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 March 31, 1998
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: 252,969,189 shares, common stock, par value $.10 per share
at April 30, 1998
PART I -FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
FRANKLIN RESOURCES, INC.
Consolidated Statements of Income
Unaudited
Three months Six months
ended ended
March 31 March 31
(In thousands, except per share data) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Operating revenues:
Investment management fees $380,948 305,586 $757,411 $578,846
Underwriting and distribution
fees 248,914 180,285 464,201 316,771
Shareholder servicing fees 39,399 28,797 77,005 53,625
Other, net 4,430 4,528 7,473 7,579
- -------------------------------------------------------------------------------
Total operating revenues 673,691 519,196 1,306,090 956,821
- -------------------------------------------------------------------------------
Operating expenses:
Underwriting and distribution 242,406 172,638 447,718 304,921
Compensation and benefits 132,744 106,783 266,035 206,354
Information systems,
technology and occupancy 45,862 29,395 92,458 55,199
Advertising and promotion 31,243 23,406 58,605 42,072
Amortization of deferred
sales commissions 26,525 11,530 50,421 22,166
Amortization of intangible
assets 8,949 9,057 17,944 16,402
Other 22,538 22,363 42,043 40,134
- -------------------------------------------------------------------------------
Total operating expenses 510,267 375,172 975,224 687,248
- -------------------------------------------------------------------------------
Operating income 163,424 144,024 330,866 269,573
Other income/(expenses):
Investment and other income 11,596 6,087 26,571 25,695
Interest expense (3,826) (5,756) (9,978) (13,929)
- -------------------------------------------------------------------------------
Other income, net 7,770 331 16,593 11,766
- -------------------------------------------------------------------------------
Income before taxes on income 171,194 144,355 347,459 281,339
Taxes on income 44,525 42,944 90,275 83,699
- -------------------------------------------------------------------------------
Net income $126,669 $101,411 $257,184 $197,640
- -------------------------------------------------------------------------------
Earnings per share:
Basic $0.50 $0.40 $1.02 $0.79
Diluted $0.50 $0.40 $1.02 $0.78
Dividends per share $0.05 $0.04 $0.10 $0.08
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited
As of As of
March 31 September 30
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents $537,526 $434,864
Receivables:
Fees from Franklin Templeton funds 228,467 213,547
Other 24,690 20,315
Investment securities,
available-for-sale 192,733 189,674
Prepaid expenses and other 15,507 20,039
- -----------------------------------------------------------------------------
Total current assets 998,923 878,439
- -----------------------------------------------------------------------------
Banking/Finance assets:
Cash and cash equivalents 7,956 7,877
Loans receivable, net 290,233 296,188
Investment securities,
available-for-sale 24,479 24,232
Other 3,834 3,739
- -----------------------------------------------------------------------------
Total banking/finance assets 326,502 332,036
- -----------------------------------------------------------------------------
Other assets:
Deferred sales commissions 145,110 119,537
Property and equipment, net 294,230 241,224
Intangible assets, net 1,207,504 1,224,019
Receivable from banking/finance group 205,886 203,787
Other 168,535 96,158
- -----------------------------------------------------------------------------
Total other assets 2,021,265 1,884,725
- -----------------------------------------------------------------------------
Total assets $3,346,690 $3,095,200
=============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited As of As of
March 31 September 30
(In thousands except share data) 1998 1997
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Compensation and benefits $103,768 $154,222
Commissions 55,930 46,125
Income taxes 33,922 31,908
Short-term debt 128,931 118,372
Other 64,009 54,873
- -----------------------------------------------------------------------------
Total current liabilities 386,560 405,500
- -----------------------------------------------------------------------------
Banking/finance liabilities:
Deposits:
Interest bearing 82,855 91,433
Non-interest bearing 8,453 6,971
Payable to parent 205,886 203,787
Other 1,661 2,213
- -----------------------------------------------------------------------------
Total banking/finance liabilities 298,855 304,404
- -----------------------------------------------------------------------------
Other Liabilities:
Long-term debt 501,628 493,244
Other 38,681 37,831
- -----------------------------------------------------------------------------
Total other liabilities 540,309 531,075
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Total liabilities 1,225,724 1,240,979
- -----------------------------------------------------------------------------
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; 252,964,896 and
126,230,916 shares issued; 252,964,896
and 126,031,900 shares outstanding,
respectively 25,296 12,623
Capital in excess of par value 123,568 91,207
Retained earnings 1,976,797 1,757,536
Less cost of treasury stock - (11,070)
Other (4,695) 3,925
- -----------------------------------------------------------------------------
Total stockholders' equity 2,120,966 1,854,221
- -------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $3,346,690 $3,095,200
=============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN RESOURCES, INC.
Consolidated Statements of Cash Flows
Unaudited
Six months ended
(In thousands) March 31 March 31
1998 1997
---------------------------------------------------------------------------
Net income $257,184 $197,640
Adjustments to reconcile net income
to net cash provided by operating
activities:
Increase in receivables,
prepaid expenses and other current assets (30,786) (39,322)
Increase in deferred sales commissions (75,994) (40,109)
Increase in other current liabilities 12,336 4,572
Increase in income taxes payable 2,014 5,752
Increase in commissions payable 9,805 9,603
(Decrease) increase in compensation and
benefits (15,500) 29,411
Depreciation and amortization 88,890 52,034
Gains on disposition of assets (5,530) (10,662)
- ---------------------------------------------------------------------------
Net cash provided by operating activities 242,419 208,919
- ---------------------------------------------------------------------------
Purchase of investments (91,955) (57,694)
Liquidation of investments 36,525 45,249
Purchase of banking/finance investments (215) (8,072)
Liquidation of banking/finance investments - 13,416
Originations of banking/finance loans
receivable (59,662) (53,920)
Collections of banking/finance loans
receivable 66,022 84,862
Purchase of property and equipment (80,353) (18,863)
Proceeds from sale of property 14,517 -
Acquisition of assets and liabilities of
Heine Securities Corporation (1,424) (550,717)
- ----------------------------------------------------------------------------
Net cash used in investing activities (116,545) (545,739)
- ----------------------------------------------------------------------------
Decrease in bank deposits (7,098) (17,618)
Exercise of common stock options 2,791 2,280
Dividends paid on common stock (23,979) (18,944)
Purchase of Company stock (2,942) (7,945)
Issuance of debt 55,597 371,081
Payments on debt (47,502) (101,182)
Purchase of option rights from subordinated
debenture holders - (91,685)
- ---------------------------------------------------------------------------
Net cash (used in) provided by financing
activities (23,133) 135,987
- ---------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents 102,741 (200,833)
Cash and cash equivalents, beginning of
period 442,741 502,189
- --------------------------------------------------------------------------
Cash and cash equivalents, end of period $545,482 $301,356
- ---------------------------------------------------------------------------
Supplemental disclosure of non-cash information:
Value of stock issued for Heine acuisition - $65,588
Value of stock issued for redemption of
debentures - $75,015
Value of common stock issued in other
transactions, principally for the
Company's incentive plans $36,988 $30,848
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN RESOURCES, INC.
Notes to Consolidated Financial Statements
March 31, 1998
(Unaudited)
1. Basis of Presentation
----------------------
The unaudited interim financial statements of Franklin Resources, Inc. and
its consolidated subsidiaries (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. These financial statements should be read in conjunction with
the Company's audited financial statements for the fiscal year ended
September 30, 1997.
2. Debt
----
At March 31, 1998, the Company had interest-rate swap agreements, maturing in
years 1998 through 2000, which effectively fixed interest rates on $295
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 believed to be immaterial.
As of March 31, 1998, the Company has fixed interest rates on approximately
$515 million of its debt through its interest-rate swap agreements and its
medium-term note program. At quarter end, the weighted average effective
interest rate, including the effect of interest-rate swap agreements, was
6.25% on approximately $580 million of outstanding commercial paper and
medium-term notes.
3. Acquisition
-----------
On November 1, 1996, the Company acquired (the "Acquisition") the assets and
liabilities of Heine Securities Corporation ("Heine"), the former investment
advisor to Mutual Series Fund Inc., other funds and managed accounts
("Mutual"). One of the Company's subsidiaries, Franklin Mutual Advisers, Inc.
("FMAI"), now serves as the investment adviser to Mutual. The transaction had
an aggregate value of approximately $616 million. Heine received $551 million
in cash and 1.1 million shares of common stock (before the effects of the
stock split paid January 15, 1997 and the stock split paid January 15, 1998).
In addition to the base purchase price, the purchase agreement also provides
for contingent payments to Heine ranging from $96.25 million to $192.5
million under certain conditions if certain agreed-upon growth targets are
met. Agreed-upon growth targets range from 12.5% to 17.5% of management fee
revenues from Mutual over a five-year period and payments are pro-rated based
upon the upper and lower range of the targets. The first contingent payment
of $64 million related to these agreed-upon growth targets was made in the
third quarter of fiscal 1998. Other payments are due in fiscal 2000 and 2001
if growth targets continue to be met. These contingent payments will be
accounted for as goodwill related to additional purchase price of Heine. The
contingent payments are not expected to have a material impact on the
Company's income statement or balance sheet. The first payment was funded
from cash on hand and existing credit facilities. The Acquisition has been
accounted for using the purchase method of accounting.
4. Stockholders' Equity
--------------------
On December 12, 1997, the Board of Directors approved a two-for-one stock
split effected in the form of a 100% stock dividend that was paid to
shareholders of record on December 31, 1997. An amount equal to the par value
of the common stock issued has been transferred from retained earnings to
common stock. 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 give retroactive effect to the stock split. Stockholders' equity as of
September 30, 1997 has not been restated.
During the quarter ended December 31, 1997, the Company retired 407,730
post-split shares of treasury stock. For treasury shares retired by the
Company, common stock was charged for the par value of the shares retired and
capital in excess of par value was charged for the excess of cost over the
par value. During the quarter ended March 31, 1998, no shares were purchased
by the Company.
5. Employee Stock Investment Plan
------------------------------
The Company's shareholders have approved a qualified, non-compensatory
Employee Stock Investment Plan ("ESIP"), which allows substantially all
employees meeting certain eligibility criteria to purchase shares of the
Company's common stock at 90% of its market value on certain defined dates.
Participants will be entitled to make their first purchase of stock under
this plan on July 31, 1998. The Company's shareholders have approved
4,000,000 shares of common stock for issuance under the ESIP.
As allowed under the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", the Company has
elected to apply Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations in
accounting for its stock-based plans. Accordingly, the Company will recognize
no compensation expense for the ESIP.
In connection with the ESIP, the Company, at its sole discretion, can provide
matching grants to participants in the ESIP of whole or partial shares of the
Company's common stock in a uniform and non-discriminatory manner. While
reserving the right to change such determination, the Company has initially
determined that it will provide one half-share for each share held by a
participant for a minimum holding period of eighteen months. The fair market
value of the Company's matching contribution will be recognized as
compensation expense during the eighteen month holding period.
6. Intangible Assets
-----------------
As of March 31, 1998, intangible assets, net held by the Company were as
follows:
Amortization
(In thousands) period in As of As of
years March 31, 1998 September 30, 1997
- -------------------------------------------------------------------------------
Goodwill 40 $777,255 $775,831
Management contracts 40 524,962 524,962
Other 5-15 31,546 31,546
--------------------------------------
1,333,763 1,332,339
Accumulated amortization (126,259) (108,320)
======================================
Intangible assets, net $1,207,504 $1,224,019
======================================
7. Adoption of New Statement of Financial Accounting Standards Board
-----------------------------------------------------------------
During the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 requires that the Company retroactively restate prior period earnings per
share ("EPS") data. The impact on previously reported EPS is not material.
8. Subsequent event - Issuance of medium-term notes
------------------------------------------------
In connection with the contingent payment referred to in Note 3 above, the
Company issued an additional $50 million under its medium-term note program.
The notes bear interest at 5.96% and mature in April 2000.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
GENERAL
Franklin Resources, Inc. and its consolidated subsidiaries (the "Company")
derive substantially all of their revenues and net income from providing
investment management, administration, distribution and related services to the
Franklin, Templeton and Mutual Series funds, institutional accounts and other
investment products (collectively the "Franklin Templeton Group"). The Company
has a diversified base of assets under management and a full range of investment
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 Six months ended
March 31 March 31
(In millions) 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------
Net income $126.7 $101.4 25% $257.2 $197.6 30%
Earnings
per share
Basic $0.50 $0.40 25% $1.02 $0.79 29%
Diluted $0.50 $0.40 25% $1.02 $0.78 31%
Operating margin 24% 28% (14)% 25% 28% (11)%
- ------------------------------------------------------------------------
Net income during the periods ended March 31, 1998 increased as compared to the
same periods in the previous fiscal year primarily due to an increase in
investment management fees as a result of a 23% increase in average assets under
management. Previously reported earnings per share have been retroactively
restated to reflect the two-for-one stock split effected in the form of a stock
dividend on January 15, 1998. Operating margins decreased primarily due to
increased mutual fund distribution costs, employee and related costs, and
information systems and technology costs.
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, increased competition and the Company's
commitment to improve its products and services. These endeavors will likely
result in increased underwriting and distribution costs, employee and related
costs and information systems and technology costs.
Assets under management
As of
March 31 %
(In billions) 1998 1997 Change
- -----------------------------------------------------------------------
Franklin Templeton Group:
Equity:
Global/international $112.8 $85.8 31%
Domestic (U.S.) 57.3 38.6 48%
- ---------------------------------------------------------------------
Total equity 170.1 124.4 37%
- ---------------------------------------------------------------------
Fixed-income :
Tax-free 48.1 43.2 11%
Domestic (primarily U.S. Gov't.) 15.7 15.4 2%
Global/international 4.1 3.1 32%
- ---------------------------------------------------------------------
Total fixed-income 67.9 61.7 10%
- ---------------------------------------------------------------------
Money funds: 4.0 3.8 5%
- ---------------------------------------------------------------------
Total Franklin Templeton Group
- - end of period $242.0 $189.9 27%
=====================================================================
Average for the three-month
period $229.4 $186.8 23%
=====================================================================
Average for the six-month
period $225.6 $176.5 28%
=====================================================================
Assets under the Company's management increased by $21.0 billion (10%) from
December 31, 1997 and increased $52.1 billion (27%) from March 31, 1997.
Equity assets grew to 70% of total assets under management at March 31, 1998,
compared to 68% as of December 31, 1997 and 66% a year earlier. These increases
have been due to net sales and market appreciation.
Fixed income and money fund assets have decreased as a percentage of total
assets under management, but increased in absolute terms by $6.4 billion (10%)
since March 31, 1997. This increase is primarily the result of net cash inflows.
Operating revenue
Three months ended Six months ended
March 31 March 31
(In millions) 1998 1997 Change 1998 1997 Change
- --------------------------------------------------------------------------------
Investment
management fees $381.0 $305.6 25% $757.4 $578.8 31%
Underwriting and
distribution fees 248.9 180.3 38% 464.2 316.8 47%
Shareholder
servicing fees 39.4 28.8 37% 77.0 53.6 44%
Other, net 4.4 4.5 (2)% 7.5 7.6 (1)%
================================================================================
Total operating
revenues $673.7 $519.2 30% $1,306.1 $956.8 37%
================================================================================
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 portfolios. The
majority of fund investment management contracts are subject to periodic
approval by each fund's Board of Directors/Trustees. There have been no
significant changes in the management fee structures for the Franklin Templeton
Group in the periods under review. Investment management fees increased due to
the 23% and 28% increase in average assets in the three- and six-month periods,
respectively. Changes in composition of assets under management in the most
recent quarter led to a decline in effective investment management fee rates as
compared to the quarters ended December 31 and March 31, 1997. The composition
of assets under management will continue to change in the future in response to
investor preferences and changes in world markets.
Certain subsidiaries of the Company act as distributors for its sponsored funds
and receive commissions and distribution fees. Underwriting commissions are
earned primarily from fund sales. Distribution fees are generally based on the
level of assets under management. These distribution fees include 12b-1 fees,
paid by the funds in reimbursement for distribution expenses incurred up to a
maximum allowed by each fund. A significant portion of underwriting commissions
and distribution fees are paid to selling intermediaries.
Underwriting and distribution fees increased 38% and 47% over the same three-
and six-month periods last year primarily as a result of increased U.S. retail
mutual fund sales and assets under management.
Shareholder servicing fees are generally fixed charges per account that vary
with the particular type of fund and the service being rendered. Shareholder
servicing fees increased principally as a result of a 34% increase in retail
fund shareholder accounts to 8.2 million from 6.1 million a year ago, and also
as a result of an increase in the average per account charge.
Other, net
Three months ended Six months ended
March 31 March 31
(In millions) 1998 1997 Change 1998 1997 Change
- ----------------------------------------------------------------------------
Revenues $10.4 $9.6 8% $20.1 $19.8 2%
Provision for
loan losses (1.6) 0.2 (900)% (3.6) (1.1) 227%
Interest expense (4.4) (5.3) (17)% (9.0) (11.1) (19)%
============================================================================
Total other, net $4.4 $4.5 (2)% $7.5 $7.6 (1)%
============================================================================
Other revenues, net consist primarily of the revenues from the Company's bank
and finance subsidiaries, which are shown net of interest expense and the
provision for loan losses. Compared to the corresponding periods in the prior
year, total other revenues remained essentially the same. An increase in the
provision for loan losses was offset by a reduction in interest expense. The
provision for loan losses has increased even as charge-offs decreased due to the
Company's decision in the last quarter of fiscal 1997 to maintain a higher level
of reserves. Interest expense decreased in the period due to a reduction in the
average borrowing requirements of the banking/finance group, combined with a
reduction in the effective interest rate.
Operating expenses
Three months ended Six months ended
March 31 March 31
(In millions) 1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------
Underwriting and
distribution $242.4 $172.6 40% $447.7 $304.9 47%
Compensation and
benefits 132.8 106.8 24% 266.0 206.3 29%
Information systems,
technology
and occupancy 45.9 29.4 56% 92.5 55.2 68%
Advertising and
promotion 31.3 23.4 34% 58.6 42.1 39%
Amortization of
deferred sales
commissions 26.5 11.5 130% 50.4 22.2 127%
Amortization of
intangible assets 8.9 9.1 (2)% 18.0 16.4 10%
Other 22.5 22.4 0% 42.0 40.1 5%
=============================================================================
Total operating
expenses $510.3 $375.2 36% $975.2 $687.2 42%
=============================================================================
Increases in operating expenses principally resulted from the general expansion
of the Company's business, increased distribution costs and the Company's
investment in information systems and technology.
Underwriting and distribution includes sales commissions and distribution fees
paid to brokers and other third-party intermediaries. The increase in
underwriting and distribution expenses was consistent with the increase in
underwriting and distribution fee revenue.
Compensation and benefits costs increased 24% and 29% over the same three- and
six-month periods in 1997 as a result of an increase in the number of employees,
increased temporary labor costs and increased payments under the Company's
incentive plans that are based on the Company's profitability. The Company
expects to have upward pressure on compensation and benefits due to the
Company's continued growth and expansion and due to the effects of a very
competitive labor market.
Information systems, technology and occupancy costs have increased 56% and 68%
over the prior three- and six-month periods, respectively, due to the Company's
commitment to invest in its infrastructure. During the past eighteen months, the
Company has embarked upon major systems implementations, Year 2000 corrections
and European Monetary Unit preparations, and has upgraded its network, desktop
and internet environments. The Company anticipates that such major systems
undertakings will continue to have an impact on the Company's operating results
through the year 2000.
In connection with Year 2000 issues, the Company has implemented steps intended
to assure that its computer systems and processes are capable of processing in
the year 2000. A detailed assessment of all major software products has been
substantially completed. The Company is in various stages of making software
repairs and upgrades to those systems and programs that it believes will be
affected by the Year 2000 problem and presently expects that it will incur
expenses in the range of $30 to $40 million on Year 2000 compliance efforts.
This is a preliminary cost estimate comprised of third-party consulting,
software and hardware expenses that will be utilized solely to combat the Year
2000 problem. The Company has not completed its remediation efforts for all
affected systems and therefore cannot as yet specifically determine total Year
2000 expenses that will be incurred through completion of the process. Costs
incurred relating to making the Company's systems Year 2000 complaint are being
expensed in the period in which they are incurred.
Advertising and promotion expenses increased during the comparative three-month
period mainly due to increased promotional activity and new marketing campaigns.
Sales commissions on certain Franklin Templeton Group products sold without a
front-end sales charge are capitalized and amortized over periods not exceeding
six years - the period in which management estimates that they will be recovered
from distribution plan payments and from contingent deferred sales charges.
Amortization of deferred sales commissions increased 130% and 127% during the
periods under review as sales of products by the Company's Canadian subsidiary
increased.
Amortization of intangible assets increased slightly in 1998 over the six-month
period ended March 31, 1997 as a result of the Acquisition that took place in
the second month of fiscal year 1997.
The Company's effective income tax rate decreased from approximately 30% in
fiscal 1997 to approximately 26% of pretax income for the first six months of
fiscal 1998 due to the relative proportion of non-U.S. pretax income and the
effects of tax law changes. The effective tax rate will continue to be
reflective of the relative contributions of foreign earnings that are subject to
reduced tax rates and are not currently included in U.S. taxable income.
II. Material Changes in Financial Condition, Liquidity and Capital
Resources
At March 31, 1998, the Company's assets aggregated $3.3 billion, up from $3.1
billion at September 30, 1997. Stockholders' equity approximated $2.1 billion
compared to approximately $1.9 billion at September 30, 1997. The increase in
assets and stockholders' equity was primarily a result of net income. Cash
provided by operating activities for the six months ended March 31, 1998
increased 15% to $242.4 million in the six months ended March 31, 1997,
primarily as a result of net income, offset by an increase in the amount of
deferred sales commissions related to sales of non-U.S. products. The Company
invested $80.4 million in property and equipment. Net cash used in financing
activities during the period was $23.1 million as the Company used cash flows to
pay down debt and to pay dividends on common stock. During the fiscal year to
date, the Company paid $24.0 million in cash dividends to stockholders and
purchased 62,762 post-split shares of its common stock for $2.9 million. The
Company may continue from time to time to purchase its own shares in the open
market and in private transactions when it believes the market price of its
shares merits such action.
In October 1997, the Company sold and leased back an office building in San
Mateo, California. Proceeds of $14.5 million were received in this transaction.
The gain on sale was deferred and will be amortized on a straight-line basis
through June 30, 2000, the end of the lease period.
At March 31, 1998, the Company held $545.5 million in cash and cash equivalents,
as compared to $442.7 million at September 30, 1997. Liquid assets, which
consist of cash and cash equivalents, investments available-for-sale and current
receivables increased to $1,015.8 million at March 31, 1998 from $889.7 million
at September 30, 1997. Revolving credit facilities at March 31, 1998 aggregated
$500 million of which $200 million was under a 364-day revolving credit
facility. The remaining $300 million facility has a five-year term. At March 31,
1998, approximately $550.4 million was available to the Company under unused
commercial paper and medium-term note programs.
In April 1998, the Company issued $50 million in medium-term notes at a fixed
rate of 5.96% that will mature in April 2000. The cash was used to make the
contingent payment related to the Acquisition. See Note 3 to the condensed
financial statements.
Management expects that the principal needs for cash will be to advance sales
commissions, fund increased property and equipment acquisitions, pay shareholder
dividends and service debt. Management believes that the Company's existing
liquid assets, together with the expected continuing cash flow from operations,
its borrowing capacity under current credit facilities and its ability to issue
stock will be sufficient to meet its present and reasonably foreseeable cash
needs.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Two complaints were filed by the same law firm, one in January 1998 and another
in February 1998, in the U. S. District Court for the Southern District of
Florida, alleging that Templeton Asset Management, Ltd., an indirect
wholly-owned subsidiary of the Company and the investment manager of the
closed-end investment Company, Templeton Vietnam Opportunities Fund, Inc. (the
"Fund"), certain of the Fund's officers and directors, the Company and certain
other Company subsidiaries committed various violations of the Investment
Company Act of 1940, the Investment Advisers Act of 1940, and state common law.
The suits are captioned James C. Roumell, Plaintiff, on behalf of himself and
all others similarly situated v. Templeton Asset Management, Ltd., et al.,
(Civil Action No. 98-6059), and Michael J. Wetta, Plaintiff, on behalf of
himself and all others similarly situated v. Templeton Asset Management, Ltd.,
et al. (Civil Action No. 98-6170).
The complaints in both actions seek monetary damages in excess of $40 million,
an order rescinding Templeton Asset Management, Ltd.'s advisory contract with
the Fund, and the restitution of all amounts paid under such contract. The
plaintiffs have not asserted claims against the Fund, which is included only as
a "nominal defendant", and therefore do not seek damages directly against the
Fund. The plaintiff in the second-filed suit, Michael J. Wetta, has included two
claims by which he is seeking the above relief in favor of the Fund.
The Company and the other defendants have moved to dismiss both cases on various
legal grounds including the fact that the lawsuits mischaracterize the
"fundamental policies" of the Fund and fail to acknowledge the basic investment
objective of the Fund to pursue long-term capital appreciation.
Management believes that these lawsuits are without merit and intends to defend
such actions vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of Franklin Resources, Inc. was
held at 9:30 a.m., Pacific Standard Time, on January 20, 1998 at the
offices of the Company at 777 Mariners Island Boulevard, San Mateo,
California.
The three proposals presented at the meeting were:
1. The election of nine directors to hold office until the next
Annual Meeting of Stockholders or until their successors are elected
and shall qualify.
2. The ratification of the appointment by the Board of Directors
of Coopers & Lybrand L.L.P. as the Company's independent
certified public accountants for the fiscal year ending
September 30, 1998.
3. The adoption of an Employee Stock Investment Plan.
(b) Each of the nine nominees for director was elected and received the number
of votes set forth below:
Name For Against
Harmon E. Burns 114,828,689 939,812
F. Warren Hellman 107,508,999 8,259,502
Charles B. Johnson 114,899,521 868,980
Charles E. Johnson 114,852,958 915,543
Rupert H. Johnson, Jr. 114,829,636 938,865
Harry O. Kline 114,640,757 1,127,744
James A. McCarthy 115,058,431 710,070
Peter M. Sacerdote 114,813,239 955,262
Louis E. Woodworth 115,059,636 708,865
The ratification of the appointment of Coopers & Lybrand, L.L.P. as the
Company's independent certified public accountants for the fiscal year ending
September 30, 1998, was approved by a vote of 115,675,454 shares in favor,
36,772 shares against and 56,275 shares abstaining.
The adoption of an Employee Stock Investment Plan was approved by a vote of
106,024,746 shares in favor, 9,451,099 shares against and 292,656 shares
abstaining.
Item 5. Other Information
TECHNOLOGY ISSUES AND CHALLENGES
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Year 2000
Many of the world's computer systems currently record years in a two-digit
format. Such computer systems may be unable to recognize, interpret or use dates
beyond the year 1999 correctly. In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems. A few systems
may also be affected by the dates in the month of September 1999. Because the
activities of many businesses are affected by dates or are date-related, the
inability to use such date information correctly could lead to business
disruptions both in the United States and internationally (the "Year 2000
Problem"). The costs and uncertainties associated with the Year 2000 Problem
will depend upon a number of factors, including computer software, computer
hardware and the nature of the industry in which a company operates.
A substantial number of the Company's current computer systems will require
modification to avoid being affected by the Year 2000 Problem. In addition, the
Company coordinates and interacts on a daily basis with numerous other companies
and persons to exchange data electronically. These third-party systems will also
require modification to manage the Year 2000 Problem.
To help ensure that the Company's computer systems will function properly in and
after 1999 ("Year 2000 Compliant"), a team of information technology
professionals began preparing for the Year 2000 Problem in 1996. The Company has
substantially completed a review of all of its major systems and programs and
has identified those that contain two-digit year codes or other elements that
might be affected by the Year 2000 Problem. The Company is in various stages of
making software repairs and upgrades to those systems and programs that it
believes will be affected by the Year 2000 Problem.
In addition, the Company has contacted all of its major external suppliers of
goods, services and data ("Third Parties") to assess their compliance efforts
and the Company's exposure in the event of a failure of Third-Party compliance
efforts. The Company's Year 2000 compliance program also includes the
comprehensive testing and Year 2000 Compliant certification of all major Company
hardware and software systems. It is the Company's present intention to
participate in industry-wide testing of securities processing which will
commence in 1999.
Based upon current information, the Company believes that its Year 2000
expenditures for compliance efforts will be in the range of $30 to $40 million.
This is a preliminary cost estimate and only includes third-party consulting and
software and hardware expenses that will be utilized solely to combat the Year
2000 Problem. The Company has not completed its remediation efforts for all
affected systems and therefore cannot yet specifically determine total Year 2000
expenses that will be incurred through completion of the process. The amount
above does not include the allocation of the internal time of a substantial
number of employees working on the Year 2000 Problem. Such internal employee
costs principally represent the redeployment of existing personnel to the Year
2000 Problem, not the addition of new employees. Such employees have and will
spend significant administrative time and effort in addressing the Year 2000
Problem. The Company is presently unable to determine the cost of such employee
resource allocation to the Year 2000 Problem. Costs incurred relating to making
the Company's systems Year 2000 Compliant are being expensed by the Company in
the period in which they are incurred. In the event that additional cash
commitments are required in connection with the Year 2000 Problem, the Company
believes that its current cash position, cash flows and lines of credit provide
sufficient liquidity to fund any unanticipated increased expenditures.
European Monetary Unit
A single currency for the European Economic and Monetary Union is scheduled to
replace the national currency for participating member countries on January 1,
1999 (the "Euro"), which include countries in which the Company has offices or
with which it does substantial business. Many of the Company's managed funds and
financial products have substantial investments in countries whose currencies
will be replaced by the Euro. All aspects of the Company's investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custodial accounts and accounting will be affected by the implementation of the
Euro (the "Euro Issue").
The Company has created an interdepartmental team consisting of information
system and technology, accounting, administrative portfolio and investment
operations personnel to determine changes that will be required in connection
with the Euro Issue in order to process transactions accurately with minimal
disruption to business activities. The Company is also communicating with its
external partners and vendors to assess their readiness to manage the Euro Issue
without disruption to the Company's business or operations.
The Company is not presently able to assess the cost impact of the Euro Issue to
the Company, but does not presently anticipate that such impact will materially
affect the Company's cash flows, operations or operating results. Costs incurred
relating to the Euro Issue are generally being expensed by the Company during
the period in which they are incurred.
Special Concerns
The Company's expectations as to the future costs associated with the Year 2000
Problem and the Euro Issue are subject to uncertainties beyond its control that
could cause actual results to differ materially from what has been discussed
above. Factors that could influence the amount and timing of future costs
include the success of the Company in identifying systems and programs that are
affected by the Year 2000 Problem and the Euro Issue, the nature and amount of
programming, installation and system work required to upgrade or to replace each
of the affected programs or systems, the rate and magnitude of related labor and
consulting costs, and the success of the Company's external partners and
suppliers in addressing their respective Year 2000 Problems and the Euro Issue.
By way of example, industry-wide testing could uncover additional problems
within the Company or Third Parties which could require greater expenditures or
cause greater disruptions. While the Company is in the process of developing
contingency plans for the failure of Third Parties to achieve Year 2000
compliance or to manage the Euro Issue, the Company's ability to minimize the
effects of the Year 2000 Problem and the Euro Issue is highly dependent upon the
efforts of Third Parties; in particular as these issues may affect certain of
the Company's key information systems. The failure of organizations such as
securities exchanges, securities clearing organizations, vendors, clients or
domestic or foreign governmental regulatory agencies to resolve their own
processing issues with respect to the Year 2000 Problem or the Euro Issue in a
timely manner could result in a material financial risk to the Company.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
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 any data or information the result of which might be to revise
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
General Factors
The Company's revenues and income are derived primarily from the management of a
variety of financial services products. The level of assets under management may
be impacted by a number of factors such as general economic and market
conditions (both domestic and global); changes in interest rates and/or
inflation rates; the level of fund sales and redemptions; and competition within
the financial services industry, which also affect sales and redemptions.
Competition within the industry also impacts the level of expenses related to
fund distribution. Sales of mutual fund shares and other financial services
products can also be negatively affected by burdensome domestic or foreign
governmental regulations.
Assets Under Management
The world's securities exchanges are currently experiencing the longest "bull
market" in history with unprecedented levels of investor demand for equity
securities. As a result of this financial environment, the Company's equity
holdings under management have increased in value, which has contributed to
increased assets under management and increased revenues. The valuation of the
equity portion of the Company's assets under management is especially subject to
the securities markets, which are cyclical and subject to periodic corrections.
A downturn in these financial markets 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. In addition, the Company
derives higher revenues from its equity assets and therefore a future shift in
assets from equity to fixed-income would, in most instances, have an adverse
impact on the Company's income and revenues.
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. The effects of the foregoing
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. In addition, the shift in
the Company's asset mix from primarily fixed-income to a combination of
fixed-income and global equities has increased the possibility of volatility in
the value of the Company's managed portfolios due to the increased percentage of
equity investments managed.
The Company's assets under management include a significant number of global
equities, which may 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.
Competition
The financial services industry is highly and increasingly competitive. Such
competition could negatively impact the Company's market share, which could
affect assets under management, from which the bulk of the Company's revenues
and income arise.
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 any of these
financial institutions, which remain the principal distribution channel for the
Company's shares, limit or restrict the sale of Franklin, Templeton or Mutual
Series shares through their distribution systems in favor of their proprietary
products, assets under management might decline 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.
As investor interest in the mutual fund industry has continued to increase, the
methods and costs of distribution of mutual fund shares has become more complex
in all segments of the industry. A multiple pricing structure has become
increasingly common in what were previously two separate distribution channels,
those with sales charges and those without sales charges. This has and will have
the effect of increasing the Company's costs of distribution and has and will
increase the amount of cash required for the advancement of sales commissions
and similar charges. If the Company is unable to fund commissions on deferred
sales charge mutual fund shares using existing cash flow and debt facilities,
additional funding will be necessary. Such increased sales costs and cash
requirements could have a material adverse effect on the Company's revenues and
earnings.
Other
- -----
The Company may also be subject to a variety of risks arising out of the Year
2000 Problem and the Euro Issue as more particularly set forth above.
The Company's real estate activities are subject to fluctuations in the real
estate marketplace 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
marketplaces as well as to significant competition from companies with much
larger receivable portfolios. In addition, certain of the Company's competitors
in the auto receivables marketplace finance auto loans as an adjunct to their
primary automobile manufacturing businesses and may at times provide auto loans
at significantly below then-market interest rates in order to further the sale
of their 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. The interest rates that
the Company can charge and, therefore, the yields on such 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 4 Indenture between the Registrant and The Chase Manhattan Bank
(formerly Chemical Bank), as trustee, dated as of May 19, 1994,
incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-3, filed on April 14, 1994
Exhibit 10.1 Representative Agreement for the Supply of Investment
Management and Administration Services, dated
February 16, 1998 by and between Templeton Funds and
Templeton Investment Management Limited
Exhibit 11 Computations of per share earnings.
Exhibit 12 Computations of ratios of earnings to fixed charges.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K:
(i) Form 8-K dated January 22, 1998 reporting under Item 5 "Other
Events" the filing of an earnings press release by the Registrant
on January 20, 1998 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: May 15, 1998 /S/ Martin L. Flanagan
-----------------------
MARTIN L. FLANAGAN
Senior Vice President,
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 incorporated by reference to Exhibit
3(v) to the Company's Form 10-Q for the Quarterly Period ended
December 31, 1994
Exhibit 4 Indenture between the Registrant and The Chase Manhattan Bank
(formerly Chemical Bank), as trustee, dated as of May 19, 1994,
incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-3, filed on April 14, 1994
Exhibit 10.1 Representative Agreement for the Supply of Investment
Management and Administration Services, dated
February 16, 1998 by and between Templeton Funds and
Templeton Investment Management Limited
Exhibit 11 Computations of per share earnings.
Exhibit 12 Computations of ratios of earnings to fixed charges.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K:
(i) Form 8-K dated January 22, 1998 reporting under Item 5 "Other
Events" the filing of an earnings press release by the Registrant
on January 20, 1998 and including said press release as an
Exhibit under Item 7 "Financial Statements and Exhibits".