UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
OR
[ ]
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2670991
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 Mariners Island Blvd., San Mateo, CA 94404
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code (650) 312-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value
$.10 per share New York Stock Exchange, Pacific Exchange
and London Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) or the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. YES X NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of $95.375 on December 1, 1997 on the
New York Stock Exchange was $6,373,105,617. Calculation of holdings by
non-affiliates is based upon the assumption, for these purposes only, that
executive officers, directors, nominees, Registrant's Profit Sharing Plan and
persons holding 5% or more of Registrant's Common Stock are affiliates. Number
of shares of the Registrant's common stock outstanding at December 1, 1997:
126,026,610.
DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the registrant's proxy
statement for its Annual Meeting of Stockholders to be held January 20, 1998,
which was filed with the Commission on December 17, 1997, are incorporated by
reference into Part III of this report.
<PAGE>
PART I
Item 1. Business
(a) GENERAL DEVELOPMENT OF BUSINESS
Franklin Resources, Inc. ("FRI") and its predecessors have been engaged in the
financial services business since 1947. FRI was organized in Delaware in
November 1969. The term "Company" as used herein, unless the context otherwise
requires, refers to Franklin Resources, Inc. and its consolidated subsidiaries.
The Company's principal executive and administrative offices are at 777 Mariners
Island Boulevard, San Mateo, California 94404. As of September 30, 1997, the
Company employed over 6,400 employees on a worldwide basis, consisting of
officers, investment management, distribution, administrative, sales and
clerical support staff. The Company also employs additional temporary help as
necessary to meet unusual requirements. Management believes that its relations
with its employees are excellent.
On October 30, 1992, the Company and certain of its direct and indirect
subsidiaries consummated the acquisition (the "Templeton Acquisition") of
substantially all of the assets and liabilities of Templeton, Galbraith &
Hansberger Ltd., a corporation organized under the laws of the Cayman Islands
and based in Nassau, Bahamas ("Old TGH"), which provided diversified investment
management and related services on a worldwide basis directly and through
subsidiaries to various U.S. open-end and closed-end investment companies as
well as to a variety of international investment portfolios and to U.S. and
international private and institutional accounts. Unless the context otherwise
requires, references herein to "Templeton" are deemed to refer to the business
operations acquired by the Company in connection with the Templeton Acquisition
and "Templeton funds" or "Templeton Family of Funds" refers to related funds.
Subsequent to the Templeton Acquisition, the Company has operated the Templeton
businesses on a unified basis with its other business operations.
In November 1993, the Company consummated an agreement to manage and advise the
Huntington Funds of Pasadena, California, now called the Franklin Templeton
Global Trust. This open-end investment company of several currency portfolio
series includes the Franklin Templeton Global Currency Fund, the Franklin
Templeton Hard Currency Fund and the Franklin Templeton High Income Currency
Fund, which invests in high quality foreign equivalent money market instruments
in various global currencies, as well as the Franklin Templeton German
Government Bond Fund, which invests in German government bonds and equivalents.
In November 1996, the Company through its wholly-owned subsidiary, Franklin
Mutual Advisers, Inc. ("FMAI") acquired (the "Mutual Acquisition") certain
assets and liabilities of Heine Securities Corporation ("Heine"), which provided
investment management services to various accounts and investment companies,
including Mutual Series Fund Inc., now known as Franklin Mutual Series Fund Inc.
("Mutual Series"). Mutual Series is an open-end investment company which, at the
time of the Mutual Acquisition, had five (5) series funds. Subsequent to the
Mutual Acquisition, the Company has managed Mutual Series on a unified basis
with its other business. Unless the context otherwise requires, references
herein to the "Mutual Funds" and the "Mutual Series" are deemed to refer to the
business operations acquired by the Company in connection with the Mutual
Acquisition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation" ("MD&A").
The purchase price paid at the closing of the Mutual Acquisition was funded
through a combination of the Company's available cash, securities and the sale
of commercial paper. The base purchase price consisted of $551 million in cash,
including acquisition expenses, and the delivery of 1.1 million shares (the
"Shares"), before the effect of the three-for-two stock dividend paid on January
15, 1997 (the "Stock Dividend"), of the Company's Common Stock. The purchase
price included the deposit into escrow of $150 million to be invested in shares
of Mutual Series, which shares are being released over a five (5) year period
from the date of the acquisition, with a minimum $100 million retention for the
full five (5) year period. In addition to the base purchase price, the
transaction included a contingent payment ranging from $96.25 million to $192.5
million if certain agreed upon growth targets are met over the five (5) years
following the closing.
For a two-year period following the closing of the Mutual Acquisition, Heine and
its chief executive officer, Michael F. Price must limit their ownership of the
Company's common stock to no more than 4.9% and have also agreed to certain
limitations on the transferability of the Shares for this same time period. In
addition, the Shares must be voted in accordance with the recommendations of the
Company's Board of Directors. The Company has also granted certain registration
rights with respect to the Shares. Mr. Price and five (5) senior executives of
Heine entered into employment agreements assumed by FMAI upon the consummation
of the transaction.
In November 1996, the holders of the option rights related to the Company's
subordinated debentures (including entities affiliated with a director of the
Company), which were issued in connection with the Templeton Acquisition,
exercised their option rights to receive approximately 2.4 million shares of the
Company's common stock in exchange for approximately $75 million of subordinated
debentures. In December 1996, the holders of the subordinated debentures sold to
the Company the remaining option rights representing an additional 2.4 million
shares, and surrendered the remaining $75 million of debentures plus accrued
interest for cash of approximately $170 million. This transaction was financed
through the issuance of $100 million in medium-term notes and through cash on
hand. See Note 8 of Notes to Consolidated Financial Statements elsewhere herein.
FRI is principally a parent company primarily engaged, through various
subsidiaries, in providing investment management, marketing, distribution,
transfer agency and other administrative services to the open-end investment
companies of the Franklin Templeton Group and to U.S. and international managed
and institutional accounts. The Company also provides investment management and
related services to a number of closed-end investment companies whose shares are
traded on various major U.S. and some international stock exchanges. In
addition, the Company provides investment management, marketing and distribution
services to certain sponsored investment companies organized in the Grand Duchy
of Luxembourg (hereinafter referred to as "SICAV Funds"), which are distributed
in marketplaces outside of North America and to certain investment funds and
portfolios in Canada (hereinafter referred to as "Canadian Funds") as well as to
certain other international portfolios in the United Kingdom and elsewhere. The
Franklin Templeton Group of Funds consists of forty-four (44) open-end
investment companies with multiple portfolios.
When used in this report, the term "Franklin Group of Funds" refers generally to
the Franklin funds not acquired through either the Templeton or Mutual
Acquisitions nor developed primarily as a result of such acquisitions. The
Franklin Group of Funds, the Templeton Family of Funds, and the Mutual Series
are hereinafter referred to individually as a "Fund" or collectively as the
"Funds", the "Franklin Templeton funds", or the "Franklin Templeton Group of
Funds". Unless specifically noted otherwise, as used in this report the terms
the "Franklin Templeton funds" or the "Franklin Templeton Group" include the
Mutual Series. The closed-end investment companies, the foreign based funds and
the other U.S. and international managed and institutional accounts are
collectively referred to as the "Other Assets". The Franklin Templeton Group of
Funds along with the Other Assets are collectively referred to as the "Franklin
Templeton Group".
As of September 30, 1997, total assets under management in the Franklin
Templeton Group were $226 billion, the make-up of which was approximately as
follows: for the open-end investment companies in the Franklin Templeton Group
(excluding variable annuities), $175.1 billion; and for all the Other Assets
(including variable annuities), $50.9 billion. This makes the Franklin Templeton
Group one of the largest investment management complexes in the United States.
The mix of assets under management by a large financial services complex such as
the Franklin Templeton Group can be segregated by type of assets, type of
investment vehicle, type of investor or geographic location of assets.
International and U.S. equity assets under management, whether held for growth
potential, income potential or various combinations thereof by all types of
investors, including institutional and separate accounts on a worldwide basis,
were approximately $157.4 billion at September 30, 1997 and represent
approximately 70% of total assets under management. Fixed-income assets (both
long and short-term), including money market fund assets, held by all types of
investors on a worldwide basis were approximately $68.6 billion and represented
30% of total assets under management at fiscal year end. Assets under management
for institutional accounts, whether in institutional mutual funds, separate
accounts or other types of investment products, were approximately $30.7 billion
or 14% of total assets under management at fiscal year end and were primarily
invested in global and international equities. Assets under management by U.S.
based closed-end funds or equivalent foreign funds were $6.6 billion, or 2.9% of
total assets, at September 30, 1997.
The Company, through certain subsidiaries, also provides advisory services,
variable annuity products, and sponsors and manages public and private real
estate programs. Other subsidiaries offer consumer banking services, insured
deposits, dealer auto loans, and credit cards. The Company also provides
custodial, trustee and fiduciary services to individual retirement account
("IRA") and profit sharing or money purchase plans and to qualified retirement
plans and private trusts. From time to time, the Company also participates in
various investment management joint ventures. On a consolidated worldwide basis,
the Company provides U.S. and international individual and institutional
investors with a broad range of investment products and services designed to
meet varying investment objectives, which affords its clients the opportunity to
allocate their investment resources among various alternative investment
products as changing worldwide economic and market conditions warrant.
Subsidiaries-Investment Management, Administration, Distribution and
Related Services
The Company's principal line of business is providing investment management,
administration, distribution and related services for the Franklin Templeton
Group. This business is primarily conducted through the principal wholly-owned
direct and indirect subsidiary companies described below. Revenues are generated
primarily by subsidiaries that provide advisory and management services.
Revenues are derived primarily from investment management fees calculated on a
sliding scale fund-by-fund basis, which generally decline as the level of assets
managed increases.
Franklin Advisers, Inc.
Franklin Advisers, Inc. ("Advisers") is a California corporation formed in 1985
and is based in San Mateo, California. Advisers is registered as an investment
advisor with the Securities and Exchange Commission (the "SEC") under the
Investment Advisers Act of 1940 (the "Advisers Act") and is also registered as
an investment advisor in the State of California. Advisers provides investment
advisory, portfolio management and administrative services under management
agreements with most of the Funds in the Franklin Group of Funds. Advisers
manages approximately $83.9 billion, representing approximately 37.1% of the
Company's total assets under management, and generates approximately 17.4% of
total Company revenues.
Franklin Advisory Services, Inc.
Franklin Advisory Services, Inc. ("FASI") is a Delaware corporation formed in
1996 and is based in Fort Lee, New Jersey. FASI is registered as an investment
advisor with the SEC under the Advisers Act and is also registered as an
investment advisor in the State of New Jersey. FASI provides investment advisory
and portfolio management services under management agreements with certain funds
in the Franklin Group of Funds.
Templeton Global Advisors Limited.
Templeton Global Advisors Limited ("TGAL") is a Bahamian corporation located in
Nassau, Bahamas formed in connection with the Templeton Acquisition and is the
successor company to Old TGH. TGAL is registered as an investment advisor with
the SEC under the Advisers Act. TGAL provides investment management services
under various agreements with certain of the Templeton funds and Other Assets.
TGAL is the principal investment advisor to the Templeton funds and manages
approximately $53.6 billion, representing approximately 23.7% of the Company's
total assets under management.
Franklin Investment Advisory Services, Inc.
Franklin Investment Advisory Services, Inc. ("FIASI") is a Delaware corporation
formed in 1996 and is based in Norwalk, Connecticut. FIASI is registered as an
investment advisor with the SEC under the Advisers Act.
Franklin Mutual Advisers, Inc.
Franklin Mutual Advisers, Inc. ("FMAI") is a Delaware corporation formed in 1996
and is based in Short Hills, New Jersey. FMAI is registered as an investment
advisor with the SEC under the Advisers Act and is also registered as an
investment advisor in the States of Georgia, Texas and New Jersey. FMAI provides
investment management and portfolio management services under various agreements
with Mutual Series. FMAI is the investment manager to the Mutual Series funds
and manages approximately $24.8 billion, representing approximately 11% of the
Company's total assets under management.
Franklin Templeton Services, Inc.
Franklin Templeton Services, Inc. ("FTSI") is a Delaware corporation formed in
1996 and is based in San Mateo, California. FTSI provides business management
services, including fund accounting, securities pricing, trading, compliance and
other related administrative activities under various management agreements to
most of the U.S. Franklin Templeton Funds.
Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. ("TICI") is a Florida corporation formed in
October 1979. Based in Ft. Lauderdale, Florida, TICI is the principal investment
advisor to the majority of the Franklin Templeton managed and institutional
accounts, excluding Mutual Series. In addition, it provides investment advisory
portfolio management services to certain of the Templeton funds and subadvisory
services to certain of the Franklin funds. TICI manages approximately $23.5
billion, representing 10.4% of the Company's total assets under management.
Templeton Asset Management Ltd.
Templeton Asset Management Ltd. ("Templeton Singapore") is a corporation
organized under the laws of and based in Singapore. It is registered as the
foreign equivalent of an investment advisor in Singapore with the Monetary
Authority of Singapore and is also registered with the SEC under the Advisers
Act. A representative office of Templeton Singapore is registered as the foreign
equivalent of an investment advisor in Hong Kong. Templeton Singapore provides
investment advisory and related services to certain Templeton funds and
portfolios. Templeton Singapore is principally an investment advisor to emerging
market equity portfolios.
Templeton/Franklin Investment Services (Asia) Limited
Templeton/Franklin Investment Services (Asia) Limited is a corporation organized
under the laws of, and is based in, Hong Kong. It was formed in late 1993 to
distribute and service the Company's financial products in Asia.
Templeton Management Limited
Templeton Management Limited is a Canadian corporation formed in October 1982,
and is registered in Canada as the foreign equivalent of an investment advisor
and a mutual fund dealer with the Ontario Securities Commission. It provides
investment advisory, portfolio management, distribution and administrative
services under various management agreements with the Canadian Funds and with
private and institutional accounts.
Franklin/Templeton Distributors, Inc.
Franklin/Templeton Distributors, Inc. ("Distributors") is a New York corporation
formed in 1947. It is registered with the SEC as a broker-dealer and as an
investment advisor and is a member of the National Association of Securities
Dealers, Inc. (the "NASD"). As the principal underwriter of the shares of most
of the Franklin and Templeton funds, it earns underwriting commissions on the
distribution of shares of the Funds.
Templeton/Franklin Investment Services, Inc.
Templeton/Franklin Investment Services, Inc. ("TFIS") is a Delaware corporation
formed in October 1987 and is registered with the SEC as a broker-dealer and an
investment advisor. Its principal business activities include: (i) through its
Templeton Portfolio Advisory division, serving as a sponsor of a comprehensive
fee (wrap account) program, in which it provides investment advisory and
broker-dealer services, as well as serving as investment adviser in other
broker-dealer wrap account programs and directly as an adviser for separate
accounts; and (ii) serving as a direct marketing broker-dealer for institutional
investors in Franklin Templeton Group of Funds.
Franklin/Templeton Investor Services, Inc.
Franklin/Templeton Investor Services, Inc. ("FTIS") is a California corporation
formed in 1981 which provides shareholder record keeping services and acts as
transfer agent and dividend-paying agent for the Franklin and Templeton funds.
FTIS is registered with the SEC as a transfer agent under the Securities
Exchange Act of 1934 (the "Exchange Act"). FTIS is compensated under an
agreement with each Franklin and Templeton open-end mutual fund on the basis of
a fixed annual fee per account, which varies with the Fund and the type of
services being provided, and is reimbursed for out-of-pocket expenses.
Other Templeton Investment Advisory, Distribution, Research and Related
Subsidiaries are organized and/or located in California, Florida, Australia, the
Bahamas, Brazil, France, Germany, India, Italy, Luxembourg, Poland, Russia,
South Africa and the United Kingdom, and provide investment advisory and related
services to other subsidiaries of the Company and to various U.S. and foreign
portfolios and private and institutional accounts. In addition, the Company,
through various Templeton subsidiaries, has opened or is in the process of
opening branch offices or in some instances forming subsidiaries in various
other international locations, including Argentina, China, Cyprus, Hungary,
Japan, Korea, Mauritius, Russia, South Africa, and Vietnam.
Franklin Templeton Trust Company
Franklin Templeton Trust Company ("FTTC"), a California corporation formed in
October 1983, is a trust company licensed by the California Superintendent of
Banks. FTTC serves primarily as custodian for Individual Retirement Accounts and
profit sharing or money purchase plans whose assets are invested in the Franklin
and Templeton funds, and as trustee or fiduciary of private trusts and
retirement plans.
Templeton Funds Trust Company
Templeton Funds Trust Company ("TFTC"), a Florida corporation formed in December
1985, is a trust company licensed by the Florida Office of the Comptroller. TFTC
serves as trustee of commingled trusts for qualified retirement plans.
Franklin Management, Inc.
Franklin Management, Inc. ("FMI"), a California corporation organized in
February 1978, is a registered investment advisor for private accounts. FMI also
provides advisory services to third party broker-dealer wrap fee programs.
Franklin Institutional Services Corporation
Franklin Institutional Services Corporation ("FISCO") is a California
corporation organized in August 1991. FISCO is a registered investment advisor
and provides services for institutional accounts.
Franklin Agency, Inc.
Franklin Agency, Inc. ("Agency") is a California corporation organized in
December 1971. Agency provides insurance agency services for the Franklin
Valuemark annuity products.
Templeton Funds Annuity Company
Templeton Funds Annuity Company ("TFAC") is a Florida corporation formed in
January 1984 which offers variable annuity products. TFAC is principally
regulated by the Florida Department of Insurance and Florida's Treasurer.
Templeton Worldwide, Inc.
Templeton Worldwide, Inc. is a Delaware corporation organized in July 1992 as
the parent holding company for all of the Templeton companies.
Subsidiaries-Other Financial Services
In addition to its principal business activity of providing investment
management and related services, during all or portions of the fiscal year, the
Company was also engaged in two (2) other lines of business in the financial
services marketplace conducted through the subsidiaries described below:
consumer lending services and the management of public and private real estate
programs.
Consumer Lending Services
Franklin Bank (the "Bank"), a 98.2%-owned subsidiary of the Company, is a
non-Federal Reserve member California State chartered bank. The Bank was formed
in 1974 and was acquired by the Company in December 1985. The Bank, with total
assets of $117.6 million as of September 30, 1997, provides consumer banking
products and services such as credit cards, auto loans, deposit accounts and
consumer loans. The Bank does not exercise its commercial lending powers in
order to maintain its status as a "non-bank bank" pursuant to the provisions of
the Competitive Equality Banking Act of 1987 ("CEBA") which permits the Company,
a "non-banking company" prior to CEBA, to remain exempt from the Bank Holding
Company Act under the "grandfathering" provisions of CEBA.
Franklin Capital Corporation
Franklin Capital Corporation ("FCC") is a Utah corporation formed in June 1993
to expand the Company's auto lending activities. FCC conducts its business
primarily in the Western region of the United States and originates its loans
through a network of auto dealerships representing a wide variety of makes and
models. FCC offers several different loan programs to finance new and used
vehicles. FCC also acquires credit card receivables from the Bank. As of
September 30, 1997, FCC's total assets included $154.3 million of gross
automobile contracts and $63.9 million of gross credit card receivables.
Real Estate Subsidiaries
The Company's real estate related line of business is conducted primarily
through two (2) principal subsidiary corporations. Franklin Properties, Inc.
("FPI") is a real estate investment and management company organized in
California in April 1988, which managed three (3) publicly traded real estate
investment trusts, until May 7, 1996, at which time two (2) of the real estate
investment trusts were merged into the third real estate investment trust, and
renamed Franklin Select Realty Trust, Inc. Franklin Select Realty Trust, Inc.
continues to be managed by FPI under an advisory agreement and is publicly
traded on the American Stock Exchange. Property Resources, Inc. ("PRI"), a
California corporation organized in April 1967 and acquired by the Company in
December 1985, serves as general partner, property manager or advisor for
certain other real estate investment programs.
Investment Management
The Franklin Templeton Group accommodates a variety of investment objectives,
including, capital appreciation, growth and income, income, tax-free income and
stability of principal. In seeking to achieve such objectives, each portfolio
emphasizes different investment securities. Portfolios seeking income focus on
taxable and tax-exempt money market instruments, tax-exempt municipal bonds,
global fixed-income securities, fixed-income debt securities of corporations and
of the United States government and its agencies and instrumentalities such as
the Government National Mortgage Association ("GNMA" or "Ginnie Mae"), the
Federal National Mortgage Association ("Fannie Mae"), and the Federal Home Loan
Mortgage Corporation ("Freddie Mac"). Portfolios that seek capital appreciation
invest primarily in equity securities in a wide variety of international and
U.S. markets, some seek broad national market exposure, while others focus on
narrower sectors such as precious metals, health care, emerging technology,
mid-cap companies, small-cap companies, real estate securities and utilities.
Still others focus on investments in particular emerging market countries and
regions. A majority of the assets managed are equity oriented.
In addition to closed-end funds, many of which are described below, the Other
Assets include portfolios managed for the world's largest corporations,
endowments, charitable foundations, pension funds, wealthy individuals and other
institutions. Investment management services for such portfolios focus on
specific client objectives utilizing the various investment techniques offered
by the Franklin Templeton Group.
During the fiscal year ended September 30, 1997, except for the Company's money
market funds, and funds specifically designed for institutional investors, whose
shares are sold without a sales charge at all purchase levels, shares of the
open-end funds in the Franklin Templeton Group of Funds generally were sold at
their respective net asset value per share plus a sales charge, which varies
depending upon the type of share, the individual fund and the amount purchased.
In accordance with certain terms and conditions described in the prospectuses
for such Funds, certain investors are eligible to purchase shares at net asset
value or at reduced sales charges, and investors may generally exchange their
shares of a fund at net asset value for shares of another fund in the Franklin
Templeton Group when they believe such an investment decision is appropriate
without the payment of additional sales charges.
As of September 30, 1997, the net asset holdings of the five (5) largest funds
in the Franklin Templeton Group (some of which are investment companies and some
of which are series of other investment companies) were Templeton Foreign Fund
($17.0 billion), Franklin California Tax-Free Income Fund, Inc. ($14.6 billion),
Templeton Growth Fund ($13.9 billion), Templeton World Fund ($9.6 billion) and
the Franklin Custodian Funds-U.S. Government ($9.5 billion). At September 30,
1997, these five (5) mutual funds represented, in the aggregate, 28.5% of all
assets under management in the Franklin Templeton Group.
General Fund Description
Set forth in the tables below is a brief description of the Funds and of the
principal investments and investment strategies of such Funds or portfolios
comprising most of the principal Funds or portfolios in the Franklin Templeton
Group separated into twenty-three (23) different general categories as follows:
(i) Franklin Funds Seeking Preservation of Capital and Income
(ii) Franklin Funds Seeking Current Income
(iii) Franklin Funds Seeking Tax-Free Income
(iv) Franklin Funds Seeking Growth and Income
(v) Franklin Funds Seeking Capital Growth
(vi) Franklin Funds for Tax-Deferred Investments (Valuemark variable
annuity)
(vii) Franklin Closed-End Funds
(viii) Franklin Funds for Institutional Investors
(ix) Franklin Templeton International Currency Funds
(x) Templeton Funds Seeking Preservation of Capital and Income
(xi) Templeton Funds Seeking Capital Growth from Global Portfolios
(xii) Templeton Funds Seeking Capital Growth from U.S. Portfolios
(xiii) Templeton Funds Seeking High Current Income from Global
Portfolios
(xiv) Templeton Funds Seeking High Total Return from Global
Portfolios
(xv) Templeton Funds for Tax-Deferred Investments
(xvi) Templeton Contractual Plans
(xvii) Templeton SICAV Funds
(xviii) Templeton Canadian Funds
(xix) Templeton Closed-End Funds
(xx) Templeton Funds for Institutional Investors
(xxi) Representative Templeton International Portfolios
(xxii) Mutual Series Funds
(xxiii) Asset Allocation Funds
Recent Fund Introductions and Changes
The Mutual Series team, known for its value-driven approach to U.S. equity
investing, joined the Franklin Templeton organization in November 1996. This
addition brought four (4) established and one (1) newly created series to the
Franklin Templeton Funds. A sixth series, Mutual Financial Services Fund, was
added in August 1997.
In December 1996, a new investment company, Franklin Templeton Fund Allocator
Series, consisting of three (3) series that invest in a selected group of
Franklin Templeton Funds, was introduced. The Franklin Discovery Biotechnology
Fund was added to the Franklin Strategic Series in September 1997. During the
fiscal year, four (4) funds were liquidated and two (2) Templeton funds were
merged into two (2) Franklin funds.
Effective January 2, 1997, twenty-five (25) Franklin Templeton funds offered a
new class of shares, called Advisor Class Shares, available without a sales
charge generally for employees and for large investments ($5 million or more).
During fiscal 1997, seventy-six (76) Franklin Templeton funds offered multiple
classes of shares in response to investor demand for varying load structures. Of
these funds, forty-five (45) offered Class I and Class II shares, seven (7)
offered Class I shares and Advisor Class Shares, and twenty-four (24) offered
Class I, Class II and Advisor Class Shares (or the Mutual Series equivalent to
Advisor Class Shares, called Z Class Shares).
(i) Franklin Funds Seeking Preservation of Capital and Income
Name of Fund Inception Principal Investments/Strategy
Date
Franklin California 09/03/85 Seeks double tax-free income (free
Tax-Exempt Money Fund from federal and state personal income
taxes) by investing in short-term
California municipal securities.
Franklin Federal Money 05/13/80 Seeks high current income by investing
Fund in short-term instruments backed by
U.S. government securities.
Franklin Money Fund 05/01/76 Seeks capital
preservation, liquidity and dividends by
investing in short-term securities (money
market instruments).
Franklin New York 09/03/85 Seeks triple tax-free income (free
Tax-Exempt Money Fund from federal, N.Y. state and N.Y. city
taxes) by investing in short-term New
York municipal securities.
Franklin Tax-Exempt 02/18/82 Seeks income free from federal taxes
Money Fund by investing in short-term municipal
securities.
Franklin Templeton Money 05/01/95 Seeks capital preservation, liquidity
Fund II and dividends, by investing in
short-term securities. Open only to
shareholders exchanging out of Class
II shares in other Franklin Templeton
Funds.
(ii) Franklin Funds Seeking Current Income
Name of Fund Inception Principal Investments/Strategy
Date
Franklin Adjustable Rate 12/26/91 Seeks high current income and
Securities Fund increased price stability by investing
in Double A rated mortgage-backed
securities: adjustable rate mortgages
("ARMs") created by private issuers as
well as Ginnie Mae, Fannie Mae and
Freddie Mac.
Franklin Adjustable U.S. 10/20/87 Seeks income with lower volatility of
Government Securities principal by investing in government
Fund or government agency guaranteed
adjustable rate mortgage-backed
securities.
Franklin Corporate 01/14/87 Seeks high after-tax income for
Qualified Dividend Fund corporations by investing in preferred
securities and by maximizing the amount
of dividend income it receives that
qualifies for the dividends-received
deduction.
Franklin Global 03/15/88 Seeks high current income by investing
Government Income Fund primarily in fixed-income securities
issued by both U.S. and foreign
governments.
Franklin Investment 01/14/87 Seeks high current income by investing
Grade Income Fund in debt securities, most of which will
be intermediate term investment grade
issues and dividend paying common and
preferred stocks.
Franklin 04/15/87 Seeks income and relative stability of
Short-Intermediate U.S. principal by investing in less
Government Securities volatile, shorter term securities of
Fund U.S. government securities carrying
the full faith and credit guarantee of
the U.S. government.
Franklin Templeton 12/31/92 Seeks total return by investing in a
German Government Bond managed portfolio of German government
Fund bonds.
Franklin's AGE High 12/31/69 Seeks high current income by investing
Income Fund in high yielding lower rated corporate
bonds.
U.S. Government 05/31/70 Seeks high current income by investing
Securities Series (a in a portfolio limited to securities
series of Franklin that are obligations of the U.S.
Custodian Funds, Inc.) government or its instrumentalities
(Ginnie Mae securities).
(iii) Franklin Funds Seeking Tax-Free Income
Federal Tax-Free Funds
Name of Fund Inception Principal Investments/Strategy
Date
Franklin Federal 09/21/92 Seeks high current income by investing
Intermediate-Term in nationally diversified municipal
Tax-Free Income Fund bonds with an average maturity of
three (3) to ten (10) years.
Franklin Federal 10/07/83 Seeks federal tax-free income by
Tax-Free Income Fund investing in nationally diversified,
investment quality municipal bonds.
Franklin High Yield 03/18/86 Seeks federal tax-free income by
Tax-Free Income Fund investing in nationally diversified,
high yield, medium and lower rated
municipal bonds.
Franklin Insured 04/01/85 Seeks federal tax-free income by
Tax-Free Income Fund investing in nationally diversified,
insured municipal bonds.
Franklin Puerto Rico 08/03/85 Seeks to provide a maximum level of
Tax-Free Income Fund income exempt from federal income tax
and the personal income taxes of the
majority of the states by investing in
municipal securities. For U.S.
citizens and residents.
State Tax-Free Funds
The Company manages insured state tax-free funds, established from 1985 to 1996,
in the states of Arizona, California, Florida, Massachusetts, Michigan,
Minnesota, New York and Ohio. The principal investments and strategy of these
funds are the purchase of insured municipal bonds exempt from federal and
specified state personal income taxes providing an investment vehicle for double
tax-free income from long-term municipal securities. In addition, the Company
manages twenty-seven (27) non-insured state tax-free income funds established
from 1977 to 1996 providing double tax-free income from long-term municipal
securities to residents of twenty-four (24) states.
(iv) Franklin Funds Seeking Growth and Income
Name of Inception Principal Investments/Strategy
Fund Date
Franklin Asset 12/05/51 Seeks total return by investing in
Allocation Fund common stocks, investment grade
corporate and U.S. government bonds,
short-term money market instruments,
securities of foreign issuers and real
estate securities.
Franklin Balance Sheet 04/02/90 Seeks high total return by investing
Investment Fund in common and preferred stocks,
secured or unsecured bonds, and
commercial paper or notes, which have
per-share current market values believed
to be below their net asset or book
values.
Franklin Convertible 04/15/87 Seeks to maximize total return by
Securities Fund investing in convertible bonds and
convertible preferred stock.
Franklin Equity Income 03/15/88 Seeks capital appreciation and high
Fund current dividend income by investing
in high yielding common stocks for
greater price stability.
Franklin Global 07/02/92 Seeks total return by investing in
Utilities Fund equity and debt securities issued by
foreign and U.S. utilities companies.
Franklin MicroCap Value 12/12/95 Seeks high total return by investing
Fund primarily in securities of companies
with market capitalization under $100
million at the time of purchase and which
are believed to be undervalued in the
marketplace.
Franklin Natural 06/05/95 Seeks high total return by investing
Resources Fund primarily in stocks of companies that
own, produce, refine, process and
market natural resources.
Franklin Rising 04/02/90 Seeks capital appreciation by
Dividends Fund investing in stocks with consistent,
substantial dividend increases for
capital growth.
Franklin Strategic 05/24/94 Seeks high current income and capital
Income Fund appreciation, by investing in U.S. and
foreign fixed-income securities.
Franklin Value Fund 03/11/96 Seeks total return by
investing in equity and debt securities
of companies worldwide, which are
believed to be undervalued in the
marketplace.
Income Series (a series 08/31/48 Seeks to maximize income by investing
of Franklin Custodian in stocks and bonds, including foreign
Funds, Inc.) and high yield, lower rated
securities, selected with particular
consideration for their income
producing potential.
Utilities Series (a 09/30/48 Seeks capital appreciation and current
series of Franklin income by investing in utility
Custodian Funds, Inc.) companies located in high growth areas.
(v) Franklin Funds Seeking Capital Growth
Name of Fund Inception Principal Investments/Strategy
Date
DynaTech Series (a 01/01/68 Seeks capital appreciation by
series of Franklin investing in the volatile stocks of
Custodian Funds, Inc.) companies engaged in dramatic
break-through areas such as medicine,
telecommunications and electronics or who
have proprietary advantages in their
field.
Franklin Blue Chip Fund 05/28/96 Seeks capital
appreciation by investing in securities
of well-established, large capitalization
companies ("blue chip companies") with a
long record of revenue growth and
profitability.
Franklin California 10/30/91 Seeks capital appreciation by
Growth Fund investing primarily in growth stocks
or securities of companies
headquartered in or conducting a
majority of operations in California.
Franklin Equity Fund 01/01/33 Seeks capital
appreciation and current income by
investing primarily in common stocks of
seasoned companies with low prices in
relation to earnings growth.
Franklin Global Health 02/14/92 Seeks capital appreciation by
Care Fund investing primarily in equity
securities of health care companies
worldwide with potential for above
average growth.
Franklin Gold Fund 05/19/69 Seeks capital
appreciation and current income by
investing in securities of companies
engaged in mining, processing or dealing
in gold or other precious metals.
Franklin MidCap Growth 06/01/96 Seeks long-term capital growth by
Fund investing in equity securities of
medium capitalization companies
believed to be positioned for rapid
growth.
Franklin Real Estate 01/03/94 Seeks to maximize total return by
Securities Fund investing primarily in the equity
securities of companies operating in
the real estate industry.
Franklin Small Cap 02/14/92 Seeks long-term capital growth by
Growth Fund investing primarily in equity
securities of small capitalization
growth companies.
Growth Series (a series 03/31/48 Seeks capital appreciation by
of Franklin Custodian investing in well-known companies with
Funds, Inc.) demonstrated growth characteristics.
Franklin Biotechnology 09/15/97 Seeks capital appreciation by
Discovery Fund investing in securities of
biotechnology companies and discovery
research firms located in the U.S. and
other countries.
(vi) Franklin Funds for Tax-Deferred Investments
Franklin Valuemark Funds is an open-end management investment company currently
consisting of twenty-three (23) separate series or portfolios which offer a wide
range of investment objectives, strategies, and risks. Shares are currently sold
only to separate accounts of the Allianz Life Insurance Company of North America
and its affiliates to fund the benefits under variable life insurance policies
and variable annuity contracts. Products presently offered include two (2)
flexible premium deferred variable annuities ("Valuemark II" in New York and
"Valuemark III" in all other states), an immediate variable annuity ("Valuemark
Income Plus"), single premium variable life insurance ("Franklin Valuemark
Life"), and flexible premium variable life insurance ("ValueLife"). The
portfolios are managed by Advisers, Franklin Advisory Services, Inc., Franklin
Mutual Advisers, Inc., TICI, TGAL, and Templeton Asia. The investment objectives
and policies of most of the portfolios are similar to those of corresponding
Franklin and Templeton funds, although differences in portfolio size,
investments held, and insurance and expense related differences will cause the
performance of the Valuemark portfolio to differ.
(vii) Franklin Closed-End Funds
Name of Fund Inception Principal Investments/Strategy
Date
Franklin Multi-Income 10/24/89 Seeks high current income by investing
Trust (listed on the primarily in high yielding,
NYSE) fixed-income corporate securities as
well as dividend-paying stocks of
companies engaged in the public
utilities industry.
Franklin Universal Trust 09/23/88 Seeks high current income by investing
(listed on the NYSE) in fixed-income debt securities and
dividend paying stocks and securities
of precious metals and natural
resources companies.
Principal Maturity Trust 01/19/89 Seeks to return investors' original
(listed on the NYSE) capital of $10 per share on or before
May 31, 2001, while providing high
monthly income by investing in
mortgage-backed securities, zero coupon
securities and high income producing debt
securities.
(viii) Franklin Funds for Institutional Investors
Name of Fund Inception Principal Investments/Strategy
Date
Adjustable Rate 11/05/91 Seeks high current income by investing
Securities Portfolio in mortgage-backed securities (ARMs).
(sold only to other
investment companies)
Franklin Cash Reserves 07/01/94 Seeks high current income by investing
Fund in U.S. and foreign short-term
securities.
Franklin Institutional 01/02/92 Seeks high current income by investing
Adjustable Rate in a portfolio of mortgage-backed
Securities Fund securities, pooled adjustable rate
mortgage securities.
Franklin Institutional 11/01/91 Seeks high current income and
Adjustable U.S. increased price stability by investing
Government Securities in a portfolio of adjustable U.S.
Fund government or guaranteed agency
mortgage-backed securities, (ARMs
created by Ginnie Mae, Fannie Mae and
Freddie Mac).
Franklin Strategic 02/01/93 Seeks a high level of total return by
Mortgage Portfolio investing primarily in mortgage-backed
securities, pooled mortgages issued or
guaranteed by Ginnie Mae, Fannie Mae or
Freddie Mac.
Franklin U. S. 02/08/94 Seeks high current income consistent
Government Agency Money with capital preservation and
Market Fund liquidity by investing in short-term
instruments backed by U.S. government
securities.
Franklin U.S. Government 01/19/88 Seeks high current income consistent
Securities Money Market with capital preservation and
Portfolio liquidity by investing in short-term
instruments backed by U.S. government
securities.
Franklin U.S. Treasury 08/20/91 Seeks high current income consistent
Money Market Portfolio with capital preservation and
liquidity by investing in short-term
U.S. Treasury obligations.
Money Market Portfolio 07/17/85 Seeks high
current income consistent with capital
preservation and liquidity by investing
all of its assets in money market
instruments.
The Money Market 07/28/92 Seeks high current income consistent
Portfolio (sold only to with capital
preservation and other investment
liquidity by investing all of its
companies) assets in money market
instruments.
The U.S. Government 07/28/92 Seeks high current income consistent
Securities Money Market with capital preservation and
Portfolio (sold only to liquidity by investing in short-term
other investment instruments backed by U.S. government
companies) securities.
U.S. Government 05/20/91 Seeks high current income and
Adjustable Rate Mortgage increased price stability by investing
Portfolio (sold only to in mortgage-backed securities, (ARMs
other investment created by Ginnie Mae, Fannie Mae and
companies) Freddie Mac).
(ix) Franklin Templeton International Currency Funds
Name of Fund Inception Principal Investments/Strategy
Date
Franklin Templeton 06/30/86 Seeks to maximize total return, by
Global Currency Fund investing in interest- earning money
market instruments denominated in three
(3) or more of sixteen (16) major world
currencies.
Franklin Templeton Hard 11/17/89 Seeks to protect against U.S. dollar
Currency Fund depreciation by investing in
high-quality money market instruments
denominated in three (3) or more of the
five (5) major currencies of lowest
inflation countries and the Swiss Franc.
Franklin Templeton High 11/17/89 Seeks current income higher than that
Income Currency Fund of U.S. dollar money market
instruments by investing in
interest-bearing money market instruments
denominated in Major and Non-Major
Currencies.
(x) Templeton Funds Seeking Preservation of Capital and Income
Name of Fund Inception Principal Investments/Strategy
Date
Templeton Money Fund 10/2/87 Seeks current income, stability of
Merged into principal and liquidity by investing
Franklin in high quality money market
Money Fund instruments with maturities not
on 12/31/96 exceeding 397 days, consisting on
primarily of short-term U.S.
government securities, bank certificates
of deposit, time deposits, bankers'
acceptances, commercial paper and
repurchase agreements.
(xi) Templeton Funds Seeking Capital Growth from Global Portfolios
Name of Fund Inception Principal Investments/Strategy
Date
Franklin Templeton Japan 07/28/94 Seeks long-term capital growth by
Fund investing primarily in the equity
securities of companies domiciled in
Japan and traded in Japanese
securities markets.
Templeton Developing 10/17/91 Seeks long-term capital appreciation
Markets Trust by investing primarily in equity
securities of issuers in countries
with developing markets.
Templeton Foreign Fund 10/05/82 Seeks long-term
capital growth by investing in stocks and
debt obligations of companies and
governments outside the United States.
Templeton Foreign 09/20/91 Seeks long-term capital growth by
Smaller Companies Fund investing in a diverse portfolio of
equity securities that trade on markets
in countries other than the United
States.
Templeton Global 03/14/94 Seeks long-term capital growth by
Infrastructure Fund investing in securities of U.S. and
foreign companies that are principally
engaged in or related to the development,
operation or rehabilitation of the
physical and social infrastructures of
various nations throughout the world.
Templeton Global 02/28/90 Seeks long-term capital growth by
Opportunities Trust investing in securities issued by
companies and governments of any
nation.
Templeton Greater 05/08/95 Seeks long-term capital appreciation
European Fund by investing primarily in equity
securities of companies Western,
Central and Eastern Europe and in
Russia.
Templeton Growth Fund 11/29/54 Seeks long-term capital growth by
investing in stocks and bonds issued
by companies and governments of any
nation.
Templeton Latin America 05/08/95 Seeks long-term capital appreciation
Fund by investing primarily in equity
securities and debt obligations of
issuers in Latin American countries.
Templeton Pacific Growth 09/20/91 Seeks long-term capital growth by
Fund investing primarily in equity
securities that trade on markets in
the Pacific Rim.
Templeton Global Real 09/18/89 Seeks long-term capital growth by
Estate Fund investing in securities of U.S. and
foreign companies engaged in or
related to the real estate industry.
Templeton Global Smaller 06/01/81 Seeks long-term capital growth by
Companies Fund, Inc. investing in common and preferred
stocks, rights and warrants of
companies of various nations
throughout the world.
Templeton World Fund 01/17/78 Seeks long-term
capital growth by investing in stocks and
debt obligations of foreign and U.S.
companies.
(xii) Templeton Funds Seeking Capital Growth From U.S. Portfolios
Name of Fund Inception Principal Investments/Strategy
Date
Templeton American 03/27/91 Seeks long-term total return by
Trust, Inc. investing no less than 65% of assets
in stocks and debt obligations of U.S.
companies and the U.S. government.
(xiii) Templeton Funds Seeking High Current Income from Global Portfolios
Name of Fund Inception Principal Investments/Strategy
Date
Templeton Americas 06/27/94 Seeks high current income, with total
Government Securities return as a secondary objective, by
Fund investing primarily in debt securities
issued or guaranteed by governments,
government agencies, political
subdivisions, and other government
entities of countries located in North,
South and Central America and the
surrounding waters.
Templeton Global Bond 09/24/86 Seeks current income by investing
Fund (formerly Templeton primarily in debt securities,
Income Fund) preferred stock, common stocks which
pay dividends and income producing
securities convertible into common stock
of companies, governments and government
agencies of various nations throughout
the world.
(xiv) Templeton Funds Seeking High Total Return from Global Portfolios
Name of Fund Inception Principal Investments/Strategy
Date
Templeton Growth and 03/14/94 Seeks high total return by investing
Income Fund (formerly primarily in equity and debt
Templeton Global Rising securities of U.S. and foreign
Dividends Fund) companies.
(xv) Templeton Funds for Tax-Deferred Investments
Name of Fund Inception Principal Investments/Strategy
Date
Templeton Asset 08/31/88 Seeks a high level of total return by
Allocation Fund investing in stocks of companies in
any nation, debt obligations of
companies and governments of any
nation, and in money market
instruments.
Templeton Bond Fund 08/31/88 Seeks high current income by investing
primarily in debt securities of
companies, governments and government
agencies of various nations throughout
the world, and in debt securities
which are convertible into common
stock of such companies.
Templeton International 05/01/92 Seeks long-term capital growth by
Fund investing in stocks and debt
obligations of companies and
governments outside the United States.
Templeton Money Market 08/31/88 Seeks current income, stability of
Fund principal and liquidity by investing
in money market instruments with
maturities not exceeding 397 days,
consisting primarily of short-term U.S.
government securities, certificates of
deposit, time deposits, bankers'
acceptances, commercial paper and
repurchase agreements.
Templeton Stock Fund 08/31/88 Seeks capital growth
by investing primarily in common stocks
issued by companies, large and small, in
various nations throughout the world.
Templeton Variable 02/16/88 Seeks long-term capital growth by
Annuity Fund investing primarily in stocks and debt
obligations of companies and
governments of any nation, including
the United States.
Mutual Shares 05/01/97 Seeks capital appreciation by
Investments Fund investing in U.S. equity securities
trading at prices below their intrinsic
values, in restructuring investments and
in foreign equity and debt securities.
Franklin Growth 05/01/97 Seeks capital appreciation by
Investments Fund investing in equities and convertible
securities issued by U.S.
corporations, including stocks of
small capitalization companies.
Mutual Discovery 05/01/97 Seeks capital appreciation by
Investments Fund investing in U.S. and foreign equity
securities, including those of small
capitalization companies, in
restructuring investments and debt
securities.
(xvi) Templeton Contractual Plans
Name of Fund Inception Principal Investments/Strategy
Date
Templeton Capital 03/01/91 Seeks long-term capital growth by
Accumulator Fund, Inc. investing in stocks and debt
obligations of companies and
governments of any nation.
(xvii) Templeton SICAV Funds
Templeton Global Strategy (SICAV)
Equity Funds (denominated in U.S. dollars unless otherwise noted)
Name of Fund Inception Principal Investments/Strategy
Date
Templeton Deutschmark 04/26/91 Seeks long-term capital growth by
Global Growth Fund investing mainly in shares of
companies of any size found in any
nation (denominated in Deutschmarks).
Templeton Emerging 02/28/91 Seeks long-term capital growth by
Markets Fund investing in the shares and debt
obligations of corporations and
governments of developing or emerging
nations.
Templeton European Fund 04/17/91 Seeks long-term
capital growth by investing mainly in
shares of companies of all sizes based in
European countries (denominated in Swiss
francs).
Templeton Far East Fund 06/30/91 Seeks long-term
capital growth by investing mainly in
shares of companies of all sizes which
are based in or which derive significant
profits from the Far East.
Templeton Global Growth 02/28/91 Seeks long-term capital growth by
Fund investing primarily in the shares of
companies of any size found in any
nation.
Templeton Pan American 02/28/91 Seeks long-term capital growth by
Fund investing primarily in shares of
companies of all sizes based in the
North or South American continents.
Templeton Smaller 07/08/91 Seeks long-term capital growth by
Companies Fund investing primarily in shares of
companies with a market capitalization of
less than $1 billion found in any nation.
Fixed Income Funds (denominated in U.S. Dollars unless otherwise noted)
Name of Fund Inception Principal Investments/Strategy
Date
Templeton Deutschmark 02/28/91 Seeks to maximize total investment
Global Bond Fund return by investing in a wide variety
of fixed-interest securities, including
those issued by supranational bodies such
as The World Bank (denominated in
Deutschmarks).
Templeton Emerging 07/05/91 Seeks to maximize total investment
Markets Fixed Income Fund return by investing primarily in
dollar and non-dollar denominated debt
obligations of emerging markets.
Templeton Global Income 02/28/91 Seeks to maximize current income by
Fund investing primarily in fixed-interest
securities of governments and
companies worldwide.
Templeton Haven Fund 07/08/91 Seeks to maintain a
stable share price by investing in
short-term high quality transferable debt
securities (denominated in Swiss francs).
Templeton U.S. 02/28/91 Seeks security of capital and income
Government Fund by investing in bonds issued by the
U.S. government and its agencies.
Templeton Worldwide Investments SICAV
Growth Portfolio 08/21/89 Seeks long term
capital growth by investing in all types
of securities issued by companies or
governments of any nation.
Income Portfolio 08/21/89 Seeks high current income and relative
stability of net asset value by
investing in high quality money market
instruments and debt securities with
remaining maturities in excess of two
(2) years.
(xviii) Templeton Canadian Funds
Non-Institutional Funds
Name of Fund Inception Principal Investments/Strategy
Date
Templeton Balanced Fund 04/07/83 Seeks long-term capital appreciation
by investing primarily in a
combination of Canadian common and
preferred shares, bonds, and
debentures; managed to comply with
eligibility requirements under
Canadian law regarding retirement and
other tax deferred plans.
Templeton Canadian Asset 9/14/94 Seeks high level of total return by
Allocation Fund investing primarily in Canadian
shares, debt obligations and short-term
instruments; managed to comply with
eligibility requirements under Canadian
law regarding retirement and other
tax-deferred plans.
Templeton Canadian Bond 01/02/90 Seeks high current income and capital
Fund appreciation by investing primarily in
publicly traded debt securities issued
or guaranteed by Canadian governments
or their agencies, or issued by
Canadian municipalities or
corporations.
Templeton Canadian Stock 01/03/89 Seeks capital appreciation by
Fund investing in a diversified portfolio
of Canadian equity securities primarily
managed to comply with eligibility
requirements of the Canadian law
regarding retirement and other tax
deferred plans.
Templeton Emerging 09/20/91 Seeks long-term capital appreciation
Markets Fund by investing primarily in emerging
country equity securities.
Templeton Global 9/14/94 Seeks high level of total return by
Balanced Fund investing in shares, debt obligations
and short-term instruments of
companies and governments of any
nation, including Canada and the
United States.
Templeton Global Bond 06/07/88 Seeks high current income by investing
Fund primarily in a portfolio of fixed
income securities of issuers
throughout the world.
Templeton Global Smaller 01/03/89 Seeks capital appreciation by
Companies Fund investing primarily in equity
securities of emerging growth
companies throughout the world.
Templeton Growth Fund, 09/01/54 Seeks long-term capital growth by
Ltd. investing in stock and debt
obligations of companies and
governments of any nation.
Templeton International 09/14/94 Seeks high level of total return by
Balanced Fund investing in shares, debt obligations
and short-term instruments of companies
and governments of any nation other than
Canada and the United States.
Templeton International 01/03/89 Seeks long-term total return by
Stock Fund investing in shares and debt
obligations of companies and
governments outside of Canada and the
United States.
Templeton Treasury Bill 02/29/88 Seeks a high level of current income
Fund consistent with preservation of
capital and liquidity by investing in
Canadian government or agency debt
obligations and high quality short-term
money market instruments.
Funds for Institutional
Investors
Name of Fund Inception Principal Investments/Strategy
Date
Templeton Global Equity 07/06/90 Seeks long-term capital appreciation
Trust (non-taxable) by investing in stocks and bonds
issued by companies and governments of
any nation.
Templeton International 07/06/90 Seeks long-term capital appreciation
Equity Trust by investing in stocks and bonds
(non-taxable) issued by companies and governments
outside of Canada and the United
States.
Templeton International 07/06/90 Seeks long-term total return by
Stock Trust (taxable) investing in stocks and bonds issued
by companies and governments outside
of Canada and the United States.
Closed-End Funds
Name of Fund Inception Principal Investments/Strategy
Date
Templeton Emerging 06/21/94 Seeks long-term capital appreciation,
Markets Appreciation by investing in equity securities and
Fund (listed on the debt obligations of issuers in
Toronto Stock Exchange emerging market countries.
and Montreal Stock
Exchange)
(xix) Templeton Closed-End Funds
Name of Fund Inception Principal Investments/Strategy
Date
Templeton China World 09/09/93 Seeks long-term capital appreciation,
Fund, Inc. (listed on by investing primarily in equity
the NYSE) securities of companies organized
under the laws of or with a principal
office in the People's Republic of China
("PRC"), Hong Kong or Taiwan collectively
"Greater China", for which the principal
trading market is in Greater China, and
which derive at least 50% of their
revenues from goods or services sold or
produced in, or have at least 50% of
their assets in, the PRC.
Templeton Dragon Fund, 09/21/94 Seeks long-term capital appreciation
Inc. (listed on the by investing at least 45% of its total
NYSE and Osaka assets in the equity securities of
Securities Exchange) companies (i) organized under the laws
of, or with a principal office in, the
PRC or Hong Kong, or the principal
business activities of which are
conducted in China or Hong Kong or for
which the principal equity securities
trading market is in China or Hong Kong,
and (ii) that derive at least 50% of
their revenues from goods or services
sold or produced, or have at least 50% of
their assets in China or Hong Kong.
Templeton Emerging 04/29/94 Seeks capital appreciation by
Markets Appreciation investing substantially all of its
Fund, Inc. (listed on assets in a portfolio of equity
the NYSE) securities and debt obligations of
issuers in emerging market countries.
Templeton Emerging 02/26/87 Seeks long-term capital appreciation
Markets Fund, Inc. by investing primarily in emerging
(listed on the NYSE and markets equity securities.
Pacific Exchange "PE")
Templeton Emerging 09/23/93 Seeks high current income, with a
Markets Income Fund, secondary investment objective of
Inc. (listed on the NYSE) capital appreciation, by investing
primarily in a portfolio of high yielding
debt obligations of sovereign or
sovereign-related entities and private
sector companies in emerging market
countries.
Templeton Global 11/22/88 Seeks high current income consistent
Governments Income Trust with the preservation of capital
(listed on the NYSE) achieved by investing at least 65% of
its total assets in debt securities
issued or guaranteed by governments,
government agencies supranational
entities, political subdivisions and
other government entities of various
nations throughout the world.
Templeton Global Income 03/17/88 Seeks high current income, with a
Fund, Inc. (listed on secondary investment objective of
the NYSE and PE) capital appreciation, by investing
primarily in a portfolio of
fixed-income securities (including
debt securities and preferred stock)
of U.S. and foreign issuers.
Templeton Global 05/23/90 Seeks high level of total return
Utilities, Inc. (listed Merged into (income plus capital
on the AMEX and the Franklin appreciation),without undue risk, by
Midwest Stock Exchange) Global investing at least 65% of its total
Utilities assets in equity and debt securities
03/29/96 issued by U.S. and foreign companies
in the utility industries.
Templeton Russia Fund, 06/15/95 Seeks long-term capital appreciation
Inc. (listed on the by investing primarily in equity
NYSE) securities of Russian companies.
Templeton Vietnam 09/15/94 Seeks long-term capital appreciation
Opportunities Fund, by investing in the equity securities
Inc. (listed on the of Vietnam companies.
NYSE)
<PAGE>
(xx) Templeton Funds for Institutional Investors
Name of Fund Inception Principal Investments/Strategy
Date
Templeton Emerging 05/03/93 Seeks long-term capital growth by
Markets Series investing in securities of issuers of
countries having emerging markets.
Templeton Foreign Equity 10/18/90 Seeks long-term capital growth by
Series investing in stocks and debt
obligations of companies and
governments outside the United States.
Templeton Growth Series 05/03/93 Seeks long-term
capital growth by investing in stocks and
debt obligations of companies and
governments of any nation.
Templeton Emerging Fixed 05/01/97 Sees long-term capital growth by
Income Series investing in stocks and debt
obligations of companies and
governments of any nation, including
developing nations.
(xxi) Representative Templeton International Portfolios
Name of Fund Inception Principal Investments/Strategy
Date
Asian Development Equity 01/22/88 Seeks to maximize overall long-term
Fund return by investing, directly or
indirectly, primarily in shares,
convertible bonds, warrants, and other
equity related securities of entities in
the Asian developing countries.
Templeton Asia Fund 11/14/89 Seeks to achieve long-term capital
appreciation by investing primarily in
equity securities of entities which
either are listed on recognized
exchanges in capital markets of the
Asia/Oceania Region or which have their
area of primary activity in those same
capital markets.
Templeton Emerging Asia 06/24/93 Seeks to achieve long-term capital
Fund appreciation by investing primarily in
equity securities of companies which are
either listed on recognized exchanges in
capital markets in emerging Asian
countries or companies which have their
primary activity in those same capital
markets.
Templeton Emerging 06/19/89 Seeks long term capital appreciation by
Markets Investment Trust investing in companies operating or
Plc. trading in emerging market countries.
(Closed End)
Templeton Global 08/29/88 Seeks to provide income by investing in
Balanced Trust an internationally diversified
portfolio of equities, fixed interest,
and convertible stocks. (Unit Trust)
Templeton Global Growth 08/29/88 Seeks to maximize total investment
Trust return by investing in an
internationally diversified portfolio
of equity shares and convertible
stocks. (Unit Trust)
Templeton Global Income 07/13/88 Seeks to achieve high current income by
Portfolio, Ltd. investing primarily in a portfolio of
fixed income securities (including debt
securities and preferred stock) of issuers
throughout the world.
Templeton Latin America 05/03/94 Seeks long-term capital growth by
Investment Trust Plc. investing in companies listed on stock
exchanges in Latin America or that have
substantial trading interests in that
region. (Closed End)
Templeton Value Trust 06/08/89 Seeks maximum total
investment return by investing in all
geographic and economic sectors.
Templeton/National Bank 04/06/93 Growth Portfolio - Seeks long term of
Greece Trans-European capital growth by investing in stock Fund
and debt securities of companies and
governments primarily located in the
European Economic Community. Income
Portfolio - Seeks high current income and
relative stability of principal by
investing in debt securities of companies
and governments located primarily in the
European Economic Community.
(xxii) Mutual Series Funds
Name of Fund Inception Principal Investments/Strategy
Date
Value - Global
Mutual European Fund (a 07/03/96 Seeks capital appreciation, which may
series of Franklin occasionally be short-term, and income
Mutual Series Funds Inc.) by investing in common and preferred
stocks, as well as debt securities,
including high yield, lower-rated
securities, that the fund's investment
manager believes are undervalued. The fund
focuses primarily in European companies
and may invest in small capitalization
stock.
Growth
Mutual Discovery Fund (a 12/31/92 Seeks long-term capital appreciation by
series of Franklin investing in common and preferred
Mutual Series Funds Inc.) stock, including high yield,
lower-rated securities of U.S. and
foreign companies. Investments include
securities of smaller cap companies.
Growth and Income
Mutual Beacon Fund (a 06/29/62 Seeks capital appreciation, which may
series of Franklin occasionally be short-term, and income
Mutual Series Funds Inc.) by investing in common and preferred
stock, as well as debt securities,
including high yield, lower-rated
securities of U.S. and foreign
companies that the fund's investment
manager believes are undervalued.
Mutual Financial 08/19/97 Seeks capital appreciation, which may
Services Fund (a series occasionally be short-term, and income
of Franklin Mutual by investing in common and preferred
Series Funds Inc.) stock, as well as debt securities and
securities convertible into common stocks
(including convertible preferred and
convertible debt securities) issued by
companies in the financial services
industry.
Mutual Qualified Fund (a 09/26/80 Seeks capital appreciation, which may
series of Franklin occasionally be short-term, and income
Mutual Series Funds Inc.) by investing in common and preferred
stock, as swell as debt securities,
including high yield, lower-rated
securities of U.S. and foreign
companies that the fund's investment
manager believes are undervalued.
Mutual Shares Fund (a 07/01/49 Seeks capital appreciation, which may
series of Franklin occasionally be short-term, and income
Mutual Series Funds Inc.) by investing in common and preferred
stock, as swell as debt securities,
including high yield, lower-rated
securities of U.S. and foreign
companies that the fund's investment
manager believes are undervalued.
(xxiii) Asset Allocation Funds
Name of Fund Inception Principal Investments/Strategy
Date
Franklin Templeton Fund Consist of three (3) series that seek
Allocator Series the highest level of long-term total
return that is consistent with an
acceptable level of risk, achieved
primarily through a professionally managed
portfolio of mutual funds. Each series
will seek to achieve its investment
objective through active asset allocation
implemented primarily with investments in
a combination of Franklin Templeton mutual
funds.
Franklin Templeton 12/31/96 Seeks the highest level of long-term
Conservative Target Fund total return that is consistent with a
lower level of risk.
Franklin Templeton 12/31/96 Seeks the highest level of long-term
Moderate Target Fund total return that is consistent with a
moderate level of risk.
Franklin Templeton 12/31/96 Seeks the highest level of long-term
Growth Target Fund total return that is consistent with a
higher level of risk.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Information on the Company's operations in various geographic areas of the world
and a breakout of business segment information is contained in Note 7 of Notes
to Consolidated Financial Statements elsewhere herein.
(c) NARRATIVE DESCRIPTION OF BUSINESS
Investment Management and Administrative Services
The Company, through its various subsidiaries described above, provides
investment advisory, portfolio management, transfer agency, business management
agent and administrative services to the Franklin Templeton Group. Such services
are provided pursuant to agreements in effect with each of the U.S. registered
Franklin Templeton Funds open- and closed-end investment companies. Comparable
agreements are in effect with foreign registered Funds and with other managed
accounts. The management agreements for the U.S. registered Franklin Templeton
Funds continue in effect for successive annual periods, providing such
continuance is specifically approved at least annually by a majority vote cast
in person at a meeting of such Funds' Boards of Trustees or Directors called for
that purpose, or by a vote of the holders of a majority of the Funds'
outstanding voting securities. In either event, the continuance must be approved
by a majority of such Funds' trustees or directors who are not parties to such
agreement or interested persons of the Funds or the Company within the meaning
of the Investment Company Act of 1940 (the "40 Act"). Trustees and directors of
Funds' boards are hereinafter referred to as "directors". Foreign registered
Funds have various termination rights and provisions.
Each such agreement automatically terminates in the event of its "assignment"
(as defined in the 40 Act) and either party may terminate the agreement without
penalty after written notice ranging from thirty (30) to sixty (60) days.
"Assignment" is defined in the 40 Act as including any direct or indirect
transfer of a controlling block of voting stock. Control is defined as the power
to exercise a controlling influence over the management or policies of a
company.
If there were to be a termination of a significant number of the management
agreements between the Franklin Templeton Funds and the Company's subsidiaries
or with respect to a significant portion of the Other Assets, such termination
would have a material adverse impact upon the Company. To date, no management
agreements of the Company or any of its subsidiaries with any of the Franklin
Templeton Funds have been involuntarily terminated. Changes in the customer base
of institutional investors occur on a regular basis. Since the Templeton
Acquisition and the Mutual Acquisition to date, assets under management in the
category of Other Assets set forth above have continued to grow.
As of September 30, 1997, substantially all of the shares of the various
directly and indirectly owned subsidiary companies were owned directly by the
Company or subsidiaries thereof, except with respect to a limited number of
foreign entities and limited minority ownership of certain other companies. As
of December 1, 1997, Charles B. Johnson, Rupert H. Johnson, Jr. and R. Martin
Wiskemann beneficially owned approximately 19.1%, 15.2% and 9.3%, respectively,
of the outstanding voting common stock of the Company.
Under the terms of the management agreements with the Franklin Templeton Funds,
the various subsidiary companies described above generally supervise and
implement such Funds' investment activities and provide the administrative
services and facilities which are necessary to the operation of such Funds'
business. Such subsidiary companies also conduct research and provide investment
advisory services and, subject to and in accordance with any directions such
Funds' boards may issue from time to time, such subsidiary companies determine
which securities such Funds will purchase, hold or sell. In addition, such
subsidiary companies take all steps necessary to implement such decisions,
including the selection of brokers and dealers to execute transactions for such
Funds, in accordance with detailed criteria set forth in the management
agreement for such Funds and applicable law and practice. Similar services are
rendered with respect to the Other Assets.
Generally, the Company or a subsidiary provides and pays the salaries of
personnel who serve as officers of the Franklin Templeton Funds, including the
President and such other administrative personnel as are necessary to conduct
such Funds' day-to-day business operations, including maintaining a Fund's
portfolio records, answering shareholder inquiries, providing information,
creating and publishing literature, compliance with securities regulations,
maintaining accounting systems and controls, preparation of annual reports and
other administrative activities.
The Funds generally pay their own expenses such as legal and auditing fees,
reporting and board and shareholder meeting costs, SEC and state registration
and similar expenses. Generally, the Funds pay advisory companies a fee payable
monthly based upon a Fund's net assets. Annual rates under the various
investment management agreements range from .15% to a maximum of 2.00% and are
generally reduced as net assets exceed various threshold levels.
The investment management agreements permit advisory companies to act as an
advisor to more than one Fund so long as such companies' ability to render
services to each of such Funds is not impaired, and so long as purchases and
sales appropriate for all such Funds are made on a proportionate or other
equitable basis. Management of the Company and the directors of the Funds
regularly review the Fund fee structures in light of Fund performance, the level
and range of services provided, industry conditions and other relevant factors.
Advisory fees are generally waived or voluntarily reduced when a new Fund is
first established and then increased to contractual levels with the growth in
net assets.
The investment advisory services provided by such advisory companies include
fundamental investment research and valuation analyses, encompassing original
country, industry and company research, company visits and inspections, and the
utilization of such sources as company public records and activities, management
interviews, company prepared information, and other publicly available
information, as well as analyses of suppliers, customers and competitors. In
addition, research services provided by brokerage firms are used to support
other research. In this regard, some brokerage business from the Funds is
allocated in recognition of value-added research services received.
Fixed-income research includes economic analysis, credit analysis and value
analysis. The economic analysis function monitors and evaluates numerous factors
that influence the supply and demand for credit on a worldwide basis. Credit
analysts research the credit worthiness of debt issuers and their individual
short-term and long-term debt issues. Yield spread differential analysis reviews
the relative value of market sectors that represent buying and selling
opportunities.
Additional shareholder administrative services are provided by FTIS, which
receives administrative fees from the Funds for providing shareholder record
keeping services and for acting as transfer and dividend-paying agent for the
Funds. As of September 30, 1997, such compensation was based upon an annual fee
per shareholder account, ranging between $14.54 and $18.00, a pro-rated portion
of which was paid monthly.
Distribution and Marketing
Distributors acts as the principal underwriter and distributor of shares of the
open-end Franklin Templeton Funds. Pursuant to underwriting agreements with the
Funds, Distributors generally pays the expenses of distribution of Fund shares.
Although the Company does significant advertising and sales promotions through
media sources, Fund shares are sold primarily through a large network of
independent participating securities dealers. As of September 30, 1997,
approximately 3,772 local, regional and national securities brokerage firms
offered shares of the Franklin Templeton Funds for sale to the investing public.
The Company has approximately sixty-five (65) "wholesalers" who interface with
the broker-dealer community. Fund shares are offered to individual investors,
qualified groups, trustees, IRA and profit sharing or money purchase plans,
employee benefit plans, trust companies, bank trust departments and
institutional investors. In addition, various management and advisory services,
commingled and pooled accounts, wrap fee arrangements and various other private
investment management services are offered to certain private and institutional
investors.
Broker-dealers are paid various fees for services in matching investors with
Funds whose investment objectives match such investors' goals. Broker-dealers
also assist in explaining the operations of the Funds, in servicing the account
and in various other distribution services.
Most of the U.S. based Franklin Templeton Funds have a multi-class share
structure whereby Class I shares are sold with a maximum front-end sales charge
which ranges from a low of 1.50% to a high of 5.75%. Reductions in the maximum
sales charges may be available depending upon the amount invested and the type
of investor. Class II shares, which were introduced during the 1995 fiscal year,
have a hybrid, level load structure combining aspects of conventional front-end,
back-end and level-load pricing. Class II shares are subject to an initial sales
charge of 1% paid immediately by the investor. Also, in connection with the
distribution of Class II shares, a principal distribution subsidiary of the
Company has in the past paid, and may in the future pay, an additional 1% to the
broker-dealer. However, Class II shares are generally subject to a 1% contingent
deferred sales charge, charged to the investor and returned to the Company, on
redemptions within eighteen (18) months of purchase. See "Risk Factors and
Cautionary Statements". Class II shares are also subject to higher on-going Rule
12b-1 fees, as described below. The multi-class structure was adopted to provide
investors greater payment alternatives in implementing their investment
programs. The Company's money market and institutional funds are sold to
investors without a sales charge.
Most of the U.S. registered Franklin Templeton funds, with the exception of
certain Franklin Templeton money market funds, have also adopted distribution
plans (the "Plans") under Rule 12b-1 promulgated under the 40 Act ("Rule
12b-1"). The Plans are established for an initial term of one (1) year and,
thereafter, must be approved annually by the Fund boards and by a majority of
disinterested directors. All such Plans are subject to termination at any time
by a majority vote of the disinterested directors or by the Funds' shareholders.
The Plans permit the Funds to bear certain expenses relating to the distribution
of their shares.
Fees under the Plans for Class I shares range in amount from a low of .10% per
annum of average daily net assets to a high of .50% while Class II share fees
range between .65% to 1%. The implementation of the Plans provided for a lower
fee on Class I shares acquired prior to the adoption of such Plans. Fees from
the Plans are paid primarily to third party dealers who provide service to their
shareholder accounts, as well as engage in distribution activities. Distributors
may also receive reimbursement from the Funds for expenses involved in
distributing the Funds, such as advertising, and reimbursement for a 1% payment
to dealers on sales of Class II shares, subject to the Plans' limitations on
amounts.
As of September 30, 1997, there were approximately 7.4 million shareholder
accounts in the worldwide Franklin Templeton Group of Funds.
Revenues
As shown in the Consolidated Financial Statements, the Company's revenues are
derived primarily from its investment management activities. Total operating
revenues are set forth in the table below. Revenues from investment management
fees have comprised approximately 60%, 58% and 58% in 1997, 1996 and 1995,
respectively, of total operating revenue for each of the three (3) fiscal years
reported. Underwriting commissions, from gross sales and reinvestments of
products subject to commissions contributed to revenues approximately 34%, 36%
and 36% in 1997, 1996 and 1995 respectively. Shareholder servicing fees from
mutual fund activities contributed 6%, 6% and 5% in 1997, 1996 and 1995
respectively. See "MD&A--Operating Revenues".
Other Financial Services
The Company's consumer lending, dealer auto loan and real estate businesses do
not as yet contribute significantly to either the revenues or the net income of
the Company. Franklin Bank's operations are limited by national banking laws and
no immediate significant increase in revenues is anticipated. The real estate
operations have incurred net losses since inception and the Company does not
anticipate any immediate improvement in this line of business. The Company's
dealer auto loan business required the infusion of significant working capital
during fiscal 1996 and 1995, either in the form of inter-company loans or by
contributions to the capital of FCC by the Company. During portions of that
period, the Company experienced an increase in delinquency rates in such loans
and, in response, expanded its auto loan collection efforts and tightened its
underwriting policies. There was a significant reduction in gross charge-offs
and delinquency rates during fiscal 1997. A more detailed analysis of the
financial effects of loan losses and delinquency rates, as well as the funding
of this activity, is contained in the "MD&A--Operating Revenues".
Regulatory Considerations
Virtually all aspects of the Company's businesses are subject to various
foreign, federal and state laws and regulations. As discussed above, the Company
and a number of its subsidiaries are registered with various foreign, federal
and state governmental agencies. Foreign, federal and state laws and regulations
grant such supervisory agencies broad administrative powers, including the power
to limit or restrict the Company from carrying on its business if it fails to
comply with such laws and regulations. In such event, the possible sanctions
which may be imposed include the suspension of individual employees, limitations
on the Company's (or a subsidiary's) engaging in business for specified periods
of time, the revocation of the investment advisor or broker-dealer registrations
of subsidiaries and censures and fines.
The Company's officers, directors and employees may from time to time own
securities which are also held by the Funds. The Company's internal policies
with respect to individual investments by certain employees, including officers
and directors who are employed by the Company, require prior clearance and
reporting of some transactions and restrict certain transactions so as to reduce
the possibility of conflicts of interest.
To the extent that existing or future regulations affecting the sale of Fund
shares or other investment products or their investment strategies cause or
contribute to reduced sales of Fund shares or investment products or impair the
investment performance of the Funds or such other investment products, the
Company's aggregate assets under management and its revenues might be adversely
affected. Changes in regulations affecting free movement of international
currencies might also adversely affect the Company.
Since 1993, the NASD Conduct Rules have limited the amount of aggregate sales
charges which may be paid in connection with the purchase and holding of
investment company shares sold through brokers. The effect of the rule might be
to limit the amount of fees that could be paid pursuant to a fund's 12b-1 Plan
in a situation where a fund has no, or limited, new sales for a prolonged period
of time. None of the Franklin Templeton funds are in, or close to, that
situation at the present time.
Technology
The Company established a dedicated Year 2000 Project Team in 1996 to assess and
modify all systems in its computing environment and is currently modifying or
replacing all non-Year-2000-compliant systems. The Company is also upgrading its
desktop hardware and software to support the next generation of more
sophisticated business applications. Communication links were also upgraded in
1997 to support the Company's global offices, as well as to provide dedicated
links to key business partners. The Company will continue to assess the impact
of Year 2000 issues on its global computer systems and applications. See
"MD&A--Operating Expenses".
Competition
The financial services industry is highly competitive and has increasingly
become a global industry. As a result, comparative market data is not readily
available. There are over 6,600 open-end investment companies of varying sizes,
investment policies and objectives whose shares are being offered to the public
in the United States. Due to the Company's international presence and varied
product mix, it is difficult to assess the Company's market position relative to
other investment managers on a worldwide basis, but the Company believes that it
is one of the more widely diversified investment managers in the United States.
The Company believes that its strong equity and fixed-income base coupled with
its strong global presence will serve its competitive needs well over time. The
Company continues its focus on service to customers, performance on investments
and extensive marketing activities with its strong broker-dealer and other
financial institution distribution network.
The Company 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. Although the banking industry continues to expand its
sponsorship of proprietary funds distributed through third party distributors,
the Company has and continues to actively pursue sales relationships with banks
and insurance companies to broaden its distribution network in response to such
competitive pressures.
As investor interest in the mutual fund industry has increased, competitive
pressures have increased on sales charges of broker-dealer distributed funds.
The Company believes that, although this trend will continue, a significant
portion of the investing public still relies on the services of the
broker-dealer community, particularly during weaker market conditions. However,
in response to competitive pressures or for other similar reasons, the Company
might be forced to lower or further adjust sales charges, substantially all of
which are currently paid to broker-dealers and other financial intermediaries.
The reduction in such sales charges could make the sale of shares of the
Franklin Templeton Funds somewhat less attractive to the broker-dealer
community, which could in turn have a material adverse effect on the Company's
revenues. The Company believes that it is well positioned to deal with such
changes in marketing trends as a result of its already extensive advertising
activities and broad based marketplace recognition.
The Company advertises the Franklin Templeton Group in major national financial
publications, as well as on radio and television to promote name recognition and
to assist its distribution network. Such activities included purchasing network
and cable programming, sponsorship of sporting events, such as the "Franklin
Templeton Shark Shoot-Out", sponsorship of The Nightly Business Report on public
television, and extensive newspaper and magazine advertising.
Further aspects of competition are discussed below under "Risk Factors and
Cautionary Statements".
Asset Mix
As discussed above, the Company's revenues are derived primarily from investment
management activities. Broadly speaking, the direction and amount of change in
the net assets of the Funds are dependent upon two factors: (1) the level of
sales of shares of the funds as compared to redemptions of shares of the funds;
and (2) the increase or decrease in the market value of the securities owned by
the Funds. Although the Company believes that it has substantially benefited
from the Templeton and Mutual Acquisitions, the resultant shift in asset mix
from primarily a fixed-income base to a combination of fixed-income and global
equities has increased the possibility of volatility in the Company's managed
portfolios due to the increased percentage of equity investments managed. In
addition, the Company derives higher revenues and income from its equity assets
and therefore a future shift in assets from equity to fixed-income would have an
adverse impact on the Company's income and revenues. Despite this potential for
volatility, management believes that the Franklin Templeton Group is more
competitive as a result of the greater diversity of global investments and
product mix available to its customers.
Market values are affected by many things, including the general condition of
national and world economics and the direction and volume of changes in interest
rates and/or inflation rates. 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.
Although the Company and its assets under management are subject to political
and currency risks, due to its international activities, as is discussed in more
detail in "Risk Factors and Cautionary Statements" and "MD&A--Liquidity and
Capital Resources", its exposure to fluctuations in foreign currency markets and
to fixed-asset value depreciation is limited.
Forward-Looking Statements
When used in this Form 10-K and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and in oral
statements made with the approval of an authorized executive officer, the words
or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties, including those discussed under the caption "Risk
Factors and Cautionary Statements" below, that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed below could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company will not undertake and specifically declines any obligation to
release publicly the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Risk Factors and Cautionary Statements
The Company's revenues and income are derived primarily from the management of a
variety of financial services products. The financial services industry is
highly competitive, as discussed above. Such competition could negatively impact
the Company's market share, which could impact assets under management, from
which the bulk of the Company's revenues and income arise.
Sales of mutual fund shares and other financial services products can also be
negatively affected by adverse general securities market conditions, burdensome
governmental regulations and recessionary global economic conditions. In
addition, securities dealers, whose large retail distribution systems play an
important role in the sale of shares of the Franklin, Templeton and Mutual
Series funds, also sponsor competing proprietary mutual funds. To the extent
that these firms limit or restrict the sale of Franklin, Templeton or Mutual
Series funds shares through their brokerage systems in favor of their
proprietary mutual funds, future sales may be negatively impacted and the
Company's revenues might be adversely affected. In addition, as the number of
competitors in the investment management industry increases, greater demands are
placed on existing distribution channels, which may cause distribution costs to
increase.
The Company's assets under management include a significant number of global
equities, which increase the volatility of the Company's managed portfolios and
its revenue and income streams. 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 Company's managed
portfolios due to the increased percentage of equity investments managed. The
securities market is currently experiencing the longest "bull market" in history
with unprecedented levels of investor demand for equity securities. As a result
of this financial environment, the Company's equity holdings have increased in
value, which has contributed to increased assets under management and revenues.
The valuation of the equity portion of the Company's assets under management is
especially subject to the securities market, which is cyclical and subject to
periodic corrections. A downturn in this financial market would have an adverse
effect on the value of the equity portion of the Company's assets under
management which in turn would have a negative effect on the Company's revenues.
In addition, the Company derives higher revenues and income from its equity
assets and therefore a future shift in assets from equity to fixed-income would
have an adverse impact on the Company's income and revenues.
Market values are affected by many things, including the general condition of
national and world economics and the direction and volume of changes in interest
rates and/or inflation rates. 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.
Certain portions of the Company's managed portfolios are invested in various
securities of corporations located or doing business in developing regions of
the world commonly known as emerging markets. These portfolios and the Company's
revenues derived from the management of such portfolios are subject to
significant risks of loss from unfavorable political and diplomatic
developments, currency fluctuations, social instability, changes in governmental
policies, expropriation, nationalization, confiscation of assets and changes in
legislation relating to foreign ownership. Foreign trading markets, particularly
in some emerging market countries are often smaller, less liquid, less regulated
and significantly more volatile.
A number of mutual fund sponsors presently market their funds without sales
charges. As investor interest in the mutual fund industry has increased,
competitive pressures have increased on sales charges of broker-dealer
distributed funds. In response to such competitive pressures, the Company might
be forced to lower or further adjust sales charges, substantially all of which
are currently paid to broker-dealers and other financial intermediaries. The
reduction in such sales charges could make the sale of shares of the Franklin,
Templeton and Mutual Series funds less attractive to the broker-dealer
community, which could in turn have a material adverse effect on the Company's
revenues. In the alternative, the Company might be required to pay additional
fees, commissions or charges in connection with the distribution of its shares
which could have a negative effect on the Company's earnings.
Sales of Class II shares have increased relative to the Company's overall sales,
resulting in higher distribution expenses, which have caused distribution
expenses to exceed distribution revenues for certain products and put increasing
pressure on the Company's profit margins. If the Company is unable to fund
commissions on Class II shares using existing cash flow and debt facilities,
additional funding will be necessary. Past sales of Class II shares are not
necessarily indicative of future sales volume, and future sales of Class II
shares may be lower or higher as a result of changes in investor demand or
lessened or unsuccessful sales efforts by the Company.
The Company is in competition with the financial services and other investment
alternatives offered by stock brokerage and investment banking firms, insurance
companies, banks, savings and loan associations and other financial
institutions. Many of these competitors have substantially greater resources
than the Company. In addition, there has been a trend of consolidation in the
mutual fund industry which has resulted in stronger competitors. The banking
industry also continues to expand its sponsorship of proprietary funds
distributed through third party distributors. To the extent that banks limit or
restrict the sale of Franklin, Templeton or Mutual Series shares through their
distribution systems in favor of their proprietary mutual funds, assets under
management might decline and the Company's revenues might be adversely affected.
The Company is unable to predict at this time whether the Taxpayer Relief Act of
1997 will have a positive or a negative effect on the Company's portfolios or
revenues.
The Company's real estate activities are subject to fluctuations in the real
estate market place as well as to significant competition from companies with
much larger real estate portfolios giving them significantly greater economies
of scale.
The Company's auto loan receivables business and credit card receivable
activities are subject to significant fluctuations in those consumer market
places as well as to significant competition from companies with much larger
receivable portfolios. In addition, certain of the Company's competitors are
engaged in the financing of auto loans in connection with a much larger
automobile manufacturing businesses and may at times provide loans at
significantly below market interest rates in order to further the sale of
automobiles.
The consumer loan market is highly competitive. The Company competes with many
types of institutions including banks, finance companies, credit unions and the
finance subsidiaries of large automobile manufacturers. Interest rates the
Company can charge and, therefore, its yields vary based on this competitive
environment. The Company is reliant on its relationships with various automobile
dealers and this relationship is highly dependent on the rates and service that
the Company provides. There is no guarantee that in this competitive environment
the Company can maintain its relationships with these dealers. Auto loan and
credit card portfolio losses can also be influenced significantly by trends in
the economy and credit markets which negatively impact borrowers' ability to
repay loans.
Item 2. Properties
General
As of September 30, 1997, the Company leases offices and facilities in ten (10)
locations in the immediate vicinity of its principal executive and
administrative offices located at 777 Mariners Island Boulevard, San Mateo,
California. In addition, the Company owns six (6) buildings near Sacramento,
California, as well as two (2) buildings in St. Petersburg, Florida, one (1)
building in Phoenix, Arizona, two (2) buildings in Nassau, Bahamas as well as
substantial space in high rise office buildings in Argentina and Singapore.
Certain properties of the Company were under construction during fiscal 1997 as
described below. Since the Company is operated on a unified basis, corporate
activities, fund related activities, accounting operations, sales, real estate
and banking operations, auto loans and credit cards, management information
system activities, publishing and printing operations, shareholder service
operations and other business activities and operations take place in a variety
of such locations. The Company or its subsidiaries also lease office space in
Florida, New York, and Utah and in several other states. In addition, the
Company or its subsidiaries also lease office space in Australia, Bermuda,
Brazil, Canada, Dubai, England, France, Germany, Hong Kong, India, Italy, Japan,
Luxembourg, Poland, Russia, Scotland, South Africa, Taiwan, and Vietnam.
Property Description
Leased
As of September 30, 1997, the Company leased properties at the locations set
forth below:
Approximate Approximate Base Expiration
Location Square Footage Monthly Rental Date
777 Mariners Island Boulevard
San Mateo, CA 94404 177,000 $443,000 February 2001
1147 & 1149 Chess Drive
Foster City, CA 94404 121,000 $108,000 June 2000
500 East Broward Boulevard
Ft. Lauderdale, FL 33394 104,000 $175,000 December 2000
1810 Gateway Drive
San Mateo, CA 94404 49,000 $89,000 June 2000
2 Waters Drive
San Mateo, CA 94404 49,000 $70,000 July 1999
1950 Elkhorn Court
San Mateo, CA 94403 37,000 $43,000 July 2001
901 & 951 Mariners Island Between March
Boulevard 34,000 $62,000 1999 &
San Mateo, CA 94404 April 2000
1850 Gateway Drive
San Mateo, CA 94404 19,000 $34,000 July 2000
1400 Fashion Island Boulevard
San Mateo, CA 94404 14,000 $41,000 June 2002
Other U.S. Locations 68,000 --
--
Foreign Operations 147,000 --
--
Owned
The Company maintains a customer service facility in the property that it owns
at 10600 White Rock Road, Rancho Cordova, California. The Company occupies
75,000 square feet in this property and has leased out 46,000 square feet to a
third party until February 2000 at an approximate monthly rental of $69,000. The
Company owns an additional twenty-seven (27) acres of adjoining land on which it
has constructed two (2) office buildings of approximately 67,000 square feet
each and a data center/warehouse facility of approximately 162,000 square feet.
The Company owns six (6) facilities in St. Petersburg, Florida, including an
approximate 90,000 square foot office building and an approximate 117,000 square
foot facility devoted to a computer data center, training, warehouse and mailing
operations. Four (4) new office buildings of approximately 70,000 square feet
each were under construction during fiscal 1997 and were completed in November
1997. Shareholder servicing activities have been relocated to this new 280,000
square foot development. The Company plans to develop additional facilities at
this site in the future.
The Company also owns two (2) office buildings in Nassau, Bahamas, of
approximately 14,000 square feet and approximately 25,000 square feet,
respectively as well as a nearby condominium residence.
Other
The Company is the sole limited partner with a 60% partnership interest in
Mariner Partners, a California limited partnership formed in 1984 to develop,
operate and hold the property occupied by the Company at 777 Mariners Island
Boulevard. Mariner Partners obtained thirty year non-recourse financing for the
property from Metropolitan Life Insurance Company at an interest rate of 8.10%
per annum, due November 2002. The principal balance outstanding as of September
30, 1997, was $24.9 million.
Property Changes
The Company entered into two (2) separate contracts, totaling approximately
$13.8 million, in May 1997 and September 1997, respectively, for the design and
construction of Buildings C and D in Rancho Cordova. Construction of Building C,
a 74,000 square foot office building, was completed in November 1997 and
Building D, a 95,000 square foot office building, is expected to be completed in
August 1998.
During fiscal 1997, the Company also owned an office building of approximately
70,000 square feet at 1800 Gateway Drive, San Mateo, California. In October
1997, the Company sold, but continued to occupy it pursuant to a lease. The
lease provides for base monthly rental payments of $199,500 and terminates in
July 2002. The Company has the right to terminate the lease without penalty at
any time after July 2000.
On December 12, 1997, the Board of Directors of the Company approved the
previously-executed contract to acquire approximately thirty-three (33) acres of
land ("Bay Meadows") located in San Mateo, California for a total estimated
purchase price of approximately $21.6 million. A subsidiary of the Company, PRI,
executed a contract in May 1995 to purchase the property, which contract was
subsequently assigned to FRI. The Bay Meadows purchase was subject to receipt of
governmental regulatory approvals, which were obtained in April 1997. As a
result, a related escrow deposit of $850,000 made by the Company became
non-refundable. As a condition to approval of the Company's planned use of the
Bay Meadows property, the City of San Mateo will require construction of roads,
modification to a freeway interchange, and other off-site improvements. The
Company is obligated to reimburse the seller of Bay Meadows for a portion of the
cost of certain of these off-site improvements. Presently, this reimbursement is
expected to approximate $7.9 million. Escrow on the purchase is scheduled to
close in April 1998, at which time the Company is obligated to make its first
payment for off-site improvements.
After receiving the necessary governmental approvals for purchase of the Bay
Meadows property, the Company executed a design build contract in July 1997 for
the design and construction of a new 900,000 square foot campus at Bay Meadows.
The total contract amount will not be final until after the project is
completely designed and building permits issued by the City of San Mateo,
California.
Item 3. Pending Legal Proceedings
There are no material pending legal proceedings to which the Company or any of
its subsidiaries is a party, or of which any of their property is the subject;
nor are any such proceedings known to be contemplated by any governmental
authorities.
Item 4. Submission of Matters to a Vote of Security Owners
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of security holders.
<PAGE>
Executive Officers of Registrant
The following information on the executive officers of the Company is given as
of December 1, 1997:
Name Age Principal Occupation for the Past Five Years
- --------------------------------------------------------------------------------
Charles B. Johnson 64 President, Chief Executive Officer and
Director of the Company; Chairman and
Director, Franklin Advisers, Inc. and
Franklin/Templeton Distributors, Inc.;
Director, Templeton Worldwide, Inc.,
Franklin Bank, Franklin/Templeton Investor
Services, Inc., Franklin Mutual Advisers,
Inc. and General Host Corporation; officer
and/or director, as the case may be, of
most other principal U.S. subsidiaries of
the Company; officer and/or director or
trustee, as the case may be, of 54 of the
investment companies in the Franklin
Templeton Group of Funds.
Harmon E. Burns 52 Executive Vice President, Director and
Secretary of the Company; Executive Vice
President and Director of
Franklin/Templeton Distributors, Inc., and
Franklin Templeton Services, Inc.;
Executive Vice President of Franklin
Advisers, Inc.; Director, Templeton
Worldwide, Inc., Franklin/Templeton
Investor Services, Inc., and Franklin
Mutual Advisers, Inc.; officer and/or
director, as the case may be, of most other
principal U.S. subsidiaries of the Company;
officer and/or director or trustee, as the
case may be, of 58 of the investment
companies in the Franklin Templeton Group
of Funds.
Rupert H. Johnson, Jr. 57 Executive Vice President and Director of
the Company; Director and President,
Franklin Advisers, Inc.; Director and
Executive Vice President,
Franklin/Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor
Services, Inc., Templeton Worldwide, Inc.,
Franklin Bank and Franklin Mutual Advisers,
Inc.; officer and/or director or trustee,
as the case may be, of most other principal
U.S. subsidiaries of the Company; and of 58
of the investment companies in the Franklin
Templeton Group of Funds.
Martin L. Flanagan 37 Senior Vice President, Chief Financial
Officer of the Company; President and Chief
Executive Officer of Franklin Templeton
Services, Inc., Senior Vice President of
Franklin Advisers, Inc., Executive Vice
President and Director of Templeton
Worldwide, Inc.; officer of most of the
subsidiaries of the Company since March
1993; and officer and/or director, trustee
or managing partner, as the case may be, of
most other principal U.S. subsidiaries of
the Company; and of 58 of the investment
companies in the Franklin Templeton Group
of Funds. Prior to 1993, employed by
various Templeton entities.
Deborah R. Gatzek 49 Senior Vice President of the Company since
March 1990; General Counsel since January
1996; Vice President of the Company from,
1986 to March 1990; Senior Vice President,
Franklin/Templeton Distributors, Inc. and
Franklin Templeton Services, Inc.; Vice
President, Franklin Advisers, Inc.; officer
of most other principal U.S. subsidiaries
of the Company; and officer of 58 of the
investment companies in the Franklin
Templeton Group of Funds.
Charles E. Johnson 41 Senior Vice President and Director of the
Company; President and Director, Templeton
Worldwide, Inc., Director, Franklin Mutual
Advisers, Inc.; President, CEO and
Director, Franklin Institutional Services
Corporation; Senior Vice President,
Franklin/Templeton Distributors Inc.;
Chairman, Director, Franklin Agency, Inc.;
Vice President, Franklin Advisers, Inc.;
Chairman and Director, Templeton Investment
Counsel, Inc.; officer and/or director, as
the case may be, of other U.S. and
international subsidiaries of the Company;
officer and/or director or trustee, as the
case may be, of 36 of the investment
companies in the Franklin Templeton Group
of Funds.
William J. Lippman 72 Senior Vice President of the Company since
March 1990; Director, Templeton Worldwide,
Inc.; and officer and/or director or
trustee of seven of the investment
companies in the Franklin Group of Funds.
Until June 1988, President, Chief Executive
Officer, and Director of L.F. Rothschild
Fund Management, Inc., Director of L.F.
Rothschild Asset Management, Inc.,
Administrative Managing Director and
Director of L.F. Rothschild & Co.,
Incorporated.
Jennifer J. Bolt 33 Vice President of the Company since June
1994; Executive Vice President, Franklin
Bank since August 1993; President and
Director, Franklin Capital Corporation,
since November 1993; employed by the
Company in various other capacities for
more than the past five (5) years.
Donna S. Ikeda 41 Vice President since October 1993;
re-joined the Company in August 1993.
Previously employed from 1982 to 1990 as
Director of Human Resources and also held
position as Manager/AVP of Shareholder
Services, Retirement Plan Phone Service and
Customer New Accounts. From 1990 until
August 1993, Vice President, Human
Resources for G.T. Capital Management, Inc.
and G.T. Global Financial Services, Inc.,
mutual fund management and financial
services companies.
Gregory E. Johnson 36 Vice President of the Company since June
1994; President, Franklin/Templeton
Distributors, Inc. since September 1994;
Vice President, Franklin Advisers, Inc.
Prior to that time, Senior Vice President
and Assistant National Sales Manager,
Franklin/Templeton Distributors, Inc.;
Employee of Franklin Resources, Inc. and
its subsidiaries in administrative and
portfolio management capacities since
January 1986; officer of one investment
company in the Franklin Group of Funds.
Gordon F. Jones 50 Vice President and Chief Information
Officer of the Company since March 1995.
From March 1990 to March 1995, Vice
President of Novell, Inc., a worldwide
network systems company; Vice President and
Chief Information Officer of Novell, Inc.
from March 1994 to March 1995.
Leslie M. Kratter 52 Vice President of the Company since March
1993. Employed by the Company since
January 1992. Secretary of Franklin
Advisers, Inc., Franklin/Templeton
Distributors, Inc., Templeton Worldwide,
Inc., and a number of the Company's
subsidiaries.
Charles R. Sims 36 Treasurer of the Company. Employed by the
Company since 1989. From August 1991 to
October 1997, Vice President and Chief
Financial Officer and from February 1992 to
October 1997, Director of Canadian
operations.
Kenneth A. Lewis 36 Vice President, Corporate Controller and
Chief Accounting Officer of the Company,
Senior Vice President and Controller of
Templeton Worldwide, Inc., and an officer
of several other U.S. subsidiaries of the
Company. Prior to the Templeton
Acquisition, employed by various Templeton
entities.
Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Peter M.
Sacerdote, a director of the Company, is a brother-in-law of Charles B. Johnson
and Rupert H. Johnson, Jr. Charles E. Johnson is the son of Charles B. Johnson
and the nephew of Rupert H. Johnson, Jr. and Peter Sacerdote. Gregory E. Johnson
is the son of Charles B. Johnson, the nephew of Rupert H. Johnson, Jr. and Peter
Sacerdote and the brother of Jennifer Bolt and Charles E. Johnson. Jennifer Bolt
is the daughter of Charles B. Johnson, the niece of Rupert H. Johnson, Jr. and
Peter Sacerdote, and the sister of Charles E. Johnson and Gregory E. Johnson.
Leslie M. Kratter is the spouse of Deborah R. Gatzek.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information About the Company's Common Stock
The Company's common stock is traded on the New York Stock Exchange ("NYSE") and
the Pacific Exchange under the ticker symbol BEN and the London Stock Exchange
under the ticker symbol FKR. On September 30, 1997, the closing price of the
Company's common stock on the NYSE was $93 1/8 per share. At December 1, 1997,
there were approximately 2,500 shareholders of record. In addition, the Company
estimates that there are approximately 22,000 beneficial shareholders whose
shares are held in street name.
The following table sets forth the high and low sales prices for the Company's
common stock from the NYSE Composite Tape. All sales prices have been adjusted
retroactively to reflect the Stock Dividend.
1997 Fiscal Year 1996 Fiscal Year
Quarter High Low High Low
- --------------------------------------------------------------------------------
October-December 49 3/4 43 1/12 38 2/3 31 1/16
January-March 71 7/8 48 3/4 39 5/12 30 11/12
April-June 74 1/4 51 7/8 41 1/6 35 3/4
July-September 93 9/16 72 5/8 45 3/4 34 1/2
The Company declared dividends of $0.34 per share in fiscal 1997 and $0.29 per
share in fiscal 1996. The Company expects to continue paying dividends on a
quarterly basis to common stockholders depending upon earnings and other
relevant factors.
Item 6. Selected Financial Highlights
IN MILLIONS, EXCEPT
ASSETS UNDER MANAGEMENT
AND PER SHARE AMOUNTS
AS OF AND FOR THE YEARS
1997 1996 1995 1994 1993
ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------
Summary of Operations:
Operating revenues** $2,163.3 $1,519.5 $1,253.3 $1,340.8 $1,175.5
Net income $ 434.1 $ 314.7 $ 268.9 $ 251.3 $ 175.5
Financial Data:
Total assets $3,095.2 $2,374.2 $2,244.7 $1,968.8 $1,581.5
Long-term debt $ 493.2 $ 399.5 $ 382.4 $ 383.7 $ 454.8
Stockholders'
equity $1,854.2 $1,400.6 $1,161.0 $ 930.8 $ 720.4
Assets Under
Management
(IN BILLIONS) $ 226.0 $ 151.6 $ 130.8 $ 118.2 $ 107.5
Per Common Share*
Earnings
Primary $ 3.43 $ 2.52 $ 2.16 $ 2.00 $ 1.41
Fully diluted $ 3.43 $ 2.50 $ 2.13 $ 2.00 $ 1.40
Cash dividends $ 0.34 $ 0.29 $ 0.27 $ 0.21 $ 0.19
Book value $ 14.71 $ 11.63 $ 9.56 $ 7.60 $ 5.85
* Prior year amounts have been restated to reflect the Stock Dividend.
** Prior year amounts have been restated to correspond to current year
treatment.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
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 most individuals and institutions.
The Company offers its services in most global markets including Asia,
Australia, Canada, the Caribbean, Continental Europe, South Africa, South
America, the United Kingdom and the United States. At September 30, 1997, the
Company had offices in over 20 different nations, employing over 6,400 people.
On November 1, 1996, the Company acquired the assets and liabilities of Heine
Securities Corporation ("Heine"), the former investment manager to Mutual Series
Fund Inc., other funds and private accounts ("Mutual"). This transaction ("the
Acquisition") had an aggregate value of approximately $616 million. Heine
received $551 million in cash and 1.1 million shares of the Company's common
stock (before the effect of the three-for-two stock dividend paid January 15,
1997) that may not be sold for two years from the date of the Acquisition and
that are subject to other restrictions.
<PAGE>
ASSETS UNDER MANAGEMENT
BY INVESTMENT OBJECTIVE,
IN BILLIONS
AS OF SEPTEMBER 30, 1997 1996 1995
- --------------------------------------------------------------------------------
Franklin Templeton Group
FIXED-INCOME
Tax-free $45.8 $42.5 $40.5
U.S. government (primarily GNMAs) 15.1 15.8 16.3
Taxable and tax-free money funds 3.7 3.7 3.6
Global/international 4.0 3.2 3.2
- --------------------------------------------------------------------------------
Total fixed-income 68.6 65.2 63.6
- --------------------------------------------------------------------------------
EQUITY
Global/international 104.3 67.2 51.5
U.S. 53.1 19.2 15.7
--------------------------------------------------------------------------
Total equity 157.4 86.4 67.2
- --------------------------------------------------------------------------------
Total Franklin Templeton Group $226.0 $151.6 $130.8
- --------------------------------------------------------------------------------
BY INVESTMENT VEHICLE,
IN BILLIONS
AS OF SEPTEMBER 30, 1997 1996 1995
- --------------------------------------------------------------------------------
Franklin Templeton Group
MUTUAL FUNDS
Open-end $175.1 $113.7 $100.1
Closed-end 6.6 5.7 5.1
Annuities 13.6 10.9 8.8
--------------------------------------------------------------------------
Total mutual funds 195.3 130.3 114.0
--------------------------------------------------------------------------
Institutional trusts and
managed accounts 30.7 21.3 16.8
- --------------------------------------------------------------------------------
Total Franklin Templeton Group $226.0 $151.6 $130.8
- --------------------------------------------------------------------------------
The Company's revenues are derived largely from the amount and composition of
assets under its management.
Assets under the Company's management grew by $74.4 billion (49%) and $20.8
billion (16%) in fiscal 1997 and 1996, respectively. Equity assets grew at the
highest rate: 82% and 29%, respectively, and represented 70% and 57% of total
assets under management during these years. The proportionately higher growth
rate of equity assets in 1997 was related to the effects of increased net sales
and market appreciation relative to other categories. The addition of Mutual
contributed $28.4 billion to the 1997 growth in this category. Institutional
assets, which are comprised predominantly of global/international equity
portfolios, grew 44% and 27% in 1997 and 1996, respectively. Fixed-income assets
grew 5% and 3% in 1997 and 1996, respectively.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, amounts included in
the Consolidated Statements of Income of Franklin Resources, Inc. and the
percentage change in those amounts from period to period.
Franklin Resources, Inc.
Consolidated Income Statement Data
IN MILLIONS,
EXCEPT PER SHARE DATA PERCENT INCREASE
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED
SEPTEMBER 30,
1997 1996 1995 1997 1996
- --------------------------------------------------------------------------------
OPERATING REVENUES
Investment
management fees $1,292.5 $880.8 $726.8 47% 21%
Underwriting and
distribution fees 735.1 545.0 449.1 35% 21%
Shareholder servicing fees 124.9 88.7 68.7 41% 29%
Other, net 10.8 5.0 8.7 116% (43)%
- -------------------------------------------------------------------------------
Total operating revenues 2,163.3 1,519.5 1,253.3 42% 21%
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Underwriting and
distribution 712.3 518.1 406.1 37% 28%
Compensation and benefits 447.2 325.1 260.1 38% 25%
Information systems,
technology and
occupancy 135.4 88.5 73.7 53% 20%
Advertising and promotion 96.6 71.7 70.1 35% 2%
Amortization of
deferred sales commissions 59.5 24.2 5.9 146% 310%
Amortization of
intangible assets 34.3 18.3 18.3 87% --
Other 86.5 56.5 51.0 53% 11%
- --------------------------------------------------------------------------------
Total operating expenses 1,571.8 1,102.4 885.2 43% 25%
- --------------------------------------------------------------------------------
Operating income 591.5 417.1 368.1 42% 13%
OTHER INCOME (EXPENSES)
Investment and other income 49.5 50.4 29.8 (2)% 69%
Interest expense (25.3) (11.3) (11.2) 124% 1%
- ------------------------------------------------------------------------------
Other income, net 24.2 39.1 18.6 (38)% 110%
- --------------------------------------------------------------------------------
Income before taxes on income 615.7 456.2 386.7 35% 18%
Taxes on income 181.6 141.5 117.8 28% 20%
- ------------------------------------------------------------------------------
Net income $434.1 $314.7 $268.9 38% 17%
==============================================================================
OPERATING PROFIT MARGIN 27% 27% 29% -- --
Earnings per share
Primary $3.43 $2.52 $2.16 36% 17%
Fully diluted $3.43 $2.50 $2.13 37% 17%
Revenues, net income and earnings per share rose to the highest levels in the
Company's history. Net income and fully diluted earnings per share for 1997
increased by 38% and 37%, respectively, driven principally by increased
investment management fee revenues. Net income and earnings per share for 1996
increased 17%, primarily as a result of a 21% increase in investment management
fee revenues.
OPERATING REVENUES
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 institutional portfolios. Under
various investment management agreements, annual rates vary and generally
decline as the average net assets of the portfolios exceed certain threshold
levels. The majority of fund investment management contracts are subject to
periodic approval by each fund's Board of Directors/Trustees and shareholders.
There have been no significant changes in the investment management fee
structures for the Franklin Templeton funds in the periods under review.
Investment management fees increased 47% and 21% in fiscal 1997 and 1996,
respectively. Management fees grew at a faster rate than average assets under
management in both 1997 and 1996 as a result of a shift in composition of
average assets under management to higher-fee equity funds during the years
under consideration.
Underwriting commission fees are earned primarily from fund sales. Distribution
fees are generally based on the level of assets under management. Most sales of
Franklin Templeton funds include a sales commission which is paid to the
Company. Certain subsidiaries of the Company act as distributors for its
sponsored funds and receive distribution fees from those funds in reimbursement
for distribution expenses incurred. A significant portion of underwriting
commission and distribution fee revenues are paid to selling intermediaries.
Underwriting and distribution fees increased 35% and 21% in 1997 and 1996,
respectively, largely due to increased fund sales which were partially offset by
a decrease in effective commission rates. Effective commission rates have
declined as relative sales of products with lower commission rates have
increased.
Shareholder servicing fees are generally fixed charges per account which vary
with the particular type of fund and the service being rendered.
Shareholder servicing fees increased 41% and 29% in 1997 and 1996, respectively.
The increases were a result of an increase in fund shareholder accounts, as well
as an increase in the average per account charge. During the second quarter of
1997, the average annual per account charge was increased for approximately 120
of the Company's U.S. registered funds.
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. Other revenues, net increased 116% in 1997 and
decreased 43% in 1996. The increase in 1997 resulted primarily from decreasing
loss and delinquency trends at the Company's bank and finance subsidiaries. The
past due rate at the end of 1997 was 3.2% compared to 4.0% at the end of 1996.
Actual gross charge-offs decreased 43% in 1997 compared to a 24% increase in
1996, reflecting the Company's more stringent underwriting policies and improved
collection efforts.
<PAGE>
OPERATING EXPENSES
Underwriting and distribution includes sales commissions and distribution fees
paid to brokers and other third-party intermediaries. During both 1997 and 1996,
underwriting and distribution expenses increased consistent with mutual fund
sales.
Compensation and benefits increased 38% and 25% in 1997 and 1996, respectively,
reflecting an increase in the number of full-time employees, the Acquisition and
increased contributions to the Company's Annual Incentive Plan that are based
upon the Company's profitability. The number of full-time employees increased
30% and 9% in 1997 and 1996, respectively, as the Company continued to expand
its operations and as a result of the Acquisition.
Information systems, technology and occupancy increased in 1997 due to costs
related to the integration of systems related to the Acquisition, several major
system implementations, as well as upgrades to our network, desktop and Internet
environments. The growth in this area in 1996 was in line with the general
growth in the Company. The Company is in the process of assessing the impact of
Year 2000 issues on its global computer systems and applications. The Company
expects to incur internal staff costs as well as consulting and other related
expenses. At this time, management believes that the costs associated with
resolving these issues will not have a material impact on the Company's
financial statements.
Advertising and promotion expenses increased 35% and 2% in 1997 and 1996,
respectively. The 1997 increase was due to marketing and promotion efforts
related to the Mutual Series funds and other promotional activities.
Amortization of deferred sales commissions increased 146% and 310% in 1997 and
1996, respectively, primarily as a result of the increase in Class II and
Canadian fund sales.
Amortization of intangibles increased in 1997 as a result of the Acquisition.
Other expenses increased in 1997 due to costs associated with the Acquisition,
as well as general growth of the Company. Other expenses increased in 1996 due
to general growth of the Company.
OTHER INCOME (EXPENSES)
Investment income declined in 1997 as a result of the sale of a portion of the
Company's investment portfolio that was used to fund the Acquisition. Investment
and other income increased in 1996 as a result of increases in investment
assets, as well as approximately $17 million in capital gains realized on the
Acquisition-related sale of investments at the end of 1996.
Interest expense increased in 1997 due to a $221.0 million increase in amounts
outstanding under the Company's commercial paper lines and a $100 million
increase in notes payable (medium-term notes) outstanding, partially offset by a
$150 million reduction in subordinated debentures.
<PAGE>
TAXES ON INCOME
The Company's effective tax rate has remained relatively stable at 30%, 31% and
30% in 1997, 1996 and 1995, respectively. The Company's effective tax rate
differs from the U.S. statutory rate primarily due to the Company's non-U.S.
subsidiaries' relative contributions to taxable income. The Company does not
provide U.S. taxes on these earnings to the extent they have been reinvested for
an indefinite period of time. The effective tax rate will continue to be
reflective of the relative contribution of foreign earnings, which are subject
to reduced tax rates and are not currently included in U.S. taxable income. The
Company is currently reviewing the effect of the Taxpayer Relief Act of 1997.
This Act may cause a change in the effective tax rate for future periods.
FINANCIAL CONDITION
At September 30, 1997, the Company's assets aggregated $3.1 billion, up from
$2.4 billion a year earlier, primarily as a result of the Acquisition and
reinvested net income. Stockholders' equity increased to approximately $1.9
billion at September 30, 1997 compared to $1.4 billion at the end of 1996,
primarily as a result of net income and the issuance of shares in connection
with the Acquisition. Outstanding debt (long-term and short-term) increased by
$211.7 million to $611.6 million at September 30, 1997, principally as a result
of the Acquisition. However, the Company's ratio of earnings (before taxes) to
fixed charges (interest and the interest factor on rent) remains high at 12.0
for 1997 compared to 11.1 for 1996. The Company's interest coverage ratio
(pretax income before interest expense divided by interest expense) is 14.2 for
1997 as compared to 13.4 for 1996. The Company's overall weighted average
interest rate at September 30, 1997, including the effect of interest-rate swap
agreements, was 6.3% on $569.7 million of outstanding commercial paper and notes
payable (medium-term notes) as compared to 6.53% on $398.7 million of debt
outstanding at September 30, 1996.
Cash provided by operating activities increased to $428.5 million in 1997, up
from $359.6 million and $296.5 million in 1996 and 1995, respectively. During
the year ended September 30, 1997, the Company used net cash of $593.4 million
for investing activities, of which $550.7 million was for the Acquisition. Net
cash provided by financing activities during the year was $105.5 million,
primarily as a result of the issuance of $416.4 million in notes payable and
commercial paper, which was partially offset by payments on debt aggregating
$128.8 million and the purchase of option rights related to the subordinated
debentures of $91.7 million (see Note 8 of Notes to the Consolidated Financial
Statements). During fiscal year 1997, the Company paid $40.4 million in
dividends to stockholders and purchased 313,000 shares of its common stock for
$19.1 million.
The Company's auto loan and credit card receivables business activities are
subject to fluctuations in those consumer market places, as well as to
competition from companies with much larger receivable portfolios. Auto loan and
credit card portfolio results can also be influenced significantly by trends in
the economy and credit markets that may negatively impact borrowers' ability to
repay loans. Credit card and auto loans receivable decreased from 1996 levels
due to net paydowns of existing loans. As a result of its improved auto loan
collection efforts and enhanced systems supporting those activities, the Company
has experienced a decrease in delinquency rates and loan losses since September
30, 1996. Any future increases in the Company's investment in dealer auto loan
and credit card portfolios are expected to be funded either through existing
debt facilities and operating cash flows or through the securitization of a
portion of the portfolios.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company held liquid assets of $889.7 million,
including $442.7 million of cash and cash equivalents, as compared to $889.9
million and $502.2 million, respectively, at September 30, 1996. Revolving
credit facilities at September 30, 1997 aggregated $500 million of which $200
million was under a 364-day revolving credit facility. The remaining $300
million revolving facility has a five-year term. At September 30, 1997,
approximately $548.5 million was available to the Company under unused
commercial paper and medium-term note facilities.
Management expects that the principal needs for cash in the coming year will be
to advance sales commissions, fund increased property and equipment
acquisitions, pay shareholder dividends, repurchase shares of the Company's
common stock 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
requirements.
Results of operations will continue to be dependent upon general economic
growth, the strength of capital markets and the Company's ability to meet
investor demands with competitive products and services. Operating revenues will
be dependent upon the amount and composition of assets under management, mutual
fund sales, and the number of mutual fund investors, private and institutional
clients. Operating costs are expected to increase with the Company's continued
expansion, the increase in competition and the Company's continued commitment to
improving its products and services.
Despite the Company's global presence, its exposure to adverse fluctuations in
foreign currency markets is limited because a substantial portion of its foreign
subsidiaries' revenues and the majority of their monetary assets are U.S. and
Canadian dollar denominated. Over 95% of the Company's operating revenues were
earned in U.S. and Canadian dollars in both 1997 and 1996. Accordingly, the
Company has not deemed it necessary to enter into foreign currency hedging
transactions.
The Company participates in the financial derivatives markets to manage its
exposure to interest-rate fluctuations on a portion of its commercial paper. The
Company has entered into interest-rate swap agreements to convert interest
payment obligations under variable-rate debt instruments to fixed-rate interest
payment obligations. Through interest-rate swap agreements and its medium-term
note program, the Company has fixed the rates of interest it pays on 84% of
outstanding debt (see Note 8 of Notes to the Consolidated Financial Statements).
Item 8. Financial Statements and Supplementary Data
Index of Consolidated Financial Statements for the years ended September 30,
1997, 1996 and 1995.
CONTENTS
Consolidated Financial Statements of Franklin Resources, Inc.:
Pages
Report of Independent Accountants
Consolidated Statements of Income, for the years ended
September 30, 1997, 1996, and 1995
Consolidated Balance Sheets
September 30, 1997 and 1996
Consolidated Statements of Stockholders' Equity,
for the years ended September 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows,
for the years ended September 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
All schedules have been omitted as the information is provided in the
financial statements or in related notes thereto or is not required to be filed
as the information is not applicable.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Franklin Resources, Inc.:
We have audited the accompanying consolidated balance sheets of Franklin
Resources, Inc. and subsidiaries as of September 30, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended September 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Franklin
Resources, Inc. and subsidiaries as of September 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
San Francisco, California
October 22, 1997
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
IN THOUSANDS,
EXCEPT PER SHARE DATA
FOR THE YEARS ENDED
SEPTEMBER 30, 1997 1996 1995
- --------------------------------------------------------------------------------
OPERATING REVENUES
Investment management fees $1,292,488 $880,684 $726,719
Underwriting and distribution fees 735,112 545,039 449,141
Shareholder servicing fees 124,905 88,715 68,701
Other, net 10,770 5,035 8,703
- --------------------------------------------------------------------------------
Total operating revenues 2,163,275 1,519,473 1,253,264
----------------------------------------------------------------------------
OPERATING EXPENSES
Underwriting and distribution 712,328 518,122 406,100
Compensation and benefits 447,169 325,135 260,097
Information systems, technology
and occupancy 135,391 88,500 73,697
Advertising and promotion 96,552 71,655 70,138
Amortization of deferred sales
commissions 59,468 24,237 5,894
Amortization of intangible assets 34,294 18,348 18,305
Other 86,613 56,368 50,892
- --------------------------------------------------------------------------------
Total operating expenses 1,571,815 1,102,365 885,123
----------------------------------------------------------------------------
OPERATING INCOME 591,460 417,108 368,141
Other income (expenses)
Investment and other income 49,586 50,458 29,673
Interest expense (25,333) (11,336) (11,159)
- --------------------------------------------------------------------------------
OTHER INCOME, NET 24,253 39,122 18,514
------------------------------------------------------------------------------
Income before taxes on income 615,713 456,230 386,655
Taxes on income 181,650 141,500 117,710
------------------------------------------------------------------------------
Net income $434,063 $314,730 $268,945
- --------------------------------------------------------------------------------
Earnings per Share
Primary $3.43 $2.52 $2.16
Fully diluted $3.43 $2.50 $2.13
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
AS OF SEPTEMBER 30, 1997 1996
- --------------------------------------------------------------------------------
Assets
CURRENT ASSETS
Cash and cash equivalents $434,864 $483,975
Receivables
Fees from Franklin Templeton funds 213,547 133,453
Other 20,315 54,727
Investment securities, available-for-sale 189,674 174,156
Prepaid expenses and other 20,039 9,952
- --------------------------------------------------------------------------------
Total current assets 878,439 856,263
- --------------------------------------------------------------------------------
BANKING/FINANCE ASSETS
Cash and cash equivalents 7,877 18,214
Loans receivable, net 296,188 345,399
Investment securities, available-for-sale 24,232 25,325
Other 3,739 4,660
- --------------------------------------------------------------------------------
Total banking/finance assets 332,036 393,598
- --------------------------------------------------------------------------------
OTHER ASSETS
Deferred sales commissions 119,537 24,316
Property and equipment, net 217,085 161,613
Intangible assets, net 1,224,019 641,983
Receivable from banking/finance group 203,787 236,532
Other 120,297 59,862
- --------------------------------------------------------------------------------
Total other assets 1,884,725 1,124,306
- --------------------------------------------------------------------------------
Total assets $3,095,200 $2,374,167
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
AS OF SEPTEMBER 30, 1997 1996
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
CURRENT LIABILITIES
Compensation and benefits $154,222 $77,935
Commissions 46,125 28,067
Income taxes 31,908 27,673
Short-term debt 118,372 427
Other 54,873 48,099
- --------------------------------------------------------------------------------
Total current liabilities 405,500 182,201
- --------------------------------------------------------------------------------
BANKING/FINANCE LIABILITIES
Deposits
Interest bearing 91,433 125,124
Non-interest bearing 6,971 6,095
Payable to Parent 203,787 236,532
Other 2,213 1,725
- --------------------------------------------------------------------------------
Total banking/finance liabilities 304,404 369,476
- --------------------------------------------------------------------------------
OTHER LIABILITIES
Long-term debt 493,244 399,462
Other 37,831 22,437
- --------------------------------------------------------------------------------
Total other liabilities 531,075 421,899
- --------------------------------------------------------------------------------
Total liabilities 1,240,979 973,576
- --------------------------------------------------------------------------------
Commitments and Contingencies (Note 11)
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value, 1,000,000 shares
authorized; none issued -- --
Common stock, $.10 par value, 500,000,000 shares
authorized; 126,230,916 and 82,264,982 shares
issued; and 126,031,900 and 80,272,131 shares
outstanding, for 1997 and 1996, respectively 12,623 8,226
Capital in excess of par value 91,207 101,226
Retained earnings 1,757,536 1,370,513
Less cost of treasury stock (11,070) (90,301)
Other 3,925 10,927
- --------------------------------------------------------------------------------
Total stockholders' equity 1,854,221 1,400,591
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $3,095,200 $2,374,167
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
IN THOUSANDS
AS OF AND FOR THE YEARS CAPITAL IN
ENDED SEPTEMBER 30, COMMON STOCK EXCESS OF RETAINED TREASURY STOCK
1997, 1996 AND 1995 SHARES AMOUNT PAR VALUE EARNINGS SHARES AMOUNT OTHER TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1994 82,265 $8,226 $92,283 $855,513 (667) $(25,409) $202 $930,815
Net income 268,945 268,945
Unrealized gain on investment
securities, net of tax 13,745 13,745
Foreign currency translation
adjustment 835 835
Purchase of treasury stock (1,126) (41,749) (41,749)
Cash dividends on
common stock (33,254) (33,254)
Issuance of restricted shares, net (48) 431 17,121 3,160 20,233
Other (45) 37 1,518 1,473
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 82,265 8,226 92,190 1,091,204 (1,325) (48,519) 17,942 1,161,043
Net income 314,730 314,730
Unrealized loss on investment
securities, net of tax (10,644) (10,644)
Foreign currency translation
adjustment (752) (752)
Purchase of treasury stock (1,001) (53,413) (53,413)
Cash dividends on
common stock (35,421) (35,421)
Issuance of restricted shares, net 9,672 280 9,777 4,381 23,830
Other (636) 53 1,854 1,218
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 82,265 8,226 101,226 1,370,513 (1,993) (90,301) 10,927 1,400,591
Net income 434,063 434,063
Issuance of stock for
Heine acquisition 22,300 1,100 43,287 65,587
Exercise and purchase of
option rights related to
subordinated debentures, net 1,796 180 (47,914) 565 31,065 (16,669)
Issuance of stock for
3-for-2 stock dividend 42,028 4,203 (4,203)
Unrealized gain on investment
securities, net of tax 3,219 3,219
Foreign currency translation
adjustment (5,192) (5,192)
Purchase of treasury stock (313) (19,135) (19,135)
Cash dividends on
common stock (42,837) (42,837)
Issuance of restricted shares,
net 96 10 14,360 352 19,455 (5,029) 28,796
Other 46 4 1,235 89 4,559 5,798
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 126,231 $12,623 $91,207 $1,757,536 (200) $(11,070) $3,925 $1,854,221
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME $434,063 $314,730 $268,945
Adjustments to reconcile net income to net cash
provided by operating activities
Increase in receivables, prepaid expenses and other (106,024) (33,405) (9,525)
Increase in deferred sales commissions (154,689) (40,080) (11,316)
Increase (decrease) in other current liabilities 22,370 3,315 (2,529)
Increase (decrease) in income taxes payable 4,235 19,452 (9,405)
Increase in commissions payable 18,058 6,787 19,191
Increase (decrease) in accrued compensation and benefits 102,171 41,328 (3,137)
Depreciation and amortization 123,908 64,728 46,834
Gains on disposition of assets (15,563) (17,272) (2,604)
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 428,529 359,583 296,454
- -----------------------------------------------------------------------------------------------------
Purchase of investments (110,019) (70,768) (130,194)
Liquidation of investments 98,826 107,287 90,869
Purchase of banking/finance investments (27,120) (60,936) (110,163)
Liquidation of banking/finance investments 28,376 59,316 113,265
Originations of banking/finance loans receivable (114,836) (103,532) (222,341)
Collections of banking/finance loans receivable 165,051 207,664 146,963
Purchase of property and equipment (82,973) (64,419) (40,365)
Acquisition of assets and liabilities of Heine
Securities Corporation (550,742) -- --
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (593,437) 74,612 (151,966)
- ------------------------------------------------------------------------------------------------------
Decrease in bank deposits (32,814) (38,155) (21,525)
Exercise of common stock options 1,878 1,219 375
Dividends paid on common stock (40,387) (34,650) (31,688)
Purchase of treasury stock (19,135) (53,413) (41,749)
Issuance of debt 416,410 134,377 34,254
Payments on debt (128,807) (203,083) (32,832)
Purchase of option rights from subordinated
debenture holdings (91,685) -- --
- -------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 105,460 (193,705) (93,165)
- -----------------------------------------------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents (59,448) 240,490 51,323
Cash and cash equivalents, beginning of year 502,189 261,699 210,376
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $442,741 $502,189 $261,699
- ------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for
Interest, including banking/finance group interest $42,154 $36,619 $28,129
Income taxes $172,906 $122,486 $125,496
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Value of common stock issued for the Acquisition $65,587 -- --
Value of common stock issued for redemption of debentures $75,015 -- --
Value of common stock issued in other transactions $31,954 $18,667 $18,546
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
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 funds, institutional accounts and other investment products
that operate in the United States, Canada, Europe and other international
markets under various rules and regulations set forth by the Securities and
Exchange Commission, individual state agencies and foreign governments. Services
to the Franklin Templeton funds are provided under contracts that definitively
set forth the fees to be charged for these services. The majority of these
contracts are subject to periodic review and approval by each fund's Board of
Directors/Trustees and shareholders. Currently, no fund's revenues represent
more than 10% of total revenues. Company revenues are largely dependent on the
total value and composition of assets under management, which include U.S. and
international equity and debt portfolios. Accordingly, fluctuations in financial
markets and in the composition of assets under management impact revenues and
results of operations.
Basis of Presentation. The consolidated financial statements are prepared in
accordance with generally accepted accounting principles which require the use
of estimates made by the Company's management. Certain 1996 and 1995 amounts
have been reclassified to conform to 1997 presentation.
The consolidated financial statements include the accounts of Franklin
Resources, Inc. and its majority-owned subsidiaries. All material inter-company
accounts and transactions have been eliminated except the inter-company payable
from the banking/finance group to the parent to fund auto and credit card loans.
Operating revenues of the banking/finance group are included in Other revenues,
net and are presented net of related interest expense and the provision for loan
losses. Accordingly, reported interest expense excludes interest expense
attributable to the banking/finance group.
Cash and Cash Equivalents include cash on hand, demand deposits with banks or
other high credit quality financial institutions, debt instruments with original
maturities of three months or less and other highly liquid investments,
including money market funds, which are readily convertible into cash. Due to
the relatively short-term nature of these instruments, the carrying value
approximates fair value.
Investment Securities, available for sale are carried at fair value. Fair values
for investments in Franklin Templeton funds are based on the last reported net
asset value. Fair values for other investments are based on the last reported
price on the exchange on which they are traded. Investments not traded on an
exchange are carried at management's estimate of fair value.
Realized gains and losses are included in investment income currently based on
specific identification. Unrealized gains and losses are reported net of tax as
a separate component of stockholders' equity until realized.
Derivative Instruments. The Company enters into interest-rate swap agreements to
manage its exposure to fluctuations in interest rates. Under these agreements
the Company agrees to exchange, at specified intervals, the difference between
fixed- and variable-interest amounts calculated by reference to an agreed-upon
notional principal amount. The interest-rate differential between the fixed
pay-rate and the variable receive-rate is reflected as an adjustment to interest
expense over the life of the swaps. The Company does not hold or issue
derivative financial instruments for trading purposes.
Loans Receivable. Interest on auto installment loans is accrued principally
using the rule of 78s method, which approximates the interest method. Interest
on all other loans is accrued using the simple interest method. An allowance for
loan losses is established monthly based on historical experience, including
delinquency and loss trends. A loan is charged to the allowance when it is
deemed to be uncollectible, taking into consideration the value of the
collateral, the financial condition of the borrower and other factors.
Recoveries on loans previously charged off as uncollectible are credited to the
allowance for loan losses.
Deferred Sales Commissions. Sales commissions paid to financial intermediaries
in connection with the sale of certain share classes of open-end Franklin
Templeton funds are deferred and amortized on a straight-line basis over periods
ranging from eighteen months to six years.
Property and Equipment are recorded at cost and are depreciated on the
straight-line basis over their estimated useful lives. Expenditures for repairs
and maintenance are charged to expense when incurred. Leasehold improvements are
amortized on the straight-line basis over their estimated useful lives or the
lease term, whichever is shorter.
Intangible Assets, consisting principally of the estimated value of mutual fund
management contracts and goodwill resulting from the acquisitions of the assets
of Templeton and Heine Securities Corporation, are being amortized over various
lives ranging from 5 to 40 years. The Company has evaluated the potential
impairment of its intangible assets on the basis of the expected future
operating cash flows to be derived from these assets in relation to the
Company's carrying values and has determined that there is no impairment.
Periodically, the Company reviews the carrying value of its intangible assets
for potential impairment.
Recognition of Revenues. Investment management fees, shareholder servicing fees,
investment income and distribution fees are all recognized as earned.
Underwriting commissions related to the sale of Franklin Templeton mutual fund
shares are recorded on the trade date.
Advertising and Promotion. Costs of advertising and promotion are expensed as
the advertising appears in the media.
Foreign Currency Translation. Assets and liabilities of foreign subsidiaries are
translated at current exchange rates as of the end of the accounting period, and
related revenues and expenses are translated at average exchange rates in effect
during the period. Net exchange gains and losses resulting from translation are
excluded from income and are recorded as a separate component of stockholders'
equity. Foreign currency transaction gains and losses are reflected in income
currently.
Dividends. During the years ended September 30, 1997, 1996 and 1995, the Company
declared dividends to common stockholders of $.34, $.29 and $.27, respectively.
All common shares and per share amounts have been adjusted to give retroactive
effect to a three-for-two stock dividend paid January 15, 1997 to shareholders
of record on December 31, 1996. Stockholders' equity as of September 30, 1996
and 1995 has not been restated.
Earnings per Share are computed by dividing net income by the weighted average
number of shares of common stock and common stock equivalents considered
outstanding during each year. The weighted average number of shares and common
stock equivalents used in computing earnings per share in 1997, 1996 and 1995
were 126,715,000, 124,970,000 and 124,671,000 for primary and 126,733,000,
125,642,000 and 126,047,000 for fully diluted, respectively.
Note 2 ACQUISITION
On November 1, 1996, the Company acquired the assets and liabilities of Heine
Securities Corporation ("Heine"), the former investment manager to Mutual Series
Fund Inc., other funds and private accounts ("Mutual"). The transaction had an
aggregate value of approximately $616 million. Heine received $551 million in
cash and 1.1 million shares of the Company's common stock (before the effect of
the three-for-two stock dividend declared December 31, 1996) that may not be
sold for two years from the date of the Acquisition and that are subject to
other restrictions. Pursuant to the terms of the acquisition agreement, the
shareholder of Heine invested $150 million of the cash proceeds in Mutual and
agreed to maintain a minimum balance of $100 million for five years from the
date of the Acquisition. 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. The Acquisition has been accounted for using the purchase
method of accounting.
Note 3 INVESTMENT SECURITIES
Investment securities, available-for-sale at September 30, 1997 and 1996
consisted of the following:
AMORTIZED GROSS UNREALIZED FAIR
IN THOUSANDS COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------
1997
Franklin Templeton
funds $151,726 $21,552 -- $173,278
Debt 33,176 341 $(134) 33,383
Equities 5,853 1,414 (79) 7,188
Other 51 6 -- 57
- ----------------------------------------------------------------------------
$190,806 $23,313 $(213) $213,906
- ----------------------------------------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
IN THOUSANDS COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------
1996
Franklin Templeton
funds $116,146 $12,993 -- $129,139
Debt 36,108 278 $(91) 36,295
Equities 1,578 2,332 (61) 3,849
Other 30,178 20 -- 30,198
- -------------------------------------------------------------------------------
$184,010 $15,623 $(152) $199,481
- --------------------------------------------------------------------------------
At September 30, 1997, maturities of debt securities were as follows:
ESTIMATED
IN THOUSANDS COST FAIR VALUE
- ----------------------------------------------------------------------------
Due in one year or less $14,063 $14,087
Due after one year through three years 15,381 15,465
Due after three years 3,732 3,831
- -------------------------------------------------------------------------------
$33,176 $33,383
- -------------------------------------------------------------------------------
<PAGE>
Note 4 BANKING/FINANCE GROUP LOANS AND ALLOWANCE FOR LOAN LOSSES
Activity of the banking/finance group's loans and allowance for loan losses for
the years ended September 30, 1997 and 1996 was as follows:
NET
CHARGE
IN THOUSANDS 1996 ADDITIONS PAYDOWNS OFFS 1997
- -------------------------------------------------------------------------------
Auto $284,141 $92,708 $(131,058) $(6,436) $239,355
Credit Card 87,527 21,622 (29,974) (927) 78,248
Other 6,387 506 (2,736) (165) 3,992
- -------------------------------------------------------------------------------
378,055 114,836 (163,768) (7,528) 321,595
- -------------------------------------------------------------------------------
Unearned fees
and discounts (23,092) (7,400) 13,645 (16,847)
Allowance for
loan losses (9,564) (6,524) 7,528 (8,560)
- -------------------------------------------------------------------------------
Loans
receivable,
net $345,399 $100,912 $(150,123) -- $296,188
----------------------------------------------------------------------------
NET
CHARGE
IN THOUSANDS 1995 ADDITIONS PAYDOWNS OFFS 1996
- -------------------------------------------------------------------------------
Auto $400,867 $62,840 $(165,380) $(14,186) $284,141
Credit Card 95,040 39,846 (45,476) (1,883) 87,527
Other 6,000 846 (320) (139) 6,387
- -------------------------------------------------------------------------------
501,907 103,532 (211,176) (16,208) 378,055
- -------------------------------------------------------------------------------
Unearned fees
and discounts (42,813) (6,900) 26,621 (23,092)
Allowance for
loan losses (9,081) (16,691) 16,208 (9,564)
- -------------------------------------------------------------------------------
Loans
receivable,
net $450,013 $79,941 $(184,555) -- $345,399
---------------------------------------------------------------------------
For the years ended September 30, 1997, 1996 and 1995, the interest expense
of the banking/finance group included in other operating revenues, net was
$21.2 million, $25.6 million and $28.6 million, respectively.
At September 30, 1996 and 1995, the carrying value of loans receivable
approximated fair value. The fair value of consumer loans is estimated
using interest rates that consider the current credit and interest rate
risk inherent in the loans and current economic and lending conditions.
At September 30, 1997 and 1996, the carrying values of deposits
approximated fair value. The fair values of the banking subsidiary's
deposit amounts payable on demand at the reporting date are estimated using
interest rates currently offered on time deposits with similar remaining
maturities.
<PAGE>
Note 5 PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at September 30, 1997 and
1996:
USEFUL LIVES
IN THOUSANDS IN YEARS 1997 1996
-----------------------------------------------------------------------------
Furniture and equipment 3-5 $181,173 $114,228
Premises and leasehold improvements 5-35 101,299 92,493
Leased equipment 5 6,860 2,451
Land -- 24,722 23,811
-----------------------------------------------------------------------------
314,054 232,983
Less: Accumulated depreciation and
amortization (96,969) (71,370)
- -------------------------------------------------------------------------------
$217,085 $161,613
- -------------------------------------------------------------------------------
Note 6 INTANGIBLE ASSETS
The following is a summary of intangible assets at September 30, 1997 and 1996:
AMORTIZATION
IN THOUSANDS PERIOD IN YEARS 1997 1996
- -----------------------------------------------------------------------------
Goodwill and management
contracts 40 $1,300,793 $716,010
Other intangibles 5-15 31,546 --
- -----------------------------------------------------------------------------
1,332,339 716,010
Accumulated amortization (108,320) (74,027)
- -----------------------------------------------------------------------------
$1,224,019 $641,983
- -----------------------------------------------------------------------------
<PAGE>
Note 7 SEGMENT INFORMATION
The Company conducts operations in five principal geographic areas of the world:
the U.S., Canada, the Bahamas, Europe and Asia/Pacific. Revenues by geographic
area include fees and commissions charged to customers and fees charged to
affiliates. Identifiable assets are those assets used exclusively in the
operations of each geographic area.
Information is summarized below:
<TABLE>
<CAPTION>
IN THOUSANDS ADJUSTMENT
ASIA/ AND
1997 US CANADA BAHAMAS EUROPE PACIFIC ELIMINATION CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES FROM
Unaffiliated customers $1,512,873 $169,560 $250,216 $61,109 $169,517 -- $2,163,275
Affiliates 152,203 1,099 3,182 26,237 8,071 $(190,792) --
- ----------------------------------------------------------------------------------------------------------------------
Total $1,665,076 $170,659 $253,398 $87,346 $177,588 $(190,792) $2,163,275
- ----------------------------------------------------------------------------------------------------------------------
Operating income $249,700 $49,374 $175,518 $1,629 $115,239 -- $591,460
- ----------------------------------------------------------------------------------------------------------------------
Identifiable assets $1,302,166 $122,335 $449,112 $32,028 $181,191 -- $2,086,832
Corporate assets -- -- -- -- -- $1,008,368 1,008,368
- ---------------------------------------------------------------------------------------------------------------------
Total assets $1,302,166 $122,335 $449,112 $32,028 $181,191 $1,008,368 $3,095,200
- ----------------------------------------------------------------------------------------------------------------------
IN THOUSANDS ADJUSTMENT
ASIA/ AND
1996 US CANADA BAHAMAS EUROPE PACIFIC ELIMINATION CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------------
REVENUES FROM
Unaffiliated customers $1,106,448 $99,658 $173,697 $31,752 $107,918 -- $1,519,473
Affiliates 34,452 509 1,773 13,742 5,982 $(56,458) --
- --------------------------------------------------------------------------------------------------------------------
Total $1,140,900 $100,167 $175,470 $45,494 $113,900 $(56,458) $1,519,473
- --------------------------------------------------------------------------------------------------------------------
Operating income $193,821 $29,131 $115,826 $742 $77,588 -- $417,108
- ---------------------------------------------------------------------------------------------------------------------
Identifiable assets $848,156 $69,547 $432,088 $24,912 $154,503 -- $1,529,206
Corporate assets -- -- -- -- -- $844,961 844,961
- ----------------------------------------------------------------------------------------------------------------------
Total assets $848,156 $69,547 $432,088 $24,912 $154,503 $844,961 $2,374,167
- ----------------------------------------------------------------------------------------------------------------------
IN THOUSANDS ADJUSTMENT
ASIA/ AND
1995 US CANADA BAHAMAS EUROPE PACIFIC ELIMINATION CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------------------
REVENUES FROM
Unaffiliated customers $947,376 $66,970 $131,571 $24,624 $82,723 -- $1,253,264
Affiliates 17,080 492 1,606 10,903 7,160 $(37,241) --
- ----------------------------------------------------------------------------------------------------------------------
Total $964,456 $67,462 $133,177 $35,527 $89,883 $(37,241) $1,253,264
- ----------------------------------------------------------------------------------------------------------------------
Operating income/(loss) $199,615 $22,362 $90,393 $(1,770) $57,541 -- $368,141
- ----------------------------------------------------------------------------------------------------------------------
Identifiable assets $819,287 $43,589 $438,859 $23,681 $138,213 -- $1,463,629
Corporate assets -- -- -- -- -- $781,052 781,052
- ----------------------------------------------------------------------------------------------------------------------
Total assets $819,287 $43,589 $438,859 $23,681 $138,213 $781,052 $2,244,681
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Summarized below are the business segments:
IN THOUSANDS OPERATING
IDENTIFIABLE INCOME/
1997 ASSETS REVENUES (LOSS)
- --------------------------------------------------------------------------------
Investment management $1,746,827 $2,152,505 $598,154
Banking/finance 332,036 8,617 (5,102)
Real estate 7,969 2,153 (1,592)
- --------------------------------------------------------------------------------
Company totals $2,086,832 $2,163,275 $591,460
- --------------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------------
Investment management $1,124,229 $1,514,438 $429,348
Banking/finance 393,598 3,179 (11,090)
Real estate 11,379 1,856 (1,150)
- --------------------------------------------------------------------------------
Company totals $1,529,206 $1,519,473 $417,108
- --------------------------------------------------------------------------------
1995
- --------------------------------------------------------------------------------
Investment management $958,200 $1,244,561 $379,288
Banking/finance 496,059 6,841 (10,217)
Real estate 9,370 1,862 (930)
- ------------------------------------------------------------------------------
Company totals $1,463,629 $1,253,264 $368,141
- -------------------------------------------------------------------------------
The investment management segment's assets are primarily intangibles and
receivables from, and investments in, Franklin Templeton funds. The
banking/finance segment's assets are primarily investment securities and
consumer loans.
Note 8 DEBT
Debt at September 30, 1997 and 1996 was as follows:
1997 WEIGHTED
IN THOUSANDS AVERAGE INTEREST RATE 1997 1996
- --------------------------------------------------------------------------------
SHORT-TERM DEBT
Commercial paper 6.26% $51,500 --
Notes payable 6.63% 60,000 --
Other -- 6,872 $427
- --------------------------------------------------------------------------------
Total short-term debt $118,372 $427
- --------------------------------------------------------------------------------
LONG-TERM DEBT
Commercial paper issued under
long-term borrowing agreements 6.26% $298,245 $128,731
Notes payable 6.36% 160,000 120,000
Subordinated debentures -- -- 150,000
Other 34,999 731
- --------------------------------------------------------------------------------
Total long-term debt $493,244 $399,462
- --------------------------------------------------------------------------------
<PAGE>
As of September 30, 1997, maturities of long-term debt are as follows:
IN THOUSANDS
1998 $298,245
1999 56,612
2000 56,612
2001 66,612
2002 6,612
Thereafter 8,551
----------------------------------
$493,244
----------------------------------
The Company has a revolving credit agreement with a group of commercial banks
that will allow it, at its option, to refinance the commercial paper for up to
five years from the closing date, May 16, 1997. In accordance with the Company's
intention and ability to refinance these obligations on a long-term basis,
$298.2 million of commercial paper at September 30, 1997 has been classified
long-term. The credit agreements include various restrictive covenants,
including: a capitalization ratio, interest coverage ratio, minimum working
capital and limitation on additional debt. The Company was in compliance with
all covenants as of September 30, 1997. At September 30, 1997, amounts available
for issuance under the Company's commercial paper program were $148.5 million.
At September 30, 1997, the Company had interest-rate swap agreements maturing
through October 2000 which effectively fixed interest rates on $295 million of
commercial paper. These financial instruments are placed with major financial
institutions. The creditworthiness of the counterparties is subject to
continuous review and full performance is anticipated. Any potential loss from
failure of the counterparties to perform is deemed to be immaterial. The
following table presents information for outstanding interest-rate swaps at
September 30, 1997:
IN THOUSANDS
MATURING IN THE YEARS
ENDING SEPTEMBER 30, 1999 2000 2001
- --------------------------------------------------------------------------------
Notional amounts $165,000 $40,000 $90,000
Fair value $(1,215) $(563) $(1,215)
Carrying value $(168) $(65) $(133)
Weighted average receive rate 5.53% 5.56% 5.56%
Weighted average pay rate 6.36% 6.52% 6.43%
Notes payable represents the Company's participation in a medium-term note
program. Notes totaling $100 million and $120 million were issued during 1997
and 1996, respectively, with interest rates ranging from 6.02% to 6.63%. These
notes mature at various times from 1998 through 2001. At September 30, 1997,
amounts available for issuance under the Company's medium-term note program were
$400 million.
On November 26, 1996, the holders of the option rights related to the Company's
subordinated debentures exercised their option rights to receive approximately
2.4 million shares of the Company's common stock in return for approximately $75
million of the subordinated debentures. The holders of the subordinated
debentures also agreed to sell to the Company the remaining option rights
representing an additional 2.4 million shares, and to surrender the remaining
$75 million of debentures plus accrued interest for cash of approximately $170
million. This transaction was financed through the issuance of $100 million in
medium-term notes referred to above and through cash on hand. No material gain
or loss was recognized on this transaction.
At September 30, 1997 and 1996, the fair value of long-term debt approximated
its carrying value. The fair values of long-term debt are estimated using
interest rates currently offered to the Company for debt with similar remaining
maturities.
Note 9 INVESTMENT INCOME
IN THOUSANDS 1997 1996 1995
- ------------------------------------------------------------------------
Dividends $14,141 $15,683 $12,873
Interest 16,105 16,787 12,029
Realized gains, net 15,563 17,271 2,499
Foreign exchange gains
(losses), net 2,245 (394) (355)
Other 1,532 1,111 2,627
- ------------------------------------------------------------------------
$49,586 $50,458 $29,673
- ------------------------------------------------------------------------
Substantially all of the Company's dividend income was generated by investments
in the Franklin Templeton funds.
<PAGE>
Note 10 TAXES ON INCOME
Taxes on income for the years ended September 30, 1997, 1996 and 1995 were
comprised of the following:
IN THOUSANDS 1997 1996 1995
- -------------------------------------------------------------------------------
Current
Federal $122,361 $98,803 $76,350
State 33,874 23,118 19,969
Foreign 26,637 25,558 20,018
Deferred (benefit) expense (1,222) (5,979) 1,373
- --------------------------------------------------------------------------------
Total provision $181,650 $141,500 $117,710
- --------------------------------------------------------------------------------
Included in income before taxes was $358.9 million, $225.7 million and $161.7
million, of foreign income for the years ended September 30, 1997, 1996 and
1995, respectively.
The major components of the net deferred tax asset as of September 30, 1997 and
1996 were as follows:
IN THOUSANDS 1997 1996
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS
State taxes expensed currently, deductible
in following year $6,844 $6,608
Temporary differences on investment losses 1,974 2,124
Loan loss reserves 3,850 3,760
Deferred compensation 3,442 1,983
Restricted stock compensation plan 34,933 20,016
Net operating loss carryforwards 27,510 18,203
Other 8,256 5,077
- --------------------------------------------------------------------------------
Total deferred tax assets 86,809 57,771
- --------------------------------------------------------------------------------
Valuation allowance for net
operating loss carryforwards (27,510) (18,203)
- --------------------------------------------------------------------------------
Deferred tax assets, net of
valuation allowance 59,299 39,568
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
Temporary differences on partnership earnings $4,774 $5,504
Capitalized compensation costs 6,728 7,503
Net unrealized gains on securities 8,967 4,622
Depreciation on fixed assets 11,384 6,244
Prepaid expenses 15,419 6,019
Other 9,233 1,315
- --------------------------------------------------------------------------------
Total deferred tax liabilities 56,505 31,207
- --------------------------------------------------------------------------------
Net deferred tax asset $2,794 $8,361
- --------------------------------------------------------------------------------
At September 30, 1997, there were approximately $28.2 million of foreign net
operating loss carryforwards of which approximately $13.0 million expire between
1999 and 2005 and the remaining have an indefinite life. In addition, there are
approximately $288.5 million in state net operating loss carryforwards that
expire between 2006 and 2012. A valuation allowance has been recognized to
offset the related deferred tax assets due to the uncertainty of realizing the
benefit of the loss carryforwards.
A substantial portion of the undistributed earnings of the Company's foreign
subsidiaries has been reinvested for an indefinite period of time. Accordingly,
no U.S. federal or state income taxes have been provided thereon. At September
30, 1997, the cumulative amount of reinvested income for which no U.S. taxes
have been provided was approximately $588 million. Determination of the amount
of the unrecognized deferred U.S. income tax liability related to such
reinvested income is not practicable because of the numerous assumptions
associated with this hypothetical calculation; however, foreign tax credits
would be available to reduce some portion of this amount.
The following is a reconciliation between the amount of tax expense at the
federal statutory rate and taxes on income as reflected in operations for the
years ended September 30, 1997, 1996 and 1995, respectively:
IN THOUSANDS 1997 1996 1995
- --------------------------------------------------------------------------------
U.S. federal statutory rate 35.0% 35.0% 35.0%
Federal taxes at statutory rate $215,500 $159,786 $135,329
State taxes, net of federal tax effect 21,099 18,167 12,747
Foreign earnings subject to
reduced tax rates for which
no U.S. tax is provided (69,973) (43,159) (32,956)
Other 15,024 6,706 2,590
- --------------------------------------------------------------------------------
Actual tax provision $181,650 $141,500 $117,710
- --------------------------------------------------------------------------------
Effective tax rate 29.5% 31.0% 30.4%
- --------------------------------------------------------------------------------
Note 11 COMMITMENTS AND CONTINGENCIES
The Company leases office space (including space from an unconsolidated
affiliate) and equipment under long-term operating leases expiring at various
dates through fiscal year 2017. Lease expense aggregated $27.6 million, $24.3
million and $21.8 million for the fiscal years ended September 30, 1997, 1996
and 1995, respectively.
At September 30, 1997, future minimum lease payments under operating leases were
as follows:
IN THOUSANDS
1998 $22,958
1999 20,900
2000 16,645
2001 7,169
2002 2,893
Thereafter 13,109
-----------------------------------
$83,674
-----------------------------------
At September 30, 1997, the Company's banking/finance group had commitments to
extend credit aggregating $390.9 million, principally under its credit card
lines.
The Company through certain subsidiaries acts as fiduciary for retirement and
employee benefit plans. At September 30, 1997, assets held in trust were
approximately $20.1 billion.
The Company is involved in various claims and legal proceedings of a nature
considered normal to its business. While it is not feasible to predict or
determine the final outcome of these proceedings, management does not believe
that they should result in a materially adverse effect on the Company's
financial position, results of operations or liquidity.
Note 12 EMPLOYEE STOCK AWARD AND OPTION PLANS
The Company sponsors an Annual Incentive Plan which provides eligible employees
payment of both cash and restricted stock. The costs associated with the Annual
Incentive Plan awards are charged to income currently.
In December 1993, the Company adopted a Universal Stock Plan providing for the
issuance of up to 3 million shares of the Company's stock for various
stock-related awards including restricted stock and stock options. As of
September 30, 1997, the Company had approximately 892,000 shares remaining
available for grant under the Universal Stock Plan. Terms and conditions under
the option plans (including price, exercise date and number of shares) are
determined by the Compensation Committee of the Board of Directors. Information
regarding the option plans for the fiscal years ending September 30, 1997, 1996
and 1995 is as follows:
FOR THE YEARS ENDED
SEPTEMBER 30, 1997 1996 1995
- --------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES IN THOUSANDS SHARES PRICE SHARES PRICE SHARES PRICE
- --------------------------------------------------------------------------------
Outstanding,
beginning
of year 282 $21.42 325 $18.12 250 $15.06
Granted 39 $44.29 36 $37.63 103 $25.04
Exercised (154) $17.50 (79) $15.31 (28) $20.32
- --------------------------------------------------------------------------------
Outstanding,
end of year 167 $30.42 282 $21.42 325 $18.12
- --------------------------------------------------------------------------------
Exercisable,
end of year 70 $28.25 51 $28.38 47 $22.47
- --------------------------------------------------------------------------------
Range of exercise prices at September 30, 1997 -- $7.88 to $44.29.
Weighted-average remaining contractual life -- 4 years.
All share and price information above has been adjusted to give retroactive
effect to a three-for-two stock dividend declared December 31, 1996.
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"). Accordingly, no compensation costs have been recognized for the stock
options granted. Had compensation costs for the Company's stock options granted
after September 30, 1995 been determined consistent with the provisions of FAS
123, the Company's net income and earnings per share would not have been
materially affected because the number of such stock options is insignificant.
Total compensation cost recognized for stock-based compensation during 1997,
1996 and 1995 was $42.2 million, $27.8 million and $16.9 million, respectively.
Note 13 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
IN THOUSANDS
QUARTER FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------------------------
1997
Revenues $437,625 $519,196 $572,547 $633,907
Net income $96,229 $101,411 $111,188 $125,235
Earnings per share
Primary $0.76 $0.80 $0.88 $0.99
Fully diluted $0.76 $0.80 $0.88 $0.99
1996
Revenues $341,755 $393,199 $394,762 $389,757
Net income $73,951 $75,212 $81,066 $84,501
Earnings per share
Primary $0.59 $0.60 $0.65 $0.68
Fully diluted $0.59 $0.60 $0.65 $0.67
1995
Revenues $303,303 $297,554 $316,568 $335,839
Net income $63,304 $63,040 $69,029 $73,572
Earnings per share
Primary $0.51 $0.51 $0.56 $0.59
Fully diluted $0.51 $0.51 $0.55 $0.59
Note 14 NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued three Statements of
Financial Accounting Standards which will become effective for the Company's
fiscal year ending September 30, 1999.
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS
128") specifies the computation, presentation and disclosure requirements for
earnings per share for entities with publicly held common stock. FAS 128 will
require the Company to change its presentation of earnings per share from
primary and fully diluted to basic and diluted. At that time, all prior period
earnings per share data will be restated. The impact on reported earnings per
share is not expected to be material as the Company's common stock equivalents
are currently not material.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130") establishes the disclosure requirements for reporting
comprehensive income in an entity's annual and interim financial statements.
Comprehensive income includes such items as foreign currency translation
adjustments and unrealized gains on securities currently reported as components
of stockholders' equity. FAS 130 will require the Company to classify items of
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately in the equity
section of the consolidated balance sheet. The Company has not yet determined
the type of presentation it will adopt.
Statement of Financial Accounting Standards No. 131, "Disclosures of Segment
Information" establishes standards for the way a public enterprise reports
information about operating segments in annual financial statements and requires
that these enterprises report selected information about operating segments in
interim financial statements. The Company has not yet determined the effect, if
any, of this pronouncement on the consolidated financial statements.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Items 10-13 are incorporated by reference to the Company's definitive proxy
statement to be mailed to stockholders in connection with the Annual Meeting of
Stockholders to be held January 20, 1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Please see the index in Item 8 for a list of the financial statements
filed as part of this report.
(2)Please see the index in Item 8 for a list of the financial statement
schedules filed as part of this report.
(3) The following exhibits are filed as part of this report:
(3)(i)(a) Registrant's Certificate of Incorporation, as filed November
28, 1969, incorporated by reference to Exhibit (3)(i) to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1994 (the "1994 Annual Report")
(3)(i)(b) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1, 1985, incorporated by reference
to Exhibit (3)(ii) to the 1994 Annual Report
(3)(i)(c) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1, 1987, incorporated by reference
to Exhibit (3)(iii) to the 1994 Annual Report
(3)(i)(d) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated by
reference to Exhibit (3)(iv) to the 1994 Annual Report
(3)(ii) Registrant's By-Laws are incorporated by reference to Form 10
(File No. 06952), incorporated by reference to Exhibit (3)(v)
to the 1994 Annual Report
10.1 Representative Distribution Plan between Templeton Growth Fund, Inc.
and Franklin/Templeton Investor Services, Inc. incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993 (the "1993 Annual Report")
10.2 Representative Transfer Agent Agreement between Templeton Growth Fund,
Inc. and Franklin/Templeton Investor Services, Inc. incorporated by
reference to Exhibit 10.3 to the 1993 Annual Report
10.3 Representative Investment Management Agreement between Templeton
Growth Fund, Inc. and Templeton, Galbraith & Hansberger Ltd.
incorporated by reference to Exhibit 10.5 to the 1993 Annual Report
10.4 Representative Management Agreement between Advisers and the Franklin
Group of Funds incorporated by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1992 (the "1992 Annual Report")
10.5 Representative Distribution 12b-1 Plan between Distributors and the
Franklin Group of Funds incorporated by reference to Exhibit 10.3 to the
1992 Annual Report
10.6 Amended Annual Incentive Compensation Plan approved January 24, 1995
incorporated by reference to the Company's Proxy Statement filed under
cover of Schedule 14A on December 28, 1994 in connection with its Annual
Meeting of Stockholders held on January 24, 1995
10.7 Universal Stock Plan approved January 19, 1994 incorporated by reference
to the Company's 1995 Proxy Statement filed under cover of Schedule 14A
on December 29, 1993 in connection with its Annual Meeting of
Stockholders held on January 19, 1994
10.8 Representative Amended and Restated Distribution Agreement between
Franklin/Templeton Distributors, Inc. and Franklin Federal Tax-Free
Income Fund, incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1995 (the "June 1995 Quarterly Report")
10.9 Distribution 12b-1 Plan for Class II shares between Franklin/Templeton
Distributors, Inc. and Franklin Federal Tax-Free Income Fund,
incorporated by reference to Exhibit 10.2 to the June 1995 Quarterly
Report
10.10 Representative Investment Management Agreement between Templeton
Global Strategy SICAV and Templeton Investment Management Limited,
incorporated by reference to Exhibit 10.3 to the June 1995 Quarterly
Report
10.11 Representative Sub-Distribution Agreement between Templeton, Galbraith
& Hansberger Ltd. and BAC Corp. Securities, incorporated by reference
to Exhibit 10.4 to the June 1995 Quarterly Report
10.12 Representative Dealer Agreement between Franklin/Templeton
Distributors, Inc. and Dealer, incorporated by reference to Exhibit
10.5 to the June 1995 Quarterly Report
10.13 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (ERISA), incorporated by reference
to Exhibit 10.6 to the June 1995 Quarterly Report
10.14 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (NON-ERISA), incorporated by
reference to Exhibit 10.7 to the June 1995 Quarterly Report
10.15 Representative Amended and Restated Transfer Agent and Shareholder
Services Agreement between Franklin/Templeton Investor Services, Inc.
and Franklin Custodian Funds, Inc., dated July 1, 1995, incorporated by
reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995 (the "1995 Annual Report")
10.16 Representative Amended and Restated Distribution Agreement between
Franklin/Templeton Distributors, Inc. and Franklin Custodian Funds,
Inc., incorporated by reference to Exhibit 10.17 to the 1995 Annual
Report
10.17 Representative Class II Distribution Plan between Franklin/Templeton
Distributors, Inc. and Franklin Custodian Funds, Inc., on behalf of
its Growth Series, incorporated by reference to Exhibit 10.18 to the
1995 Annual Report
10.18 Representative Dealer Agreement between Franklin/Templeton
Distributors, Inc. and Dealer, incorporated by reference to Exhibit
10.19 to the 1995 Annual Report
10.19 Representative Mutual Fund Purchase and Sales Agreement for Accounts of
Bank and Trust Company Customers, effective July 1, 1995, incorporated
by reference to Exhibit 10.20 to the 1995 Annual Report
10.20 Representative Management Agreement between Franklin Value Investors
Trust, on behalf of Franklin MicroCap Value Fund, and Franklin
Advisers, Inc., incorporated by reference to Exhibit 10.21 to the 1995
Annual Report
10.21 Representative Sub-Distribution Agreement between Templeton, Galbraith
& Hansberger Ltd. and Sub-Distributor, incorporated by reference to
Exhibit 10.22 to the 1995 Annual Report
10.22 Representative Non-Exclusive Underwriting Agreement between Templeton
Growth Fund, Inc. and Templeton Franklin Investment Services (Asia)
Limited, dated September 18, 1995, incorporated by reference to
Exhibit 10.23 to the 1995 Annual Report
10.23 Representative Shareholder Services Agreement between
Franklin/Templeton Investor Services, Inc. and Templeton Franklin
Investment Services (Asia) Limited, dated September 18, 1995,
incorporated by reference to Exhibit 10.24 to the 1995 Annual Report
10.24 Agreement to Merge the Businesses of Heine Securities Corporation,
Elmore Securities Corporation and Franklin Resources, Inc., dated June
25, 1996, incorporated by reference to Exhibit 2 to Registrant's Report
on Form 8-K dated June 25, 1996
10.25 Subcontract for Transfer Agency and Shareholder Services dated November
1, 1996 by and between Franklin Investor Services, Inc. and PFPC Inc.,
incorporated by reference to Exhibit 10.25 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1996 (the
"1996 Annual Report")
10.26 Representative Sample of Franklin/Templeton Investor Services, Inc.
Transfer Agent and Shareholder Services Agreement, incorporated by
reference to Exhibit 10.26 to the 1996 Annual Report
10.27 Representative Administration Agreement between Templeton Growth Fund,
Inc. and Franklin Templeton Services, Inc., incorporated by reference
to Exhibit 10.27 to the 1996 Annual Report
10.28 Representative Sample of Fund Administration Agreement with Franklin
Templeton Services, Inc., incorporated by reference to Exhibit 10.28
to the 1996 Annual Report
10.29 Representative Subcontract for Fund Administrative Services between
Franklin Advisers, Inc. and Franklin Templeton Services, Inc.,
incorporated by reference to Exhibit 10.29 to the 1996 Annual Report
10.30 Representative Investment Advisory Agreement between Franklin Mutual
Series Fund Inc. and Franklin Mutual Advisers, Inc., incorporated by
reference to Exhibit 10.30 to the 1996 Annual Report
10.31 Representative Management Agreement between Franklin Valuemark Funds
and Franklin Mutual Advisers, Inc., incorporated by reference to
Exhibit 10.31 to the 1996 Annual Report
10.32 Representative Investment Advisory and Asset Allocation Agreement
between Franklin Templeton Fund Allocator Series and Franklin
Advisers, Inc., incorporated by reference to Exhibit 10.32 to the 1996
Annual Report
10.33 Representative Management Agreement between Franklin New York Tax-Free
Income Fund, Inc. and Franklin Investment Advisory Services, Inc.,
incorporated by reference to Exhibit 10.33 to the 1996 Annual Report
10.34 1998 Employee Stock Purchase Plan approved December 12, 1997 by the
Board of Directors, incorporated by reference to the Company's Proxy
Statement filed under cover of Schedule 14A on December 17, 1997 in
connection with its Annual Meeting of Stockholders to be held on January
20, 1998
10.35 System Development and Services Agreement dated as of August 29, 1997
by and between Franklin/Templeton Investor Services, Inc. and Sungard
Shareholder Systems, Inc.
12 Computation of Ratios of Earnings to Fixed Charges
21 List of Subsidiaries
23 Consent of Independent Accountants
27 Financial Data Schedule
(b)(1) Current Report on Form 8-K dated July 24, 1997 was filed on July 24,
1997 attaching Registrant's press release dated July 24, 1997 under
Items 5 and 7.
(c) See Item 14(a)(3) above.
(d) No separate financial statements are required; schedules are included
in Item 8.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FRANKLIN RESOURCES, INC.
Date: December 12, 1997 By /s/ Charles B. Johnson
Charles B. Johnson, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Date: December 12, 1997 By /s/ Charles B. Johnson
Charles B. Johnson, Principal
Executive Officer and Director
Date: December 12, 1997 By /s/ Harmon E. Burns
Harmon E. Burns, Executive Vice
President-Legal and Administrative
Secretary and Director
Date: December 12, 1997 By /s/ Martin L. Flanagan
Martin L. Flanagan, Treasurer
and Chief Financial Officer
Date: December 12, 1997 By /s/ Kenneth A. Lewis
Kenneth A. Lewis, Controller
Date: December 12, 1997 By /s/ James A. McCarthy
James A. McCarthy, Director
Date: December 12, 1997 By /s/ F. Warren Hellman
F. Warren Hellman, Director
Date: December 12, 1997 By /s/ Charles E. Johnson
Charles E. Johnson, Director
Date: December 12, 1997 By /s/ Rupert H. Johnson, Jr.
Rupert H. Johnson, Jr., Director
Date: December 12, 1997 By /s/ Harry O. Kline
Harry O. Kline, Director
Date: December 12, 1997 By /s/ Louis E. Woodworth
Louis E. Woodworth, Director
Date: December 12, 1997 By
Peter M. Sacerdote, Director
<PAGE>
ITEM
(3)(i)(a) Registrant's Certificate of Incorporation, as filed November
28, 1969, incorporated by reference to Exhibit (3)(i) to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1994 (the "1994 Annual Report")
(3)(i)(b) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1, 1985, incorporated by reference
to Exhibit (3)(ii) to the 1994 Annual Report
(3)(i)(c) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1, 1987, incorporated by reference
to Exhibit (3)(iii) to the 1994 Annual Report
(3)(i)(d) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated by
reference to Exhibit (3)(iv) to the 1994 Annual Report
(3)(ii) Registrant's By-Laws are incorporated by reference to Form 10
(File No. 06952), incorporated by reference to Exhibit (3)(v)
to the 1994 Annual Report
10.1 Representative Distribution Plan between Templeton Growth Fund, Inc.
and Franklin/Templeton Investor Services, Inc. incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993 (the "1993 Annual Report")
10.2 Representative Transfer Agent Agreement between Templeton Growth Fund,
Inc. and Franklin/Templeton Investor Services, Inc. incorporated by
reference to Exhibit 10.3 to the 1993 Annual Report
10.3 Representative Investment Management Agreement between Templeton
Growth Fund, Inc. and Templeton, Galbraith & Hansberger Ltd.
incorporated by reference to Exhibit 10.5 to the 1993 Annual Report
10.4 Representative Management Agreement between Advisers and the Franklin
Group of Funds incorporated by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1992 (the "1992 Annual Report")
10.5 Representative Distribution 12b-1 Plan between Distributors and the
Franklin Group of Funds incorporated by reference to Exhibit 10.3 to the
1992 Annual Report
10.6 Amended Annual Incentive Compensation Plan approved January 24, 1995
incorporated by reference to the Company's Proxy Statement filed under
cover of Schedule 14A on December 28, 1994 in connection with its Annual
Meeting of Stockholders held on January 24, 1995
10.7 Universal Stock Plan approved January 19, 1994 incorporated by reference
to the Company's 1995 Proxy Statement filed under cover of Schedule 14A
on December 29, 1993 in connection with its Annual Meeting of
Stockholders held on January 19, 1994
10.8 Representative Amended and Restated Distribution Agreement between
Franklin/Templeton Distributors, Inc. and Franklin Federal Tax-Free
Income Fund, incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1995 (the "June 1995 Quarterly Report")
10.9 Distribution 12b-1 Plan for Class II shares between Franklin/Templeton
Distributors, Inc. and Franklin Federal Tax-Free Income Fund,
incorporated by reference to Exhibit 10.2 to the June 1995 Quarterly
Report
10.10 Representative Investment Management Agreement between Templeton
Global Strategy SICAV and Templeton Investment Management Limited,
incorporated by reference to Exhibit 10.3 to the June 1995 Quarterly
Report
10.11 Representative Sub-Distribution Agreement between Templeton, Galbraith
& Hansberger Ltd. and BAC Corp. Securities, incorporated by reference
to Exhibit 10.4 to the June 1995 Quarterly Report
10.12 Representative Dealer Agreement between Franklin/Templeton
Distributors, Inc. and Dealer, incorporated by reference to Exhibit
10.5 to the June 1995 Quarterly Report
10.13 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (ERISA), incorporated by reference
to Exhibit 10.6 to the June 1995 Quarterly Report
10.14 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (NON-ERISA), incorporated by
reference to Exhibit 10.7 to the June 1995 Quarterly Report
10.15 Representative Amended and Restated Transfer Agent and Shareholder
Services Agreement between Franklin/Templeton Investor Services, Inc.
and Franklin Custodian Funds, Inc., dated July 1, 1995, incorporated by
reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995 (the "1995 Annual Report")
10.16 Representative Amended and Restated Distribution Agreement between
Franklin/Templeton Distributors, Inc. and Franklin Custodian Funds,
Inc., incorporated by reference to Exhibit 10.17 to the 1995 Annual
Report
10.17 Representative Class II Distribution Plan between Franklin/Templeton
Distributors, Inc. and Franklin Custodian Funds, Inc., on behalf of
its Growth Series, incorporated by reference to Exhibit 10.18 to the
1995 Annual Report
10.18 Representative Dealer Agreement between Franklin/Templeton
Distributors, Inc. and Dealer, incorporated by reference to Exhibit
10.19 to the 1995 Annual Report
10.19 Representative Mutual Fund Purchase and Sales Agreement for Accounts of
Bank and Trust Company Customers, effective July 1, 1995, incorporated
by reference to Exhibit 10.20 to the 1995 Annual Report
10.20 Representative Management Agreement between Franklin Value Investors
Trust, on behalf of Franklin MicroCap Value Fund, and Franklin
Advisers, Inc., incorporated by reference to Exhibit 10.21 to the 1995
Annual Report
10.21 Representative Sub-Distribution Agreement between Templeton, Galbraith
& Hansberger Ltd. and Sub-Distributor, incorporated by reference to
Exhibit 10.22 to the 1995 Annual Report
10.22 Representative Non-Exclusive Underwriting Agreement between Templeton
Growth Fund, Inc. and Templeton Franklin Investment Services (Asia)
Limited, dated September 18, 1995, incorporated by reference to
Exhibit 10.23 to the 1995 Annual Report
10.23 Representative Shareholder Services Agreement between
Franklin/Templeton Investor Services, Inc. and Templeton Franklin
Investment Services (Asia) Limited, dated September 18, 1995,
incorporated by reference to Exhibit 10.24 to the 1995 Annual Report
10.24 Agreement to Merge the Businesses of Heine Securities Corporation,
Elmore Securities Corporation and Franklin Resources, Inc., dated June
25, 1996, incorporated by reference to Exhibit 2 to Registrant's Report
on Form 8-K dated June 25, 1996
10.25 Subcontract for Transfer Agency and Shareholder Services dated November
1, 1996 by and between Franklin Investor Services, Inc. and PFPC Inc.,
incorporated by reference to Exhibit 10.25 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1996 (the
"1996 Annual Report")
10.26 Representative Sample of Franklin/Templeton Investor Services, Inc.
Transfer Agent and Shareholder Services Agreement, incorporated by
reference to Exhibit 10.26 to the 1996 Annual Report
10.27 Representative Administration Agreement between Templeton Growth Fund,
Inc. and Franklin Templeton Services, Inc., incorporated by reference
to Exhibit 10.27 to the 1996 Annual Report
10.28 Representative Sample of Fund Administration Agreement with Franklin
Templeton Services, Inc., incorporated by reference to Exhibit 10.28
to the 1996 Annual Report
10.29 Representative Subcontract for Fund Administrative Services between
Franklin Advisers, Inc. and Franklin Templeton Services, Inc.,
incorporated by reference to Exhibit 10.29 to the 1996 Annual Report
10.30 Representative Investment Advisory Agreement between Franklin Mutual
Series Fund Inc. and Franklin Mutual Advisers, Inc., incorporated by
reference to Exhibit 10.30 to the 1996 Annual Report
10.31 Representative Management Agreement between Franklin Valuemark Funds
and Franklin Mutual Advisers, Inc., incorporated by reference to
Exhibit 10.31 to the 1996 Annual Report
10.32 Representative Investment Advisory and Asset Allocation Agreement
between Franklin Templeton Fund Allocator Series and Franklin
Advisers, Inc., incorporated by reference to Exhibit 10.32 to the 1996
Annual Report
10.33 Representative Management Agreement between Franklin New York Tax-Free
Income Fund, Inc. and Franklin Investment Advisory Services, Inc.,
incorporated by reference to Exhibit 10.33 to the 1996 Annual Report
10.34 1998 Employee Stock Purchase Plan approved December 12, 1997 by the
Board of Directors, incorporated by reference to the Company's Proxy
Statement filed under cover of Schedule 14A on December 17, 1997 in
connection with its Annual Meeting of Stockholders to be held on January
20, 1998
10.35 System Development and Services Agreement dated as of August 29, 1997
by and between Franklin/Templeton Investor Services, Inc. and Sungard
Shareholder Systems, Inc.
12 Computation of Ratios of Earnings to Fixed Charges
21 List of Subsidiaries
23 Consent of Independent Accountants
27 Financial Data Schedule
(b)(1) Current Report on Form 8-K dated July 24, 1997 was filed on July 24,
1997 attaching Registrant's press release dated July 24, 1997 under
Items 5 and 7.
(c) See Item 14(a)(3) above.
(d) No separate financial statements are required; schedules are included
in Item 8.
EXHIBIT 10.35
SYSTEM DEVELOPMENT AND SERVICES AGREEMENT
BETWEEN
FRANKLIN/TEMPLETON INVESTOR SERVICES, INC
AND
SUNGARD SHAREHOLDER SYSTEMS, INC.
Table of Contents
Recitals...............................................................1
1. Definitions............................................................1
2. Deliverables...........................................................8
2.1 General................................................................8
2.2 Priority...............................................................9
2.3 Schedule...............................................................9
2.4 Investar and Investar*ONE..............................................9
(a) Investar...............................................................9
(b) Investar*ONE...........................................................9
2.5 Modification Process..................................................10
(a) General procedures....................................................10
(b) SRAs. ................................................................10
(c) SRA review process....................................................10
(d) SDS's.................................................................10
(e) SDS review process....................................................11
(f) Accepted SDS..........................................................11
(g) SDS Amendments........................................................11
(h) SDS Cancellation......................................................12
2.6 Specific Deliverables.................................................13
(a) Day One Class A Deliverables..........................................13
(b) Day One Class B Deliverables..........................................13
(i) Agreed-upon SRAs..................................................13
(ii) Interfaces and reports....... ....................................13
(a) Day One Deferred Deliverables and Day Two Deliverables...............14
(b) Requested Enhancements ..............................................14
(c) Eliminated subsystems................................................14
3. Scalability..........................................................14
3.1 Scalability Target...................................................14
(a) Completion of Initial Conversion.....................................14
(b) Subsequent scalability...............................................14
(c) Acquisitions.........................................................14
3.2 Performance Requirements.............................................15
3.3 Cost of Modifying the Software for Scalability Purposes...............15
4. Correction of Non-Conformities........................................16
4.1 General...............................................................16
4.2 Procedure.............................................................16
(a) Notification..........................................................16
(i) Discovery by FTIS.................................................16
(ii) Discovery by SunGard..............................................16
(b) SunGard response.......................................................16
(c) Class One Non-Conformities.............................................17
(d) Class Two Non-Conformities.............................................17
4.3 Fault Determination...................................................17
4.4 Compensation..........................................................17
5. SunGard Development...................................................18
5.1 DefinedDeliverables... ...............................................18
(a) Day One Class A Deliverables..........................................18
(b) Dedicated Developer Hours.............................................18
(c) Additional Developer Hours............................................18
5.2 FTIS Hours............................................................18
5.3 AdditionalServices.... ...............................................20
(a) In general............................................................20
(b) Rates for Additional Services.........................................20
(c) Increase in rates.....................................................20
5.4 Updates and enhancements..............................................20
(a) Development not requested by FTIS.....................................20
(b) Requested Enhancements................................................20
6. Delivery, Installation and Conversion...............................21
6.1 Testing by Third Party Vendors........................................21
6.2 Manner of Delivery....................................................21
6.3 Installation..........................................................21
(a) Acceptance testing....................................................21
(b) Installation..........................................................21
(c) Subsequent installation. .............................................22
(d) Installation prior to Completion of Initial Conversion................22
6.4 Conversion............................................................22
(a) Schedule..............................................................22
(b) Requirements..........................................................22
(c) Cost..................................................................22
(i) Initial Conversion....................................................22
(ii) Conversion necessitated by new Deliverables...........................22
(iii) Conversion necessitated by Acquired Accounts..........................22
6.5 Legacy System.........................................................23
7. Processing............................................................23
7.1 Operating Environment.................................................23
7.2 Modifications to the Operating Environment............................23
(a) Non-material modifications............................................23
(b) Material modifications................................................23
7.3 Operation.............................................................24
(a) Data center management................................................24
(b) Production control....................................................25
8. SunGard Services......................................................25
8.1 Training..............................................................25
(a) Prior to Completion of Initial Conversion.............................25
(b) Subsequent training...................................................25
8.2 Support...............................................................25
(a) Prior to Completion of Initial Conversion.............................25
(b) Subsequent support....................................................26
8.3 Disaster Recovery.....................................................26
9. Compensation..........................................................26
9.1 Initial Payment......................................................26
9.2 Account Fees..........................................................26
9.3 Modification of Account Fees..........................................26
9.4 Expenses..............................................................27
9.5 Taxes.................................................................28
9.6 Late Payment..........................................................28
10. Licenses and Ownership................................................28
10.1 License by SunGard....................................................28
(a) License rights regarding Software.....................................28
(b) License rights regarding Documentation................................29
(c) Term..................................................................29
(d) License limitations...................................................29
(e) FTIS liability........................................................29
10.2 License by FTIS.......................................................29
10.3 Ownership.............................................................30
(a) SunGard ownership.....................................................30
(b) FTIS ownership........................................................30
(c) Exceptions............................................................30
11. Confidentiality.......................................................30
11.1 Definition of Confidential Information................................30
11.2 Nondisclosure and Nonuse of Confidential Information..................31
11.3 Limitations on Confidentiality........................................31
11.4 Return of Tangible Materials..........................................32
12. FTIS Enhancements.....................................................32
12.1 In General............................................................32
12.2 Use of Deliverables...................................................32
12.3 Restrictions on FTIS Enhancement......................................32
12.4 Limitation of SunGard Obligations.....................................32
13. Certain FTIS Obligations..............................................32
13.1 Access to Facilities and Personnel....................................32
13.2 FTIS Resources........................................................33
13.3 Use of Software.......................................................33
13.4 Non-U.S. Processing Site..............................................33
13.5 Export Control........................................................33
13.6 Data Accuracy.........................................................33
13.7 Data Use..............................................................33
13.8 Backups...............................................................33
13.9 Review of Data and Discovery of Non-Conformities......................34
13.10 Account Purging.......................................................34
14. Term/Termination/Transition Services..................................34
14.1 Term..................................................................34
14.2 Termination for Material Breach.......................................34
14.3 Effect of Termination for Material Breach.............................35
(a) Termination by FTIS...................................................35
(b) Termination by SunGard................................................35
14.4 Transition Services...................................................35
14.5 Survival..............................................................36
15. Dispute Resolution....................................................36
15.1 Resolution by the Parties.............................................36
15.2 Arbitration...........................................................36
15.3 Abbreviated Arbitration Procedures....................................36
(a) Commencement..........................................................36
(b) Selection of Arbitrator...............................................36
(c) Procedures............................................................37
(d) Decision..............................................................37
15.4 General Arbitration Procedures........................................37
(a) Commencement..........................................................37
(b) Selection of arbitrator...............................................37
(c) Procedures............................................................37
(d) Decision..............................................................37
16. Remedies; Limitations of Liability....................................37
16.1 General...............................................................37
16.2 Attorneys' Fees and Costs.............................................37
16.3 Interlocutory Relief..................................................38
16.4 Limitations of Liability..............................................38
17. Audit Procedures......................................................39
17.1 Record Keeping........................................................39
17.2 Audit Right...........................................................39
18. Representations and Warranties........................................40
18.1 FTIS Representations and Warranties...................................40
18.2 SunGard Representations and Warranties................................40
18.3 Disclaimer ...........................................................41
19. Indemnification.......................................................41
19.1 SunGard's Indemnification.............................................41
19.2 FTIS' Indemnification.................................................41
19.3 SunGard-Caused Infringement...........................................42
19.4 FTIS-Caused Infringement..............................................42
20. Insolvency............................................................42
20.1 Right to Terminate....................................................42
20.2 License of "Intellectual Property"....................................43
21. Guarantee.............................................................43
21.1 By SunGard Data Systems...............................................43
21.2 By FRI................................................................43
22. SunGard Insurance.....................................................43
23. Miscellaneous.........................................................44
23.1 Cooperation...........................................................44
23.2 Assignment............................................................44
23.3 Modification..........................................................44
23.4 Entire Agreement......................................................44
23.5 Severability..........................................................44
23.6 Force Majeure.........................................................45
23.7 Waiver................................................................45
23.8 No Joint Venture or Agency............................................45
23.9 Notices...............................................................45
23.10 Applicable Law; Jurisdiction..........................................46
23.11 No Third Party Beneficiaries..........................................46
23.12 Counterparts; Facsimiles..............................................46
23.13 Prior Work............................................................46
23.14 Non-Solicitation......................................................46
Exhibit A:..Day One Class A Deliverables Exhibit B:..Day One Class B
Deliverables Exhibit C:..Day One Deferred Deliverables Exhibit D:..Day Two
Deliverables Exhibit E:..Investar Performance Requirements Exhibit F:..Initial
Conversion Schedule Exhibit G:..Operating Environment Exhibit H:..SunGard Data
Systems Insurance Policies Exhibit I:..SunGard Calling List Exhibit J:..SunGard
Payment Schedule Under Section 14.3(a) Exhibit K:..Excluded Transactions Exhibit
L:..Year 2000 Compliance Exhibit M:..Scheduled Rates
(EXHIBITS A THROUGH M INTENTIONALLY OMITTED)
<PAGE>
THIS SYSTEM DEVELOPMENT AND SERVICES AGREEMENT ("Agreement") is made and entered
into as of the 29th day of August, 1997 (the "Effective Date") by and between:
(i) FRANKLIN/TEMPLETON INVESTOR SERVICES, INC., a California Corporation,
having a place of business at 777 Mariners Island Blvd., San Mateo, CA 94404
("FTIS"); and
(ii) SUNGARD SHAREHOLDER SYSTEMS, INC., a Delaware Corporation, having a
place of business at 951 Mariners Island Blvd., San Mateo, CA 94404 ("SunGard")
with reference to the following:
RECITALS
The following provisions form the basis for, and are hereby made a part
of, this Agreement:
A. SunGard is in the business of developing and distributing mutual fund
shareholder accounting systems, including Investar and Investar*ONE.
B. FTIS is in the business of providing transfer agency services to
clients receiving investment management services from affiliates of
Franklin Resources, Inc. ("FRI").
C. This Agreement sets forth the terms and conditions upon which FTIS will
engage SunGard to develop and deliver mutual fund shareholder accounting
systems.
AGREEMENT
Now, Therefore, in consideration of the promises and the mutual covenants herein
contained and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereby agree as follows:
1. Definitions.
1.1 1981 Agreement. "1981 Agreement" shall mean the Stock Transfer
Data Processing Services Agreement between SunGard (f/k/a Applied
Financial Systems, Inc.) and FTIS (f/k/a Franklin Administrative
Services, Inc.), dated July 19, 1981, as amended.
1.2 Account. "Account" shall mean a unique combination of a company
number, a fund number of any FRI Client and an account number.
1.3 Account Fees. "Account Fees" shall mean per Account fees as
specified in Section 1.2
1.4 Acquired Accounts. "Acquired Accounts" shall mean Accounts relating
to assets under management by subsidiaries of FRI where such assets
became managed by FRI subsidiaries during the term of this Agreement
in connection with an acquisition by FRI or its subsidiaries of an
unrelated investment management company, a merger with an unrelated
investment management company or a similar transaction.
1.5 Additional Services. "Additional Services" shall mean services
provided to FTIS on a fee for service basis, as further specified
in Section 5.3.
1.6 Advance. "Advance" shall have the meaning specified in the Third
Amended MOU.
1.7 At No Additional Charge to FTIS. "At No Additional Charge to FTIS"
shall mean that services provided to FTIS are compensated through
payment of Account Fees and shall not be treated as FTIS Hours, or
as Additional Services, or Chargeable to FTIS, but shall be provided
without additional compensation by FTIS.
1.8 Audit Cost. "Audit Cost" shall mean, (i) if the audit is performed
by independent certified public accountants, the cost, including
reasonable expenses billed by such certified public accountants to
the auditing party for such audit; or (ii) if the audit is performed
by employees of the auditing party, all reasonable expenses incurred
during the course of such audit plus a reasonable allocation of each
such employee's salary reflecting the time spent on the audit.
1.9 Calling List. "Calling List" shall mean the list of
SunGard-designated personnel specified in Exhibit I, as such list
may be modified from time to time by SunGard.
1.10 Chargeable to FTIS. "Chargeable to FTIS" shall mean that services
provided to FTIS shall be treated as FTIS Hours, if available, or as
Additional Services if FTIS Hours are unavailable.
1.11 Claim. "Claim" shall mean any claim, action, suit, proceeding or
litigation and any loss, deficiency, damages, liabilities, costs and
expenses, including, without limitation, reasonable settlement costs
and reasonable attorneys' fees and all related costs and expenses,
payable as a result thereof or otherwise incurred in connection
therewith.
1.12 Class One Non-Conformity. "Class One Non-Conformity" shall mean a
Non-Conformity that (i) renders continued use of the Software either
impossible or substantially impractical or (ii) either materially
interrupts production by FTIS or makes continued production
substantially more costly for FTIS.
1.13 Class Two Non-Conformity. "Class Two Non-Conformity" shall mean
a Non-Conformity other than a Class One Non-Conformity.
1.14 Completion of Initial Conversion. "Completion of Initial
Conversion" shall mean successful completion of the last of the
Initial Conversions.
1.15 Confidential Information. "Confidential Information" shall have
the meaning specified in Section 11.1, below.
1.16 Conversion. "Conversion" shall mean conversion of Account data into
a format which allows processing of such data by the Software. At a
minimum, Conversion shall include (i) analysis of data transfer
results and tests for data integrity; (ii) conversion of all current
data for all Open Accounts and Zero Balance Accounts that are
included at the time of such conversion in the databases of the
system from which such data is being converted; (iii) conversion of
all historical data since and beginning with the beginning of the
preceding calendar year to the extent that such data exists on such
databases at the time of conversion; and (iv) conversion of certain
historical data since and beginning with the beginning of the tenth
preceding calendar year for all Open Accounts and Zero Balance
Accounts, such conversion to include data sufficient to allow FTIS
to generate reports used to establish the cost basis for assets held
in such Open Accounts and Zero Balance Accounts, to the extent that
such data exists on such databases at the time of such Conversion.
Notwithstanding the foregoing, with respect to the Initial
Conversion only, all historical data shall be converted since and
beginning with January 1, 1996 with respect to Titan data and
January 1, 1997 with respect to MPS data, as well as such additional
historical data as is required beginning with the twelfth preceding
calendar year to establish cost basis data as provided for above.
1.17 CPI. "CPI" shall mean the United States Consumer Price Index for
all Urban Consumers (CPI-U) All Items, U.S. City Average, as
published by the U.S. Department. of Labor, or, in the event that
such index is no longer published, such other index as most
closely substitutes for such index.
1.18 Customer Documentation. "Customer Documentation" shall mean that
user documentation provided by SunGard to its service bureau
customers.
1.19 Day One Class A Deliverables. "Day One Class A Deliverables"
shall mean those Deliverables specified in the attached Exhibit A.
1.20 Day One Class B Deliverables. "Day One Class B Deliverables"
shall mean those Deliverables specified in the attached Exhibit B.
1.21 Day One Deferred Deliverables. "Day One Deferred Deliverables"
shall mean those Deliverables specified in the attached Exhibit C.
1.22 Day Two Deliverables. "Day Two Deliverables" shall mean those
Deliverables specified in the attached Exhibit D.
1.23 Dedicated Developer Hours. "Dedicated Developer Hours" shall
mean Developer Hours which SunGard shall dedicate to development
and related tasks under this Agreement as specified in Section
5.1(b).
1.24 Deliverables. "Deliverables" shall mean the Software and the
Documentation.
1.25 Developer Hours. "Developer Hours" shall mean hours worked on
development and related tasks under this Agreement, including,
without limitation, hours spent by SunGard on design, development,
documentation and SunGard testing and hours spent on the SRA/SDS
process specified in Section 2.5.
1.26 Discloseable Items. "Discloseable Items" shall mean the following
information from the Deliverables: the End User Documentation, the
format and visual expression of all data input screens, data output
screens and data reports produced by the Software (but not including
the data contained on such screens or in such reports), and the
format and structure of all data extract files extracted from the
database used by the Software, including descriptions of the fields
of such data extract files.
1.27 Distribution. "Distribution" shall mean dividend distributions
counting ordinary income, short-term capital gains and long-term
capital gains separately.
1.28 Documentation. "Documentation" shall mean the Operating
Documentation, the Customer Documentation and the End User
Documentation.
1.29 Effective Date. "Effective Date" shall mean the date first
written above.
1.30 End User Documentation. "End User Documentation" shall mean that
portion of the Customer Documentation that is identified by SunGard
as non-confidential and that shall be reasonably sufficient to allow
End Users to provide input to and receive output from the Software,
including a reasonable explanation of (a) data input and output
screens (including commands available from such screens), (b) data
reports, and (c) the format and structure of data extract files
extracted by the Software from the database used by the Software.
1.31 End Users. "End Users" shall mean FRI Clients, investors in FRI
Clients, vendors to FRI Clients, distributors for FRI Clients, and
other individuals and entities to whom FTIS may reasonably choose to
disclose information in the ordinary course of its business.
1.32 First Amended MOU. "First Amended MOU" shall mean the First
Amended Memorandum of Understanding executed by the parties
effective January 24, 1997.
1.33 Force Majeure Event. "Force Majeure Event" shall mean, with respect
to a party, any event beyond such party's reasonable control,
including but not limited to, any war, riot, labor strike or other
labor problem, any act of God or natural disaster, any disruption or
outage of power, communications or other utility, any act of any
third party for whom the party in question does not have
responsibility under this Agreement, or any law, regulation,
ordinance or other act or order of any court, government or
governmental agency, excluding any such law, regulation, ordinance
or other act or order as to which such party has indemnified the
other party.
1.34 FTIS-Caused Infringement. "FTIS-Caused Infringement" shall mean any
infringement by FTIS, FRI or any FRI Affiliate of any third party
Intellectual Property Right, but shall not include any
SunGard-Caused Infringement.
1.35 FRI. "FRI" shall mean Franklin Resources, Inc.
1.36 FRI Affiliate. "FRI Affiliate" shall mean any company controlled by
or under common control with FRI, including, without limitation, any
direct or indirect parent, sibling or direct or indirect FRI
subsidiary, but only during such time as such relationship exists.
1.37 FRI Client. "FRI Client" shall mean any individual or entity to whom
FRI, or any FRI Affiliate, provides investment management or
investment advisory services, including any such entity that
constitutes an open or closed end investment company, unit
investment trust, real estate investment trust or similar investment
entity, but only during such time as such relationship exists..
1.38 FTIS. "FTIS " shall mean Franklin/Templeton Investor Services,
Inc.
1.39 FTIS Enhancements. "FTIS Enhancements" shall mean enhancements to
the Software created pursuant to Section 12 by FTIS or for FTIS by a
third party other than SunGard.
1.40 FTIS Hours. "FTIS Hours" shall mean hours of SunGard employees and
individual contractors when providing services to FTIS hereunder, as
further specified in Section 5.2.
1.41 FTIS Trainers. "FTIS Trainers" shall mean employees and/or
individual contractors of FTIS, FRI or any FRI Affiliate designated
by FTIS to perform training on the Software.
1.42 FTIS Unrelated Party. "FTIS Unrelated Party" shall mean any
individual or entity other than FRI, FRI Affiliates, FRI Clients or
End Users.
1.43 Increase in the CPI. "Increase in the CPI" shall mean the net
increase in the CPI for the immediately preceding twelve (12) month
period, or the closest available approximation of such period.
1.44 Incremental Accounts. "Incremental Accounts" shall mean the
number of Processed Open Accounts which exceeds the number of
Processed Open Accounts in existence as of the seventh
anniversary of the Completion of Initial Conversion.
1.45 Initial Conversion. "Initial Conversion" shall mean completion of
Conversion of Accounts to Investar as specified in the schedule
attached hereto as Exhibit F, including any modifications to such
schedule as may be agreed in writing by the parties under the terms
of this Agreement.
1.46 Initial Payment. "Initial Payment" shall have the meaning
specified in Section 9.1, below.
1.47 Intellectual Property Right. "Intellectual Property Right" shall
mean any intellectual property right, whether arising inside or
outside the United States, and whether arising under the laws of the
United States or of any foreign jurisdiction, including patent
rights, copyright rights, trade secret rights and any other similar
intellectual property rights.
1.48 Investar. "Investar" shall mean the production version of the mutual
fund shareholder accounting system marketed by SunGard under the
name "Investar," current as of the date initially installed in a
production environment at FTIS.
1.49 Investar*ONE. "Investar*ONE" shall mean the production version of
the mutual fund shareholder accounting systems marketed by SunGard
under the name "Investar*ONE," current as of the date initially
installed in a production environment at a Processing Site.
1.50 MOU. "MOU" shall mean the Memorandum of Understanding executed
by the parties effective January 3, 1997.
1.51 Non-Conformity. "Non-Conformity" shall mean a failure of Software to
correctly perform the functionality specified in the associated SDS,
a Software bug, or a failure to meet a Performance Requirement. In
the event that the requirements of an SDS conflict with the
Performance Requirements, for purposes of determining whether a
Non-Conformity exists, the Performance Requirements shall govern
(except that the foregoing shall not prevent the parties from
agreeing in an accepted SDS to modify one or more Performance
Requirements for particular functionality or reports).
1.52 Normal Processing. "Normal Processing" shall mean processing
which occurs on business days (excluding weekends and holidays),
but excluding the six (6) hour period of time following the
commencement of "F Day Processing."
1.53 Open Account. "Open Account" shall mean an Account that carries
a positive balance.
1.54 Operating Documentation. "Operating Documentation" shall mean (i)
prior to Completion of Initial Conversion, such documentation as
SunGard uses internally for operation of the Software; and (ii)
within a reasonable time period following Completion of Initial
Conversion, reasonably current and reasonably complete documentation
which is reasonably sufficient to allow trained FTIS, FRI and FRI
Affiliate personnel to operate the Software in the Operating
Environment and in the ordinary course of business.
1.55 Operating Environment. "Operating Environment" shall mean the
hardware and software environment specified in the attached
Exhibit G, including amendments as may from time to time be
agreed by the parties.
1.56 Performance Requirements. "Performance Requirements" shall mean
those standards specified in the attached Exhibit E, including
any modifications to such standards as may be agreed by the
parties in writing under the terms of this Agreement.
1.57 POA. "POA" shall mean Processed Open Account.
1.58 Processed Open Account. "Processed Open Account" shall mean an
Account that is running "live" on Investar and/or Investar*ONE and
that is an Open Account for at least one day during a calendar
month. A Processed Open Account running "live" on both Investar and
Investar*ONE during the same month will be counted as a single
Processed Open Account.
1.59 Processing Sites. "Processing Sites" shall mean those sites of
FTIS, FRI or any FRI Affiliate designated by FTIS. Each
Processing Site shall contain a full, operational Operating
Environment.
1.60 Proprietary Item. "Proprietary Item" shall mean the Software
(including the object code and source code for the Software), the
Documentation, the ideas, methods, algorithms, formulae and concepts
used in developing and/or incorporated in the Software or
Documentation, including, but not limited to, the visual expressions
and other design features of the Software, and all revisions,
modifications, refinements, releases, versions, enhancements and
improvements of the Software or Documentation, but shall exclude
Discloseable Items.
1.61 Reasonable Transition Period. "Reasonable Transition Period" shall
mean a period of not less than one year which is reasonably
sufficient to allow FTIS to convert processing to a replacement
system following expiration or termination of this Agreement,
including reasonable time for (i) investigation of alternative
systems; (ii) negotiation with other vendors; (iii) development
work; and (iv) account conversion.
1.62 Reimbursable Expenses. "Reimbursable Expenses" shall mean (a) the
following reasonable out-of-pocket expenses incurred by SunGard's
employees and individual contractors in the course of traveling to
or from an FTIS facility or a third party facility to which travel
is required under this Agreement or in the course of traveling to or
from a SunGard facility for a meeting with FTIS personnel or with
third party personnel if such meeting is requested by FTIS: (i)
ground transportation expenses; (ii) air travel in coach class;
(iii) lodging and meal expenses reasonably incurred during such
travel, or during the visit to such FTIS or third party facility;
(b) the cost of data communication lines necessary in order to allow
SunGard to provide services required under this Agreement; and (c)
reasonable delivery charges.
1.63 Requested Enhancements. "Requested Enhancements" shall mean
Deliverables requested by FTIS during the term of this Agreement,
excluding Day One Class A Deliverables, Day One Class B
Deliverables, Day One Deferred Deliverables and Day Two
Deliverables.
1.64 Response Time. "Response Time" shall mean host response time as
measured in the IMS log.
1.65 Scalability Target. "Scalability Target" shall mean the number
of Processed Open Accounts calculated pursuant to Exhibit E.
1.66 SDS. "SDS" shall mean a System Design Specification in substantially
the same format as those currently in use by the parties. Each SDS
shall specify (i) the functional design to be used to implement the
functionality specified in one or more SRAs, (ii) a schedule for
delivery, testing, installation of Software, conversion of data (if
applicable) and preparation of Documentation, and (iii) a budget
specified in terms of Developer Hours.
1.67 Second Amended MOU. "Second Amended MOU" shall mean the Second
Amended Memorandum of Understanding executed by the parties
effective April 30, 1997.
1.68 Software. "Software" shall mean Investar and Investar*ONE and
that computer software developed and/or delivered by SunGard
pursuant to this Agreement.
1.69 SRA. "SRA" shall mean a Systems Requirement Analysis document in
substantially the same form as those currently in use by the
parties. An SRA shall specify one or more functional requirements
requested by FTIS.
1.70 SunGard Affiliate. "SunGard Affiliate" shall mean any company
controlled by or under common control with SunGard Data Systems,
including, without limitation, any direct or indirect parent,
sibling or direct or indirect SunGard Data Systems subsidiary, but
only during such time as such relationship exists.
1.71 SunGard-Caused Infringement. "SunGard-Caused Infringement" shall
mean infringement by any Deliverable of any third party Intellectual
Property Right, but shall not include (i) infringement to the extent
attributable to an SRA, unless (a) a non-infringing implementation
was reasonably available or (b) SunGard knew that such SRA required
such infringement but failed to inform FTIS; or (ii) infringement to
the extent attributable to (a) any unauthorized or improper use or
modification of any Deliverable, (b) any authorized modification of
any Deliverable made by FTIS or on behalf of FTIS by any individual
or entity other than SunGard, (c) any unauthorized combination of
any Deliverable with any other software, documentation or other
item, or (d) any breach of any provision of this Agreement by FTIS
or any FRI Affiliate, FRI Client, End User or Third Party Vendor.
1.72 SunGard-Caused Non-Conformity. "SunGard-Caused Non-Conformity" shall
mean a Non-Conformity caused by (i) a failure of Software caused
other than by a Force Majeure Event; or (ii) a failure of SunGard
personnel to properly carry out production control requirements
during such time as SunGard is responsible for production control.
1.73 SunGard Data Systems. "SunGard Data Systems" shall mean SunGard
Data Systems, Inc., the ultimate corporate parent of SunGard.
1.74 SunGard Unrelated Party. "SunGard Unrelated Party" shall mean any
individual or entity other than SunGard Data Systems, SunGard
Affiliates or customers of SunGard, SunGard Data Systems or SunGard
Affiliates.
1.75 Termination Date. "Termination Date" shall mean the effective
date of a termination for material breach by FTIS pursuant to
Section 14.2.
1.76 Testing Period. "Testing Period" shall mean the period of time
during which FTIS shall complete testing of delivered Software. The
Testing Period will be that period provided by SunGard to its
service bureau customers for testing such Software prior to
installation of such Software at the SunGard service bureau data
center, or, if FTIS determines in its reasonable discretion that the
magnitude of such Software delivery is such that parallel processing
is necessary in which such Software would be tested on a test
database made up of duplicates of a large subset or the entirety of
Open Accounts, the Testing Period shall be a reasonable time for
completion of such parallel processing testing.
1.77 Third Amended MOU. "Third Amended MOU" shall mean the Third
Amended Memorandum of Understanding executed by the parties
effective June 30, 1997.
1.78 Third Party Vendors. "Third Party Vendors" shall mean third party
companies and consultants providing computer hardware and/or
software products, services or consultation to FTIS, FRI or any FRI
Affiliate or any company or consultant under consideration for
provision of such products, services or consultation.
1.79 Year 2000 Compliant. "Year 2000 Compliant," with respect to
Software, shall mean that such Software is capable of accurately
accounting for 20th and 21st century dates and processing the fact
that year 2000 is a leap year, and normal operation will not be
impaired by the advent of the year 2000, including accurately
recognizing and accommodating the rollover to the year 2000.
1.80 Zero Balance Accounts. "Zero Balance Accounts" shall mean
Accounts with a balance of zero.
2. Deliverables.
2.1 General. SunGard shall use commercially reasonable efforts to
deliver Software that is free from Non-Conformities, including
testing Software prior to delivery, in accordance with SunGard's
past practices and normal and reasonable industry standards, unless
FTIS requests that Software be delivered prior to completion of
testing, in which event SunGard shall comply with such request. In
addition, SunGard shall maintain a System Development Life Cycle
methodology which meets current industry standards, including
controls regarding the integrity, auditability and compatibility of
all Software. Such methodology shall be consistent with SunGard's
past practices, but in any event will meet current industry
standards.
2.2 Priority. The successful implementation of the Day One Class A
Deliverables, Day One Class B Deliverables, Day One Deferred
Deliverables and Day Two Deliverables shall be SunGard's highest
customer priority.
2.3 Schedule. SunGard shall deliver and install Deliverables, and
convert Accounts (if relevant), pursuant to the schedule specified
in the SDS associated with such Deliverables. In addition, SunGard
shall meet all dates specified in Exhibit F, including all Initial
Conversion dates.
2.4 Investar and Investar*ONE.
(a) Investar. SunGard has delivered and installed Investar at the
FTIS Processing Center in St. Petersburg, Florida and shall
undertake Initial Conversion of Accounts pursuant to the
schedule attached as Exhibit F. SunGard has also delivered the
Documentation for Investar.
(b) Investar*ONE. During the term of this Agreement, FTIS may
evaluate Investar*ONE to determine whether, in FTIS'
reasonable, good faith judgment, Investar*ONE is suitable
for FTIS applications. If FTIS reaches a preliminary
conclusion that Investar*ONE may be suitable for FTIS
applications, FTIS shall communicate such conclusion to
SunGard and shall act reasonably in response to any request
by SunGard that the schedule for Investar Year 2000
Compliance be extended pending a final FTIS determination
on Investar*ONE. If FTIS reaches a final conclusion that
Investar*ONE is suitable for FTIS applications, the parties
shall negotiate regarding Performance Requirements
applicable to Investar*ONE, and SunGard shall specify the
Operating Environment required for Investar*ONE. If FTIS
agrees to install SunGard's Operating Environment
specification, and if the parties reach agreement on the
Performance Requirements for Investar*ONE, then the
Operating Environment and Performance Requirements
specified by this Agreement shall be amended and SunGard
shall install Investar*ONE at all then-existing Processing
Sites. If FTIS determines that Investar*ONE is not
suitable for FTIS applications, or if FTIS determines that
it is unwilling to install the Investar*ONE Operating
Environment specified by SunGard, or if the parties are
unable to agree on Investar*ONE Performance Requirements,
then FTIS shall have no obligation to accept Investar*ONE,
and the Performance Requirements, including any applicable
Year 2000 requirements (including any extension in the Year
2000 schedule agreed upon pursuant to this Section), shall
continue to apply to Investar. If Franklin accepts
Investar*ONE by using it in production, then, irrespective
of whether the parties agree on Performance Requirements,
SunGard should have no further obligation to render
Investar Year 2000 Compliant.
2.5 Modification Process. The parties contemplate a definition process
leading to agreement on defined functionality, a schedule and a
budget for modifications to Investar and Investar*ONE. This process
has been partially completed for Day One Class A Deliverables, Day
One Class B Deliverables, Day One Deferred Deliverables and Day Two
Deliverables. This definition process encompasses the steps outlined
below, which may be waived by mutual agreement.
(a) General procedures. The parties will cooperate in defining
the nature of development to be accomplished. Such
cooperation will include, but not be limited to, meetings
among project personnel on a weekly basis, such meetings to
include discussions of progress and of functionality which
may be requested by FTIS. In addition, the parties will
exercise reasonable discretion in responding to any request
to extend the deadlines for response specified in this
Section. All notices specified in this Section shall be in
writing and shall be given in accordance with Section 23.9
except that faxes and electronic mail shall not require
confirmation.
(b) SRAs. Once FTIS has defined functionality which it wishes
to request, FTIS shall describe that functionality in an
SRA, which shall be delivered to an appropriate SunGard
representative. Each SRA shall contain sufficient
information to define the nature of the FTIS functional
requirements and shall specify a date for SunGard to
complete its review process pursuant to subsection (c)
hereof, such date to be seven (7) business days from the
date of delivery of the SRA unless another reasonable date
is specified (the "review period"). In the event that
SunGard reasonably believes such dates are unreasonable
under the circumstances, the parties shall discuss
modifying such dates.
(c) SRA review process. Once it has received an SRA from FTIS,
SunGard shall review that SRA within the review period in
order to determine whether the FTIS requirements are
described in a reasonably complete and unambiguous manner.
If SunGard determines, in its reasonable discretion, that
the SRA is either not reasonably complete or contains
ambiguities, SunGard shall request additional information
from FTIS, in which event the parties shall reasonably work
together to clarify the SRA. This process shall continue
in an iterative fashion until (i) SunGard has notified FTIS
that the SRA is reasonably complete and unambiguous, or
(ii) FTIS has withdrawn the SRA. Neither party shall have
any further obligation hereunder with respect to an SRA
which has been withdrawn by FTIS, except that FTIS shall be
responsible for any Developer Hours incurred by SunGard
during the response and evaluation process.
(d) SDS's. Once SunGard has notified FTIS that an SRA is
reasonably complete and unambiguous, SunGard shall provide
FTIS with one or more SDS's, within a thirty (30) day
period, or such longer or shorter period as the parties may
agree, detailing the manner in which SunGard proposes to
implement the functionality specified in such SRA. Each
such SDS shall include (i) a detailed description of the
functionality which SunGard proposes to provide, (ii) a
schedule for delivery, testing and installation of
Software, conversion of data, if applicable, and
preparation of Documentation, (iii) a budget specifying the
number of Development Hours required to implement the SDS,
(iv) an explanation, if applicable, of the impact of such
SDS on other SDS's, the Initial Conversion schedule, or
Performance Requirements, and (v) a date by which the SDS
shall be deemed withdrawn if not accepted, such date to be
thirty (30) days from the date of delivery of such SDS
unless another reasonable date is specified (the "response
period").
(e) SDS review process. Once it has received an SDS from
SunGard, FTIS shall review that SDS within the response
period. Within the response period, FTIS shall notify
SunGard that (i) the SDS is accepted, (ii) the SDS is
rejected, or (iii) FTIS requires further clarification or
wishes to further discuss the terms of the SDS. If FTIS
does not provide any such notice within such time period,
the SDS shall be deemed rejected. In the event that FTIS
rejects the SDS or it is deemed rejected, neither party
shall have any further obligation with respect to the SDS
or the associated SRA(s), subject to FTIS' right to submit
a similar SRA to SunGard, thereby again triggering the SRA
review process, except that FTIS shall remain responsible
for any Developer Hours incurred by SunGard during the
response and evaluation process. In the event that FTIS
requests further clarification or discussion, such
clarification or discussion shall take place, after which
SunGard shall either submit a new SDS or resubmit the
original SDS, either event again triggering a new response
period for response by FTIS. If the duration of the SDS
review process renders the proposed schedule unrealistic,
SunGard may propose a revision to the schedule, in which
event FTIS may, in its reasonable discretion (a) promptly
accept the revised schedule in writing; (b) discuss the
necessity of the revised schedule, and possible
alternatives with SunGard, or (c) reject the SDS in writing
or fail to respond within the response period, in which
event the SDS shall be deemed rejected.
(f) Accepted SDS. Once FTIS has accepted an SDS in writing,
SunGard shall deliver corresponding Deliverables pursuant
to the schedule and within the budget specified in the
SDS. The Developer Hours actually incurred by SunGard with
respect to such SDS, capped at the budget specified in the
SDS, shall be subtracted from the Dedicated Developer
Hours, if available, or shall be Chargeable to FTIS, if
Dedicated Developer Hours are unavailable. In the event
that FTIS authorizes SunGard to begin work on an SDS prior
to formal acceptance of the SDS, this will be deemed an
acceptance of the SDS.
(g) SDS amendments. Either party may request an amendment to
any SDS previously accepted by FTIS by submitting a written
request to the other party describing the nature of the
requested change. In such event, the parties shall discuss
the nature of the amendment in order to determine whether,
in the reasonable judgment of both parties, the amendment
would have a material effect on the schedule or budget for
the SDS to be amended, any other related SDS, the
Performance Requirements or the Initial Conversion
schedule. If the parties determine that the amendment
would have no such material effect, then the parties shall
cooperate to define an amended SDS. If the parties
determine that the amendment would have a material effect,
then the parties shall negotiate the terms upon which the
SDS, and/or other SDS's and/or the Initial Conversion,
schedule and/or the Performance Requirements, would be
amended, and the parties shall determine whether SunGard
should suspend work on such other SDS's during such
negotiations. Such terms may include a modification of the
Initial Conversion schedule, the schedule or budget for the
SDS('s), or such other terms as may be agreeable to the
parties. If the parties agree in writing on one or more
amended SDS's, such amended SDS's shall be substituted for
the original SDS's, and both parties will be bound by the
terms of the amended SDS's. If the parties fail to agree
on one or more amended SDS's, the original SDS's will
remain in effect unless canceled by FTIS as provided below
(provided that any period during which such work was
suspended shall be added to the schedule under such SDS's).
(h) SDS cancellation. At any point after acceptance of an SDS,
FTIS shall have the right, in its reasonable discretion, to
cancel such SDS, by providing written notice of
cancellation to SunGard. Once SunGard receives such notice
of cancellation, SunGard may request that the parties
discuss the nature of the cancellation in order to
determine whether, in the reasonable judgment of both
parties, the cancellation would have a material effect on
the schedule or budget for other SDS's or the Initial
Conversion schedule. Otherwise, SunGard shall promptly
unwind and discontinue work on the SDS and shall notify
FTIS of the Developer Hours and Reimbursable Expenses
expended with respect to such SDS prior to and after
receipt of such cancellation notice. For purposes of
compensation and/or allocation, such Developer Hours and
Reimbursable Expenses shall then be treated as if such SDS
had been completed and the associated Deliverable delivered
and accepted, as of the date SunGard completes the
unwinding and discontinuance of work on such SDS. If the
parties determine that the cancellation would have a
material effect on other SDS's or the Initial Conversion
schedule, then the parties shall reasonably negotiate the
terms upon which the other SDS's or the Initial Conversion
schedule would be amended, and FTIS shall have the right to
authorize SunGard to suspend work on such other SDS's
during such negotiations. Such terms may include a
modification of the schedule or budget for the other SDS's,
or such other terms as may be agreeable to the parties. If
the parties agree in writing on one or more amended SDS's,
such amended SDS's shall be substituted for the original
SDS's, and both parties will be bound by the terms of the
amended SDS's. If the parties fail to agree on one or more
amended SDS's, the original SDS's will remain in effect,
provided that any period during which work was suspended
shall be added to the schedule under such SDS's.
2.6 Specific Deliverables.
(a) Day One Class A Deliverables. With respect to the Day One
Class A Deliverables, the parties have agreed on the SRAs
specified in Exhibit A as well as the accompanying
schedule, and SunGard has proposed SDS's corresponding to
such SRAs, but FTIS has not yet accepted all of such
SDS's. FTIS shall promptly provide responses to all such
SDS's not already accepted as of the Effective Date.
SunGard shall deliver the Day One Class A Deliverables with
functionality corresponding to the SRAs specified in
Exhibit A pursuant to the schedule specified in such
Exhibit and pursuant to the Initial Conversion schedule.
If FTIS' responses require a change to one or more SDS's
not accepted as the Effective Date and such change requires
a material increase in the Developer Hours budgeted by
SunGard for such SDS, then SunGard shall have the right to
refuse to implement such change unless FTIS also agrees to
a modification of the schedule for such SDS (which may
include treating the modification as a Day One Class B
Deliverable or a Day One Deferred Deliverable) or a
modification of the Initial Conversion schedule. In such
event, both parties will act reasonably in attempting to
meet such schedules and in negotiating alterations if
necessary.
(b) Day One Class B Deliverables. The Day One Class B
Deliverables are specified in Exhibit B hereto.
(i)Agreed-upon SRAs. With respect to the Day One Class B
Deliverables, the parties have agreed on the SRAs
specified in Exhibit B as well as the accompanying
schedule, and SunGard has proposed partial SDS's
corresponding to such SRAs, but without complete
specification of all budget information. Promptly after
the Effective Date, SunGard shall provide FTIS proposed
amended SDS's corresponding to the Day One Class B
Deliverable SRAs identified in Exhibit B. Each such
amended SDS shall specify the same functionality and
schedule as the original corresponding SDS, but shall
also specify a budget, in terms of Developer Hours, for
development. Each such proposed amended SDS shall be
treated, for purposes of the SDS review and acceptance
procedure specified above, as if such proposed amended
SDS constituted an SDS newly delivered to FTIS. If FTIS
requires a change to one or more SDS's not accepted as
of the Effective Date and such change requires a
material increase in the Developer Hours budgeted by
SunGard for such SDS, then SunGard shall have the right
to refuse to implement such change unless FTIS also
agrees to a modification of the schedule for such SDS or
a modification of the Initial Conversion schedule. In
such event, both parties will act reasonably in
attempting to meet such schedules and in negotiating
alterations if necessary.
(ii) Interfaces and reports. In addition to the SRAs
specified in Exhibit B, the Day One Class B Deliverables
shall also include certain interface and report
functionality. Certain of such interface and report
functionality is specified in Exhibit B. Promptly after
the Effective Date, FTIS will supplement the Exhibit B
description of such functionality with a complete
description, and will provide SunGard with a reasonable
prioritization list for such interface and report
functionality. SunGard's obligation to provide such
interface and report functionality pursuant to the Day
One Class B schedule shall be limited to providing 3,000
hours for interface functionality and 2,000 hours for
report functionality. Prior to the delivery dates
specified in such schedule, SunGard shall devote such
hours to such functionality, following the
prioritization order provided by FTIS. Any such
functionality not complete within such budget shall
become a Day One Deferred Deliverable, and shall be
delivered according to a schedule and budget to be
agreed upon by the parties.
(c) Day One Deferred Deliverables and Day Two Deliverables.
FTIS has provided SunGard with SRAs corresponding to
requested Day One Deferred and Day Two Deliverables.
SunGard's response to such SRAs shall be delivered to FTIS
within sixty (60) days after Completion of Initial
Conversion. In responding to such SRAs, SunGard shall
prioritize delivery of Day One Deferred Deliverables over
Day Two Deliverables.
(d) Requested Enhancements. FTIS has not yet provided SRAs to
SunGard corresponding to Requested Enhancements. Such
SRAs may be provided at any time during the term of this
Agreement. SunGard shall have no obligation to provide any
response to any SRA proposing a Requested Enhancement until
sixty (60) days following the Completion of Initial
Conversion, with the exception of SRAs seeking modification
of interfaces between Investar and FTIS subsystems designed
to modify the output of dates from Investar to the
subsystems in such a manner as to adequately handle dates
during and after the year 2000. SunGard shall respond to
any such SRAs within the normal response time provided
above. Any such response shall specify that work shall be
completed within four (4) months of the acceptance of the
SDS.
(e) Eliminated subsystems. By December 31, 1997, SunGard will
provide to FTIS a list of existing FTIS subsystems that will
be eliminated through incorporation of subsystem functionality
into the Software prior to January 1, 2000.
3. Scalability.
3.1 Scalability Target. The Scalability Target shall be calculated
as follows:
(a) Completion of Initial Conversion. The Scalability Target as
of the Completion of Initial Conversion shall be as
specified in Exhibit M.
(b) Subsequent scalability. At the end of each calendar quarter
after the first full calendar quarter following the
Completion of Initial Conversion, the Scalability Target
will be set as specified in Exhibit M
(c) Acquisitions. FTIS shall provide notice of any acquisition
of Acquired Accounts as follows: six (6) months notice of
any acquisition involving an increase of POAs of six
percent (6%) or less and twelve (12) months notice of any
acquisition involving an increase of POAs of greater than
six percent (6%). For these purposes, the percentage
increase of POAs shall be calculated by comparing the
number of Accounts to be acquired with the number of POAs,
both numbers calculated as of the date of such notice.
Providing that proper notice has been given, the
Scalability Target shall be increased by the number of POAs
given in such notice, such increase to take effect as of
the date of closing of such acquisition or as of the date
when such notice runs, whichever is later, such increase to
be added to the existing Scalability Target as of the date
such increase takes effect.
3.2 Performance Requirements. Subject to the requirements of this
Agreement, including Sections 7.1and 7.2, the Software will be
required to meet all Performance Requirements when running with
actual Processed Open Accounts, if the number of Processed Open
Accounts is equal to or less than the Scalability Target. The
Software shall not be required to meet the Performance Requirements
if running with actual Processed Open Accounts in excess of the
Scalability Target; provided, however, that during any such period
the Software shall continue to be able to meet the Performance
Requirements if running with a number of Processed Open Accounts
which equals the Scalability Target. In any period during which the
number of Processed Open Accounts exceeds the Scalability Target,
SunGard will undertake commercially reasonable good faith efforts to
render the Software capable of continuing to meet the Performance
Requirements. Nothing herein contained shall require the Software to
meet the Performance Requirements for a volume of Processed Open
Accounts which exceeds the number actually in existence.
3.3 Cost of Modifying the Software for Scalability Purposes. In general,
SunGard shall be solely responsible for any work required in order
to modify the Software as may be required to meet the Scalability
Target, and such work shall be At No Additional Cost to FTIS.
Notwithstanding the foregoing, FTIS shall be responsible for any
incremental cost required for tuning for any acquisition of Acquired
Accounts involving an increase of POAs of greater than 10% (ten
percent), such percentage to be calculated at the time of giving
notice of such acquisition, as specified in Section 3.1(c). In such
event, tuning required in order to meet the Scalability Targets in
effect during the notice period shall be At No Additional Charge to
FTIS, but tuning required in order to meet scalability required for
such Acquired Accounts shall be Chargeable to FTIS. The parties
recognize that it may be difficult to differentiate costs incurred
in order to meet Scalability Targets during the notice period and
costs incurred in order to meet the requirements of the additional
Acquired Accounts, and the parties will negotiate reasonably in
attempting to determine the cost to be borne by FTIS. If the parties
are unable to agree on such cost, the matter will be submitted to
the dispute resolution process specified in Section 15. FTIS will
make any payment required hereunder within thirty (30) days of
conversion of the Acquired Accounts, unless the parties are unable
to agree on the amount of such payment, in which event the timing of
the payment shall be specified pursuant to the dispute resolution
process.
4. Correction of Non-Conformities.
4.1 General. During the term of this Agreement, SunGard shall use
commercially reasonable efforts to correct Non-Conformities pursuant
to the procedures specified in this Section. FTIS shall use
commercially reasonable efforts to cooperate in such SunGard
correction efforts, including but not limited to, promptly providing
to SunGard (i) all documentation, examples, source data and other
information regarding each Non-Conformity as is reasonably possible
for FTIS to provide and (ii) all potentially relevant information
regarding data center management and system performance and, (iii)
if FTIS was responsible for production control during any period
when the Non-Conformity occurred, all potentially relevant
information regarding production control.
4.2 Procedure.
(a) Notification. Each party shall use commercially reasonable
efforts to discover Non-Conformities, and shall inform the
other of any Non-Conformities promptly once discovered.
(i)Discovery by FTIS. When and if FTIS discovers a Class
One Non-Conformity, FTIS shall immediately report such
Class One Non-Conformity to SunGard using the Calling
List. If the first person on the Calling List is not
available when FTIS attempts to contact such person, or
if SunGard fails to respond to such call, then FTIS
shall continue calling the persons on the Calling List
(in the order listed) until contact is made and SunGard
responds to the call. When and if FTIS discovers a Class
Two Non-Conformity, FTIS shall report such Class Two
Non-Conformity using written reporting procedures
consistent with the parties' past practices, unless FTIS
determines, in its reasonable judgment, that such Class
Two Non-Conformity is sufficiently important to be
reported to SunGard by telephone, in which case FTIS
shall use the Calling List procedure set forth above,
but shall identify the Non-Conformity as a Class Two
Non-Conformity.
(ii) Discovery by SunGard. When and if SunGard discovers a
Class One Non-Conformity, SunGard shall immediately
report such Class One Non-Conformity to the president of
FTIS, or, in the event such individual is unavailable,
to the most senior representative of FTIS available on
immediate notice. When and if SunGard discovers a Class
Two Non-Conformity, SunGard shall report such Class Two
Non-Conformity using written reporting procedures
consistent with the parties' past practices, unless
SunGard determines, in its reasonable judgment, that
such Class Two Non-Conformity is sufficiently important
to be reported to FTIS by telephone, in which event
SunGard shall promptly report such Class Two
Non-Conformity to the appropriate FTIS personnel.
(b) SunGard response. SunGard shall use commercially
reasonable efforts to respond to FTIS reports of
Non-Conformities through off-site telephone consultation,
assistance and advice within fifteen (15) minutes for Class
One Non-Conformities and within one (1) hour for Class Two
Non-Conformities that are reported by FTIS by telephone,
but, in any event, SunGard shall respond within no more
than one (1) hour to reports of Class One Non-Conformities
and within no more than four (4) hours to reports of Class
Two Non-Conformities that are reported by FTIS by
telephone.
(c) Class One Non-Conformities. Upon detecting or being
notified of a Class One Non-Conformity, SunGard shall
immediately assemble the appropriate personnel to analyze
the problem, identify potential solutions and determine the
best plan of action. FTIS shall participate in this
process as reasonably necessary. Once an appropriate plan
of action is determined, SunGard shall take all reasonably
necessary steps to supply a reasonable work-around or
correction as soon as possible. This shall include
assigning qualified, dedicated staff to work on the
Non-Conformity 24 hours a day, seven days per week, at
either the SunGard site or a Processing Site as necessary.
SunGard personnel shall be dedicated to resolving the
Non-Conformity until an acceptable work-around or
correction is supplied or until FTIS determines in its
reasonable judgment after consultation with SunGard that a
work-around or correction cannot be produced. A SunGard
representative shall keep FTIS regularly informed of the
status of the Non-Conformity correction process.
(d) Class Two Non-Conformities. For any Class Two
Non-Conformities, SunGard shall work with FTIS to document
the Non-Conformity through mutually established procedures
consistent with the parties' past practices. Class Two
Non-Conformities shall be resolved according to priorities
reasonably established by SunGard after consultation with
FTIS. SunGard personnel shall be dedicated to resolving
Class Two Non-Conformities through SunGard's normal
software support procedures.
4.3 Fault Determination. The parties will cooperate reasonably to
investigate any suspected or confirmed Non-Conformity to determine
if the Non-Conformity is a SunGard-Caused Non-Conformity. If the
parties are unable to agree whether a Non-Conformity is a
SunGard-Caused Non-Conformity, such dispute will be subject to the
dispute resolution procedures of Section 15. In any such
arbitration, FTIS shall have the burden to establish, by a
preponderance of the evidence, that any Non-Conformity first
manifested while FTIS was responsible for production control is a
SunGard-Caused Non-Conformity, whether or not such Non-Conformity is
similar to a Non-Conformity previously reported.
4.4 Compensation. SunGard's investigation and correction of
SunGard-Caused Non-Conformities shall be At No Additional Charge to
FTIS and SunGard shall not be entitled to reimbursement of
Reimbursable Expenses incurred in connection therewith. SunGard's
investigation and correction of Non-Conformities other than
SunGard-Caused Non-Conformities shall be Chargeable to FTIS. In the
event the parties agree that the ultimate responsibility for a
Non-Conformity is unclear or is shared, the parties may agree to any
allocation of the cost of investigation and correction that the
parties determine to be reasonable.
5. SunGard Development.
5.1 Defined Deliverables.
(a) Day One Class A Deliverables. SunGard shall devote sufficient
resources to ensure timely completion of the Day One Class A
Deliverables and agrees that the Day One Class A Deliverables
shall be completed without the imposition of any hourly
development charges to FTIS.
(b) Dedicated Developer Hours. SunGard shall provide Dedicated
Developer Hours for development of Day One Class B
Deliverables, Day One Deferred Deliverables, Day Two
Deliverables or Requested Enhancements. Such Dedicated
Developer Hours shall be provided to FTIS without the
imposition of any hourly development charges. The number
of Dedicated Developer Hours to be provided by SunGard
shall be calculated by taking the number of Developer Hours
used by SunGard from July 1, 1997 through the Effective
Date, other than Developer hours used during such period
related to Day One Class A Deliverables, and subtracting
that number from 44,325. For purposes of calculation of
the Dedicated Developer Hours, within seven (7) days of the
Effective Date, SunGard shall notify FTIS of the number of
Developer Hours used by SunGard from July 1, 1997 through
the Effective Date, other than Developer Hours used during
such period related to Day One Class A Deliverables.
(c) Additional Developer Hours. To the extent that Day One Class B
Deliverables, Day One Deferred Deliverables, Day Two
Deliverables or Requested Enhancements require Developer Hours
in excess of the Dedicated Developer Hours, such excess
Developer Hours shall be Chargeable to FTIS.
5.2 FTIS Hours.
(a) After Completion of Initial Conversion and throughout the
remainder of the term of this Agreement, SunGard shall
provide FTIS a pool of hours for services ("FTIS Hours").
Such services shall include: (i) assistance in the
operation of the Software; (ii) help desk support; (iii)
training; (iv) new conversions, representing customers of
FRI Clients newly managed by FRI or any FRI Affiliate; (v)
custom development; and (vi) maintenance, support and other
services provided by SunGard hereunder to the extent that
FTIS Hours are used therefor in accordance with this
Agreement.
(b) In assigning personnel to tasks using FTIS Hours, SunGard
shall use reasonable efforts to maintain continuity of
personnel. Notwithstanding the foregoing, SunGard shall
have the right, in its reasonable discretion, to assign
tasks using FTIS Hours to various SunGard employees and
individual contractors, so long as such employees and
individual contractors are qualified for such tasks, it
being understood that both parties will benefit if SunGard
personnel who have responsibilities for multiple customers
are sometimes assigned to tasks using FTIS Hours.
(c) On a monthly basis, FTIS and SunGard shall consult
regarding the types of tasks being performed using FTIS
Hours, as well as the types of tasks anticipated by the
parties. SunGard shall provide personnel suited to the
anticipated tasks. FTIS shall act reasonably in any
request that the mix of tasks be altered in such a manner
as to require the assignment of different personnel by
SunGard, and shall provide SunGard at least three (3)
months notice prior to requiring any such alteration.
(d) Beginning the first complete month after Completion of
Initial Conversion, SunGard shall provide FTIS with two
thousand eight hundred thirty-three (2,833) FTIS Hours per
month. SunGard shall provide FTIS with an additional one
hundred forty-two (142) hours per month for each seven
hundred fifty thousand (750,000) Processed Open Accounts
by which the Processed Open Accounts exceeds five million
(5,000,000). Such additional hours shall be provided
beginning three (3) months following the month in which
such 750,000 Processed Open Accounts came into existence.
In the event that Processed Open Accounts grow to a level
requiring additional hours per month, but later sink below
that level, SunGard's requirement to provide such
additional hours shall terminate three (3) months following
the month in which such Processed Open Accounts sank below
such level. Notwithstanding the foregoing, SunGard's
requirement to provide FTIS Hours shall never decrease
below 2,833 FTIS Hours per month, subject to FTIS' right to
require a lower amount, as specified below. All FTIS Hours
shall be provided monthly on a non-cumulative basis with no
carry-forward of unused hours to subsequent months.
(e) After completion of the first twelve (12) month period
following the Completion of Initial Conversion, FTIS shall
have the right to decrease (in increments of 1,700 hours
per year) the number of FTIS Hours below SunGard's current
minimum requirement (as based on the number of Processed
Open Accounts), or to increase such number (in increments
of 1,700 hours per year) up to the current minimum (as
based on the number of Processed Open Accounts), if the
number had previously been reduced. FTIS' right to alter
the number of FTIS Hours shall be exercisable on three (3)
months' notice to SunGard, and shall be exercisable no more
than once in any twelve (12) month period.
(f) For each twelve (12) month period during which the FTIS
Hours are reduced below the current SunGard minimum
requirement (as based on the number of Processed Open
Accounts), FTIS shall receive a credit of $100,000 for each
such reduction of 1,700 FTIS Hours. Such credit shall be
applied against compensation otherwise due SunGard pursuant
to this Agreement. In the event that such a reduction
applies for a period of less than twelve months, FTIS shall
receive a pro-rated credit.
(g) SunGard shall maintain records sufficient to show the FTIS
Hours worked each month, and shall report such information to
FTIS on a monthly basis.
5.3 Additional Services.
(a) In general. If, following the Completion of Initial
Conversion, the maintenance, support, development and other
requirements of FTIS exceed that which can be provided through
the use of FTIS Hours, FTIS may, after reasonable consultation
with SunGard, require that SunGard assign additional personnel
to such requirements, subject to the terms and conditions of
this Section.
(b) Rates for Additional Services. For work performed through
the end of 1998, such personnel shall be billed at a rate
not to exceed the rate specified in Exhibit M.
(c) Increase in rates. Increases in rates for Additional Services
shall take place no more than once annually, with the earliest
such increase to take place no earlier than January 1, 1999.
Any such increase shall be calculated in accordance with the
formula specified in Exhibit M.
5.4 Updates and Enhancements.
(a) Development not requested by FTIS. During the term of this
Agreement, and consistent with SunGard's past practices,
SunGard shall continue to devote resources to maintenance
and updating of Investar and/or Investar*ONE. Accordingly,
from time to time, at its own cost and expense, and in
accordance with its past practice, SunGard shall develop
updates and enhancements to such products. SunGard shall
provide such updates and enhancements to FTIS. If SunGard
charges other SunGard customers for such updates and
enhancements, the parties shall negotiate regarding whether
a charge shall be imposed on FTIS for such updates and
enhancements. Both parties shall be reasonable in such
negotiations, which shall conform generally to the past
practices of the parties with respect to charges for
updates and enhancements. If the parties agree that a
charge should be imposed on FTIS, FTIS shall have the
right, at its option, to apply available FTIS Hours to such
charge, with such FTIS Hours to be valued at the
then-current cost for Additional Services. No charge for
updates or enhancements not requested by FTIS shall be
imposed if FTIS notifies SunGard that FTIS has no need of
the new functionality incorporated in such update or
enhancement. In such event, FTIS shall install such update
or enhancement, subject to the other provisions of this
Agreement, but shall pay no update or enhancement charge
until and unless FTIS uses any material part of such new
functionality.
(b) Requested Enhancements. If SunGard incorporates a
Requested Enhancement into a new enhancement to software
made available to third parties, and if SunGard charges
third parties for such enhancement, then SunGard shall
provide FTIS with a credit reflecting a reasonable
allocation of the amount of such charges to third parties,
such credit to take the form of a credit against Account
Fees, and to be capped at the amount of the payment made by
FTIS for such enhancement, calculated either by the dollar
amount paid by FTIS for Additional Services or by an
attributed dollar amount for FTIS Hours used for such
development, calculated by multiplying the number of such
hours used by the then-current hourly rate for Additional
Services.
6. Delivery, Installation and Conversion.
6.1 Testing by Third Party Vendors. At FTIS' request set forth in an
SRA, SunGard shall cooperate reasonably with FTIS in providing
Software to Third Party Vendors for testing in accordance with
reasonable test plans and procedures set forth by such vendors, such
delivery to occur sufficiently in advance of the scheduled delivery
date for such Software to allow for completion of reasonable testing
and revision of the Software in light of testing results (if
necessary) prior to such scheduled delivery date.
6.2 Manner of Delivery. SunGard shall deliver Software by providing the
following to FTIS at each Processing Site designated by FTIS: (i)
two (2) executable copies of such Software, and (ii) two (2) source
code versions of such Software. SunGard shall deliver Documentation
by delivering ten (10) hard copies and one machine-readable copy of
associated Documentation.
6.3 Installation.
(a) Acceptance testing. Following delivery of Software by
SunGard, SunGard shall install such Software in a test
environment maintained by FTIS at a single Processing Site
reasonably designated by FTIS, following which FTIS shall
perform initial testing to determine whether such Software
appears to contain material Non-Conformities. Such testing
will be completed within the Testing Period, and SunGard
shall have the right to observe and reasonably participate
in such testing. If FTIS discovers material
Non-Conformities during such testing, FTIS shall have the
right to reject such Software until and unless such
material Non-Conformities have been substantially
corrected. In the event of such a rejection, such Software
will be deemed non-delivered until and unless conforming
Software has been delivered. If the parties disagree
regarding whether Software contains material
Non-Conformities, such dispute may be submitted to the
arbitration procedures specified in this Agreement.
Neither such FTIS initial testing, nor any statement by
FTIS that the Software does not appear to contain
Non-Conformities, shall waive or otherwise affect SunGard's
obligation to correct Non-Conformities in accordance with
the terms of this Agreement.
(b) Installation. If FTIS notifies SunGard that delivered
Software does not appear to contain material
Non-Conformities, or if the Testing Period passes with no
identification of actual or suspected material
Non-Conformities by FTIS, or if FTIS authorizes SunGard to
install the Software in a production environment, then FTIS
will be deemed to have accepted such Software. In such
event, SunGard shall install such Software in production
environments in such Processing Sites as may be reasonably
designated by FTIS. This Section 6.3(b) shall not apply to
any delivery of Investar*ONE which takes place prior to
acceptance and installation of Investar*ONE pursuant to the
provisions of Section 2.4(b). Such delivery shall be
governed by the provisions of such section.
(c) Subsequent installation. Following initial installation at
Processing Sites designated by FTIS, and throughout the
term of this Agreement, FTIS shall have the right, upon
reasonable notice, to designate additional Processing Sites
for installation of previously delivered and installed
Software. In such event, SunGard shall undertake such
installation pursuant to terms and conditions to be agreed
by the parties and such SunGard services shall be
Chargeable to FTIS.
(d) Installation prior to Completion of Initial Conversion.
Notwithstanding any of the foregoing provisions, prior to
the Completion of Initial Conversion, SunGard shall be
responsible for installation at the FTIS Processing Site
located in St. Petersburg, Florida and at the FTIS
Processing Site in Rancho Cordova, California. Prior to
Completion of Initial Conversion, the sole use made of the
Software at the Rancho Cordova Processing Site shall be for
scalability testing and to perform read-only functions and
prepare reports during that time period. Notwithstanding
the foregoing, in the event that a disaster adversely
affects processing at the St. Petersburg Processing Site
prior to Completion of Initial Conversion, SunGard shall
reasonably cooperate with FTIS in shifting installation and
processing to the Rancho Cordova Processing Site.
Subsequent to the Completion of Initial Conversion, FTIS
shall have the right, upon reasonable notice, to require
that SunGard install the Software at additional Processing
Sites chosen by FTIS, subject to the other provisions of
this Agreement.
6.4 Conversion.
(a) Schedule. SunGard shall meet the deadlines specified in the
Initial Conversion schedule and shall meet any other
Conversion deadlines which may be specified in SDS's agreed to
by the parties.
(b) Requirements. Conversion shall take place pursuant to
procedures mutually agreed by the parties, which procedures
shall minimize any necessary disruption to the operations of
FTIS, FRI or any FRI Affiliate.
(c) Cost.
(i) Initial Conversion. Initial Conversion shall be
performed by SunGard At No Additional Charge to
FTIS.
(ii) Conversion necessitated by new Deliverables. Any
Conversion necessitated by the delivery of new
Deliverables by SunGard (other than Initial Conversion)
shall be accomplished within the budget specified in the
associated SDS(s).
(iii) Conversion necessitated by Acquired Accounts. In the
event that FRI or any FRI Affiliate acquires Acquired
Accounts which require Conversion in order to run on
Software previously installed by SunGard, SunGard shall
undertake such Conversion pursuant to terms and
conditions to be agreed by the parties, and such
conversion services shall be Chargeable to FTIS.
6.5 Legacy System. For a period of thirty (30) days following the
Initial Conversion of any Account previously serviced by SunGard
pursuant to the 1981 Agreement, SunGard shall At No Additional
Charge to FTIS maintain existing data as of the time of such
Conversion and legacy systems for such Account, so as to allow
processing for such Account to be shifted back if necessary, it
being understood that, if processing is shifted back, data changes
made since the date of such Conversion may need to be reinput. In
the event such a reversion becomes necessary, the parties shall
negotiate regarding payment for the cost of such reversion and of
processing under such legacy system, and shall submit such dispute
to arbitration if no agreement is reached. In any such dispute, the
parties' relative fault shall be taken into account in setting such
costs. Notwithstanding the foregoing, there shall be a rebuttable
presumption that SunGard shall be paid for processing pursuant to
the most recent prices paid by FTIS for MPS processing under the
1981 Agreement, if the reversion to the legacy system is not due to
any fault of SunGard.
7. Processing.
7.1 Operating Environment. It shall be FTIS' responsibility, at its
expense, to procure and maintain an operational Operating
Environment for each Processing Site in sufficient time to allow
SunGard to meet the schedules required under this Agreement.
7.2 Modifications to the Operating Environment. SunGard shall have the
right to propose modifications to the Operating Environment. SunGard
shall not propose any such modifications unless SunGard has
implemented such modifications in its own processing center, or will
implement such modification as of the effective date of the
modification proposed by SunGard, or such modification is, in
SunGard's reasonable judgment, necessary to meet Performance
Requirements related to scalability or otherwise to handle growth in
Account volume processed under this Agreement.
(a) Non-material modifications. If proposed Operating Environment
modifications do not impose a material cost on FTIS, Exhibit G
shall be amended to incorporate such modification, and FTIS
shall implement such modification within a time period which
is reasonable under the circumstances.
(b) Material modifications. SunGard shall consult with FTIS
prior to proposing a modification to the Operating
Environment which imposes a material cost on FTIS. Any
such material modification shall not be imposed on less
than one (1) years' notice or such shorter period as may be
reasonable under the circumstances. If SunGard proposes a
material modification to the Operating Environment, FTIS
shall, within a reasonable time period, determine whether
it is willing to implement such modification. If FTIS
determines that it is willing to implement such
modification, Exhibit G shall be amended to incorporate
such modification and FTIS shall implement such
modification within the notice period. If FTIS determines
that it is not willing to implement such modification, FTIS
shall so notify SunGard. In such event, SunGard shall
propose a percentage increase in the amount of Account Fees
(the "proposed increase"). If FTIS agrees to the proposed
increase, then (i) the Account Fees shall be increased
through the remaining term of this Agreement by the
proposed increase, (ii) such modification to the Operating
Environment shall not take effect, and (iii) SunGard shall
continue to perform all of its obligations under this
Agreement, except that SunGard's obligations under Section
5.4 to develop periodic updates and enhancements of the
Software shall apply only to the version of the Software
maintained by SunGard in its service bureau environment,
and SunGard shall have no liability for any failure to meet
the Performance Requirements to the extent caused by the
failure to modify the Operating Environment. If FTIS
refuses to agree to the proposed increase, then (i) the
proposed increase shall be treated as a percentage decrease
in the Account Fees, which decreased Account Fees shall
remain in effect through the remaining term of this
Agreement, (ii) SunGard shall continue to perform all of
its obligations under this Agreement, except that SunGard's
obligation under Section 5.4 to develop periodic updates
and enhancements of the Software as used by FTIS shall
apply only to the version of the Software maintained by
SunGard in its service bureau environment, SunGard shall
have no liability for any failure to meet the Performance
Requirements to the extent caused by the failure to modify
the Operating Environment and SunGard shall have no further
liability for Non-Conformities other than to use reasonable
efforts to investigate and correct Non-Conformities in
accordance with Section 4.2, provided that all such
investigations and corrections shall be Chargeable to FTIS,
and (iii) the then current minimum requirement for FTIS
Hours shall be reduced by a percentage equal to the amount
of the proposed increase.
7.3 Operation.
(a) Data center management. FTIS shall be responsible for
data center management. In accordance with normal industry
standards, FTIS shall monitor the performance of the system
on an ongoing basis and will implement reasonable hardware
tuning or improvements, including, without limitation, disk
cache increases, in order to maximize throughput and
minimize I/O time. Such changes shall not include any
changes to the Operating Environment. Although FTIS shall
not be contractually obligated to meet the following
requirements, the Performance Requirements shall be waived
for any period during which any of the following
requirements are not met:
(i) a reasonable number of message regions must be
allocated to support IMS message activity;
(ii) a reasonable number of initiators must be allocated
to achieve optimum throughput for production jobs;
(iii) Investar has the highest application priority, which may
be shared only with other critical applications as
agreed, and provided that Investar never has less than
60 MIPS available to it; or
(iv) average daily system utilization of the MVS LPAR in
which Investar production executes will not exceed 90%
during both on-line production and batch processing.
(b) Production control. During the period prior to Completion
of Initial Conversion, SunGard shall provide production
control from SunGard's facility in San Mateo At No
Additional Charge to FTIS. Following Completion of Initial
Conversion, SunGard shall continue to provide production
control from such facility, or from such other SunGard
facility as SunGard may reasonably designate, with such
production control services to be Chargeable to FTIS, until
FTIS assumes responsibility for production control. FTIS
shall provide reasonable notice once it intends to assume
responsibility for production control. At such time,
SunGard and FTIS shall cooperate in transferring such
responsibility from SunGard to FTIS.
8. SunGard Services.
8.1 Training. FTIS Trainers shall have primary responsibility for
End-User training. Pursuant to the terms and conditions of this
Section, SunGard shall train such FTIS Trainers. Such training shall
take place in a professional manner in accordance with standard
industry practices. The parties will cooperate in scheduling any
training required of SunGard hereunder, and FTIS will provide
reasonable notice of training requests to SunGard. If, in SunGard's
reasonable judgment, a proposed FTIS Trainer is unable or unwilling
to be properly trained, SunGard shall notify FTIS of such judgment,
and FTIS shall replace such proposed FTIS Trainer.
(a) Prior to Completion of Initial Conversion. Prior to
Completion of Initial Conversion, SunGard shall provide
training to a reasonable number of FTIS Trainers sufficient
to provide such FTIS Trainers with a thorough understanding
of the Deliverables and to allow such FTIS Trainers to
adequately train other personnel regarding use of such
Deliverables. Such training shall take place At No
Additional Charge to FTIS.
(b) Subsequent training. Following Completion of Initial
Conversion, training of FTIS Trainers shall be Chargeable to
FTIS. In addition, FTIS may request training other than
training of FTIS Trainers, in which event SunGard shall
provide such training on reasonable notice, and such training
shall be Chargeable to FTIS.
8.2 Support. Pursuant to the terms and conditions specified below in
this Section, SunGard shall provide reasonable support for operation
of the Software, including help desk support and reasonable
consultation.
(a) Prior to Completion of Initial Conversion. Prior to
Completion of Initial Conversion, SunGard shall provide
reasonable support to FTIS At No Additional Charge to
FTIS.
(b) Subsequent support. Following Completion of Initial
Conversion, SunGard support shall be Chargeable to FTIS.
8.3 Disaster Recovery. FTIS shall be solely responsible for disaster
recovery. Notwithstanding the foregoing, in the event of a
disaster, SunGard shall provide reasonable support to FTIS to
assist FTIS in resuming full operation, including providing
additional copies of the Deliverables as may be necessary. Any
such support shall be Chargeable to FTIS.
9. Compensation.
9.1 Initial Payment. Pursuant to the First Amended MOU, the Second
Amended MOU and the Third Amended MOU, FTIS has paid to SunGard an
Advance in the amount of three million two hundred fifty thousand
dollars ($3,250,000). Upon execution of this Agreement, FTIS shall
pay SunGard the additional amount of four million two hundred fifty
thousand dollars ($4,250,000). The cumulative total of seven million
five hundred thousand dollars ($7,500,000) shall be referred to
herein as the "Initial Payment." The Initial Payment is being made
and has been made due to the significant development, installation
and conversion costs being incurred by SunGard prior to the
Completion of Initial Conversion.
9.2 Account Fees. During the term of this Agreement, and subject to
Section 1.1, FTIS shall pay SunGard a fee based on the number of
Processed Open Accounts. Such fee shall be calculated as specified
in Exhibit M, subject to a minimum of five hundred thousand dollars
($500,000) per month, which shall apply beginning the first full
month after the Completion of Initial Conversion, such minimum to be
calculated before application of Section 9.3. Such fee shall be paid
within thirty (30) days of the end of the month to which the fee
pertains.
9.3 Modification of Account Fees. Account Fees otherwise due and
owing to SunGard pursuant to pursuant to Section 9.1 may be
modified as follows:
(a) Account Fees otherwise due and owing to SunGard shall be
reduced by one hundred fifty-five thousand, six hundred
eighty-seven dollars and sixty-seven cents ($155,687.67)
per month for each of the first sixty (60) months following
the Completion of Initial Conversion. In addition, the
Account Fees due and owing for the first full month
following the Completion of Initial Conversion shall be
reduced by an amount equal to fifty-six thousand two
hundred and fifty dollars ($56,250.00) multiplied by the
number of months (full and partial) between the Effective
Date and the Completion of Initial Conversion, and, if the
amount of such total reduction for such first month
following the Completion of Initial Conversion exceeds the
Account Fees for such month, then any balance shall serve
as a reduction in the Account Fees due and owing for each
subsequent month until such balance is reduced to zero.
(b) If SunGard misses an Initial Conversion Date, or Software
contains a Class One Non-Conformity which constitutes a
SunGard-Caused Non-Conformity, the parties agree that the
value of the Software to FTIS will be reduced during such
period. In such event, the Account Fees payable by FTIS
shall be reduced by 10%. Such reduction will apply to the
Account Fees payable for the entirety of any month if such
condition existed during any portion of such month, if the
condition constituted (i) a failure to meet an Initial
Conversion Date, (ii) a Class One Non-Conformity which was
not promptly corrected, or (iii) repeated Class One
Non-Conformities during the month, even if each such
Non-Conformity was promptly corrected. Such reduction will
apply only to Account Fees payable for any day(s) during
which such condition existed, if the failure constituted a
Class One Non-Conformity which was promptly corrected,
unless repeated Class One Non-Conformities occurred during
such month. Such a reduction shall not be imposed
unilaterally by FTIS, but shall be imposed only by an
arbitrator following an arbitration in which the burden
shall be on FTIS to establish the existence and duration of
the condition justifying such reduction by a preponderance
of the evidence. In such event, the amount of any damages
which would otherwise be awarded to FTIS based on or
arising out of such condition shall be reduced by the
amount of such reduction in Account Fees.
(c) If SunGard misses an SDS schedule other than an Initial
Conversion schedule and such schedule miss is material, or
Software contains a Class Two Non-Conformity which
constitutes a SunGard-Caused Non-Conformity and which is
both material and not promptly corrected, the parties agree
that the value of the Software to FTIS may be reduced
during such period, and an arbitrator may reduce Account
Fees payable for a month by up to 5% if such a condition
existed during some or all of such month. If such
condition existed for less than an entire month, any such
reduction shall be applied pro rata for a reasonable
portion of such month, taking into account the severity of
the problem, provided that such period may be longer or
shorter than the actual period of such condition. Such a
reduction shall not be imposed unilaterally by FTIS, but
shall be imposed only by an arbitrator following an
arbitration in which the burden shall be on FTIS to
establish the existence and duration of the condition
justifying such reduction by a preponderance of the
evidence. In such event, the amount of any damages which
would otherwise be awarded to FTIS based on or arising out
of such condition shall be reduced by the amount of such
reduction in Account Fees.
(d) On the seventh, eighth and ninth anniversaries of the
Completion of Initial Conversion, SunGard shall have the right
to increase the Account Fees applicable to Incremental
Accounts by the Increase in the CPI, plus two percent (2%).
9.4 Expenses. FTIS shall reimburse SunGard for Reimbursable Expenses
incurred by SunGard in the course of the SRA/SDS process, and in
providing development, training and related services from December
1, 1996 through the Effective Date, and FTIS shall reimburse SunGard
for Reimbursable Expenses incurred by SunGard in the course of
providing services under this Agreement, except as this Agreement
may expressly provide to the contrary. SunGard shall provide an
invoice, copies of receipts and other supporting documentation
within two (2) months of the date of such expense, except that such
documentation for expenses incurred before the Effective Date shall
be provided within two (2) months after the Effective Date. FTIS
shall reimburse SunGard for such Reimbursable Expenses within thirty
(30) days of receipt of such documentation.
9.5 Taxes. The fees and other amounts payable by FTIS to SunGard under
this Agreement do not include any taxes of any jurisdiction that may
be assessed or imposed upon the copies of the Software and
Documentation delivered to FTIS, the license granted under this
Agreement or the services provided under this Agreement, or that may
be otherwise assessed or imposed in connection with the transactions
contemplated by this Agreement, including sales, use, excise, value
added, personal property, export, import and withholding taxes,
excluding only taxes based upon SunGard's net income and taxes
similar to or in lieu of income taxes that are based upon SunGard's
revenues. FTIS shall directly pay any such taxes assessed against
it, and FTIS shall promptly reimburse SunGard for any such taxes
payable or collectable by SunGard.
9.6 Late Payment. If FTIS fails to make any payment required hereunder,
FTIS shall not be in breach of this Agreement for such failure
unless FTIS fails to make such payment within seven (7) business
days after receipt of SunGard's notice that such payment was not
made by the date required hereunder (the "due date"). If FTIS
disputes whether a payment is required hereunder, FTIS shall be
entitled to withhold such payment pending resolution of such dispute
pursuant to the provisions of Section 15, and such act of
withholding shall not constitute a breach of this Agreement unless
FTIS continues to withhold such payment in violation of an
arbitration decision. If the arbitrator(s) assigned to such dispute
determines that FTIS' position was incorrect but reasonable, FTIS
shall be ordered to pay the amount due plus reasonable interest
(which shall be no lower than SunGard's then most recent cost of
funds rate) from the due date. If the arbitrator(s) assigned to such
dispute determines that FTIS' position was incorrect and
unreasonable, FTIS shall be ordered to pay the amount due plus
reasonable interest (which shall be no lower than SunGard's then
most recent cost of funds rate) from the due date plus liquidated
damages of two percent (2%) of such disputed amount, multiplied by
the number of months (full or partial) between the due date and the
date of payment, the parties being in agreement that in such event
the actual damages would be difficult or impossible to calculate and
such liquidated damages would be a reasonable measure of such
damages.
10. Licenses and Ownership.
10.1 License by SunGard. SunGard grants FTIS, FRI and FRI Affiliates (the
"licensees") a limited, world-wide, non-exclusive license under all
relevant SunGard Intellectual Property Rights which inhere in or are
relevant to any of the Deliverables, and which are necessary to
exercise the rights set forth in Subsections (a) and (b) of this
Section 10.1, subject to the terms and conditions of this Agreement.
(a) License rights regarding Software. The license to Software
shall include and be limited to the following rights: (i)
the right to execute the Software only for the purpose of
providing shareholder accounting processing and related
services for FRI Clients and providing related services to
End Users, including the right to make any copies
necessarily made in the course of such execution, such
right limited to execution at Processing Sites; (ii) the
right to make one backup/archive copy; (iii) the right to
disclose Discloseable Items to FRI Clients, End Users and
Third Party Vendors, whether or not located at Processing
Sites; (iv) the right, subject to the requirements of
Section 12, to create or have created FTIS Enhancements;
and (v) the right to disclose the Software to Third Party
Vendors approved by SunGard pursuant to Section 11 on a
need-to-know basis.
(b) License rights regarding Documentation. The license to
Documentation shall include the following rights: (i) the
right to make copies of Documentation; (ii) the right to
modify Documentation; (iii) the right to provide End User
Documentation to FRI Clients, End Users and Third Party
Vendors; (iv) the right to provide Customer Documentation
to employees and individual contractors of FTIS, FRI and
FRI Affiliates on a need-to-know basis and subject to the
non-disclosure obligations of Section 11; and (v) the right
to disclose the Customer Documentation to Third Party
Vendors approved by SunGard pursuant to Section 11 on a
need-to-know basis.
(c) Term. The licenses extended hereunder shall terminate at
the later of: (i) the expiration or termination of this
Agreement, or (ii) the expiration of any Reasonable
Transition Period.
(d) License limitations. Except as otherwise permitted
pursuant to this Agreement, or with the prior written
consent of SunGard, the licensees will not, nor will they
permit any FRI Client, End User or third party to, (i) use
any Proprietary Item for any purpose, at any location or in
any manner, (ii) license, sublicense, market, sell or
otherwise distribute any Proprietary Item, (iii) make or
retain any copy of any Proprietary Item, (iv) refer to or
use any Proprietary Item as part of any effort to develop a
program having functional attributes, visual expressions or
other features similar to those of the Software or to
otherwise compete with SunGard, (v) modify, adapt,
translate or create derivative works based upon any
Proprietary Item, or combine or merge any part of any
Proprietary Item with or into any other software or
documentation, or (vi) remove, erase or tamper with any
copyright or other proprietary notice printed or stamped
on, affixed to, or encoded or recorded in any Proprietary
Item.
(e) FTIS liability. FTIS shall be liable for any breach of the
provisions of this Section 10.1 or of Section 11 by any FRI
Affiliate, FRI Client, Third Party Vendor or End User to which
FTIS has disclosed or made available any information subject
to such provisions.
10.2 License by FTIS. FTIS grants SunGard a limited, perpetual,
world-wide, non-exclusive, royalty-free license under all relevant
FTIS Intellectual Property Rights which inhere in or are relevant to
any of the ideas, methods, algorithms, formulae and concepts
incorporated in SRAs conveyed to SunGard and which are necessary to
allow SunGard to (i) use such ideas, methods, algorithms, formulae
and concepts, and (ii) incorporate such ideas, methods, algorithms,
formulae and concepts into materials, including computer programs,
and documentation, to be provided by SunGard to third parties, and
to exploit such ideas, methods, algorithms, formulae and concepts
for SunGard's commercial purposes.
10.3 Ownership.
(a) SunGard ownership. Title to all Proprietary Items and all
Discloseable Items will remain exclusively in SunGard.
(b) FTIS ownership. The provisions of Subsection (a) of this
Section shall not apply to any ideas, methods, algorithms,
formulae and concepts which are currently owned by and used
in the course of business of FTIS, FRI or FRI Affiliates,
or to those ideas, methods, algorithms, formulae and
concepts which may be disclosed by FTIS, FRI or any FRI
Affiliate to SunGard pursuant to this Agreement. Title to
all such ideas, methods, algorithms, formulae and concepts
will remain exclusively in FTIS, FRI or FRI Affiliates.
(c) Exceptions. Notwithstanding the provisions of Subsections
(a) and (b) of this Section, (i) nothing herein contained
shall limit either party's right to use any ideas, methods,
algorithms, formulae or concepts which are owned by such
party, in the public domain or owned by any third party
(subject to such third party's rights), including ideas,
methods, algorithms, formulae or concepts incorporated in
the Proprietary Items, (ii) nothing herein contained shall
limit any disclosure right expressly granted to FTIS
pursuant to this Agreement, including the right to disclose
Discloseable Items.
11. Confidentiality.
11.1 Definition of Confidential Information. This Confidentiality Section
shall apply to any information conveyed by one party hereunder to
the other party, or learned by either party from the other during
the course of dealings between the parties. Such information shall
constitute Confidential Information if (1) the information is
specifically identified as confidential when conveyed or learned, or
(2) the information is of a type that the other party should
reasonably recognize as confidential, or is conveyed under
circumstances which the other party should reasonably recognize as
denoting confidentiality. Without limitation of the foregoing, (1)
FTIS acknowledges that Proprietary Items (subject to the limitations
contained in Sections 10.3(b) and (c)) are trade secrets,
Confidential Information and proprietary property of SunGard, having
great commercial value to SunGard, and that the development and
design of the Proprietary Items have involved and will involve the
expenditure by SunGard of substantial amounts of time and money and
the use by SunGard of skilled experts; (2) information regarding the
business or financial condition of either party constitutes
Confidential Information; (3) information regarding the business or
technical plans or prospects of either party constitutes
Confidential Information; and (4) the terms of this Agreement
constitute Confidential Information. Notwithstanding the foregoing,
or anything else in this Agreement, Discloseable Items shall not
constitute Confidential Information.
11.2 Nondisclosure and Nonuse of Confidential Information. The receiving
party will undertake reasonable precautions to avoid inadvertent
disclosure of Confidential Information, such precautions to be at
least as extensive as those taken to protect confidential
information belonging to the receiving party. The receiving party
will not disclose, publish, or disseminate Confidential Information
to anyone other than the following individuals, each of whom must
have a need to know in order to carry out the receiving party's
rights or obligations under this Agreement, and each of whom must
have been informed of and agreed to be bound by the receiving
party's obligations relating to disclosure and use restrictions
hereunder: (1) employees, (2) individual contractors engaged by the
receiving party (directly or through an agency) who sign written
non-disclosure agreements, and (3) Third Party Vendors (other than
agencies providing individual contractors) engaged by FTIS, but only
to the extent that SunGard authorizes disclosure to each such Third
Party Vendor in writing, such authorization to be not unreasonably
withheld. The receiving party agrees to take reasonable precautions
to prevent any unauthorized use, disclosure, publication, or
dissemination of Confidential Information. The receiving party
agrees to accept Confidential Information for the sole purpose of
carrying out the receiving party's rights and obligations under this
Agreement. The receiving party agrees not to use Confidential
Information otherwise for its own or any third party's benefit
without the prior written approval of an authorized representative
of the disclosing party in each instance. The receiving party shall
have the right to disclose Confidential Information as strictly
necessary for compliance with legal or regulatory requirements,
including subpoenas. Prior to any such disclosure, the receiving
party shall provide reasonable notice to the disclosing party, and
shall cooperate in any effort by the disclosing party to petition
the authority compelling such disclosure for an order that such
disclosure not occur or that such disclosure occur pursuant to terms
and conditions designed to ensure continued confidentiality.
11.3 Limitations on Confidentiality. The receiving party's obligations
hereunder with respect to any Confidential Information shall
terminate when the receiving party can document that: (a) such
Confidential Information has become generally available to the
public through no fault on the part of the receiving party; (b) the
conveying party has made such Confidential Information available to
other parties without any obligation of confidentiality; (c) the
receiving party rightfully had such Confidential Information in its
possession, free of any obligation of confidentiality to the
disclosing party, prior to disclosure by the disclosing party; (d)
such Confidential Information was independently developed by the
receiving party independently of and without reference to any
Confidential Information; (e) the receiving party rightfully
obtained such Confidential Information from a third party with the
right to transfer or disclose it without any obligation of
confidentiality; or (f) such Confidential Information does not
constitute a Proprietary Item and was first conveyed to the
receiving party more than seven (7) years previously.
11.4 Return of Tangible Materials. Upon expiration or termination of this
Agreement, and following a Reasonable Transition Period, within
thirty (30) business days of receipt of written request by the
disclosing party, the receiving party will return to the disclosing
party all documents, records and copies thereof containing
Confidential Information and will certify in writing to the
disclosing party that all copies of Confidential Information have
been permanently deleted or destroyed, including copies installed in
computer memory, on computer disks, tapes or other media. For
purposes of this section, the term "documents" includes all
information fixed in any tangible medium of expression, in whatever
form or format.
12. FTIS Enhancements.
12.1 In General. Subject to the restrictions contained in this Section,
nothing herein contained shall be deemed to restrict FTIS' right to
develop FTIS Enhancements, or to have FTIS Enhancements developed by
third parties. FTIS shall refrain from developing any FTIS
Enhancement, or having any FTIS Enhancement developed, unless and
until FTIS has proposed an SRA corresponding to such FTIS
Enhancement, and such SRA has been withdrawn by FTIS after receipt
of a response from SunGard or has resulted in an SDS which has been
rejected or canceled by FTIS.
12.2 Use of Deliverables. FTIS may make use of Documentation and
Discloseable Items in creating FTIS Enhancements, and may disclose
such information to Third Party Vendors for the purpose of having
FTIS Enhancements developed, subject to the nondisclosure procedure
of Section 11, provided, however, that, if Proprietary Items are to
be disclosed to Third Party Vendors for such purpose, such Third
Party Vendors must be approved in advance by SunGard pursuant to the
provisions of Section 11.2.
12.3 Restrictions on FTIS Enhancements. FTIS Enhancements shall not
incorporate or modify the Software source or object code or modify
the database structure, data structures or file structures used by
the Software. Notwithstanding the foregoing, nothing contained in
this Section 12.3 shall limit FTIS' right to develop FTIS
Enhancements which modify the structure or organization of data
which has been output from the database used by the Software, as
long as such data is not reinput into such database, or to develop
FTIS Enhancements which translate data into the format used by the
Software, in order to facilitate storage of such data in the
database used by the Software.
12.4 Limitation of SunGard Obligations. FTIS acknowledges that
modifications and additions to input and output of the Software
could affect compliance of the Software with the Performance
Requirements. SunGard shall have no liability for any
Non-Conformities to the extent attributable to any FTIS Enhancement.
13. Certain FTIS Obligations.
13.1 Access to Facilities and Personnel. FTIS shall provide SunGard
access to the Processing Sites and to FTIS' equipment and personnel,
and shall otherwise cooperate with SunGard as reasonably necessary
for SunGard to perform its installation, testing, conversion,
training, maintenance, support and other obligations under this
Agreement.
13.2 FTIS Resources. FTIS shall devote such facilities, personnel and
other resources as are reasonably necessary, in FTIS' good faith
judgment, to test and install the Software.
13.3 Use of Software. Except as may be otherwise expressly provided for
herein, FTIS shall use the Software in production to process those
Accounts identified in the Initial Conversion Schedule, as well as
new Accounts generated through the normal expansion of business.
Notwithstanding the foregoing, FTIS shall have no obligation to use
the Software to process Acquired Accounts, unless FTIS has given
SunGard notice pursuant to Section 3.1(c), in which event FTIS shall
use the Software in production to process those Acquired Accounts
actually acquired in connection with such transaction, beginning as
soon as is reasonably practicable after closing of such transaction.
13.4 Non-U.S. Processing Site. If FTIS designates a Processing Site
located in a country other than the United States, FTIS shall be
solely responsible for compliance with all laws and regulations of
(i) the United States which apply to export of any of the
Deliverables to such country; and (ii) such other country, including
those relating to compliance with import and export requirements,
requirements of registration of this Agreement or the Deliverables,
and laws and regulations related to possession, use or remote use of
the Deliverables. This Section 13.4 shall not limit SunGard's
responsibility for SunGard-Caused Infringement, except to the extent
that such SunGard-Caused Infringement would not have occurred had
FTIS complied with all laws and regulations of such country other
than laws or regulations conveying an Intellectual Property Right to
the third party seeking to enforce such Intellectual Property Right
against FTIS.
13.5 Export Control. FTIS shall not export any of the Deliverables,
or authorize any other party to export any of the Deliverables:
(i) into (or to a national resident of) any country to which the
U.S. has embargoed goods, (which currently include Cuba, Iraq,
Libya, Sudan, North Korea, Iran and Syria); or (ii) to anyone on
the U.S. Treasury Department's list of Specially Designated
Nationals or the U.S. Commerce Department's Table of Denial
Orders.
13.6 Data Accuracy. FTIS shall be exclusively responsible for, and
SunGard shall have no liability with respect to, the accuracy of
data and other information which is input into the Software by
anyone other than SunGard, including, without limitation, data
generated, obtained or gathered by FTIS or any FRI Affiliate, FRI
Client, End User or Third Party Vendor, and any errors in data
output or Non-Conformities caused by the input of erroneous data
shall be FTIS' sole responsibility.
13.7 Data Use. SunGard shall have no responsibility for nor any liability
for any loss or damage resulting from any use or misuse of the
results obtained from the use of any Software or services provided
under this Agreement, provided, however, that this Section 13.7
shall not apply to any damage resulting from use of inaccurate data
resulting from a Non-Conformity (to the extent that such damages
constitute direct damages to FTIS).
13.8 Backups. Consistent with normal industry standards, FTIS shall
establish and maintain appropriate control and backup procedures
designed to reduce any loss of information that could result from
any interruption or delay in processing or from any Non-Conformity.
Such procedures shall include maintaining duplicate copies of data
and such other measures as may be reasonably consistent with normal
industry practices.
13.9 Review of Data and Discovery of Non-Conformities. Consistent with
normal industry standards, FTIS shall establish and maintain
appropriate procedures to reasonably review data output from the
Software and the operation of the Software. In the event that FTIS
discovers Non-Conformities, FTIS shall promptly inform SunGard of
such Non-Conformities. In the event that FTIS fails to inform
SunGard of a Non-Conformity after discovery, or after FTIS
reasonably should have discovered such Non-Conformity in the
exercise of reasonable care, SunGard shall have no liability to FTIS
for any damages or losses incurred following the date of such
discovery or the date on which FTIS reasonably should have made such
discovery, whichever is earlier; provided, however, that this
Section 13.9 shall not affect SunGard's obligation to correct any
such Non-Conformity in accordance with the terms of this Agreement.
13.10 Account Purging. FTIS shall periodically purge Account data and
closed Accounts from the database used by the Software in a manner
consistent with the parties' past practices and normal industry
practices.
14. Term/Termination/Transition Services.
14.1 Term. Subject to the terms and conditions of the Agreement, the
Agreement shall be effective from the date of execution and continue
for a period of ten (10) years from and after Completion of Initial
Conversion.
14.2 Termination for Material Breach. Subject to the terms and conditions
of the Agreement, either party ("terminating party") may provide
written notice of material breach to the other party ("breaching
party"). The terminating party may then terminate the Agreement for
material breach by providing written notice of termination, if such
breach remains uncured for a period of thirty (30) days following
such notice of breach; provided, however, that (i) such right to
terminate shall lapse if the breaching party cures such breach prior
to exercise of such right to terminate, and (2) if, following
receipt of the notice of breach, the breaching party promptly begins
and diligently prosecutes a reasonable cure of such breach, then the
breaching party may dispute the materiality of the breach, and the
grounds for termination, under Section 15 of this Agreement. In the
event of such a dispute, the termination will not take effect until
an arbitrator has determined that the agreement is in material
breach, although, in such event, the termination will be deemed to
have taken effect as of the date of the original notice of
termination. In particular, and without limitation of the foregoing,
this Agreement may be declared in material breach if (a) SunGard
misses an Initial Conversion Date or Software contains a Class One
Non-Conformity which constitutes a SunGard-Caused Non-Conformity and
SunGard fails to promptly provide a reasonable correction or
work-around; (b)(i) SunGard fails to meet an SDS schedule or
Software contains a Class Two Non-Conformity which constitutes a
SunGard-Caused Non-Conformity, (ii) such failure is material and is
particularly egregious or damaging, and (iii) SunGard fails to
promptly cure such failure within a reasonable period under the
circumstances; (c) FTIS fails to make payment to SunGard, subject to
the provisions of Section 9.6; or (d) FTIS fails to process Accounts
on the Software as contemplated by Section 13.3, and such failure is
particularly egregious or damaging and FTIS fails to promptly cure
such failure within a reasonable period under the circumstances.
14.3 Effect of Termination for Material Breach.
(a) Termination by FTIS. If FTIS terminates this Agreement for
material breach, in addition to any other rights and
remedies FTIS might otherwise have, SunGard shall be
required to pay to FTIS those sums specified in Exhibit J.
SunGard shall be entitled to retain any Account Fees
previously paid by FTIS and other amounts previously paid
or then owing by FTIS. This Section 14.3(a) shall not
limit the ability of an arbitrator or arbitration panel to
enter any additional award against SunGard.
(b) Termination by SunGard. If SunGard terminates the
Agreement for material breach, in addition to any other
rights and remedies SunGard might otherwise have, SunGard
shall be entitled to retain the Initial Payment as well as
any Account Fees and other amounts previously paid or then
owing by FTIS. This Section 14.3(b) shall not limit the
ability of an arbitrator or arbitration panel to enter any
additional award against FTIS.
14.4 Transition Services.
(a) For a Reasonable Transition Period after the expiration or
termination of this Agreement, including termination for
material breach by either party, SunGard shall continue to
(i) to the extent applicable, provide data processing
services to FTIS in accordance with the terms of the 1981
Agreement for any MPS Accounts not successfully converted
as of the date of such expiration or termination, and (ii)
to the fullest extent possible under the circumstances,
perform all obligations under this Agreement with respect
to Accounts successfully converted as of the date of such
expiration or termination, subject to performance by FTIS
of its obligations under this Agreement, including its
obligations to pay Account Fees and other amounts due
hereunder. All such processing and/or services shall be
subject to the payment terms and conditions of the 1981
Agreement and/or this Agreement, as applicable.
(b) In connection with the expiration or termination of the
Agreement, including termination for material breach by
either party, SunGard shall comply with FTIS' reasonable
directions to effect the orderly transition and migration
of all or any of the Accounts to an alternative system
designated by FTIS. The parties shall jointly develop and
follow a transition plan setting forth the respective tasks
to be accomplished by each party in connection with such
orderly transition and migration and a schedule pursuant to
which the tasks are to be completed, with such SunGard
services to be Chargeable to FTIS. During a Reasonable
Transition Period following such expiration or termination,
SunGard shall continue to perform its obligations under
this Agreement, subject to performance by FTIS of its
obligations under this Agreement, including its obligation
to pay Account Fees and other amounts due hereunder.
Notwithstanding the foregoing, if the transition assistance
provided by SunGard shall require resources beyond those
otherwise then being provided by SunGard under this
Agreement, FTIS shall compensate SunGard for such
additional resources as Additional Services.
(c) Nothing herein contained shall serve to limit FTIS' right to
disclose Discloseable Items to third parties whom FTIS is
considering or has decided to select as a replacement for
SunGard.
14.5 Survival. The following Sections shall survive termination or
expiration of this Agreement: 9, 10, 11, 14, 15, 16, 17, 19, 21,
23.
15. Dispute Resolution.
15.1 Resolution by the Parties. Prior to submitting any dispute for
resolution in accordance with Section 15.3 or 15.4, the parties
shall make a good faith attempt to resolve such dispute through
negotiation involving the project managers. If the project managers
are unable to resolve such dispute, the dispute shall be submitted
for negotiations involving more senior management at the following
levels: for FTIS: the President; for SunGard: the Chief Executive
Officer of SunGard's Trust & Shareholder Systems Group or of SunGard
Data Systems. If such negotiations fail to reach a resolution within
seven (7) business days, either party shall be free to initiate
arbitration proceedings.
15.2 Arbitration. All disputes arising out of or relating to this
Agreement shall be settled by binding arbitration, to be carried out
in San Mateo County, California, or in such other jurisdiction as
the parties may mutually designate. Either party shall have seven
(7) business days to seek reconsideration of any arbitration
decision. If neither party seeks reconsideration, or if
reconsideration is denied, the arbitration decision shall become
final and binding on both parties and shall be enforceable in any
court of law. All arbitration proceedings, results and all documents
prepared in connection with any arbitration shall be confidential
and shall not be disclosed to any person other than the parties to
the proceedings, their counsel, witnesses and experts, the
arbitrator(s), the special master (if any), or, if involved, the
court and court staff. All documents filed with the arbitrators or
with a court shall be filed under seal, unless the court denies
permission to file documents under seal.
15.3 Abbreviated Arbitration Procedures. If a dispute arises which cannot
be resolved pursuant to Section 15.1, the parties may agree to an
abbreviated arbitration procedure before a single neutral arbitrator
jointly selected by the parties. If the parties are unable to agree
to use the abbreviated arbitration procedure, the dispute shall be
resolved pursuant to the full arbitration procedure specified in
Section 15.4.
(a) Commencement. An abbreviated arbitration shall be
commenced by written notification from one party to the
other party specifying the nature of the dispute and
proposing abbreviated arbitration. If the other party
agrees to the abbreviated arbitration procedure, or if the
other party fails to respond within seven (7) days of
receipt of such notice, the abbreviated arbitration
procedure shall be used.
(b) Selection of arbitrator. The parties shall promptly agree on
appointment of a single neutral arbitrator. In the event the
parties are unable to agree upon an arbitrator within thirty
(30) days of commencement of the arbitration, either party
shall have the right to convert the arbitration to a full
arbitration under Section 15.4.
(c) Procedures. An abbreviated arbitration shall be handled in an
informal manner and without discovery, but shall include a
cooperative sharing by the parties of clearly relevant
information. Procedures shall be by mutual agreement of the
parties or, failing mutual agreement, shall be as specified by
the arbitrator.
(d) Decision. The decision of the arbitrator shall be provided
to the parties within sixty (60) days of commencement of
the arbitration.
15.4 General Arbitration Procedures.
(a) Commencement. A general arbitration shall be commenced by (i)
written notification from one party to the other party
specifying the nature of the dispute and demanding general
arbitration, or (ii) as specified in Section 15.3.
(b) Selection of arbitrator. Disputes shall be decided by a
panel of three (3) neutral arbitrators selected by mutual
agreement of the parties. If within sixty (60) days of
initiation of the arbitration procedure, the parties have
not agreed upon a panel of neutral arbitrators, either
party may petition the Superior Court of the State of
California in and for the County of San Mateo or the
District Court for the Northern District of California for
the appointment of such panel. If, in their opinion it
would be useful to do so, the arbitrators may select a
special master with the appropriate qualifications to
understand and review any technical and/or business issues
raised by the claim(s).
(c) Procedures. If requested by a party, or otherwise deemed
necessary by the arbitrators, the parties will conduct
discovery of a scope and nature as agreed upon by the
parties, or, if the parties are unable to agree, as
specified by the arbitrators. Hearings and other
proceedings shall be subject to procedures agreed upon by
the parties, or if the parties are unable to agree, as
specified by the arbitrators.
(d) Decision. A written decision of the arbitrators shall be
rendered within thirty (30) days after the conclusion of the
arbitration hearings and shall set forth in detail the reasons
for such decision, which shall be based on applicable law.
16. Remedies; Limitations of Liability.
16.1 General. In any arbitration arising out or related to this
Agreement, the arbitrator(s) shall have the power to award equitable
relief and damages as provided by law for the particular claim(s)
asserted.
16.2 Attorneys' Fees and Costs. In any litigation or arbitration arising
out or related to this Agreement, reasonable costs and attorneys'
fees shall be awarded to the prevailing party. For purposes of this
provision, the "prevailing" party shall be that party the positions
of which have been substantially vindicated, even if the other party
has nominally prevailed in the dispute. The award of attorneys' fees
and costs may be reduced or eliminated if, taking into account the
significance of the issues at stake, and the overall cost of the
dispute resolution, the prevailing party is deemed to have acted
unreasonably in bringing the claims or in defending against them.
16.3 Interlocutory Relief. Notwithstanding the requirement that all
disputes be resolved by binding arbitration, either party may
request a temporary restraining order or other interlocutory relief
from any court with jurisdiction. Neither the making of such a
request, nor the granting of interlocutory relief, shall serve to
waive either party's right to seek arbitration.
16.4 Limitations of Liability.
(a) EXCEPT FOR THE PARTIES' RESPECTIVE INDEMNIFICATION
OBLIGATIONS AS PROVIDED IN SECTIONS 19.1 AND 19.2 HEREOF,
NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY
INCIDENTAL, CONSEQUENTIAL, SPECIAL, OR PUNITIVE DAMAGES OF
ANY KIND OR NATURE, INCLUDING, WITHOUT LIMITATION, SUCH
DAMAGES ARISING FROM ANY BREACH OF THIS AGREEMENT OR ANY
TERMINATION OF THIS AGREEMENT, WHETHER SUCH LIABILITY IS
ASSERTED ON THE BASIS OF CONTRACT, TORT (INCLUDING
NEGLIGENCE OR STRICT LIABILITY), OR OTHERWISE, EVEN IF THE
OTHER PARTY HAS BEEN ADVISED OR WAS AWARE OF THE
POSSIBILITY OF SUCH LOSS OR DAMAGES. THE LIMITATIONS OF
LIABILITY OF THIS SECTION 16.4(a) SHALL NOT EXTEND TO
LIABILITY ARISING OUT OF ACTIONS WHICH ARE WILLFUL,
DELIBERATE OR RECKLESS.
(b) EXCEPT FOR FTIS' OBLIGATIONS UNDER SECTION 9, AND EXCEPT
FOR THE PARTIES' RESPECTIVE INDEMNIFICATION OBLIGATIONS AS
PROVIDED IN SECTIONS 19.1 AND 19.2 HEREOF, NEITHER PARTY
SHALL BE LIABLE TO THE OTHER PARTY FOR DIRECT DAMAGES IN AN
AMOUNT EXCEEDING FIVE MILLION DOLLARS ($5,000,000) PER
TWELVE (12) MONTH PERIOD AND TWENTY MILLION DOLLARS
($20,000,000) IN THE AGGREGATE DURING THE ENTIRE TERM OF
THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, DIRECT
DAMAGES ARISING FROM ANY BREACH OF THIS AGREEMENT OR ANY
TERMINATION OF THIS AGREEMENT, WHETHER SUCH LIABILITY IS
ASSERTED ON THE BASIS OF CONTRACT, TORT (INCLUDING
NEGLIGENCE OR STRICT LIABILITY) OR OTHERWISE. IN THE EVENT
THAT THIS AGREEMENT IS TERMINATED FOR MATERIAL BREACH, AND
THE OTHER PARTY ACCEPTS SUCH TERMINATION OR AN ARBITRATOR
DETERMINES THAT THE AGREEMENT WAS MATERIALLY BREACHED AND
WAS PROPERLY TERMINATED, THE FOREGOING FIVE MILLION DOLLAR
($5,000,000) ANNUAL LIMITATION SHALL NOT APPLY TO ANY
LIABILITY ASSESSED FOR SUCH BREACH, BUT THE TWENTY MILLION
DOLLAR ($20,000,000) AGGREGATE LIMITATION SHALL APPLY
THERETO. THE LIMITATIONS OF LIABILITY OF THIS SECTION
16.4(b) SHALL NOT EXTEND TO LIABILITY ARISING OUT OF
ACTIONS WHICH ARE WILLFUL, DELIBERATE OR RECKLESS.
(c) THE PARTIES HAVE FREELY AND OPENLY NEGOTIATED THIS AGREEMENT,
INCLUDING BUT NOT LIMITED TO THE PRICING TERMS HEREOF, WITH
THE KNOWLEDGE THAT THE LIABILITY OF THE PARTIES IS TO BE
LIMITED IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT.
(d) SunGard shall have no liability with respect to any failure
to meet a schedule, including any Initial Conversion
schedule, failure to meet a Performance Requirement,
Non-Conformity, claim of infringement or other matter to
the extent attributable to (i) any unauthorized or improper
use or modification of any Deliverable, (ii) any authorized
modification of any Deliverable made by FTIS or on behalf
of FTIS by any individual or entity other than SunGard,
(iii) any unauthorized combination of any Deliverable with
any other software, documentation or other item, or (iv)
any breach of any provision of this Agreement by FTIS or
any FRI Affiliate, FRI Client or End User.
17. Audit Procedures.
17.1 Record Keeping. During the term of this Agreement, and for a period
of three (3) years thereafter, each party shall maintain accurate
and complete records relating to and documenting each party's
performance hereunder, including, without limitation of the
foregoing, records on the following subjects: (i) for SunGard: (a)
Developer Hours used, (b) Additional Services performed; (c)
Reimbursable Expenses submitted; (d) terms of agreements with third
parties entered into by SunGard which relate to delivery of any
Deliverables to such third party; and (e) FTIS Hours used; (ii) for
FTIS, with respect to each Processing Site: (a) the number of
Accounts, including Processed Open Accounts being processed each
month; (b) data center management; (c) production control; and (d)
computer hardware, software and infrastructure used for processing
hereunder. Such records will be maintained for a minimum of three
(3) years and in a manner consistent with normal industry practices
for the maintenance of significant records.
17.2 Audit Right. From time to time during the term of this Agreement,
each party shall have the right to appoint either its own employees
or individual contractors or an independent firm of certified public
accountants reasonably acceptable to the other party to audit the
other party's books and records relating to obligations under this
Agreement, and/or review the other party's operations and facilities
pertaining to its obligations under this Agreement. Any such auditor
must agree to execute the audited party's standard form of
non-disclosure agreement requiring that information learned be held
in strict confidence, except as may be necessary to report
conclusions to the auditing party and to explain the basis for such
conclusions. Audits shall occur no more frequently than annually and
shall be conducted in a manner that does not interfere unreasonably
with the audited party's business activities. An audit may cover any
period within the preceding two (2) years unless such period has
been previously audited. The Audit Cost shall be borne by the
auditing party unless such audit results in a finding of a
discrepancy the reasonable value of which exceeds one hundred fifty
percent (150%) of the Audit Cost, in which event the Audit Cost
shall be borne by the audited party. If an audit reveals a
discrepancy, the audited party shall promptly cure such discrepancy,
unless the audited party disputes the existence or extent of such
discrepancy, in which event the audited party shall have the right
to invoke the dispute resolution procedures of this Agreement. In
such dispute resolution procedures, the cost of the audit shall be
treated as an expense for purposes of reimbursement to the
prevailing party.
18. Representations and Warranties.
18.1 FTIS Representations and Warranties. FTIS hereby represents and
warrants to SunGard that:
(a) FTIS has the full corporate right, power and authority to
enter into this Agreement and to perform the acts required of
it hereunder, and to grant the rights granted by it hereunder;
(b) the execution of this Agreement by FTIS, and the
performance by FTIS, FRI and FRI Affiliates of their
obligations and duties hereunder, do not and will not
violate any agreement by which any of them is bound, and
FTIS shall not enter into any agreement of any nature
whatsoever that would: (i) prohibit FTIS from performing
its obligations to SunGard hereunder; or (ii) constitute a
breach of any of FTIS' representations, warranties or
covenants hereunder;
(c) FTIS is not aware of any material claim, or threat of material
claim, by any third party that any of the ideas, methods,
algorithms, formulae and concepts referred to in Section 10.2
hereof or any FTIS Enhancements violate any Intellectual
Property Right of any third party; and
(d) FTIS has obtained or will obtain all third party licenses,
permits and authorizations necessary for FTIS to use and
operate the Operating Environment at all Processing Sites.
18.2 SunGard Representations and Warranties. SunGard hereby
represents and warrants to FTIS that:
(a) SunGard has full corporate right, power and authority to enter
into this Agreement, to perform the acts required of it
hereunder, and to grant the rights granted by it hereunder;
(b) the execution of this Agreement by SunGard, and the
performance by SunGard of its obligations and duties
hereunder, do not violate any agreement to which SunGard is
a party or by which it is otherwise bound, and SunGard
shall not enter into any agreement of any nature whatsoever
that would: (i) prohibit SunGard from performing its
obligations to FTIS hereunder; or (ii) constitute a breach
of any of SunGard's representations, warranties or
covenants;
(c) SunGard is not aware of any material claim, or threat of
material claim, by any third party that any of the
Deliverables violate any Intellectual Property Right of any
third party.
18.3 Disclaimer. EXCEPT AS EXPRESSLY STATED IN THIS AGREEMENT, NEITHER
PARTY HAS MADE OR IS MAKING, DIRECTLY OR INDIRECTLY, ANY WARRANTIES
OR REPRESENTATIONS, ORAL OR WRITTEN, EXPRESS OR IMPLIED. IN
PARTICULAR, AND WITHOUT LIMITATION, SUNGARD MAKES NO SUCH WARRANTIES
OR REPRESENTATIONS REGARDING ANY SOFTWARE OR OTHER DELIVERABLE, ANY
SERVICES PROVIDED HEREUNDER, OR ANY OTHER MATTER PERTAINING TO THIS
AGREEMENT, INCLUDING BUT NOT LIMITED TO ANY EXPRESS OR IMPLIED
WARRANTIES OR REPRESENTATIONS REGARDING SUITABILITY, DURABILITY,
MERCHANTABILITY, QUALITY, CONDITION, FITNESS FOR A PARTICULAR
PURPOSE, OR CONFORMITY TO ANY REPRESENTATION OR DESCRIPTION.
19. Indemnification.
19.1 SunGard's Indemnification. SunGard shall indemnify, defend and hold
harmless FTIS, FRI and FRI Affiliates, and each of their respective
officers, directors, employees and individual contractors from and
against any and all Claims by any party other than an FRI Affiliate
arising from or in connection with (i) any willful misconduct of
SunGard in the performance of this Agreement; (ii) SunGard's failure
to comply with federal, state or local law; and (iii) any
SunGard-Caused Infringement. SunGard shall indemnify, defend and
hold harmless FTIS, FRI and FRI Affiliates, and each of their
respective officers, directors, employees and individual contractors
from and against any and all Claims by any FTIS Unrelated Party
arising from or in connection with: (i) a material breach by SunGard
of this Agreement or the covenants, representations or warranties of
SunGard provided herein; (ii) any negligent act, or negligent
omission of SunGard in the performance of this Agreement. FTIS shall
give SunGard prompt written notice of the assertion of any such
Claim. SunGard shall assume defense of such Claim at its own expense
and with counsel of its own choosing. At SunGard's expense, FTIS
shall render assistance in this defense as reasonably requested by
SunGard. FTIS shall be entitled to participate in any such action or
proceeding at its own expense with counsel of its own choosing.
Nothing in this Section 19.1 shall serve to limit any obligation
SunGard might otherwise have pursuant to this Agreement to
compensate FTIS for direct damages suffered by FTIS, including
damages suffered as a result of any claim brought against FTIS by
any other party, to the extent that such damages constitute direct
damages to FTIS.
19.2 FTIS' Indemnification. FTIS shall indemnify, defend and hold
harmless SunGard, SunGard Data Systems and SunGard Affiliates, and
each of their respective officers, directors, employees and
individual contractors, harmless from and against any and all Claims
by any party other than a SunGard Affiliate arising from or in
connection with (i) any willful misconduct of FTIS in the
performance of this Agreement; (ii) FTIS' failure to comply with
federal, state or local law; (iii) any violation of any law or
regulation of any non-United States jurisdiction in which FTIS
locates a Processing Site caused by operation of the Software, with
the exception of laws or regulations relating to SunGard-Caused
Infringement; and (iv) any Franklin-Caused Infringement. FTIS shall
indemnify, defend and hold harmless SunGard, SunGard Data Systems
and SunGard Affiliates, and each of their respective officers,
directors, employees and individual contractors from and against any
and all Claims by any SunGard Unrelated Party arising from or in
connection with: (i) a material breach by FTIS of this Agreement or
the covenants, representations or warranties of FTIS provided
herein; (ii) any negligent act, or negligent omission of FTIS in the
performance of this Agreement. SunGard shall give FTIS prompt
written notice of the assertion of any such Claim. FTIS shall assume
the defense of such Claim at its own expense with counsel of its own
choosing. SunGard shall render assistance in this defense as
reasonably requested by FTIS. SunGard shall be entitled to
participate in any such action or proceeding at its own expense with
counsel of its own choosing. Nothing in this Section 19.2 shall
serve to limit any obligation FTIS might otherwise have pursuant to
this Agreement to compensate SunGard for direct damages suffered by
SunGard, including damages suffered as a result of any claim brought
against SunGard by any other party, to the extent that such damages
constitute direct damages to SunGard.
19.3 SunGard-Caused Infringement. If any SunGard-Caused Infringement is
found to exist, in addition to any indemnity obligations which may
arise, SunGard shall promptly (1) procure, at SunGard's expense, the
right of FTIS to continue to use the affected Deliverables or (2)
alter such Deliverables so as to render such Deliverables
non-infringing, such alteration to be At No Additional Charge to
FTIS. If SunGard believes in its reasonable good faith judgment that
such a finding is likely, SunGard may take such steps in the
exercise of its reasonable, good faith discretion.
19.4 FTIS-Caused Infringement. If any FTIS-Caused Infringement involving
any Deliverables is found to exist, in addition to any indemnity
obligations which may arise, at FTIS' reasonable option, SunGard
shall promptly (1) procure, at FTIS' expense, the right of SunGard
and FTIS to continue to use the affected Deliverables or (2) alter
such Deliverables so as to render such Deliverables non-infringing,
which may, at FTIS' reasonable option, include an alteration to
remove that portion of such Deliverables which caused such
infringement, such alteration to be Chargeable to FTIS. If FTIS
believes in its reasonable good faith judgment that such a finding
is likely, FTIS may require such steps in the exercise of its
reasonable, good faith discretion.
20. Insolvency.
20.1 Right to Terminate. If SunGard institutes or is made a defendant in
any proceeding for its protection (if not dismissed within one
hundred eighty (180) days) under any bankruptcy, insolvency,
reorganization or receivership law or makes an assignment for the
benefit of creditors or is unable to meet its debts as they become
due for a period exceeding one hundred eighty (180) days, FTIS may
elect to terminate this Agreement and any licenses granted hereunder
immediately, by written notice to SunGard, without prejudice to any
right or remedy that FTIS may have including, but not limited to,
damages, to the extent that the same may be recoverable.
20.2 License of "Intellectual Property". All rights and licenses granted
under or pursuant to this Agreement by the parties with respect to
the Deliverables are, and shall otherwise be deemed to be, for
purposes of Section 365(n) of Title 11 of the United States Code
(the "Bankruptcy Code"), licenses of rights to "intellectual
property" as defined under Section 101 of the Bankruptcy Code. The
parties agree that if FTIS does not terminate this Agreement for
material breach by SunGard, FTIS, as a licensee of such rights and
licenses, shall retain and may fully exercise, provided it abides by
the terms of this Agreement, all of its rights and elections under
the Bankruptcy Code, including without limitation any and all rights
to upgrades of, and improvements made by SunGard whether such
upgrades and improvements arise prior or subsequent to the
commencement of a case under the Bankruptcy Code. The parties
further agree that, in the event that any proceeding shall be
instituted by or against SunGard (if not dismissed within one
hundred eighty (180) days) seeking to adjudicate it bankrupt or
insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief or composition of it or
its debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors, or seeking an entry of an order
for relief or the appointment of a receiver, trustee or other
similar official for it or any substantial part of its property, or
SunGard shall take any action to authorize any of the foregoing
actions (each a "Proceeding"), FTIS shall have the right, in the
event it has not terminated this Agreement hereunder, to retain and
enforce its rights under this Agreement, including, but not limited
to, the following rights; provided it abides by the terms of this
Agreement:
(a) the right to continue to use the Deliverables in accordance
with the terms and conditions of this Agreement; and.
(b) the right to access to all Deliverables as provided in this
Agreement, and the Deliverables, if not already in FTIS'
possession, shall be promptly delivered to FTIS upon any such
commencement of a Proceeding upon written request therefor by
FTIS, unless SunGard elects to continue to perform its
obligations under this Agreement.
21. Guarantee.
21.1 By SunGard Data Systems. SunGard's ultimate parent company, SunGard
Data Systems, Inc. guarantees the payment of all credits,
reimbursements, damages, indemnities and other amounts owed by
SunGard to FTIS under this Agreement and shall assume full
responsibility for payment of such amounts in the event that SunGard
is unable to pay such amounts.
21.2 By FRI. FTIS' parent company, FRI, guarantees the payment of all
fees, reimbursements, damages, indemnities and other amounts owed by
FTIS to SunGard under this Agreement and shall assume full
responsibility for payment of such amounts in the event that FTIS is
unable to pay such amounts.
22. SunGard Insurance. SunGard represents that Exhibit H is an accurate
list of the insurance policies maintained by SunGard Data Systems as of
the Effective Date for the benefit of SunGard Data Systems and all of
its direct and indirect subsidiaries, including SunGard. Promptly
after the Effective Date, FTIS shall be named as an additional insured
on SunGard Data Systems' liability insurance policies, and SunGard
shall deliver appropriate certificates of insurance to FTIS. SunGard
shall promptly notify FTIS of any material decrease in coverage or
other material adverse change with respect to SunGard Data Systems'
insurance policies. If FTIS reasonably determines that any such change
will require FTIS to incur a materially greater risk, then FTIS shall
give written notice to SunGard of such determination, explaining the
reasons therefor and requesting specific changes in SunGard Data
Systems' insurance policies. Any changes in SunGard Data Systems'
insurance policies that are agreed to by the parties shall be promptly
implemented. If the parties are unable to agree on changes to SunGard
Data Systems' insurance policies, then their dispute shall be resolved
in accordance with the provisions of Section 15 of this Agreement.
23. Miscellaneous.
23.1 Cooperation. Each party shall use commercially reasonable efforts to
cooperate with the other party in connection with the performance of
this Agreement including, without limitation, executing and
delivering such documents and taking such actions as reasonably
necessary and appropriate to carry out the intent and purposes of
this Agreement.
23.2 Assignment. Neither party may assign its rights, or delegate its
duties, under this Agreement in whole or in part without the express
written consent of the other party, such consent not to be
unreasonably withheld. Any attempted or purported assignment without
such required consent shall be null and void and a material breach
of this Agreement. Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the successors and
permitted assigns of the parties hereto.
23.3 Modification. This Agreement, including all terms and conditions
contained herein or in any other schedule or attachment hereto, may
be amended, modified or supplemented only in writing, signed by each
party hereto.
23.4 Entire Agreement. This Agreement, including all schedules and
attachments hereto, sets forth the entire understanding between the
parties with respect to the subject matter hereof, and supersedes
all prior or contemporaneous understandings, communications or
agreements, whether written or oral, regarding the subject matter
hereof. In particular, and without limitation of the foregoing, this
Agreement supersedes the Third Amended MOU, the Non-Disclosure
Agreement entered into by the parties effective May 31, 1996 and the
Software Evaluation Agreement entered into by the parties effective
January 24, 1997. In addition, upon Completion of Initial
Conversion, the 1981 Agreement shall terminate.
23.5 Severability. If any provision of this Agreement or the application
thereof to any party or circumstance shall at any time or to any
extent be determined to be invalid or unenforceable, such provision
(or part thereof) shall be enforced to the extent possible
consistent with the stated intentions of the parties, or, if
incapable of such enforcement, shall be deemed deleted from this
Agreement, while the remainder of this Agreement shall remain in
full force and effect.
23.6 Force Majeure. Neither party hereto shall be responsible for any
failure to perform or delay in performing its obligations under this
Agreement that is caused by a Force Majeure Event, and neither party
shall be considered in breach of or in default under this Agreement
as a result of any such failure or delay caused by a Force Majeure
Event. Without limiting the foregoing, SunGard shall not be
responsible for any failure to meet any schedule, any failure to
meet Performance Requirements or any other Non-Conformities caused
by any Force Majeure Event. Obligations hereunder, however, shall in
no event be permanently excused but shall be suspended only until
the cessation of any Force Majeure Event, at which time the parties
shall consult with each other in order to determine whether any
schedule changes should be made. In the event that a Force Majeure
Event obstructs performance of this Agreement for more than one (1)
month, the parties hereto shall consult with each other to determine
whether this Agreement should be modified or terminated. A party
experiencing a Force Majeure Event shall use commercially reasonable
efforts under the circumstances in order to remedy that situation as
well as to minimize its effects and shall notify the other party as
soon as possible after its occurrence.
23.7 Waiver. Any of the provisions of this Agreement may be waived by the
party entitled to the benefit thereof. Neither party shall be
deemed, by any act or omission, to have waived any of its rights or
remedies hereunder unless such waiver is in writing and signed by
the waiving party, and then only to the extent specifically set
forth in such writing. A waiver with reference to one event shall
not be construed as continuing or as a bar to or waiver of any right
or remedy as to a subsequent event.
23.8 No Joint Venture or Agency. Nothing herein shall be construed or
deemed to create any relationship of joint venture, partnership,
master-servant or principal-agent between the parties. Except as
expressly provided herein, neither party shall have authority to
commit or bind the other with respect to any third party.
23.9 Notices. Any notice or other communication to be given hereunder
shall be in writing and shall be (as elected by the party giving
such notice): (i) personally delivered; (ii) transmitted by postage
prepaid first class registered or certified airmail, return receipt
requested; (iii) deposited prepaid with a nationally recognized
overnight courier service; or (iv) delivered by facsimile
transmission or e-mail, with confirmation provided under options
(i)-(iii). Unless otherwise provided herein, all notices shall be
deemed to have been duly given on: (a) the date of receipt (or if
delivery is refused, the date of such refusal) if delivered
personally or by courier; or (b) five (5) days after the date of
posting if transmitted by mail. Notice hereunder shall be directed
to the following addresses or at such other addresses as either
party may designate from time to time:
FTIS: SUNGARD:
Franklin Templeton Investor Services, Inc. SunGard
Shareholders Systems, Inc.
777 Mariners Island Blvd. 951 Mariners Island Blvd.
San Mateo, CA 94404 San Mateo, CA 94404
Attn: President Attn: President
cc: cc:
Franklin Resources, Inc. SunGard Data Systems,
Inc.
777 Mariners Island Blvd. 1285 Drummers Lane
San Mateo, CA 94404 Suite 300
Attn: General Counsel Wayne, PA 19087
Attn: General Counsel
23.10 Applicable Law; Jurisdiction. This Agreement shall be governed by
the laws of the State of California applicable to agreements made
and to be wholly performed therein (without reference to conflict of
laws). The parties agree that the only proper venues for any action
to enforce this agreement shall be the Superior Court of the State
of California in and for the County of San Mateo or the United
States District Court for the Northern District of California.
23.11 No Third Party Beneficiaries. Nothing express or implied in this
Agreement is intended to confer, nor shall anything herein confer,
upon any person other than the parties and the respective successors
or permitted assigns of the parties, any rights, remedies,
obligations or liabilities whatsoever.
23.12 Counterparts, Facsimiles. This Agreement may be executed in any
number of counterparts, each of which when so executed and delivered
shall be deemed an original, and such counterparts together shall
constitute one and the same instrument. For purposes hereof, a
facsimile copy of this Agreement, including the signature pages
hereto, shall be deemed to be an original. Notwithstanding the
foregoing, the parties shall each deliver original execution copies
of this Agreement to one another as soon as practicable following
execution thereof.
23.13 Prior Work. Development, design and other work done by SunGard prior
to the Effective Date under the MOU, the First Amended MOU, the
Second Amended MOU and the Third Amended MOU shall fall within the
scope of this Agreement as if such work had been done after the
Effective Date.
23.14 Non-Solicitation. During the term of this Agreement and any
Reasonable Transition Period, without the other party's prior
written consent, neither party shall employ, engage, or solicit for
employment or engagement, any person who then is an employee or
individual contractor of the other party or was an employee or
individual contractor of the other party within the previous six (6)
months.
<PAGE>
IN WITNESS WHEREOF, the undersigned parties have caused this Agreement to be
executed by its duly authorized representatives as of the day and year first
above written.
FRANKLIN TEMPLETON INVESTOR SERVICES, INC.
By: /s/ Frank Isola
----------------
Name: Frank Isola
Title: President
SUNGARD SHAREHOLDER SYSTEMS, INC.
By: /s/Norman Schlansky
--------------------
Name: Norman Schlansky
Title: President and Chief Operating Officer
<PAGE>
GUARANTEED IN ACCORDANCE WITH SECTION 21
SUNGARD DATA SYSTEMS, INC.
By: /s/Lawrence A. Gross
---------------------
Name: Lawrence A. Gross
Title: Vice President & General Counsel
FRANKLIN RESOURCES, INC.
By: /s/ Harmon E. Burns
---------------------
Name: Harmon E. Burns
Title: Executive Vice President
Exhibit 12
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
For the Years Ended
(Dollars in thousands) 1997 1996 1995
- ---------------------------------- ------------- --------------- -------------
Income before taxes $615,713 $456,230 $386,655
Add fixed charges:
Interest expense 46,563 36,866 39,721
Interest factor on rent 9,202 8,085 7,271
- ---------------------------------- ------------- --------------- -------------
Total fixed charges 55,765 44,951 46,992
Earnings before fixed charges
and taxes on income $671,478 $501,181 $433,647
================================== ============= =============== =============
Ratio of earnings to fixed
charges 12.0 11.1 9.2
================================== ============= =============== =============
EXHIBIT 21
FRANKLIN RESOURCES, INC.
FOR FISCAL YEAR ENDED SEPTEMBER 30, 1997
LIST OF PRINCIPAL SUBSIDIARIES*
State or
Nation of
Name Incorporation
- --------------------------------------------------------------------------------
Closed Joint-Stock Company Templeton Russia
Continental Property Management Company California
Franklin Advisers, Inc. California
Franklin Advisory Services, Inc. Delaware
Franklin Agency, Inc. California
Franklin Asset Management (Proprietary) Limited South Africa
Franklin Bank California
Franklin Capital Corporation Utah
Franklin Institutional Services Corporation California
Franklin Investment Advisory Services, Inc. Delaware
Franklin Management, Inc. California
Franklin Mutual Advisers, Inc. Delaware
Franklin Partners, Inc. California
Franklin Properties, Inc. California
Franklin Real Estate Management, Inc. California
Franklin Templeton Holding Limited Mauritius
Franklin Templeton Services, Inc. Delaware
Franklin Templeton Trust Company California
Franklin/Templeton Distributors, Inc. New York
Franklin/Templeton Investor Services, Inc. California
Franklin/Templeton Travel, Inc. California
FS Capital Group California
FS Properties Inc. California
Happy Dragon Holdings Ltd. British
Virgin
Islands
Orion Fund Management Limited Bermuda
Property Resources Equity Trust California
Property Resources, Inc. California
T.G.H. Holdings Ltd. Bahamas
TDA Emerging Europe Fund, LLC Delaware
Templeton Global Value Investors, Inc. Delaware
Templeton Asset Management India Pvt. Ltd. India
Templeton Asset Management Ltd. Japan
Templeton Direct Advisors, Inc. Delaware
Templeton do Brasil-Consultoria Financeira LTDA. Brazil
Templeton Direct Investments, Inc. Delaware
Templeton Direct Advisors, L.P. Delaware
Templeton France S.A. France
Templeton/Franklin Investment Services, Inc. Delaware
Templeton Funds Annuity Company Florida
Templeton Funds Trust Company Florida
Templeton Global Advisors Limited Bahamas
Templeton Global Investors Limited England
Templeton Global Investors, Inc. Delaware
Templeton Global Strategic Services (Deutschland) GmbH Germany
Templeton Global Strategic Services S.A. Luxembourg
Templeton Global Value Investors, Inc. Delaware
Templeton Heritage Limited Canada
Templeton Holdings Limited England
Templeton International, Inc. Delaware
Templeton Investment Counsel, Inc. Florida
Templeton Investment Holdings (Cyprus) Limited Cyprus
Templeton Investment Management (Australia) Limited Australia
Templeton Investment Management Co., Ltd. Singapore
Templeton Investment Management Limited England
Templeton Italia, Srl. Italy
Templeton Management Limited Canada
Templeton Research Poland SP.z.o.o. Poland
Templeton (Switzerland) Ltd. Switzerland
Templeton Trust Services Pvt. Ltd. India
Templeton Unit Trust Managers Limited England
Templeton Worldwide, Inc. Delaware
Templeton/Franklin Investment Services (Asia) Limited Hong Kong
Templeton/Franklin Investment Services, Inc. Delaware
*All subsidiaries currently do business only under their corporate name except
for Templeton Quantitative Advisors, Inc., which also operates under the assumed
name, "The DAIS Group"; Templeton Investment Counsel, Inc. which also operates
under the name "Templeton Global Bond Managers"; and Templeton/Franklin
Investment Services, Inc. which also operates under the assumed name, "Templeton
Portfolio Advisory". All Templeton subsidiaries also on occasion use the name
Templeton Worldwide.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Franklin Resources, Inc. on Form S-3 dated October 9, 1996 for the issuance of
medium term notes, Form S-3 filed September 30, 1994 for the registration of
1,411,736 shares, Form S-8 for the 1988 Restricted Stock Plan, Form S-8 for the
Franklin Resources, Inc. Universal Stock Plan, Form S-8 for Franklin Resources,
Inc. United Kingdom Stock Option Plan #1 and Form S-8 for the Canada Stock
Option Plan, of our report dated October 22, 1997, on our audits of
the consolidated financial statements of Franklin Resources, Inc. and
subsidiaries as of September 30, 1997 and 1996 and for the years ended
September 30, 1997, 1996, and 1995, which report is included in this Annual
Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
San Francisco, California
December 18, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 434,864
<SECURITIES> 189,674
<RECEIVABLES> 233,862
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 878,439
<PP&E> 217,085
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,095,200
<CURRENT-LIABILITIES> 405,500
<BONDS> 0
0
0
<COMMON> 12,623
<OTHER-SE> 1,841,598
<TOTAL-LIABILITY-AND-EQUITY> 3,095,200
<SALES> 0
<TOTAL-REVENUES> 2,163,275
<CGS> 0
<TOTAL-COSTS> 1,571,815
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,333
<INCOME-PRETAX> 615,713
<INCOME-TAX> 181,650
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 434,063
<EPS-PRIMARY> 3.43
<EPS-DILUTED> 3.43
</TABLE>
