SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 30, 1996
(August 30, 1996)
......................... FRANKLIN RESOURCES, INC. ....................
(Exact name of registrant as specified in its charter)
.... DELAWARE ................. 1-9318 ....... 13-2670991 ...
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
777 MARINERS ISLAND BLVD., SAN MATEO, CALIFORNIA ........ 94404...
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code..(415) 312-3000
.......................................................................
(Former name or former address, if changed since last report)
Item 5. Other Events
Franklin Resources, Inc. (the "Registrant") is filing this report
solely for the purpose of providing certain historical and pro forma
financial information in connection with the Registrant's previously
announced agreement to acquire certain of the assets and liabilities of
Heine Securities Corporation ("Heine"). Such transaction has not yet
been consummated.
As more fully described in the Registrant's Current Report on Form
8-K/A filed on June 26, 1996, the Registrant and its subsidiary,
Franklin Mutual Advisers, Inc. (f/k/a Elmore Securities Corporation),
have entered into an agreement (the "Agreement") with Heine and its
sole stockholder and chief executive officer, Michael F. Price, to
acquire certain of the assets, and assume certain of the liabilities,
of Heine for a base purchase price consisting of a $400 million cash
payment, the delivery of 1.1 million shares of the Registrant's common
stock and the deposit in escrow of $150 million to be invested in
shares of the Mutual Series Fund Inc. ("Mutual"), a series of funds
managed by Heine. Such Mutual shares will be released to Heine over a
five year period with a minimum $100 million retention for the full
five year period. The 1.1 million shares of the Registrant's common
stock were originally deposited in escrow pending the closing of the
acquisition. The parties have subsequently agreed to release such
shares and the Registrant will deliver such shares at closing. In addition
to the base purchase price, the Agreement also provides for a
contingent payment to Heine ranging from $96.25 million to $192.5
million under certain conditions if certain agreed upon growth targets
are met over the next five years.
It is anticipated that the closing of the transaction will take
place on or about October 31, 1996. Completion of the acquisition is,
however, subject to the satisfaction of certain conditions specified in
the Agreement, including the accuracy of representations and
warranties; compliance with covenants (including approval of the
shareholders of Mutual); Mr. Price's employment agreement with Heine,
and the employment agreements of three of five other senior executives,
being in full force and effect at the time of closing; and the absence
of any event which would have a material adverse effect on Heine, as
well as other customary conditions. In addition, the Registrant or
Heine may terminate the transaction if at least 80% of the total assets
under Heine's management as of the date of the Agreement are not still
under management by Heine immediately prior to the closing.
The foregoing descriptions of certain provisions of the Agreement
are only summaries thereof, and such statements are qualified in their
entirety by reference to all provisions of the Agreement attached as
Exhibit 2 to the Registrant's Current Report on Form 8-K filed on June
25, 1996.
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits.
(a) Financial Statements of Businesses Acquired.
(i) 12/31/95 Heine Securities Corporation
Report on Examination
(ii) 12/31/94 Heine Securities Corporation
Report on Examination
(iii) Heine Unaudited Financial Statement for
period ended 6/30/96
(iv) Heine Unaudited Financial Statement for
period ended 6/30/95
(b) Pro Forma Financial Information
(i) Franklin Resources, Inc. Unaudited Pro Forma
Condensed Consolidated Financial Statements
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 hereunto duly authorized.
FRANKLIN RESOURCES, INC.
(Registrant)
Date: August 30, 1996 /s/ Leslie M. Kratter
---------------------
LESLIE M. KRATTER
Vice President
Financial Statements
(a) Financial Statements of Businesses Acquired.
(i) 12/31/95 Heine Securities Corporation
Report on Examination
(ii) 12/31/94 Heine Securities Corporation
Report on Examination
(iii) Heine Unaudited Financial Statement for
period ended 6/30/96
(iv) Heine Unaudited Financial Statement for
period ended 6/30/95
(b) Pro Forma Financial Information
(i) Franklin Resources, Inc. Unaudited Pro Forma
Condensed Consolidated Financial Statements
Exhibit (a)(i) 12/31/95 Heine Securities Corporation
Report on Examination
HEINE SECURITIES CORPORATION
----------------------------
REPORT ON EXAMINATION
----------------------
DECEMBER 31, 1995
-----------------------
INDEPENDENT AUDITORS' REPORT
---------------------------------
To the Officers and Director of
Heine Securities Corporation
Short Hills, New Jersey 07078
We have audited the accompanying balance sheet of Heine Securities
Corporation as of December 31, 1995, and the related statements of
income and retained earnings, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Heine
Securities Corporation as of December 31, 1995, and the results of its
operations and its cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ Graber & Co.
-----------------
GRABER & CO.
Certified Public Accountants
February 8, 1996
Garden City, New York
HEINE SECURITIES CORPORATION
-----------------------------
BALANCE SHEET
----------------
DECEMBER 31, 1995
---------------------
ASSETS
----------
Cash and cash equivalents $ 14,910
Management fees receivable 7,747,454
Due from Mutual Series Fund
- administrative expenses 739,570
Due from Clearwater Securities, Inc.
- administrative expenses 336,904
Other receivables 193,790
Investments - at market value (note 2) 2,793
Prepaid expenses 143,274
Property and equipment - net of accumulated
depreciation of $798,076 (notes 2 and 3) 409,261
---------
TOTAL ASSETS 9,587,956
------------ =========
LIABILITIES AND SHAREHOLDER'S EQUITY
-------------------------------------
LIABILITIES:
- -----------
Accounts payable and accrued expenses 1,030,120
Income taxes payable 476,205
--------
TOTAL LIABILITIES 1,506,325
----------------
SHAREHOLDER'S EQUITY:
- --------------------
Common stock without par value:
authorized 1,000 shares; issued
and outstanding 1 share $ 1,000
Retained earnings 8,080,631
---------
TOTAL SHAREHOLDER'S EQUITY 8,081,631
--------------------------- ---------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $9,587,956
------------------------ ==========
The accompanying notes are an integral part of the financial
statements.
HEINE SECURITIES CORPORATION
-----------------------------
STATEMENT OF INCOME AND RETAINED EARNINGS
-----------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------
INCOME:
- ------
Investment advisory fees (note 4) $71,548,602
Administrative fees allocated
to Mutual Series Fund Inc. and
Clearwater Securities, Inc. (note 4) 3,911,272
Interest 29,211
Other 20,023
------
TOTAL INCOME $ 75,509,108
------------
EXPENSES:
- --------
Salaries and compensation 21,200,529
Employee fringe benefits 837,952
Retirement plan (note 5) 265,453
Printing 786,435
Stationery and postage 492,176
Communications 250,239
Professional fees 306,790
Travel and entertainment 534,814
Occupancy 252,360
Depreciation 123,635
Messenger and delivery 36,394
Insurance 26,237
Maintenance and repairs 44,864
Charitable contributions 43,402
Other 77,955
------
TOTAL EXPENSES 25,279,235
-------------- ----------
Income before provision for income tax
and change in unrealized appreciation
of investments 50,229,873
Provision for state income tax (note 2) 1,216,206
-----------
Income before change in unrealized
appreciation of investments 49,013,667
Decrease in unrealized appreciation
of investments 600
------------
NET INCOME 49,013,067
- ----------
Retained earnings - December 31, 1994 5,367,564
Distribution of earnings to shareholder (46,300,000)
----------
RETAINED EARNINGS - DECEMBER 31. 1995 $ 8,080,631
- -------------------------------------- ============
The accompanying notes are an integral part of the financial
statements.
HEINE SECURITIES CORPORATION
----------------------------
STATEMENT OF CASH FLOWS
-----------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
-------------------------------------
CASH PROVIDED BY (USED FOR)
- ---------------------------
OPERATING ACTIVITIES:
- ---------------------
Net income $ 49,013,067
Adjustments to reconcile net income to
net cash:
Depreciation $ 123,635
Decrease in market value of investments 600
Change in assets and liabilities:
Management fees receivable (3,053,855)
Receivable from Mutual Series Fund Inc.
- administrative expenses 415,966
Receivable from Clearwater Securities, Inc.
- administrative expenses (204,377)
Other receivables (151,315)
Prepaid expenses (87,011)
Accounts payable and accrued expenses 573,890
Income taxes payable (224,662)
--------
Total adjustments (2,607,129)
--------------
NET CASH PROVIDED BY
--------------------
OPERATING ACTIVITIES 46,405,938
----------------------
CASH USED FOR
- -------------
INVESTING ACTIVITIES:
- ----------------------
Additions to property and equipment (222,390)
CASH USED FOR FINANCING ACTIVITIES:
- ----------------------------------
Distribution of earnings to shareholder (46,300,000)
------------
Net decrease in cash and cash equivalents (116,452)
Cash and cash equivalents at beginning of year 131,362
-------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 14,910
- ---------------------------------------- =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
- -------------------------------------------------
Cash paid during the year for:
Interest $ -0-
Taxes $1,440,868
The accompanying notes are an integral part of the financial
statements.
HEINE SECURITIES CORPORATION
-----------------------------
NOTES TO FINANCIAL STATEMENTS
------------------------------
DECEMBER 31, 1995
------------------
NOTE 1: ORGANIZATION
- -------- ------------
Heine Securities Corporation (the "Company") is registered
under the Investment Advisers Act of 1940 and serves as Investment
Adviser to Mutual Series Fund Inc. (the "Series Fund") consisting
of four portfolios. The Company also provides investment advisory
services to other entities.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
- ------ -------------------------------
The following is a summary of significant accounting
policies consistently followed by the Company in the preparation
of its financial statements. The policies are in conformity with
generally accepted accounting principles.
Investments:
-----------
Investments in securities, recorded on a settlement date
basis, are valued at fair market value, with unrealized gains
and losses reflected in the financial statements.
Property and Equipment and Depreciation:
---------------------------------------
Property and equipment is stated at cost. Depreciation
for both financial reporting and tax reporting purposes is
being provided by accelerated methods over the estimated
useful lives of the related assets.
Income Taxes:
------------
Effective August 1, 1986, the Company had elected to be
taxed under the provisions of Subchapter S of the Internal
Revenue Code for Federal purposes. Under those provisions,
the Company does not pay corporate income taxes on its
taxable income; instead, each shareholder is liable for
individual taxes on his respective share of the Company's
taxable income. Accordingly, no provision for such taxes has
been made. The Company elected New Jersey S-Corporation
status beginning January 1, 1994, but is subject to corporate
taxes at a lower corporate rate than corporations not making
such an election.
NOTE 3: PROPERTY AND EQUIPMENT
- ------ ----------------------
Property and equipment and their estimated useful lives
consists of the following:
Furniture and fixtures (7 years) $ 505,177
Equipment (5 years) 296,195
Leasehold improvements (7 - 10 years) 405,965
---------
1,207,337
Less: Accumulated depreciation 798,076
---------
$ 409,261
==========
NOTE 4: INVESTMENT ADVISORY FEES AND TRANSACTIONS WITH
- ------ ----------------------------------------------
AFFILIATES
------------
Investment advisory agreements in effect during 1995
provided for payment by the Series Fund to the Company of a
monthly fee based on average daily net assets of four portfolios,
three at the annual rate of .60% and the fourth at the annual rate
of .80%. The agreements shall continue in effect through June 30,
1996, subject to termination without penalty, on sixty days notice
by either party. Investment advisory fees paid by the Series Fund
account for approximately 95% of the fees earned by the Company.
Certain officers and the director of the Company are also
executive officers and a director of the Series Fund.
The Company manages the investments, provides various
administrative services and supervises the daily business affairs
of each portfolio of the Series Fund, subject to supervision of
the Board of Directors of the Series Fund. Expense and other cost
obligations of each portfolio are included in the investment
advisory agreement, with the Company reimbursed for certain
administrative services it incurs on behalf of each portfolio.
In October, 1994, a new affiliate of the Company, Clearwater
Securities, Inc. ("Clearwater"), an NASD member broker-dealer
registered with the Securities and Exchange Commission, began
executing trades in exchange listed securities for the Company's
clients through a clearing broker. Certain officers, employees
and the director of the Company are also officers, employees and a
director of Clearwater. The Company is reimbursed for certain
administrative services it incurs on behalf of Clearwater.
NOTE 5: RETIREMENT PLAN
- ------ ---------------
Effective July 1, 1988, the Company adopted a new defined
contribution retirement plan. Employees become participants upon
completing one year of service (as defined in the plan) and become
fully vested upon attainment of the earlier of age 65 or the
completion of five years of employment.
Employer contributions for a year shall be determined by the
sole discretion of the Company's director subject to the maximum
allowable by the Internal Revenue Code for any one employee
account. For the year ended December 31, 1995, the Company's
contribution was $265,453.
NOTE 6: LEASE COMMITMENTS
- ------ -----------------
In November, 1995, the Company entered into an agreement to
lease additional space and extend the term of the original lease
for its office, for an additional seven year period commencing on
June 1, 1998 and expiring on May 31, 2005. Under the amendment,
the basic annual rent for all space shall increase to $647,100 per
year from $448,000 per year through October 31, 1998, to $744,165
for the next three years and to $776,520 per year for the last
four years ending May 31, 2005. The lease also provides for
increases in operating expenses and property taxes to be borne by
the Company. In addition, the Company was granted an additional
option for a further term of five years with a basic annual rent
equal to 95% of the fair market rental value of the premises at
the commencement of such renewal term.
The Company, in turn, has allocated space to the Series Fund
and Clearwater, with much of the newly obtained space to be used
by the Series Fund. The net annual basic rental cost to the
Company, for its allocated portion of space is not expected to
vary much from the $233,000 incurred in 1995. The cost of
construction is expected to be largely funded by a $500,000
contribution from the landlord. The three entities will continue
to share common operating costs in accordance with methods and
allocations consistent with relevant provisions of the Securities
Exchange Act of 1934, the Investment Company Act of 1940 and the
Investment Advisers Act of 1940.
The Company has also entered into a lease with Jet Express
Transit Corp. ("Jet Express"), an affiliate, for a five year
period beginning January 1, 1996 and ending December 31, 2000,
which term shall then be renewed annually. Under the lease, the
Company shall have the right to use the aircraft on an "as needed"
basis provided such use will be for a minimum of 175 hours per
year at a rental rate of $3,500 per hour or a minimum annual cost
of $612,500. The operation and use of the aircraft shall be at
the risk of the Company with indemnity protection provided to Jet
Express from and against all liability, loss, damage, expense
caused directly or indirectly by injury to person or property from
use of the aircraft as well as from certain other specified
conditions.
NOTE 7: EMPLOYMENT AGREEMENTS AND OTHER COMMITMENTS
- ------ -------------------------------------------
On December 28, 1995, the Company entered into employment
agreements with five key employees. The agreements, which are for
an initial term of five years, commence with the date on which
Heine Securities Corporation ("HSC") and or Michael F. Price
("Price") sign a definitive agreement providing for an HSC Change
of Control Transaction, as defined. In the absence of a closing
date of an HSC Change of Control Transaction prior to December 31,
1996, the agreements shall terminate and have no force or effect.
The agreements for the five employees in the aggregate
provide for a minimum base salary of $2,250,000 per year,
guaranteed payments of the greater of $7,000,000 per year or a
percentage of the sales price received by Price considered
nonforfeitable, but not in excess of 7% of such purchase price.
In addition, the Company shall establish a bonus pool for benefit
of its key personnel, including the five contracted employees in
an amount not less than the greater of $6,800,000 or 11% of
Adjusted Earnings, as defined, with a minimum bonus for the five
contracted employees of no less than $3,150,000 in the first year
increasing to $3,840,000 by the fifth year.
In addition, a plan established for key employees by the
Company in November 1989, and amended in August, 1991, currently
provides in the aggregate up to approximately $730,000 to be paid
to participants on the closing date of any sale of substantially
all of the assets or stock of the Company or the merger of the
Company into another company.
Exhibit (a)(ii) 12/31/94 Heine Securities Corporation
Report on Examination
HEINE SECURITIES CORPORATION
-----------------------------
REPORT ON EXAMINATION
----------------------
December 31, 1994
------------------
INDEPENDENT AUDITORS' REPORT
-----------------------------
To the Officers and Director of
Heine Securities Corporation
Short Hills, New Jersey 07078
We have audited the accompanying balance sheet of Heine
Securities Corporation as of December 31, 1994, and the related
statements of income and retained earnings, and cash flows for the
year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Heine Securities Corporation as of December 31, 1994 and the results
of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Graber & Co.
----------------
GRABER & CO.
Certified Public Accountants
January 31, 1995
Garden City, New York
HEINE SECURITIES CORPORATION
----------------------------
BALANCE SHEET
-------------
DECEMBER 31, 1994
------------------
ASSETS
-------
Cash and cash equivalents $ 131,362
Management fees receivable 4,693,599
Due from Mutual Series Fund
- administrative expenses 1,155,536
Due from Clearwater Securities, Inc.
- administrative expenses 132,527
Other receivables 42,475
Investments - at market value (note 2) 3,393
Prepaid expenses 56,263
Property and equipment - net of accumulated
depreciation of $674,441 (notes 2 and 3) 310,506
-------
TOTAL ASSETS $6,525,661
------------- ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
LIABILITIES:
- ------------
Accounts payable and accrued expenses $ 456,230
Income taxes payable 700,867
-------
TOTAL LIABILITIES: 1,157,097
-----------------
SHAREHOLDER'S EQUITY:
- --------------------
Common stock without par value:
authorized 1,000 shares; issued
and outstanding 1 share $ 1,000
Retained earnings 5,367,564
---------
TOTAL SHAREHOLDER'S EQUITY 5,368,564
- -------------------------- ---------
TOTAL LIABILITIES AND
- ---------------------
SHAREHOLDER'S EQUITY 6,525,661
- ---------------------- =========
The accompanying notes are an integral part of the financial
statements.
HEINE SECURITIES CORPORATION
-----------------------------
STATEMENT OF INCOME AND RETAINED EARNINGS
-----------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1994
-------------------------------------
INCOME:
- ------
Investment advisory fees (note 4) $48,732,890
Administrative fees allocated principly
to Mutual Series Fund Inc. (note 4) 2,879,013
Interest 28,301
Other 53,739
-------
TOTAL INCOME $51,693,943
-------------
EXPENSES:
- --------
Salaries and compensation 17,045,326
Employee fringe benefits 700,909
Retirement plan (note 5) 229,473
Printing 573,983
Stationery and postage 309,321
Mailing 66,130
Professional fees 242,355
Travel and entertainment 555,069
Occupancy 161,155
Depreciation 101,806
Communications 120,366
Insurance 29,703
Maintenance and repairs 18,999
Charitable contributions 48,770
Other 103,138
-------
TOTAL EXPENSES 20,306,503
--------------- ----------
Income before provision for income tax
and change in unrealized appreciation
of investments 31,387,440
Provision for state income tax (note 2) 736,867
-------
Income before change in unrealized
appreciation of investments 30,650,573
Decrease in unrealized appreciation
of investments 1,036
-----
NET INCOME 30,649,537
----------
Retained earnings - December 31, 1993 1,218,027
Distribution of earnings to shareholder (26,500,000)
------------
RETAINED EARNINGS - DECEMBER 31. 1994 $ 5,367,564
-------------------------------------- ==============
The accompanying notes are an integral part of the financial statements.
HEINE SECURITIES CORPORATION
----------------------------
STATEMENT OF CASH FLOWS
-----------------------
FOR THE YEAR ENDED DECEMBER 31, 1994
------------------------------------
CASH PROVIDED BY (USED FOR)
- ---------------------------
OPERATING ACTIVITIES:
- --------------------
Net income $ 30,649,537
Adjustments to reconcile net income to
net cash:
Depreciation $ 101,806
Decrease in market value of investments 1,036
Change in assets and liabilities:
Management fees receivable (969,742)
Receivable from Mutual Series Fund Inc.
- administrative expense 160,130
Receivable from Clearwater Securities, Inc.
- administrative expense (132,527)
Other receivables 155,154
Prepaid expenses (49,978)
Accounts payable and accrued expenses 46,900
Income taxes payable 677,278
-------
Total adjustments (9,943)
--------
NET CASH PROVIDED BY
--------------------
OPERATING ACTIVITIES 30,639,594
----------------------
CASH PROVIDED BY (USED FOR)
- ---------------------------
INVESTING ACTIVITIES:
- ----------------------
Additions to property and equipment (51,971)
Liquidating distributions received
on investments 4,606
------
NET CASH USED FOR
- -----------------
INVESTING ACTIVITIES (47,365)
----------------------
CASH USED FOR FINANCING ACTIVITIES:
- ----------------------------------
Decrease in note payable to bank (4,100,000)
Distribution of earnings to shareholde (26,500,000)
------------
NET CASH USED FOR
-----------------
FINANCING ACTIVITIES (30,600,000)
---------------------- ------------
Net decrease in cash and cash equivalents (7,771)
Cash and cash equivalents at beginning of year 139,133
-------
CASH AND CASH EQUIVALENTS AT END OF YEAR $131,362
- ---------------------------------------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
- -------------------------------------------------
Cash paid during the year for:
Interest $ 9,044
Taxes $ 59,590
The accompanying notes are an integral part of the financial statements.
HEINE SECURITIES CORPORATION
-----------------------------
NOTES TO FINANCIAL STATEMENTS
------------------------------
DECEMBER 31. 1994
------------------
NOTE 1: ORGANIZATION
- ------ ------------
Heine Securities Corporation (the "Company") is registered under
the Investment Advisers Act of 1940 and serves as Investment Adviser to
Mutual Series Fund Inc. (the "Series Fund") consisting of four
portfolios. The Company also provides investment advisory services to
other entities.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
- ------ -------------------------------
The following is a summary of significant accounting policies
consistently followed by the Company in the preparation of its
financial statements. The policies are in conformity with generally
accepted accounting principles.
Investments:
-------------
Investments in securities, recorded on a settlement date
basis, are valued at fair market value, with unrealized gains and
losses reflected in the financial statements.
Property and Equipment and Depreciation:
---------------------------------------
Property and equipment is stated at cost. Depreciation for
both financial reporting and tax reporting purposes is being
provided by accelerated methods over the estimated useful lives of
the related assets.
Income Taxes:
-------------
Effective August 1, 1986, the Company had elected to be taxed
under the provisions of Subchapter S of the Internal Revenue Code
for Federal purposes. Under those provisions, the Company does
not pay corporate income taxes on its taxable income; instead,
each shareholder is liable for individual taxes on his respective
share of the Company's taxable income. Accordingly, no provision
for such taxes has been made. The Company elected New Jersey
S-Corporation status beginning January 1, 1994, but is subject to
corporate taxes at a lower corporate rate than corporations not
making such an election.
NOTE 3: PROPERTY AND EQUIPMENT
- ------ ----------------------
Property and equipment and their estimated useful lives consists of the
following:
Furniture and fixtures (7 years) $483,473
Equipment (5 years) 146,546
Leasehold improvements(7 - 10 years) 354,928
-------
984,947
Less:Accumulated depreciation 674,441
-------
$310,506
========
NOTE 4: INVESTMENT ADVISORY FEES AND TRANSACTIONS WITH AFFILIATES
- ------ ---------------------------------------------------------
Investment advisory agreements in effect during 1994 provided for
payment by the Series Fund to the Company of a monthly fee based on
average daily net assets of four portfolios, three at the annual rate
of .60% and the fourth at the annual rate of .80%. The agreements
shall continue in effect through June 30, 1995, subject to termination
without penalty, on sixty days notice by either party. Certain
officers and the director of the Company are also executive officers
and a director of the Series Fund.
The Company manages the investments, provides various
administrative services and supervises the daily business affairs of
each portfolio of the Series Fund, subject to supervision of the Board
of Directors of the Series Fund. Expense and other cost obligations of
each portfolio are included in the investment advisory agreement, with
the Company reimbursed for certain administrative services it incurs on
behalf of each portfolio.
In October, 1994, a new affiliate of the Company, Clearwater
Securities, Inc. ("Clearwater"), an NASD member broker-dealer
registered with the Securities and Exchange Commission, began executing
trades in exchange listed securities for the Company's clients through
a clearing broker. Certain officers, employees and the director of the
Company are also officers, employees and a director of Clearwater. The
Company is reimbursed for certain administrative services it incurs on
behalf of Clearwater.
NOTE 5: RETIREMENT PLAN
- ------ ---------------
Effective July 1, 1988, the Company adopted a new defined
contribution retirement plan. Employees become participants upon
completing one year of service (as defined in the plan) and become
fully vested upon attainment of the earlier of age 65 or the completion
of five years of employment.
Employer contributions for a year shall be determined by the sole
discretion of the Company's director subject to the maximum allowable
by the Internal Revenue Code for any one employee account. For the year
ended December 31, 1994, the Company's contribution was $229,473.
NOTE 6: COMMITMENTS
- ------ -----------
In January, 1993, the Company entered into an agreement to lease
additional space and extend the term of the original lease for its
office, for a five year period commencing on June 1, 1993 and expiring
on May 31, 1998. Under the amendment, the basic annual rent for all
space shall increase to $448,000 per year from $436,000 per year with
credits allowed from the effective date of the amendment, June 1, 1993
through April 27, 1994. The lease also provides for increases in
operating expenses and property taxes to be borne by the Company. In
addition, the Company was granted an additional option for a further
term of five years with a basic annual rent equal to 95% of the fair
market rental value of the premises at the commencement of such renewal
term.
The Company, in turn, has entered into sublease arrangements with
the Series Fund and Clearwater for space sublet to them for the same
period of time. The net annual basic rental cost to the Company, net
of sublet income, after expiration of allowable credits, will be
approximately $227,000. The three entities will continue to share
common operating costs in accordance with methods and allocations
consistent with relevant provisions of the Securities Exchange Act of
1934, the Investment Company Act of 1940 and the Investment Advisers
Act of 1940.
Exhibit (a)(iii) Heine Unaudited Financial Statement for
period ended 6/30/96s
HEINE SECURITIES CORPORATION
-----------------------------
BALANCE SHEET
----------------
UNAUDITED
JUNE 30, 1996
---------------
ASSETS
Cash $ 51,516
Accounts receivable:
Investment management fees 9,212,854
Other 1,284,735
Other assets 1,124,228
------------
TOTAL ASSETS $11,673,333
============
LIABILITIES AND SHAREHOLDER'S EQUITY
- -------------------------------------
LIABILITIES:
Accounts payable and accrued
expenses $ 7,741,107
Income taxes payable 948,000
------------
TOTAL LIABILITIES 8,689,107
------------
SHAREHOLDER'S EQUITY:
Common stock without par value:
authorized 1,000 shares; issued
and outstanding 1 share $1,000
Retained earnings 2,983,226
------------
TOTAL SHAREHOLDER'S EQUITY 2,984,226
------------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $ 11,673,333
============
HEINE SECURITIES CORPORATION
-----------------------------
STATEMENT OF INCOME
---------------------
UNAUDITED
FOR THE SIX MONTHS ENDED JUNE 30, 1996
--------------------------------------
REVENUES:
Investment management fees $ 49,809,043
Other 2,463,676
------------
Total revenues 52,272,719
EXPENSES:
Employee related 14,199,875
General and administrative 2,015,858
------------
Total expenses 16,215,733
Income before taxes 36,056,986
Provision for income taxes 1,852,217
------------
Net income $ 34,204,769
============
HEINE SECURITIES CORPORATION
------------------------------
STATEMENT OF CASH FLOW
----------------------
UNAUDITED
FOR THE SIX MONTHS ENDED JUNE 39, 1996
----------------------------------------
Net income $ 34,204,769
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 65,345
Change in assets and liabilities:
Accounts receivable - Investment
management fees (1,465,400)
Accounts receivable - other (14,471)
Other assets (737,502)
Accounts payable and accrued
expenses 6,710,987
Income taxes payable 471,795
-----------
NET CASH PROVIDED BY OPERATIONS 39,235,523
CASH USED FOR INVESTING ACTIVITIES
Additions to property, plant and
equipment 101,083
CASH USED FOR FINANCING ACTIVITIES
Distribution of earnings to
shareholder (39,300,000)
------------
Increase in cash during the period 36,606
CASH AT THE BEGINNING OF THE PERIOD 14,910
--------
CASH AT THE END OF THE PERIOD 51,516
==========
Exhibit (a)(iv) Heine Unaudited Financial Statement for
period ended 6/30/95
HEINE SECURITIES CORPORATION
-----------------------------
BALANCE SHEET
---------------
UNAUDITED
JUNE 30, 1995
-------------
ASSETS
Cash $39,754
Accounts receivable
Investment management fees 5,915,897
Other 1,310,975
Other assets 701,967
----------
TOTAL ASSETS $7,968,593
============
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
LIABILITIES:
Accounts payable and accrued
expenses $4,475,500
Income taxes payable 513,000
----------
TOTAL LIABILITIES 4,988,500
----------
SHAREHOLDER'S EQUITY:
Common stock without par value:
authorized 1,000 shares; issued
and outstanding 1 share $1,000
Retained earnings 2,979,093
----------
TOTAL SHAREHOLDER'S EQUITY 2,980,093
----------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $7,968,593
============
HEINE SECURITIES CORPORATION
-----------------------------
STATEMENT OF INCOME
---------------------
UNAUDITED
FOR THE SIX MONTHS ENDED JUNE 30, 1995
--------------------------------------
REVENUES:
Investment management fees $31,088,617
Other 1,774,858
------------
Total revenues 32,863,475
EXPENSES:
Employee related 10,303,812
General and administrative 1,332,360
------------
Total expenses 11,636,172
Income before taxes 21,227,303
Provision for income taxes 513,001
------------
Net income $ 20,714,302
============
HEINE SECURITIES CORPORATION
-----------------------------
STATEMENT OF CASH FLOW
------------------------
UNAUDITED
FOR THE SIX MONTHS ENDED JUNE 30, 1995E
--------------------------------------
Net income $ 20,714,302
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 44,398
Change in assets and liabilities:
Accounts receivable - Investment
management fees (1,222,298)
Accounts receivable - other 19,563
Other assets (415,841)
Accounts payable and accrued
expenses 4,019,270
Income taxes payable (187,867)
----------
NET CASH PROVIDED BY OPERATIONS 22,971,527
CASH USED FOR INVESTING ACTIVITIES
Additions to property, plant and
equipment 36,865
CASH USED FOR FINANCING ACTIVITIES
Distribution of earnings to
shareholder (23,100,000)
------------
Increase in cash during the period (91,608)
CASH AT THE BEGINNING OF THE PERIOD 131,362
---------
CASH AT THE END OF THE PERIOD 39,754
=========
Exhibit (b)(i)
FRANKLIN RESOURCES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed consolidated balance
sheet as of June 30, 1996 gives effect to the merger of businesses as
if it had occurred on June 30, 1996. The accompanying unaudited pro
forma condensed consolidated statement of operations for the year ended
June 30, 1996 presents the results of operations of Franklin Resources,
Inc. ("the Company") as if such merger had occurred on July 1, 1995.
These unaudited pro forma condensed consolidated financial statements
are not necessarily indicative of the results of operations or
financial condition that would have been achieved had such merger
actually occurred on July 1, 1995, or of the future results of
operations or financial condition of the Company. The pro forma
adjustments set forth below reflect only purchase accounting
adjustments and other adjustments that reflect obligations required
under the Agreement to Merge the Businesses of Franklin Resources, Inc.
and Heine Securities Corporation ("HSC") dated June 25, 1996 ("the
Agreement"). They do not reflect any benefits or cost savings
anticipated as a result of such merger. The pro forma adjustments are
based on available information and certain assumptions that management
believes are reasonable.
The pro forma adjustments are applied to historical consolidated
financial statements of the Company, using the purchase method of
accounting and information available. Under purchase accounting, the
acquisition cost of such ownership interest will be allocated to the
assets and liabilities acquired based on their relative fair value as
of the Closing Date, with any excess of the acquisition cost over the
fair value of the assets acquired less the fair value of the
liabilities assumed recorded as excess of cost over book value
acquired. The final allocations may be different from the amounts
reflected herein; however, management of the Company believes that any
adjustments will not have a material financial impact.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As Of June 30, 1996
(Dollars in Franklin Heine Pro forma Pro forma
thousand) 30-Jun-96 30-Jun-96 Adjustments Reference Franklin
- ----------- ---------- ---------- ---------- --------- ---------
ASSETS:
Cash and cash $ 52 $ (52) (1)
equivalents $ 383,326 (285,000) (2) $ 98,326
Banking/finance
loans receivable,
net 367,958 - - 367,958
Receivables other 158,324 10,498 (10,498) (1) 158,324
Investment
securities,
available for sale 245,456 - - 245,456
Premises and
equipment, net 142,663 445 973 (2) 144,081
Intangibles - - 580,000 (2) 580,000
Goodwill, net 646,438 - 37,520 (2) 683,958
Other assets 64,923 678 (678) (1) 64,923
- ------------------ ---------- ---------- ----------- --------- ---------
Total assets 2,009,088 11,673 322,265 2,343,026
================== ========== ========== =========== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITES:
Trade payables and
accrued expenses 129,602 8,689 (8,689) (1) 129,602
Debt 379,993 - 270,000 (2) 649,993
Other liabilities 173,702 - - 173,702
-----------------------------------------------------------------------
Total
liabilities 683,297 8,689 261,311 953,297
-----------------------------------------------------------------------
STOCKHOLDERS'
EQUITY
Common stock 8,226 1 (1) (1) 9,326
1,100 (2)
Capital in excess
of par value 98,933 62,838 (2) 161,771
Retained earnings 1,305,209 2,983 (2,983) (1) 1,305,209
Less cost of
treasury stock (86,577) (86,577)
-----------------------------------------------------------------------
Total stock-
holders' equity 1,325,791 2,984 60,954 1,389,729
-----------------------------------------------------------------------
2,009,088 11,673 322,265 2,343,026
The accompanying notes are an integral part of these unaudited pro
forma condensed consolidated financial statements
Franklin Resources, Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For The Twelve Months Ended June 30, 1996
(In thousands except per share data)
Franklin Heine Pro Pro
Resources, Securities Forma Forma
Inc. Corp. Adjust- Reference Combined
ments
- -----------------------------------------------------------------------
Revenues:
Investment
management fees $841,586 $94,754 $ 900 (3) $936,579
(661) (4)
Sales and
distribution fees 533,106 - 533,106
Transfer, trust
and related fees 88,080 - 88,080
Banking/finance,
net and other 5,272 - 5,272
- -----------------------------------------------------------------------
1,468,044 94,754 239 1,563,037
- -----------------------------------------------------------------------
Expenses:
Commissions and
distribution 459,337 - - 459,337
General and
administrative 520,525 29,860 5,066 (5) 555,451
Selling 67,717 - 3,500 (6) 71,217
Intangible
amortization 18,413 - 17,510 (7) 35,923
- -----------------------------------------------------------------------
1,065,992 29,860 26,076 1,121,928
- ----------------------------------------------------------------------
Operating income 402,052 64,894 (25,837) 441,109
- -----------------------------------------------------------------------
Other income
(expenses), net
Investment and
other income 45,773 165 (15,950) (8) 29,988
Interest expense (10,807) - (16,612) (9) (27,419)
- -----------------------------------------------------------------------
34,966 165 (32,562) 2,569
- -----------------------------------------------------------------------
Income before
taxes 437,018 65,059 (58,399) 443,678
Taxes on income 133,217 2,555 166 (10) 135,938
- -----------------------------------------------------------------------
Net income $303,801 $62,504 $(58,565) $307,740
=======================================================================
Earnings per
share:
Primary $3.65 $3.64
Fully diluted $3.63 $3.63
Weighted average
number of shares:
Primary 83,345 1,100 84,445
Fully diluted 83,630 1,100 84,730
The accompanying notes are an integral part of these unaudited pro
forma condensed consolidated financial statements
FRANKLIN RESOURCES, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA ADJUSTMENTS
Sources and Uses of Funds
The sources and uses of the financing for the merger are summarized as
follows (dollars in thousands):
Sources of Funds
Available cash $285,000
Issuance of debt 270,000
Issuance of common stock
(1,100,000 shares at $58.125) 63,938
--------
Total sources $618,938
========
Uses of Funds
Purchase of assets and liabilities $613,938
Estimated costs of merger 5,000
--------
Total uses $618,938
========
The Agreement also includes a provision for contingent payments ranging
from $96.25 million to $192.50 million under certain conditions based
upon investment management revenue growth. To obtain the maximum
payment of $192.50 million, investment management fees earned by the
Company must grow at a cumulative compound annual growth rate of 17.5%
for five years. The lower amount of $96.25 million would be paid if
investment management fees grow at a cumulative compound annual growth
rate of 12.5%. Contingent payments are earned pro rata if investment
management fees grow at a cumulative compound annual growth rate
between 12.5% and 17.5%. No contingent payments are earned if the
cumulative compound annual growth rate is below 12.5%.
Merger Adjustments
Pro forma adjustments to give effect to the merger are summarized as
follows:
1. Assets and liabilities excluded from the purchase in accordance
with the Agreement have been removed from the condensed consolidated
pro forma balance sheet.
2. The allocation of the purchase price as of June 30, 1996 is
summarized as follows (dollars in thousands).
Issuance of shares $ 63,938
Cash and debt 555,000
--------
Total cost of purchase 618,938
Fair value of assets acquired (1,418)
Investment management contracts (580,000)
---------
Excess of cost over fair value
of assets acquired $ 37,520
=========
3. The Agreement requires HSC to invest $150 million of the proceeds
from the sale in Mutual Series Fund, Inc. Pro forma investment
management fees have been increased as a result.
4. Revenue earned by providing services to an affiliated broker
dealer is included in investment management fees for HSC. In
accordance with the terms of the Agreement, the Company will no longer
provide these services and accordingly, pro forma management fee
revenue has been decreased.
5. In accordance with the terms of the Agreement, the Company has
assumed HSC's liabilities relating to certain employee incentive
arrangements. These costs are reflected in pro forma general and
administrative expenses.
6. The Agreement requires that a minimum of $7,000,000 be spent on
advertising over a two year period. Pro forma selling expenses have
been increased by $3,500,000 to reflect the first year of that
commitment.
7. Pro forma amortization expense has been increased as the value of
intangibles are amortized over a thirty-five year period and the value
of goodwill is amortized over a forty year period
8. Investment income was adjusted to reflect lower cash balances
available for investing as a result of cash used in the transaction
9. Interest expense was adjusted as follows:
$270 million debt at an average borrowing rate of 6.15% = $16,612,459
10. All applicable pro forma adjustments, as well as the pre-tax
earnings of HSC (an S-Corporation) were tax effected at the appropriate
rate.
