244,681 - ----------------------------------------- ---------- ----------- The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY As of and for the years ended September 30, 1996, 1995 and 1994 Capital in Treas- Common Stock Excess of Retained ury Stock In thousands Shares Amount Par Value Earnings Shares Amount Other Total - ---------------- ------ ------ -------- ---------- ------- -------- ------- ---------- Balance, October 1, 1993 82,099 $8,210 $83,683 $630,399 - - $(1,914) $720,378 Net income 251,308 251,308 Unrealized gain on investment securities, 1,836 1,836 net of tax Foreign currency translation 352 352 adjustment Purchase of treasury stock (672) $(26,410) (26,410) Cash dividends on common stock (26,194) (26,194) Issuance of restricted shares, net 119 11 6,797 5 1,001 (72) 7,737 Other 47 5 1,803 1,808 - ---------------- ------ ------ -------- ---------- ------- -------- ------- --------- Balance, September 30, 1994 82,265 8,226 92,283 855,513 (667) (25,409) 202 930,815 Net income 268,945 268,945 Unrealized gain on investment securities, net of tax 13,745 13,745 Foreign currency translation 835 835 adjustment Purchase of treasury stock (1,126) (41,749) (41,749) Cash dividends on common stock (33,254) (33,254) Issuance of restricted shares, net (48) 431 17,121 3,160 20,233 Other (45) 37 1,518 1,473 - ---------------- ------ ------ -------- ---------- ------- -------- ------- ---------- Balance, September 30, 1995 82,265 8,226 92,190 1,091,204 (1,325) (48,519) 17,942 1,161,043 Net income 314,730 314,730 Unrealized loss on investment securities, net of tax (10,644) (10,644) Foreign currency translation adjustment (752) (752) Purchase of treasury stock (1,001) (53,413) (53,413) Cash dividends on common stock (35,421) (35,421) Issuance of restricted shares, net 9,672 280 9,777 4,381 23,830 Other (636) 53 1,854 1,218 Balance, September 30, 1996 82,265 $8,226 $101,226 $1,370,513 (1,993) $(90,301) $10,927 $1,400,591 The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended September 30, In thousands 1996 1995 1994 - ----------------------------------- ---------- --------- ---------- Net Income $314,730 $268,945 $251,308 Adjustments to reconcile net income to net cash provided by operating activities: Decrease (increase) in receivables prepaid expenses and other (33,405) (9,525) 1,339 Increase in deferred sales commissions, net (15,843) (5,422) (1,197) Increase (decrease) in other current liabilities 3,315 (2,529) (54,670) Increase (decrease) in income taxes payable 19,452 (9,405) 12,115 Increase in commissions payable 6,787 19,191 498 Increase (decrease) in accrued employee related 41,328 (3,137) 30,117 Depreciation and amortization 40,491 40,940 36,693 Gains on disposition of assets (17,272) (2,604) (1,396) - --------------------------------------- --------- -------- -------- Net cash provided by operating activities 359,583 296,454 274,807 - --------------------------------------- --------- --------- --------- Purchase of investments (70,768) (130,194) (39,660) Liquidation of investments 107,287 90,869 30,654 Purchase of banking/finance investments (60,936) (110,163) (97,570) Liquidation of banking/finance investments 59,316 113,265 140,547 Originations of banking/finance loans receivable (103,532) (222,341) (310,744) Collections of banking/finance loans receivable 207,664 146,963 42,529 Purchase of property and equipment (64,419) (40,365) (39,153) - --------------------------------------- --------- -------- -------- Net cash provided by (used in) investing activities 74,612 (151,966) (273,397) - --------------------------------------- --------- -------- -------- Decrease in bank deposits (38,155) (21,525) (3,937) Dividends paid on common stock (34,650) (31,688) (25,415) Purchase of treasury stock (53,413) (41,749) (26,410) Issuance of debt 134,377 34,254 399,431 Payments on debt (203,083) (32,832) (437,813) Other 1,219 375 158 - --------------------------------------- --------- -------- -------- Net cash used in financing activities (193,705) (93,165) (93,986) - --------------------------------------- --------- -------- -------- Increase (decrease) in cash and (92,576) cash equivalents 240,490 51,323 Cash and cash equivalents, beginning of year 261,699 210,376 302,952 Cash and cash equivalents, end of year $502,189 $261,699 $210,376 - --------------------------------------- --------- -------- -------- Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest, including banking/finance group interest $36,619 $28,129 $31,004 Income taxes $122,486 $125,496 $98,691 Supplemental Disclosure of Non-Cash Information: Value of common stock issued $18,667 $18,546 $8,044 The accompanying notes are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Franklin Resources, Inc. and its consolidated subsidiaries (the Company) derives substantially all of its revenues and net income from providing investment management, administration, distribution and related services to the Franklin Templeton funds, institutional accounts and other investment products that operate in the United States, Canada, Europe and other international markets under various rules and regulations set forth by the Securities and Exchange Commission, individual state agencies and foreign governments. Services to the Franklin Templeton funds are provided under contracts that definitively set forth the fees to be charged for these services. The majority of these contracts are subject to periodic review and approval by each fund's Board of Directors/Trustees and shareholders. Currently, no fund represents more than 10% of total revenues. Company revenues are largely dependent on the total value and composition of assets under management, which include domestic and international equity and debt portfolios; accordingly, fluctuations in financial markets and in the composition of assets under management impact revenues and results of operations. BASIS OF PRESENTATION The consolidated financial statements are prepared in accordance with generally accepted accounting principles which require the use of estimates made by the Company's management. Certain 1995 and 1994 amounts have been reclassified to conform to 1996 presentation. The consolidated financial statements include the accounts of Franklin Resources, Inc. and its majority-owned subsidiaries. All material intercompany accounts and transactions are eliminated except the intercompany payable from the banking/finance group to the parent to fund auto and credit card loans. Operating revenues of the banking/finance group are presented net of interest expense and the provision for loan losses. Reported interest expense excludes interest expense attributable to the banking/finance group. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, demand deposits with banks or other high credit quality financial institutions, debt instruments with original maturities of three months or less, and other highly liquid investments, including money market funds, which are readily convertible into cash. Due to the relatively short-term nature of these instruments, the carrying value approximates fair value. INVESTMENT SECURITIES The Company's investments in the Franklin Templeton funds and other securities available-for-sale are carried at fair value. Fair values for investments in Franklin Templeton funds are based on the last reported net asset value. Fair values for other investments are based on the last reported price on the exchange on which they are traded. Investments not traded on an exchange are carried at management's estimate of fair value. Realized gains and losses are included in investment income currently based on specific identification. Unrealized gains and losses are reported net of tax as a separate component of stockholders' equity until realized. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is a party to interest-rate swap agreements in effect on a portion of its long-term debt. The differential to be paid or received is accrued as the interest rates change and is recognized over the term of the agreements. The carrying value of these instruments approximated fair value (see Note 6). LOANS RECEIVABLE Interest on auto installment loans is accrued principally using the rule of 78s method, which approximates the interest method. Interest on all other loans is accrued using the simple interest method. An allowance for loan losses is established monthly based on historical experience, including delinquency and loss trends. A loan is charged to the allowance when it is deemed to be uncollectible, taking into consideration the value of the collateral, the financial condition of the borrower and other factors. Recoveries on loans previously charged off as uncollectible are credited to the allowance for loan losses. DEFERRED SALES COMMISSIONS Sales commissions paid to financial intermediaries in connection with the sale of certain share classes of open-end Franklin Templeton funds are deferred and amortized on a straight-line basis over a period of up to eighteen months for U.S.-based funds, forty months for Canadian-based funds and four years for European funds. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and are depreciated on the straight-line basis over their estimated useful lives. Expenditures for repairs and maintenance are charged to expense when incurred. Leasehold improvements are amortized on the straight-line basis over their estimated useful lives or the lease term, whichever is shorter. INTANGIBLE ASSETS At September 30, 1996 and 1995, intangible assets consist principally of the excess of cost over fair market value of the Company's acquisition of Templeton, which is being amortized on a straight-line basis over a period of forty years. The Company has evaluated the potential impairment of goodwill on the basis of the expected future operating cash flows to be derived from this intangible asset in relation to the Company's carrying value and has determined that there is no impairment. Periodically, the Company will review the carrying value of goodwill for potential impairment. RECOGNITION OF REVENUES Investment management, shareholder servicing fees, investment income and distribution fees are all accrued as earned. Underwriting commissions related to the sale of Franklin Templeton fund shares are recorded on the trade date. ADVERTISING AND PROMOTION Costs of advertising and promotion are expensed as the advertising appears in the media. FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign subsidiaries are translated at current exchange rates as of the end of the accounting period, and related revenues and expenses are translated at average exchange rates in effect during the period. Net exchange gains and losses resulting from translation are excluded from income and are recorded as a separate component of stockholders' equity. Foreign currency transaction gains and losses are reflected in income currently. EARNINGS PER SHARE Earnings per share are computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents (principally restricted stock and debenture option rights) considered outstanding during each year. The weighted average number of shares and common stock equivalents used in computing earnings per share in 1996, 1995, and 1994 were 83,313,000, 83,114,000, and 83,709,000 for primary and 83,761,000, 84,031,000, and 83,709,000 for fully diluted, respectively. 2. INVESTMENT SECURITIES Investments at September 30, 1996 and 1995 consisted of the following: 1996 Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - ------------------------ -------- --------- --------- --------- Investment securities available-for-sale: Franklin Templeton funds $116,146 $12,993 $- $129,139 Debt 10,841 240 - 11,081 Equities 1,578 2,332 (61) 3,849 Other 30,068 19 - 30,087 -------- -------- --------- --------- $158,633 $15,584 $(61) $174,156 Banking/finance group investment portfolio: U.S. treasury and other U.S. government agency $25,267 $38 $(91) $25,214 Other 110 1 - 111 -------- -------- --------- --------- $25,377 $39 $(91) $25,325 1995 ------------------ ----------------- ------------------ ------------------- Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - --------------------------------------------- ------------------ ----------------- ------------------ ------------------- Investment securities available-for-sale: Franklin Templeton funds $125,253 $14,638 $(5,957) $133,934 Debt 21,031 638 (563) 21,106 Equities 2,366 23,895 (68) 26,193 Other 26,991 255 (1) 27,245 -------------- ----------------- ------------------ ------------------- $175,641 $39,426 $(6,589) $208,478 -------------- ----------------- ------------------ ------------------- Banking/finance group investment portfolio: U.S. treasury and other U.S. government agency $23,675 $91 $(222) $23,544 Other 110 1 - 111 -------------- ----------------- ------------------ ------------------- $23,785 $92 $(222) $23,655 Investments in the Franklin Templeton funds are shares of investment companies for which the Company acts as investment manager. At September 30, 1996, debt securities, at fair value which approximates amortized cost, are as follows: Banking/ Other Finance Debt In thousands Group Securities - ---------------------------- -------- -------- Maturity: 0-1 year $23,190 $2,476 1-5 years 2,024 4,776 Greater than 5 years - 3,829 -------- --------- $25,214 $11,081 3. BANKING/FINANCE GROUP LOANS AND ALLOWANCE FOR LOAN LOSSES The banking/finance group's loans at September 30, 1996 and 1995 consisted of the following: In thousands 1996 1995 - ------------------------------- -------- --------- Auto $284,141 $400,867 Credit card 87,527 95,040 Other 6,387 6,000 -------- --------- 378,055 501,907 Unearned fees and discounts (23,092) (42,813) Allowance for loan losses (9,564) (9,081) -------- --------- Loans receivable, net $345,399 $450,013 Activity in the banking/finance group's allowance for loan losses for the years ended September 30, 1996, 1995, and 1994 was as follows: In thousands 1996 1995 1994 - ---------------------------- --------- --------- --------- Beginning balance $9,081 $3,170 $1,472 Provision for loan losses 16,691 17,189 5,415 Loans charged off (18,485) (14,879) (4,390) Recoveries 2,277 3,601 673 - ---------------------------- --------- --------- --------- Ending balance $9,564 $9,081 $3,170 For the years ended September 30, 1996, 1995, and 1994, the interest expense of the banking/finance group included in banking/finance, net and other revenues was $25.6 million, $28.6 million, and $12.2 million, respectively. The fair value of consumer loans is estimated using interest rates that consider the current credit and interest rate risk inherent in the loans and current economic and lending conditions. At September 30, 1996 and 1995, the carrying value of loans receivable approximated fair value. The fair values of the banking subsidiary's deposits subject to immediate withdrawal are equal to the amount payable on demand at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using interest rates currently offered on time deposits with similar remaining maturities. At September 30, 1996 and 1995, the carrying values of deposits subject to immediate withdrawal and of fixed-rate certificates of deposit approximated fair value. 4. PROPERTY AND EQUIPMENT The following is a summary of property and equipment at September 30, 1996 and 1995: Estimated Useful Lives In thousands in Years 1996 1995 - ---------------------------- ----------- -------- --------- Furniture and equipment 3-5 $114,228 $88,769 Premises and leasehold improvements 5-35 92,493 70,011 Leased equipment 5 2,451 7,456 Land -- 23,811 9,984 -------- --------- 232,983 176,220 Less: Accumulated depreciation and amortization (71,370) (57,592) -------- --------- $161,613 $118,628 5. SEGMENT INFORMATION The Company conducts operations in five principal geographic areas of the world: USA, Canada, the Bahamas, Europe and Asia/Pacific. Revenue by geographic area includes fees and commissions charged to customers and fees charged to affiliates. Identifiable assets are those assets used exclusively in the operations of each geographic area. Information is summarized below: 1996 Adjustment and Asia/ Elimin- Consol- In thousands USA Canada Bahamas Europe Pacific ation idated - ------------ ---------- -------- -------- -------- -------- --------- ---------- Revenues from: Unaffiliated customers $1,107,255 $100,602 $174,250 $31,753 $108,708 -- $1,522,568 Affiliates 34,452 509 1,773 13,742 5,982 $(56,458) -- - ------------ ---------- -------- -------- -------- -------- --------- ---------- Total $1,141,707 $101,111 $176,023 $45,495 $114,690 $(56,458) $1,522,568 - ------------ ---------- -------- -------- -------- -------- --------- ---------- Operating income/ (loss) $193,821 $29,131 $115,826 $742 $77,588 -- $417,108 - ------------ ---------- -------- -------- -------- -------- --------- ---------- Identifiable assets $848,156 $69,547 $432,088 $24,912 $154,503 -- $1,529,206 Corporate assets -- -- -- -- -- $844,961 844,961 - ------------ ---------- -------- -------- -------- -------- --------- ---------- Total assets $848,156 $69,547 $432,088 $24,912 $154,503 $844,961 $2,374,167 - ------------ ---------- -------- -------- -------- -------- --------- ---------- 1995 - ------------ ---------- -------- -------- -------- -------- --------- ---------- Adjust-ment and Asia/ Elimin- Consol- In thousands USA Canada Bahamas Europe Pacific ation idated - ------------ ---------- -------- -------- -------- -------- --------- ---------- Revenues from: Unaffiliated customers $948,728 $67,326 $133,545 $25,471 $82,727 -- $1,257,797 Affiliates 17,080 492 1,606 10,903 7,160 $(37,241) -- - ------------ ---------- -------- -------- -------- -------- --------- ---------- Total $965,808 $67,818 $135,151 $36,374 $89,887 $(37,241) $1,257,797 - ------------ ---------- -------- -------- -------- -------- --------- ---------- Operating income/(loss) $199,615 $22,362 $90,393 $(1,770) $57,541 -- $368,141 - ------------ ---------- -------- -------- -------- -------- --------- ---------- Identifiable assets $819,287 $43,589 $438,859 $23,681 $138,213 -- $1,463,629 Corporate assets -- -- -- -- -- $781,052 781,052 - ------------ ---------- -------- -------- -------- -------- --------- ---------- Total assets $819,287 $43,589 $438,859 $23,681 $138,213 $781,052 $2,244,681 - ------------ ---------- -------- -------- -------- -------- --------- ---------- 1994 - ------------ ---------- -------- -------- -------- -------- --------- ---------- Adjust-ment and Asia/ Elimin- Consol- In thousands USA Canada Bahamas Europe Pacific ation idated - ------------ ---------- -------- -------- -------- -------- --------- ---------- Revenues from: Unaffiliated customers $1,099,405 $50,919 $103,677 $33,509 $55,031 -- $1,342,541 Affiliates 8,699 510 1,040 567 6,214 $(17,030) -- - ------------ ---------- -------- -------- -------- -------- --------- ---------- Total $1,108,104 $51,429 $104,717 $34,076 $61,245 $(17,030) $1,342,541 - ------------ ---------- -------- -------- -------- -------- --------- ---------- Operating income/ (loss) $242,137 $15,978 $70,161 $(1,711) $40,136 -- $366,701 - ------------ ---------- -------- -------- -------- -------- --------- ---------- Identifiable assets $726,224 $39,500 $448,205 $22,443 $139,748 -- $1,376,120 Corporate assets -- -- -- -- -- $592,638 592,638 - ------------ ---------- -------- -------- -------- -------- --------- ---------- Total assets $726,224 $39,500 $448,205 $22,443 $139,748 $592,638 $1,968,758 Summarized below are the business segments: 1996 ---------- ---------- --------- Operating Identifi-able Income In thousands Assets Revenue (Loss) - ----------------------------- ---------- ---------- --------- Investment management $1,124,229 $1,517,533 $429,348 Banking/finance 393,598 3,179 (11,090) Other 11,379 1,856 (1,150) ---------- ---------- --------- Company totals $1,529,206 $1,522,568 $417,108 1995 ---------- ---------- --------- Investment management $958,200 $1,249,094 $379,288 Banking/finance 496,059 6,841 (10,217) Other 9,370 1,862 (930) ---------- ---------- --------- Company totals $1,463,629 $1,257,797 $368,141 1994 ---------- ---------- --------- Investment management $923,894 $1,328,629 $365,566 Banking/finance 443,420 12,625 2,537 Other 8,806 1,287 (1,402) ---------- ---------- --------- Company totals $1,376,120 $1,342,541 $366,701 The investment management segment's assets are primarily receivables from, and investments in, Franklin Templeton funds and goodwill from the acquisition of Templeton. The banking/finance segment's assets are primarily investment securities and consumer loans. 6. DEBT Debt at September 30, 1996 and 1995 was as follows: 1996 Weighted Average Effective Interest In thousands Rate 1996 1995 ------- ------- ------- Short-Term Debt: Current maturities of other notes and capital lease obligations -- $427 $1,283 Commercial paper -- -- 85,921 ------- ------- ------- Total short-term debt $427 $87,204 ------- ------- ------- Long-Term Debt: Notes payable 6.57% $120,000 $80,000 Commercial paper issued under long-term borrowing agreements 6.04% 128,731 150,000 Subordinated debentures 6.69% 150,000 150,000 Other notes and capital lease obligations 731 2,367 ------- ------- Total long-term debt $399,462 $382,367 Maturities of long-term debt excluding other notes and capital lease obligations are as follows (in thousands): 1997 $128,731 1998 60,000 2001 60,000 Thereafter 150,000 --------- $398,731 The Company has two back-up credit agreements with a group of commercial banks that will allow it at its option to refinance the commercial paper up to five years from the closing date, May 17, 1996. In accordance with the Company's intention and ability to refinance these obligations on a long-term basis, the outstanding balance of $128.7 million at September 30, 1996 has been classified long-term. The credit agreements include various restrictive covenants, including: a capitalization ratio, interest coverage ratio, minimum working capital and limitation on additional debt. The Company was in compliance with all covenants as of September 30, 1996. At September 30, 1996, the Company had interest-rate swap agreements maturing August through September 1999 which effectively fixed interest rates on $125 million of commercial paper. The fixed rates of interest ranged from 6.240% to 6.451%. These financial instruments are placed with major financial institutions. The creditworthiness of the counterparties is subject to continuous review and full performance is anticipated. Any potential loss from failure of the counterparties to perform is deemed to be immaterial. Subsequent to year end, the Company entered into agreements to fix interest rates on an additional $170 million of commercial paper at rates between 6.350% and 6.645%, maturing in years 1998 through 2000 (see Note 14). During 1994, the Company initiated a $300 million medium-term note program. Notes totaling $120 million were issued during fiscal year 1996. These notes mature at various times from 1998 through 2001. On October 9, 1996, the Company increased the amounts available for issuance under its medium-term note program from $100 million to $500 million. The subordinated debentures mature on August 3, 2002 and have a fixed interest rate of 6.25% per annum. Under certain circumstances, all or a portion of the debentures could pay additional interest, increasing to a maximum rate of 7.77%. The subordinated debentures have option rights which allow the holder to purchase common shares of the Company at any time during the term of the debentures, for cash or in redemption of the debentures. The Company may redeem the debentures any time after August 3, 1997, or sooner, to the extent options are exercised. The maximum number of shares purchasable under the option rights was 4,721,435 shares at September 30, 1996. The option price ranges from $29.44 to $31.77 per share and the redemption price ranges from 92.68% to 100% of face value, over the remaining term of the debentures (see Note 14). The fair values of long-term debt are estimated using interest rates currently offered to the Company for debt with similar remaining maturities. The fair value of the option rights attached to the subordinated debentures is calculated based on the Company's closing stock price and the option and redemption prices at the reporting date. At September 30, 1996 and 1995, the fair value of long-term debt approximated its carrying value. 7. INVESTMENT INCOME In thousands 1996 1995 1994 - ---------------------------- --------- --------- --------- Dividends $15,683 $12,873 $10,969 Interest 16,787 12,029 6,538 Realized gains, net 17,271 2,499 1,396 Foreign exchange losses, net (394) (355) (420) Other income 1,111 2,627 4,220 - ---------------------------- --------- --------- --------- $50,458 $29,673 $22,703 Substantially all of the Company's dividend income was generated by investments in the Franklin Templeton funds. 8. Taxes on Income Taxes on income for the years ended September 30, 1996, 1995, and 1994 were comprised of the following: In thousands 1996 1995 1994 - ----------------------------- --------- --------- --------- Current: Federal $98,803 $76,350 $87,951 State 23,118 19,969 22,257 Foreign 25,558 20,018 13,717 Deferred (benefit) expenses (5,979) 1,373 (12,712) - ----------------------------- --------- --------- --------- Total provision $141,500 $117,710 $111,213 Included in income before taxes was $225.7 million, $161.7 million, and $115.3 million of foreign income for the years ended September 30, 1996, 1995, and 1994, respectively. The major components of the net deferred tax asset (liability) as of September 30, 1996 and 1995 were as follows: In thousands 1996 1995 - --------------------------------------------- -------- --------- Deferred Tax Assets: State taxes expensed currently, deductible in following year $6,608 $5,543 Temporary differences on investment losses 2,124 3,278 Loan loss reserves 3,760 3,868 Deferred compensation 1,983 486 Restricted stock compensation plan 20,016 17,700 Net operating loss carryforwards 18,203 16,180 Other 5,077 1,478 -------- --------- Total deferred tax assets 57,771 48,533 -------- --------- Valuation allowance for net operating loss carryforwards (18,203) (16,180) -------- --------- Deferred tax assets, net of valuation allowance 39,568 32,353 -------- --------- Deferred Tax Liabilities: Temporary differences on partnership earnings $5,504 $5,516 Capitalized compensation costs 7,503 6,992 Net unrealized gains on securities 4,622 11,942 Depreciation on fixed assets 6,244 4,963 Prepaid expenses 6,019 3,309 Other 1,315 1,899 -------- --------- Total deferred tax liabilities 31,207 34,621 -------- --------- Net deferred tax asset (liability) $8,361 $(2,268) At September 30, 1996, there were approximately $20.1 million of foreign net operating loss carryforwards of which approximately $2.8 million expire in 2003 and the remaining have an indefinite life. In addition, there are approximately $192.4 million in state net operating loss carryforwards that expire between 2006 and 2011. A valuation allowance has been recognized to offset the related deferred tax assets due to the uncertainty of realizing the benefit of the loss carryforwards. A substantial portion of the undistributed earnings of the Company's foreign subsidiaries has been reinvested and is not expected to be remitted to the parent company. Accordingly, no U.S. federal or state income taxes have been provided thereon. At September 30, 1996, the cumulative amount of reinvested income for which no U.S. taxes have been provided was approximately $369 million. Determination of the amount of unrecognized deferred U.S. income tax liability related to such reinvested income is not practicable because of the numerous assumptions associated with this hypothetical calculation; however, foreign tax credits would be available to reduce some portion of this amount. The following is a reconciliation between the amount of tax expense at the federal statutory rate and taxes on income as reflected in operations for the years ended September 30, 1996, 1995, and 1994, respectively: In thousands 1996 1995 1994 - ------------------------------------------------------------------------------ - ----------------------------------- --------- -------- -------- U.S. federal statutory rate 35% 35% 35% Federal taxes at statutory rate $159,786 $135,329 $126,882 State taxes, net of federal tax effect 18,167 12,747 12,944 Foreign earnings subject to reduced tax rates for which no U.S. tax is provided (43,159) (32,956) (25,194) Other 6,706 2,590 (3,419) - ----------------------------------- --------- -------- -------- Actual tax provision $141,500 $117,710 $111,213 - ----------------------------------- --------- -------- -------- Effective tax rate 31% 30% 31% 9. COMMITMENTS The Company leases office space (including space from an unconsolidated affiliate) and equipment under long-term operating leases expiring at various dates through fiscal year 2001. Lease expenses were $24.3 million, $21.8 million, and $15.1 million for the fiscal years ended September 30, 1996, 1995, and 1994, respectively. At September 30, 1996, remaining operating lease commitments were as follows (in thousands): 1997 $16,970 1998 14,501 1999 13,177 2000 10,362 2001 4,037 Thereafter 10,591 -------- $69,638 At September 30, 1996, the Company's banking/finance group had commitments to extend credit aggregating $481 million principally under its credit card lines. The Company through certain subsidiaries acts as fiduciary for retirement and employee benefit plans. At September 30, 1996, assets held in trust were approximately $12.8 billion. 10. Dividends During the years ended September 30, 1996, 1995, and 1994, the Company declared dividends to common stockholders of $0.44, $0.40, and $0.32 per share, respectively. 11. Employee Stock Award and Option Plans In 1994, the Company implemented an annual incentive plan which provides eligible employees payment of both cash and restricted stock. The costs associated with the annual incentive plan awards are charged to income currently. The Company has adopted stock option plans which provide for the grant of options to officers and other key employees of the Company to purchase up to 2,358,250 shares of the Company's common stock of which 1,046,513 and 1,099,123 shares were authorized but unissued as of September 30,1996 and 1995, respectively. Terms and conditions (including price, exercise date and number of shares) are determined by the Board of Directors, which administers the plans. At September 30, 1996, options to purchase 188,007 shares were outstanding at prices ranging from $11.82 to $56.44 of which 38,411 shares were exercisable. During 1996, 24,247 shares were granted and 52,610 were exercised. Beginning with the financial statements for 1997, the Company will be required to make certain additional disclosures as if the fair value-based method of accounting, defined in SFAS 123 "Accounting for Stock-Based Compensation," had been applied to the Company's stock option grants made subsequent to September 30, 1995. 12. Employee Benefit and Incentive Plans On January 1, 1996, the Company merged its two defined contribution plans. The resulting defined contribution profit sharing 401(k) plan covers eligible U.S. employees. Contributions are based on the Company's prior year's results of operations and are made at the discretion of the Company's Board of Directors. The Company's contribution, including both profit sharing and matching components, was $15.9 million, $13.9 million, and $10.1 million during 1996, 1995, and 1994, respectively. 13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Quarter ------------------------------------------------ In thousands First Second Third Fourth - ------------------- ------- ------- ------- -------- 1996 Revenues $342,614 $393,801 $395,402 $390,751 Net income $73,951 $75,212 $81,066 $84,501 Earnings per share: Primary $0.89 $0.91 $0.98 $1.01 Fully diluted $0.89 $0.91 $0.97 $1.01 1995 Revenues $303,711 $298,033 $319,826 $336,227 Net income $63,304 $63,040 $69,029 $73,572 Earnings per share: Primary $0.76 $0.76 $0.84 $0.89 Fully diluted $0.76 $0.76 $0.83 $0.88 1994 Revenues $342,313 $365,329 $316,463 $318,436 Net income $59,001 $68,601 $60,023 $63,683 Earnings per share: Primary $0.70 $0.82 $0.72 $0.76 Fully diluted $0.70 $0.82 $0.72 $0.76 14. Subsequent Events Acquisition On November 1, 1996, the Company acquired the assets and liabilities of Heine Securities Corporation, Inc. (Heine), the investment advisor to Mutual Series Fund Inc. (Mutual). The transaction has an aggregate value of approximately $615 million. The shareholder of Heine received $550 million in cash and 1.1 million shares of Franklin Resources, Inc. common stock which may not be sold for two years and which are subject to other restrictions. The shareholder will initially invest $150 million of the cash proceeds in Mutual with a minimum balance of $100 million for five years. The Company financed the cash payment from cash and securities on hand, as well as its available commercial paper. As part of the financing for this transaction, the Company entered into swap agreements with major financial institutions which became effective on October 31, 1996 and mature through October 31, 2000. (See Note 6.) Subordinated Debentures On November 26, 1996, the holders of the option rights related to the Company's subordinated debentures (see Note 6) have entered into an agreement with the Company to exercise their option rights to receive approximately 2.4 million shares of the Company's common stock in return for approximately $75 million of the subordinated debentures. In addition, the Company has agreed to purchase the remaining $75 million of subordinated debentures and option rights from the holders for approximately $170 million. The Company intends to finance the purchase of the option rights from the proceeds of a new issuance of medium-term notes and cash on hand. PART III Items 10-13 are incorporated by reference to the Company's definitive proxy statement to be mailed to stockholders in connection with the Annual Meeting of Stockholders to be held January 23, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Please see the index in Item 8 for a list of the financial statements filed as part of this report. (2) Please see the index in Item 8 for a list of the financial statement schedules filed as part of this report. (3) The following exhibits are filed as part of this report: (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") (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 (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 (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 (3)(ii) Registrant's By-Laws are incorporated by reference to Form 10 (File No. 06952), incorporated by reference to Exhibit (3)(v) to the 1994 Annual Report 10.1 Representative Distribution Plan between Templeton Growth Fund, Inc. and Franklin/Templeton Investor Services, Inc. incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993 (the "1993 Annual Report") 10.2 Representative Transfer Agent Agreement between Templeton Growth Fund, Inc. and Franklin/Templeton Investor Services, Inc. incorporated by reference to Exhibit 10.3 to the 1993 Annual Report 10.3 Representative Investment Management Agreement between Templeton Growth Fund, Inc. and Templeton, Galbraith & Hansberger Ltd. incorporated by reference to Exhibit 10.5 to the 1993 Annual Report 10.4 Representative Management Agreement between Advisers and the Franklin Group of Funds incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1992 (the "1992 Annual Report") 10.5 Representative Distribution 12b-1 Plan between Distributors and the Franklin Group of Funds incorporated by reference to Exhibit 10.3 to the 1992 Annual Report 10.6 Registrant's Amended Annual Incentive Compensation Plan approved January 24, 1995 incorporated by reference to the Company's Proxy Statement filed under cover of Schedule 14A on December 28, 1994 in connection with its Annual Meeting of Stockholders held on January 24, 1995. 10.7 Registrant's Universal Stock Plan approved January 19, 1994 incorporated by reference to the Company's 1995 Proxy Statement filed under cover of Schedule 14A on December 29, 1993 in connection with its Annual Meeting of Stockholders held on January 19, 1994. 10.8 Representative Amended and Restated Distribution Agreement between Franklin/Templeton Distributors, Inc. and Franklin Federal Tax-Free Income Fund, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 (the "June 1995 Quarterly Report") 10.9 Representative Distribution 12b-1 Plan for Class II shares between Franklin/Templeton Distributors, Inc. and Franklin Federal Tax-Free Income Fund, incorporated by reference to Exhibit 10.2 to the June 1995 Quarterly Report 10.10 Representative Investment Management Agreement between Templeton Global Strategy SICAV and Templeton Investment Management Limited, incorporated by reference to Exhibit 10.3 to the June 1995 Quarterly Report 10.11 Representative Sub-Distribution Agreement between Templeton, Galbraith & Hansberger Ltd. and BAC Corp. Securities, incorporated by reference to Exhibit 10.4 to the June 1995 Quarterly Report 10.12 Representative Dealer Agreement between Franklin/Templeton Distributors, Inc. and Dealer, incorporated by reference to Exhibit 10.5 to the June 1995 Quarterly Report 10.13 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (ERISA), incorporated by reference to Exhibit 10.6 to the June 1995 Quarterly Report 10.14 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (NON-ERISA), incorporated by reference to Exhibit 10.7 to the June 1995 Quarterly Report 10.15 Representative Amended and Restated Transfer Agent and Shareholder Services Agreement between Franklin/Templeton Investor Services, Inc. and Franklin Custodian Funds, Inc., dated July 1, 1995, incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 (the "1995 Annual Report") 10.16 Representative Amended and Restated Distribution Agreement between Franklin/Templeton Distributors, Inc. and Franklin Custodian Funds, Inc.,incorporated by reference to Exhibit 10.17 to the 1995 Annual Report. 10.17 Representative Class II Distribution Plan between Franklin/Templeton Distributors, Inc. and Franklin Custodian Funds, Inc., on behalf of its Growth Series, incorporated by reference to Exhibit 10.18 to the 1995 Annual Report. 10.18 Representative Dealer Agreement between Franklin/Templeton Distributors, Inc. and Dealer, incorporated by reference to Exhibit 10.19 to the 1995 Annual Report. 10.19 Representative Mutual Fund Purchase and Sales Agreement for Accounts of Bank and Trust Company Customers, effective July 1, 1995, incorporated by reference to Exhibit 10.20 to the 1995 Annual Report. 10.20 Representative Management Agreement between Franklin Value Investors Trust, on behalf of Franklin MicroCap Value Fund, and Franklin Advisers, Inc., incorporated by reference to Exhibit 10.21 to the 1995 Annual Report. 10.21 Representative Sub-Distribution Agreement between Templeton, Galbraith & Hansberger Ltd. and Sub-Distributor, incorporated by reference to Exhibit 10.22 to the 1995 Annual Report. 10.22 Representative Non-Exclusive Underwriting Agreement between Templeton Growth Fund, Inc. and Templeton Franklin Investment Services (Asia) Limited, dated September 18, 1995, incorporated by reference to Exhibit 10.23 to the 1995 Annual Report. 10.23 Representative Shareholder Services Agreement between Franklin/Templeton Investor Services, Inc. and Templeton Franklin Investment Services (Asia) Limited, dated September 18, 1995, incorporated by reference to Exhibit 10.24 to the 1995 Annual Report. 10.24 Agreement to Merge the Businesses of Heine Securities Corporation, Elmore Securities Corporation and Franklin Resources, Inc., dated June 25, 1996, incorporated by reference to Exhibit 2 to Registrant's Report on Form 8-K dated June 25, 1996. 10.25 Subcontract for Transfer Agency and Shareholder Services dated November 1, 1996 by and between Franklin Investor Services, Inc. and PFPC Inc. 10.26 Representative Sample of Franklin/Templeton Investor Services, Inc. Transfer Agent and Shareholder Services Agreement. 10.27 Representative Administration Agreement between Templeton Growth Fund, Inc. and Franklin Templeton Services, Inc. 10.28 Representative Sample of Fund Administration Agreement with Franklin Templeton Services, Inc. 10.29 Representative Subcontract for Fund Administrative Services between Franklin Advisers, Inc. and Franklin Templeton Services, Inc. 10.30 Representative Investment Advisory Agreement between Franklin Mutual Series Fund Inc. and Franklin Mutual Advisers, Inc. 10.31 Representative Management Agreement between Franklin Valuemark Funds and Franklin Mutual Advisers, Inc. 10.32 Representative Investment Advisory and Asset Allocation Agreement between Franklin Templeton Fund Allocator Series and Franklin Advisers, Inc. 10.33 Representative Management Agreement between Franklin New York Tax-Free Income Fund, Inc. and Franklin Investment Advisory Services, Inc. 12 Computation of Ratios of Earnings to Fixed Charges 21 List of Subsidiaries 23 Consent of Independent Accountants 27 Financial Data Schedule (b) (1) A Current Report on Form 8-K dated July 25, 1996 was filed on July 26, 1996 attaching Registrant's press release dated July 25, 1996 under Items 5 and 7. (2) A Current Report on Form 8-K dated October 24, 1996 was filed on October 25, 1996 attaching Registrant's press release dated October 24, 1996 under Items 5 and 7. (3) A Current Report on Form 8-K dated November 27, 1996 was filed on November 27, 1996 attaching Registrant's press release dated November 27, 1996 under Items 5 and 7. (c) See Item 14(a)(3) above. (d) No separate financial statements are required; schedules are included in Item 8. SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN RESOURCES, INC. Date: December 26, 1996 By /S/ CHARLES B. JOHNSON Charles B. Johnson, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Date: December 26, 1996 By /S/ CHARLES B. JOHNSON Charles B. Johnson, Principal Executive Officer and Director Date: December 26, 1996 By /S/ HARMON E. BURNS Harmon E. Burns, Executive Vice President-Legal and Adminis- trative,Secretary and Director Date: December 26, 1996 By /S/ MARTIN L. FLANAGAN Martin L. Flanagan, Treasurer and Chief Financial Officer Date: December 26, 1996 By /S/ KENNETH A. LEWIS Kenneth A. Lewis, Controller Date: December 26, 1996 By /S/ JUDSON R. GROSVENOR Judson R. Grosvenor, Director Date: December 26, 1996 By /S/ F. WARREN HELLMAN F. Warren Hellman, Director Date: December 26, 1996 By /S/ CHARLES E. JOHNSON Charles E. Johnson, Director Date: December 26, 1996 By /S/ RUPERT H. JOHNSON, JR. Rupert H. Johnson, Jr., Director Date: December 26, 1996 By /S/ HARRY O. KLINE Harry O. Kline, Director Date: December 26, 1996 By /S/ LOUIS E. WOODWORTH Louis E. Woodworth, Director Date: December 26, 1996 By /S/ PETER M. SACERDOTE Peter M. Sacerdote, Director INDEX OF EXHIBITS (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") (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 (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 (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 (3)(ii) Registrant's By-Laws are incorporated by reference to Form 10 (File No. 06952), incorporated by reference to Exhibit (3)(v) to the 1994 Annual Report 10.1 Representative Distribution Plan between Templeton Growth Fund, Inc. and Franklin/Templeton Investor Services, Inc. incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993 (the "1993 Annual Report") 10.2 Representative Transfer Agent Agreement between Templeton Growth Fund, Inc. and Franklin/Templeton Investor Services, Inc. incorporated by reference to Exhibit 10.3 to the 1993 Annual Report 10.3 Representative Investment Management Agreement between Templeton Growth Fund, Inc. and Templeton, Galbraith & Hansberger Ltd. incorporated by reference to Exhibit 10.5 to the 1993 Annual Report 10.4 Representative Management Agreement between Advisers and the Franklin Group of Funds incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1992 (the "1992 Annual Report") 10.5 Representative Distribution 12b-1 Plan between Distributors and the Franklin Group of Funds incorporated by reference to Exhibit 10.3 to the 1992 Annual Report 10.6 Registrant's Amended Annual Incentive Compensation Plan approved January 24, 1995 incorporated by reference to the Company's Proxy Statement filed under cover of Schedule 14A on December 28, 1994 in connection with its Annual Meeting of Stockholders held on January 24, 1995. 10.7 Registrant's Universal Stock Plan approved January 19, 1994 incorporated by reference to the Company's 1995 Proxy Statement filed under cover of Schedule 14A on December 29, 1993 in connection with its Annual Meeting of Stockholders held on January 19, 1994. 10.8 Representative Amended and Restated Distribution Agreement between Franklin/Templeton Distributors, Inc. and Franklin Federal Tax-Free Income Fund, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 (the "June 1995 Quarterly Report") 10.9 Representative Distribution 12b-1 Plan for Class II shares between Franklin/Templeton Distributors, Inc. and Franklin Federal Tax-Free Income Fund, incorporated by reference to Exhibit 10.2 to the June 1995 Quarterly Report 10.10 Representative Investment Management Agreement between Templeton Global Strategy SICAV and Templeton Investment Management Limited, incorporated by reference to Exhibit 10.3 to the June 1995 Quarterly Report 10.11 Representative Sub-Distribution Agreement between Templeton, Galbraith & Hansberger Ltd. and BAC Corp. Securities, incorporated by reference to Exhibit 10.4 to the June 1995 Quarterly Report 10.12 Representative Dealer Agreement between Franklin/Templeton Distributors,Inc. and Dealer, incorporated by reference to Exhibit 10.5 to the June 1995 Quarterly Report 10.13 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (ERISA), incorporated by reference to Exhibit 10.6 to the June 1995 Quarterly Report 10.14 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (NON-ERISA), incorporated by reference to Exhibit 10.7 to the June 1995 Quarterly Report 10.15 Representative Amended and Restated Transfer Agent and Shareholder Services Agreement between Franklin/Templeton Investor Services, Inc. and Franklin Custodian Funds, Inc., dated July 1, 1995, incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 (the "1995 Annual Report") 10.16 Representative Amended and Restated Distribution Agreement between Franklin/Templeton Distributors, Inc. and Franklin Custodian Funds, Inc.,incorporated by reference to Exhibit 10.17 to the 1995 Annual Report. 10.17 Representative Class II Distribution Plan between Franklin/Templeton Distributors, Inc. and Franklin Custodian Funds, Inc., on behalf of its Growth Series, incorporated by reference to Exhibit 10.18 to the 1995 Annual Report. 10.18 Representative Dealer Agreement between Franklin/Templeton Distributors,Inc. and Dealer, incorporated by reference to Exhibit 10.19 to the 1995 Annual Report. 10.19 Representative Mutual Fund Purchase and Sales Agreement for Accounts of Bank and Trust Company Customers, effective July 1, 1995, incorporated by reference to Exhibit 10.20 to the 1995 Annual Report. 10.20 Representative Management Agreement between Franklin Value Investors Trust, on behalf of Franklin MicroCap Value Fund, and Franklin Advisers, Inc., incorporated by reference to Exhibit 10.21 to the 1995 Annual Report. 10.21 Representative Sub-Distribution Agreement between Templeton, Galbraith & Hansberger Ltd. and Sub-Distributor, incorporated by reference to Exhibit 10.22 to the 1995 Annual Report. 10.22 Representative Non-Exclusive Underwriting Agreement between Templeton Growth Fund, Inc. and Templeton Franklin Investment Services (Asia) Limited, dated September 18, 1995, incorporated by reference to Exhibit 10.23 to the 1995 Annual Report. 10.23 Representative Shareholder Services Agreement between Franklin/Templeton Investor Services, Inc. and Templeton Franklin Investment Services (Asia) Limited, dated September 18, 1995, incorporated by reference to Exhibit 10.24 to the 1995 Annual Report. 10.24 Agreement to Merge the Businesses of Heine Securities Corporation, Elmore Securities Corporation and Franklin Resources, Inc., dated June 25, 1996, incorporated by reference to Exhibit 2 to Registrant's Report on Form 8-K dated June 25, 1996. 10.25 Subcontract for Transfer Agency and Shareholder Services dated November 1,1996 by and between Franklin Investor Services, Inc. and PFPC Inc. 10.26 Representative Sample of Franklin/Templeton Investor Services, Inc. Transfer Agent and Shareholder Services Agreement. 10.27 Representative Administration Agreement between Templeton Growth Fund, Inc. and Franklin Templeton Services, Inc. 10.28 Representative Sample of Fund Administration Agreement with Franklin Templeton Services, Inc. 10.29 Representative Subcontract for Fund Administrative Services between Franklin Advisers, Inc. and Franklin Templeton Services, Inc. 10.30 Representative Investment Advisory Agreement between Franklin Mutual Series Fund Inc. and Franklin Mutual Advisers, Inc. 10.31 Representative Management Agreement between Franklin Valuemark Funds and Franklin Mutual Advisers, Inc. 10.32 Representative Investment Advisory and Asset Allocation Agreement between Franklin Templeton Fund Allocator Series and Franklin Advisers, Inc. 10.33 Representative Management Agreement between Franklin New York Tax-Free Income Fund, Inc. and Franklin Investment Advisory Services, Inc. 12 Computation of Ratios of Earnings to Fixed Charges 21 List of Subsidiaries 23 Consent of Independent Accountants 27 Financial Data Schedule (b) (1) A Current Report on Form 8-K dated July 25, 1996 was filed on July 26, 1996 attaching Registrant's press release dated July 25, 1996 under Items 5 and 7. (2) A Current Report on Form 8-K dated October 24, 1996 was filed on October 25, 1996 attaching Registrant's press release dated October 24, 1996 under Items 5 and 7. (3) A Current Report on Form 8-K dated November 27, 1996 was filed on November 27, 1996 attaching Registrant's press release dated November 27, 1996 under Items 5 and 7. (c) See Item 14(a)(3) above. (d) No separate financial statements are required; schedules are included in Item 8.