FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to______________
Commission File No. 1-9318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2670991
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
777 Mariners Island Blvd., San Mateo, CA 94404
(Address of Principal Executive Offices)
(Zip Code)
(650) 312-2000
(Registrant's telephone number, including area code)
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ______
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES _____ NO ______
APPLICABLE ONLY TO CORPORATE ISSUERS:
Outstanding: 126,062,347 shares, common stock, par value $.10 per share at
July 31, 1997.
PART I -FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
FRANKLIN RESOURCES, INC.
Consolidated Statements of Income
Unaudited
Three months ended Nine months ended
June 30 June 30
(In thousands, except per share
data) 1997 1996 1997 1996
- --------------------------------------------------------------------------------
Operating revenues:
Investment management fees $343,271 $228,291 $927,211 $646,435
Underwriting and distribution
fees 195,744 143,649 512,515 415,595
Shareholder servicing fees 36,614 22,911 90,239 65,758
Banking/finance, net and other 2,223 551 9,802 4,029
- -------------------------------------------------------------------------------
Total operating revenues 577,852 395,402 1,539,767 1,131,817
- -------------------------------------------------------------------------------
Operating expenses:
Underwriting and distribution 209,644 144,137 536,729 409,369
Employee related 115,476 85,710 321,830 244,298
General and administrative 60,432 35,670 160,861 105,258
Advertising and promotion 28,144 18,118 70,216 50,929
Amortization of intangible
assets 8,931 4,529 25,333 13,900
- -------------------------------------------------------------------------------
Total operating expenses 422,627 288,164 1,114,969 823,754
- -------------------------------------------------------------------------------
Operating income 155,225 107,238 424,798 308,063
Other income/(expenses):
Investment and other income 8,784 16,611 34,479 37,265
Interest expense (5,735) (2,782) (19,664) (8,824)
- -------------------------------------------------------------------------------
Other income/(expenses),
net 3,049 13,829 14,815 28,441
- -------------------------------------------------------------------------------
Income before taxes on income 158,274 121,067 439,613 336,504
Taxes on income 47,086 40,001 130,785 106,275
===============================================================================
Net income $111,188 $81,066 $308,828 $230,229
===============================================================================
Earnings per share:
Primary $0.88 $0.65 $2.44 $1.84
Fully diluted $0.88 $0.65 $2.44 $1.84
Dividends per share $0.08 $0.07 $0.24 $0.21
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited
As of As of
June 30 September 30
(In thousands)
1997 1996
- --------------------------------------------------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents $323,300 $483,975
Receivables:
Fees from Franklin Templeton funds 189,943 133,453
Other 29,974 54,727
Investment securities, available for
sale 174,788 174,156
Prepaid expenses and other 14,514 9,952
- --------------------------------------------------------------------------------
Total current assets 732,519 856,263
- --------------------------------------------------------------------------------
Banking/Finance assets:
Cash and cash equivalents 10,142 18,214
Loans receivable, net 305,533 345,399
Investment securities, available for
sale 25,131 25,325
Other assets 3,900 4,660
- --------------------------------------------------------------------------------
Total banking/finance assets 344,706 393,598
- --------------------------------------------------------------------------------
Other assets:
Deferred sales commissions, net 64,810 24,316
Property and equipment, net 199,087 161,613
Intangible assets, net of $99,373 and
$74,027 accumulated amortization,
respectively 1,232,964 641,983
Receivable from banking/finance group 203,524 236,532
Other assets 104,143 59,862
- --------------------------------------------------------------------------------
Total other assets 1,804,528 1,124,306
- --------------------------------------------------------------------------------
Total assets $2,881,753 $2,374,167
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited
As of As of
June 30 September 30
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accrued employee related $115,747 $77,935
Commissions payable 42,042 28,067
Income taxes payable 21,038 27,673
Short-term debt 49,585 427
Other 46,169 48,099
- -----------------------------------------------------------------------------
Total current liabilities 274,581 182,201
- -----------------------------------------------------------------------------
Banking/Finance liabilities:
Deposits of account holders:
Interest bearing 100,418 125,124
Non-interest bearing 7,472 6,095
Payable to parent 203,524 236,532
Other liabilities 1,851 1,725
- -----------------------------------------------------------------------------
Total banking/finance liabilities 313,265 369,476
- -----------------------------------------------------------------------------
Other liabilities:
Long-term debt 521,456 399,462
Other liabilities 29,629 22,437
- -----------------------------------------------------------------------------
Total other liabilities 551,085 421,899
- -----------------------------------------------------------------------------
Total liabilities 1,138,931 973,576
- -----------------------------------------------------------------------------
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; 126,230,916 and
82,264,982 shares issued; 126,093,787
and 80,272,131 shares
outstanding, respectively 12,623 8,226
Capital in excess of par value 90,215 101,226
Retained earnings 1,643,645 1,370,513
Less cost of treasury stock (6,436) (90,301)
Other 2,775 10,927
- -----------------------------------------------------------------------------
Total stockholders' equity 1,742,822 1,400,591
- -----------------------------------------------------------------------------
Total liabilities and stockholders'
equity $2,881,753 $2,374,167
=============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN RESOURCES, INC.
Consolidated Statements of Cash Flows
Unaudited
Nine months ended
June 30
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
Net income $308,828 $230,229
Adjustments to reconcile net income to
net cash provided by operating
activities:
(Increase) decrease in receivables, prepaid
expenses and other current assets (67,379) 12,596
Increase in deferred sales commissions, net (40,494) (16,387)
Increase in other current liabilities 5,456 22,475
(Decrease) increase in income taxes payable (6,635) 4,858
Increase in commissions payable 13,975 5,256
Increase (decrease) in accrued employee related 61,485 (2,114)
Depreciation and amortization 46,109 29,962
Realized gains on disposition of investments
and other assets (11,969) (13,418)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 309,376 273,457
- --------------------------------------------------------------------------------
Purchase of investments (82,296) (56,804)
Liquidation of investments 79,145 63,398
Purchase of banking/finance investments (27,118) (38,605)
Liquidation of banking/finance investments 27,374 39,284
Originations of banking/finance loans receivable (86,076) (69,464)
Collections of banking/finance loans receivable 128,627 138,283
Purchase of property and equipment (56,535) (39,977)
Acquisition of assets and liabilities of Heine
Securities Corporation (550,740) -
- --------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (567,619) 36,115
- --------------------------------------------------------------------------------
Decrease in bank deposits (23,329) (23,845)
Exercise of common stock options 1,878 1,167
Dividends paid on common stock (29,040) (25,826)
Purchase of treasury stock (15,356) (50,682)
Issuance of debt 374,328 72,701
Payments on debt (127,300) (161,460)
Purchase of option rights from
subordinated debenture holders (91,685) -
- --------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 89,496 (187,945)
- --------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (168,747) 121,627
Cash and cash equivalents, beginning of the period 502,189 261,699
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of the period $333,442 $383,326
================================================================================
Supplemental disclosure of non-cash information:
Value of stock issued for Heine acquisition $65,588 -
Value of stock issued for redemption of debentures $75,015 -
Value of common stock issued in other transactions $31,398 $17,675
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN RESOURCES, INC.
Notes to Consolidated Financial Statements
June 30, 1997
(Unaudited)
1. Basis of Presentation
The unaudited interim consolidated financial statements of Franklin Resources,
Inc. (the "Company") included herein have been prepared in accordance with the
instructions to Form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, all appropriate adjustments
necessary to a fair presentation of the results of operations have been made for
the periods shown. All adjustments are of a normal recurring nature. Certain
prior year amounts have been reclassified to conform to current year
presentation. The number of shares used for purposes of calculating earnings per
share and all per share data have been adjusted for all periods presented to
reflect a three-for-two stock dividend paid on January 15, 1997. Stockholders'
equity as of September 30, 1996 has not been restated. These financial
statements should be read in conjunction with the Company's audited financial
statements for the year ended September 30, 1996.
2. Debt
During October 1996, the Company issued $270.8 million in commercial paper as
part of the Heine transaction (see Note 3. "Acquisition" below).
During December 1996, the holders of the option rights related to the Company's
$150.0 million of subordinated debentures exercised their rights to receive
approximately 2.4 million shares of the Company's common stock in return for
approximately $75.0 million of the subordinated debentures. In addition, the
Company purchased the remaining $75.0 million of subordinated debentures and
associated option rights, representing approximately 2.4 million shares, from
the holders for approximately $165.8 million plus accrued interest. This
transaction was financed in part through the issuance of $100.0 million in
medium-term notes, maturing in years 1998 through 1999 with coupon rates ranging
from 6.02% to 6.19%. No material gain or loss was recognized on this
transaction.
At June 30, 1997, the Company had interest rate swap agreements, maturing in
years 1998 through 2000, which effectively fixed interest rates on $295.0
million of commercial paper. The fixed rates of interest ranged from 6.24% to
6.65%. 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. As of June 30, 1997, the
weighted average effective interest rate, including the effect of interest-rate
swap agreements, was 6.30% on approximately $571.5 million of outstanding
commercial paper and medium-term notes. Through its interest rate swap
agreements and its medium-term note program, the Company has fixed the rates of
interest it pays on $515.0 million of its outstanding debt.
3. Acquisition
On November 1, 1996, the Company acquired the assets and liabilities of Heine
Securities Corporation ("Heine"), the former investment advisor to Mutual Series
Fund, Inc., other funds and private accounts ("Mutual"). One of the Company's
subsidiaries, Franklin Mutual Advisers, Inc. ("FMAI"), now serves as the
investment adviser to Mutual. This transaction (the "Acquisition") had an
aggregate value of approximately $616.0 million. Heine received $550 million in
cash and 1.1 million pre-split shares of the Company's common stock which may
not be sold for two years and which are subject to other restrictions. The
Acquisition has been accounted for using the purchase method of accounting.
Intangibles purchased in the Acquisition, principally management contracts, are
being amortized over various lives averaging approximately 34 years.
4. New Statements of Financial Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 specifies the computation, presentation and disclosure requirements for
earnings per share for entities with publicly held common stock. In summary, FAS
128 will require the Company to change its presentation of earnings per share
from primary and fully diluted to basic and diluted for its fiscal year ending
September 30, 1999. At that time, all prior period earnings per share data will
be restated. The impact on reported earnings per share is not expected to be
material as the Company's common stock equivalents are not currently material.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"). FAS 130 establishes the disclosure requirements for reporting
comprehensive income in an entity's annual and interim financial statements. FAS
130 becomes effective for the Company for the fiscal year ending September 30,
1999. Comprehensive income includes such items as foreign currency translation
adjustments and unrealized gains on securities currently reported as components
of stockholders' equity. FAS 130 will require the Company to classify items of
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately in the equity
section of the consolidated balance sheet. The Company has not yet determined
the effect, if any, of this pronouncement on the Company's results of
operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures of Segment Information"
("FAS 131"). FAS 131 establishes standards for the way a public enterprise
reports information about operating segments in annual financial statements and
requires that these enterprises report selected information about operating
segments in interim financial statements. FAS 131 will be effective for the
Company's fiscal year ending September 30, 1999. The Company has not yet
determined the effect, if any, of this pronouncement on the consolidated
financial statements.
Item 2. 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 Group's mutual funds, managed accounts and other investment
products. The Company's revenues are derived largely from the amount and
composition of assets under management. The Company has a diversified base of
assets under management and a full range of investment management products and
services to meet the needs of a variety of individuals and institutions.
I. Material Changes in Results of Operations
Results of operations
Three months ended Nine months ended
June 30 June 30
% %
(In millions) 1997 1996 Change 1997 1996 Change
- ------------------------------------------------------------------------
Net income $111.2 $81.1 37% $308.8 $230.2 34%
Earnings per share:
Primary $.88 $.65 35% $2.44 $1.84 33%
Fully-diluted $.88 $.65 35% $2.44 $1.84 33%
Operating margin 27% 27% 28% 27%
- ------------------------------------------------------------------------
Net income for the quarter and nine months ended June 30, 1997 increased as
compared to the same periods in 1996 principally due to an increase in
investment management fees as a result of increased average assets under
management. Previously reported earnings per share have been restated for the
three- and nine-month periods to reflect the three-for-two stock dividend paid
on January 15, 1997.
Operating revenues will continue to be 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 ongoing expansion, the increase in competition and the
Company's commitment to constantly improve its products and services.
The contributions to the Company's operating profit from its non-U.S. operations
increased for the quarter and nine months ended June 30, 1997, principally as a
result of increased fee revenues from investment management services. This trend
will continue to be dependent on the amount and composition of assets managed by
the Company's non-U.S. subsidiaries. There have been no significant changes to
the Company's limited exposure to fluctuations in global currency markets.
Assets under management
As of
June 30 %
(In billions) 1997 1996 Change
- --------------------------------------------------------------------------------
Franklin Templeton Group:
Fixed-income funds:
Tax-free $44.4 $41.7 6%
U.S. government fixed-income
(primarily GNMA's) 14.7 15.5 (5%)
Taxable and tax-free money funds 3.0 2.8 7%
Global/international fixed-income 3.5 2.9 21%
- --------------------------------------------------------------------------------
Total fixed-income funds 65.6 62.9 4%
- --------------------------------------------------------------------------------
Equity/income funds:
Global/international equity 67.9 45.3 50%
U.S. equity/income 46.8 18.8 149%
- --------------------------------------------------------------------------------
Total equity/income funds 114.7 64.1 79%
- --------------------------------------------------------------------------------
Total Franklin Templeton fund assets 180.3 127.0 42%
Franklin Templeton institutional assets 28.5 20.6 38%
- --------------------------------------------------------------------------------
Total Franklin Templeton Group $208.8 $147.6 41%
===============================================================================
Changes in assets under management
Three months ended Nine months ended
June 30 June 30
% %
(In billions) 1997 1996 Change 1997 1996 Change
- --------------------------------------------------------------------------------
Assets under management
- beginning $189.9 $141.4 34% $151.6 $130.8 16%
Mutual acquisition - - - 18.6 - -
Sales & reinvestments, net of
underwriting commissions 14.3 9.9 44% 40.1 27.2 47%
Redemptions (7.6) (5.6) 36% (23.7) (15.6) 52%
Market appreciation 12.2 1.9 542% 22.2 5.2 327%
- --------------------------------------------------------------------------------
Assets under management
- ending $208.8 $147.6 41% $208.8 $147.6 41%
================================================================================
Monthly average assets under
management $198.2 $144.7 37% $183.7 $138.6 33%
================================================================================
The Company's assets under management were $208.8 billion at June 30, 1997,
which included $24.9 billion in Mutual assets, an increase of $18.9 billion
(10%) from March 31, 1997 and an increase of $61.2 billion (41%) from June 30,
1996. These increases were the result of net sales, market appreciation and the
Acquisition.
Fixed-income funds represented 31% of total assets under management as of June
30, 1997, down from 43% a year ago. The decrease was primarily a result of the
impact of the Mutual assets and the growth of global/international equity funds
on the Company's product mix.
Equity/income funds grew to 55% of total assets under management as of June 30,
1997, up from 43% a year ago. This increase was partially the result of the
addition of $24.9 billion of Mutual assets under management to the Company's
equity/income product mix. However, U.S. equity/income funds, excluding Mutual
assets, increased 16% and global/international equity funds increased 50% from
levels a year ago.
Institutional assets, comprised predominately of global/international equity
portfolios, represented 14% of total assets under management as of June 30,
1997, the same percentage as a year ago, even though they increased 38% from
levels a year ago. The Company remains strongly committed to the institutional
asset market and intends to continue to expand the services it provides in this
area.
Operating revenue
Three months ended Nine months ended
June 30 June 30
% %
(In millions) 1997 1996 Change 1997 1996 Change
- --------------------------------------------------------------------------------
Investment management fees $343.3 $228.3 50% $927.2 $646.4 43%
Underwriting and
distribution fees 195.7 143.6 36% 512.5 415.6 23%
Shareholder servicing fees 36.6 22.9 60% 90.2 65.8 37%
Banking/finance, net and
other 2.2 .6 267% 9.8 4.0 145%
================================================================================
Total operating revenues $577.9 $395.4 46% $1,539.8 $1,131.8 36%
================================================================================
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 of open-end and closed-end investment companies and managed
accounts. Under 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
Group of Funds are reviewed and approved annually by each funds' Board of
Directors/Trustees. There have been no significant changes in the management fee
structures for the Franklin Templeton Group of Funds in the period under review.
Investment management fees increased primarily as a result of a 37% and a 33%
increase in monthly average assets under management and a shift in the
composition of average assets under management to higher fee equity and income
funds for the three- and nine-month periods ended June 30, 1997.
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 the Company's sponsored mutual funds and
receive distribution fees, including 12b-1 fees, from those funds in
reimbursement for distribution expenses incurred up to a maximum allowed by each
fund. A significant portion of distribution fees are reallowed to selling
intermediaries. Distribution fees are typically based on levels of assets under
management.
Underwriting and distribution fees increased 36% and 23% for the three-and
nine-month periods ended June 30, 1997 over the same periods in the previous
fiscal year primarily as a result of 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.
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 increased primarily as a result of an increase in Franklin
Templeton retail fund shareholder accounts, including 700 thousand Mutual
shareholders, to 7.0 million, or 30%, from 5.4 million a year ago. The increase
in shareholder servicing fees was also due to an increase in the average annual
shareholder servicing fees of approximately $3.20 per account, for approximately
122 of the Company's U.S. mutual funds, consisting of approximately 4.9 million
shareholder accounts effective in the second quarter of fiscal year 1997.
Banking/finance, net and other
Three months ended Nine months ended
June 30 June 30
% %
(In millions) 1997 1996 Change 1997 1996 Change
- -----------------------------------------------------------------------------
Revenues $9.3 $11.5 (19%) $29.1 $36.6 (20%)
Provision for loan losses (1.9) (4.8) (60%) (3.0) (13.2) (77%)
Interest expense (5.2) (6.1) (15%) (16.3) (19.4) (16%)
=============================================================================
Banking/finance, net
and other $2.2 $.6 267% $9.8 $4.0 145%
=============================================================================
Compared to the corresponding periods in the prior year, banking/finance, net
and other revenues increased principally due to decreases in the provision for
loan losses. For the three- and nine-month periods ended June 30, 1997,
charge-offs decreased $1.6 million, or 35%, and $6.7 million, or 43%, compared
to the same periods a year ago. Delinquencies decreased $10.0 million, or 51%
from levels of a year ago. Revenues decreased principally due to a 17% decrease
in average loans outstanding for the periods reported as a result of net
paydowns of dealer auto loans. Interest expense decreased in the three- and
nine-month periods due to reductions in the borrowing requirements of the
banking/finance group.
Operating expenses
Three months ended Nine months ended
June 30 June 30
% %
(In millions) 1997 1996 Change 1997 1996 Change
- ------------------------------------------------------------------------------
Underwriting and
distribution $209.6 $144.1 45% $536.7 $409.4 31%
Employee related expenses 115.5 85.7 35% 321.8 244.3 32%
General and administrative 60.4 35.7 69% 160.9 105.3 53%
Advertising and promotion 28.1 18.1 55% 70.2 50.9 38%
Amortization of intangibles 8.9 4.6 93% 25.3 13.9 82%
==============================================================================
Total operating expenses $422.6 $288.2 47% $1,115.0 $823.8 35%
==============================================================================
Increases in operating expenses principally resulted from the general expansion
of the Company's business and the Acquisition.
Underwriting and distribution expenses include sales commissions and
distribution fees paid to brokers and other third party intermediaries.
Generally, 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.
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 approximately 17% and 16% of open-end U.S. mutual funds sales for
the three- and nine-month periods ended June 30, 1997 as compared to 12% and 13%
for the same periods in 1996.
Employee related costs increased 35% and 32% for the three- and nine-month
periods ended June 30, 1997 over the same periods in 1996 as a result of a 21%
increase in the number of employees, increases in the Company's incentive
compensation related to the Company's increased earnings and additional employee
related costs associated with the Acquisition.
General and administrative expenses increased during the periods under review
primarily as a result of higher technology and facilities costs related to the
expansion of the Company's business.
Advertising and promotion expenses increased during the comparative three- and
nine-month periods mainly due to marketing and promotional efforts related to
the Mutual Series funds.
Amortization of intangibles increased as a result of approximately $615.0
million of additional intangibles related to the Acquisition.
Other income/(expenses)
Three months ended Nine months ended
June 30 June 30
% %
(In millions) 1997 1996 Change 1997 1996 Change
- -----------------------------------------------------------------------------
Investment and other income $8.8 $16.6 (47%) $34.5 $37.3 8%
Interest expense (5.7) (2.8) 104% (19.7) (8.8) 124%
=============================================================================
Other income/(expenses),
net $3.0 $13.8 (78%) $14.8 $28.4 (48%)
=============================================================================
The decrease in investment income for the three- and nine-months ended June 30,
1997 as compared to the same periods in 1996 was primarily due to a decrease in
dividend income as a result of the sale of a portion of the Company's investment
portfolio which was used to fund portions of the Acquisition.
Interest expense increased for the three- and nine-month periods primarily due
to a $222.4 million increase in commercial paper and a $120.0 million increase
in medium-term notes outstanding, partially offset by a $150.0 million reduction
in subordinated debentures. The Company's overall weighted average effective
interest rate at June 30, 1997, including the effect of interest-rate swap
agreements, was 6.30% on $571.5 million of outstanding commercial paper and
medium-term notes as compared to 6.33% on $379.2 million of debt outstanding at
June 30, 1996.
In the periods under review, the effective tax rate decreased slightly to 30% of
pretax income. The effective tax rate will continue to be reflective of the
relative contributions of foreign earnings which are subject to reduced tax
rates and are not currently includable in U.S. taxable income.
II. Material Changes in Financial Condition, Liquidity and Capital Resources
As of June 30, 1997, stockholders' equity increased to approximately $1.7
billion compared to approximately $1.4 billion at September 30, 1996,
principally as a result of increased net income and the issuance of 1.1 million
pre-split shares in connection with the Acquisition. Cash provided by operating
activities for the nine months ended June 30, 1997 increased $35.9 million also
as a result of net income. During the nine-month period ended June 30, 1997, the
Company used net cash of $567.6 million for investing activities, $550.7 million
of which was for the Acquisition and $56.5 million of which was for purchases of
property and equipment, partially offset by net paydowns of banking/finance
group loans. Net cash provided by financing activities during the period was
$89.5 million primarily as a result of the issuance of $374.3 million in
medium-term notes and commercial paper, which was partially offset by payment on
debt of $127.3 million and the purchase of option rights related to the
subordinated debentures of $91.7 million. During the period, the Company paid
$29.0 million in dividends to stockholders and purchased 262.8 thousand shares
of its common stock for $15.4 million. As of June 30, 1997, the Company had 5.5
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.
At June 30, 1997, the Company held liquid assets of $753.3 million, including
$333.4 million in cash and cash equivalents as compared to $889.9 million and
$502.2 million, respectively, at September 30, 1996. The Company maintains a
$400 million commercial paper program and a $500 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 June 30,
1997, total back-up credit facilities were $500 million of which, $200 million
was under a 364-day revolving credit facility. The remaining $300 million
back-up facility has a five-year term. At June 30, 1997, approximately $448.5
million was available to the Company under unused credit facilities.
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.
PART II - OTHER INFORMATION
Item 5. Other Information.
When used in this Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and in oral
statements made with the approval of an authorized executive officer, the words
or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties, including those discussed under the caption "Risk
Factors and Cautionary Statements" below, that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed below could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company will NOT undertake and specifically declines any obligation to
release publicly the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Risk Factors and Cautionary Statements
The Company's revenues and income are derived primarily from the management of a
variety of financial services products. The financial services industry is
highly competitive. Such competition could negatively impact the Company's
market share, which could impact assets under management, from which the bulk of
the Company's revenues and income arise.
Sales of mutual fund shares and other financial services products can also be
negatively affected by adverse general securities market conditions, burdensome
governmental regulations and recessionary global economic conditions. In
addition, securities dealers, whose large retail distribution systems play an
important role in the sale of shares of the Franklin, Templeton and Mutual
Series funds, also sponsor competing proprietary mutual funds. To the extent
that these firms limit or restrict the sale of Franklin, Templeton or Mutual
Series funds shares through their brokerage systems in favor of their
proprietary mutual funds, future sales may be negatively impacted and the
Company's revenues might be adversely affected. In addition, as the number of
competitors in the investment management industry increases, greater demands are
placed on existing distribution channels, which may cause distribution costs to
increase. The Company's assets under management include a significant number of
global equities, which may or may not increase the volatility of the Company's
managed portfolios and its revenue and income streams.
Certain portions of the Company's managed portfolios are invested in various
securities of corporations located or doing business in developing regions of
the world commonly known as emerging markets. These portfolios and the Company's
revenues derived from the management of such portfolios are subject to
significant risks of loss from unfavorable political and diplomatic
developments, currency fluctuations, social instability, changes in governmental
policies, expropriation, nationalization, confiscation of assets and changes in
legislation relating to foreign ownership. Foreign trading markets, particularly
in some emerging market countries are often smaller, less liquid, less regulated
and significantly more volatile
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. In response to such competitive pressures, 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, Templeton and Mutual Series funds
less attractive to the broker-dealer community, which could in turn have a
material adverse effect on the Company's revenues. In the alternative, the
Company might be required to pay additional fees, commissions or charges in
connection with the distribution of its shares which could have a negative
effect on the Company's earnings.
Sales of Class II shares have increased relative to the Company's overall sales,
resulting in higher distribution expenses, which have caused distribution
expenses to exceed distribution revenues for certain products and put increasing
pressure on the Company's profit margins. If the Company is unable to fund
commissions on Class II shares using existing cash flow and debt facilities,
additional funding will be necessary. Past sales of Class II shares are not
necessarily indicative of future sales volume, and future sales of Class II
shares may be lower or higher as a result of changes in investor demand or
lessened or unsuccessful sales efforts by the Company.
The Company is 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. In addition, there has been a trend of consolidation in the
mutual fund industry which has resulted in stronger competitors. The banking
industry also continues to expand its sponsorship of proprietary funds
distributed through third party distributors. To the extent that banks limit or
restrict the sale of Franklin, Templeton or Mutual Series shares 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.
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 moneys
to and from fixed-income funds and, therefore, on the Company's revenues from
such funds.
Since 1992, equity investments have increased as a percentage of the Company's
assets under management. The securities market is currently experiencing the
longest "bull market" in history with unprecedented levels of investor demand
for equity securities. As a result of this positive financial environment, the
Company's equity holdings have increased in value. The combination of these and
other factors has caused the Company's assets under management and revenues to
increase. The valuation of the equity portion of the Company's assets under
management is especially subject to the securities market, which is cyclical and
subject to periodic corrections. A downturn in this financial market would have
an adverse effect on the value of the equity portion of the Company's assets
under management which in turn would have a negative effect on the Company's
revenues.
The Company is unable to predict at this time whether the Taxpayer Relief Act of
1997 will have a positive or a negative effect on the Company's portfolios or
revenues.
The Company's real estate activities are subject to fluctuations in the real
estate market place as well as to significant competition from companies with
much larger real estate portfolios giving them significantly greater economies
of scale.
The Company's auto loan receivables business and credit card receivable
activities are subject to significant fluctuations in those consumer market
places as well as to significant competition from companies with much larger
receivable portfolios. In addition, certain of the Company's competitors are
engaged in the financing of auto loans in connection with a much larger
automobile manufacturing businesses and may at times provide loans at
significantly below market interest rates in order to further the sale of
automobiles.
The consumer loan market is highly competitive. The Company competes with many
types of institutions including banks, finance companies, credit unions and the
finance subsidiaries of large automobile manufacturers. Interest rates the
Company can charge and, therefore, its yields vary based on this competitive
environment. The Company is reliant on its relationships with various automobile
dealers and this relationship is highly dependent on the rates and service that
the Company provides. There is no guarantee that in this competitive environment
the Company can maintain its relationships with these dealers. 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.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of the report:
Exhibit 3(i)(a) Registrant's Certificate of Incorporation, as filed
November 28, 1969, incorporated by reference to Exhibit (3)(i)
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994 (the "1994 Annual Report")
Exhibit 3(i)(b) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1, 1985, incorporated by
reference to Exhibit (3)(ii) to the 1994 Annual Report
Exhibit 3(i)(c) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1, 1987, incorporated by
reference to Exhibit (3)(iii) to the 1994 Annual Report
Exhibit 3(i)(d) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated by
reference to Exhibit (3)(iv) to the 1994 Annual Report
Exhibit (3)(ii) Registrant's By-Laws incorporated by reference to
Exhibit 3(v) to the Company's Form 10-Q for the Quarterly
Period ended December 31, 1994
Exhibit 11 Computations of per share earnings.
Exhibit 12 Computations of ratios of earnings to fixed charges
Exhibit 27 Financial Data Schedule (Filed with the SEC only)
(b) Reports on Form 8-K:
(i) Form 8-K dated April 24, 1997 reporting under Item 5 "Other
Events" the filing of an earnings press release by the
Registrant on April 23, 1997 and including said press release
as an Exhibit under Item 7 "Financial Statements and Exhibits".
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN RESOURCES, INC.
Registrant
Date: August 14, 1997 /S/ Martin L. Flanagan
MARTIN L. FLANAGAN
Senior Vice President,
Treasurer and Chief
Financial Officer
INDEX TO EXHIBITS
Exhibit
Exhibit 3(i)(a) Registrant's Certificate of Incorporation, as filed
November 28, 1969, incorporated by reference to Exhibit (3)(i)
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994 (the "1994 Annual Report")
Exhibit 3(i)(b) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1, 1985, incorporated by
reference to Exhibit (3)(ii) to the 1994 Annual Report
Exhibit 3(i)(c) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1, 1987, incorporated by
reference to Exhibit (3)(iii) to the 1994 Annual Report
Exhibit 3(i)(d) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated by
reference to Exhibit (3)(iv) to the 1994 Annual Report
Exhibit (3)(ii) Registrant's By-Laws are incorporated by reference to
Exhibit 3(v) to Registrant's Form 10-Q for the Quarterly Period
ended December 31, 1994.
Exhibit 11 Computations of per share earnings.
Exhibit 12 Computations of ratios of earnings to fixed charges
Exhibit 27 Financial Data Schedule-(Filed with the SEC only)
(b) Reports on Form 8-K:
(i) Form 8-K dated April 24, 1997 reporting under Item 5 "Other
Events" the filing of an earnings press release by the
Registrant on April 23, 1997 and including said press release
as an Exhibit under Item 7 "Financial Statements and Exhibits".
Exhibit 11
COMPUTATIONS OF PER SHARE EARNINGS
Earnings per share are based on net income divided by the average number of
shares outstanding including common stock equivalents during the period. The
number of shares used for purposes of calculating earnings per share and all per
share data have been adjusted for all periods presented to reflect a
three-for-two stock dividend paid on January 15, 1997.
Three months ended Nine months ended
June 30 June 30
Restated Restated
(Dollars and shares in
thousands) 1997 1996 1997 1996
- ------------------------------------------------------------------------
Average outstanding shares 126,093 120,524 125,902 120,759
Common stock equivalents:
Primary 265 4,024 718 4,094
Fully diluted 287 4,523 740 4,523
Total shares:
Primary 126,358 124,548 126,620 124,853
Fully diluted 126,380 125,047 126,642 125,282
Net income $111,188 $81,066 $308,828 $230,229
Earnings per share:
Primary $.88 $.65 $2.44 $1.84
Fully diluted $.88 $.65 $2.44 $1.84
Exhibit 12
COMPUTATIONS OF EARNINGS TO FIXED CHARGES
Three months ended Nine months ended
June 30 June 30
(Dollars in thousands) 1997 1996 1997 1996
- ----------------------------------------------------------------------------
Income before taxes $158,274 $121,067 $439,613 $336,504
Add fixed charges:
Interest 9,325 6,844 30,942 21,746
Interest factor on rent 2,330 2,072 6,759 6,022
- ----------------------------------------------------------------------------
Total fixed charges 11,655 8,916 37,701 27,768
- ----------------------------------------------------------------------------
Earnings before fixed charges
and taxes on income $169,929 $129,983 $477,314 $364,272
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Ratio of earnings to fixed
charges 14.6 14.6 12.7 13.1
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