FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to______________
Commission File No. 1-9318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2670991
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
777 Mariners Island Blvd., San Mateo, CA 94404
(Address of Principal Executive Offices)
(Zip Code)
(650) 312-2000
(Registrant's telephone number, including area code)
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ______
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES _____ NO ______
APPLICABLE ONLY TO CORPORATE ISSUERS:
Outstanding: 252,780,524 shares, common stock, par value $.10 per share
at January 31, 1998
<PAGE>
PART I -FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
FRANKLIN RESOURCES, INC.
Consolidated Statements of Income
Unaudited
Three months ended
December
31
(In thousands, except per share data) 1997 1996
- --------------------------------------------------------------------------------
Operating revenues:
Investment management fees $376,463 $273,260
Underwriting and distribution fees 215,287 136,486
Shareholder servicing fees 37,606 24,828
Other, net 3,043 3,051
- --------------------------------------------------------------------------------
Total operating revenues 632,399 437,625
- --------------------------------------------------------------------------------
Operating expenses:
Underwriting and distribution 205,312 132,283
Compensation and benefits 133,291 99,571
Information systems, technology and
occupancy 46,596 25,804
Advertising and promotion 27,362 18,666
Amortization of deferred sales
commissions 23,896 10,636
Amortization of intangible assets 8,995 7,345
Other 19,505 17,771
- --------------------------------------------------------------------------------
Total operating expenses 464,957 312,076
- --------------------------------------------------------------------------------
Operating income 167,442 125,549
Other income/(expenses):
Investment and other income 14,975 19,608
Interest expense (6,152) (8,173)
- -------------------------------------------------------------------------------
Other income, net 8,823 11,435
- --------------------------------------------------------------------------------
Income before taxes on income 176,265 136,984
Taxes on income 45,750 40,755
- --------------------------------------------------------------------------------
Net income $130,515 $96,229
- --------------------------------------------------------------------------------
Earnings per share:
Basic $0.52 $0.38
Diluted $0.52 $0.38
Dividends per share $0.05 $0.04
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited
As of As of
December 31 September 30
(In thousands) 1997 1997
- --------------------------------------------------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents $440,474 $434,864
Receivables:
Fees from Franklin Templeton funds 200,258 213,547
Other 9,593 20,315
Investment securities,
available-for-sale 234,000 189,674
Prepaid expenses and other 17,009 20,039
- -----------------------------------------------------------------------------
Total current assets 901,334 878,439
- -----------------------------------------------------------------------------
Banking/Finance assets:
Cash and cash equivalents 12,319 7,877
Loans receivable, net 288,446 296,188
Investment securities,
available-for-sale 24,482 24,232
Other 3,833 3,739
- -----------------------------------------------------------------------------
Total banking/finance assets 329,080 332,036
- -----------------------------------------------------------------------------
Other assets:
Deferred sales commissions 146,864 119,537
Property and equipment, net 258,184 217,085
Intangible assets, net 1,216,458 1,224,019
Receivable from banking/finance group 199,995 203,787
Other 115,633 120,297
- -----------------------------------------------------------------------------
Total other assets 1,937,134 1,884,725
- -----------------------------------------------------------------------------
Total assets $3,167,548 $3,095,200
=============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited As of As of
December 31 September 30
(In thousands except share data) 1997 1997
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Compensation and benefits $84,885 $154,222
Commissions 49,148 46,125
Income taxes 60,122 31,908
Short-term debt 93,057 118,372
Other 60,954 54,873
- -----------------------------------------------------------------------------
Total current liabilities 348,166 405,500
- -----------------------------------------------------------------------------
Banking/finance liabilities:
Deposits:
Interest bearing 92,130 91,433
Non-interest bearing 7,937 6,971
Payable to parent 199,995 203,787
Other 1,521 2,213
- -----------------------------------------------------------------------------
Total banking/finance liabilities 301,583 304,404
- -----------------------------------------------------------------------------
Other Liabilities:
Long-term debt 499,541 493,244
Other 34,406 37,831
- -----------------------------------------------------------------------------
Total other liabilities 533,947 531,075
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Total liabilities 1,183,696 1,240,979
- -----------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $1.00 par value,
1,000,000 shares authorized; none - -
issued
Common stock, $.10 par value, 25,272 12,623
500,000,000 shares
authorized; 252,715,488 and
126,230,916 shares
issued; 252,715,488 and 126,031,900
shares outstanding, respectively
Capital in excess of par value 108,700 91,207
Retained earnings 1,862,780 1,757,536
Less cost of treasury stock - (11,070)
Other (12,900) 3,925
- -----------------------------------------------------------------------------
Total stockholders' equity 1,983,852 1,854,221
- -----------------------------------------------------------------------------
Total liabilities and $3,167,548 $3,095,200
stockholders' equity
=============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FRANKLIN RESOURCES, INC.
Consolidated Statements of Cash Flows
Unaudited Three months ended
(In thousands) Dec-97 Dec-96
- ---------------------------------------------------------------------------
Net income $130,515 $96,229
Adjustments to reconcile net income
to net cash provided by operating
activities:
Decrease in receivables,
prepaid expenses and other current assets 21,889 28,076
Increase in deferred sales commissions (51,223) (9,188)
Increase (decrease) in other current
liabilities 32 (9,237)
Increase in income taxes payable 28,214 26,085
Increase in commissions payable 3,023 3,346
Decrease in compensation and benefits (40,536) (3,429)
Depreciation and amortization 42,448 24,239
Gains on disposition of assets (4,036) (10,866)
- ---------------------------------------------------------------------------
Net cash provided by operating activities 130,326 145,255
- ---------------------------------------------------------------------------
Purchase of investments (74,599) (32,247)
Liquidation of investments 21,799 33,313
Purchase of banking/finance investments (214) (9,129)
Liquidation of banking/finance investments - 9,000
Originations of banking/finance loans
receivable (25,434) (31,662)
Collections of banking/finance loans
receivable 33,637 42,119
Purchase of property and equipment (58,058) (9,957)
Proceeds from sale of property 14,517 -
Acquisition of assets and liabilities of
Heine Securities Corporation (1,424) (550,536)
- ----------------------------------------------------------------------------
Net cash used in investing activities (89,776) (549,099)
- ----------------------------------------------------------------------------
Increase (decrease) in bank deposits 1,662 (8,281)
Exercise of common stock options 1,039 1,085
Dividends paid on common stock (11,345) (8,830)
Purchase of treasury stock (2,942) (6,800)
Issuance of debt 22,986 371,072
Payments on debt (41,898) (74,543)
Purchase of option rights from subordinated
debenture holders - (91,685)
- ----------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (30,498) 182,018
- ----------------------------------------------------------------------------
Increase(decrease) in cash and cash
equivalents 10,052 (221,826)
Cash and cash equivalents, beginning of
period 442,741 502,189
- ---------------------------------------------------------------------------
Cash and cash equivalents, end of period $452,793 $280,363
- ---------------------------------------------------------------------------
Supplemental disclosure of non-cash information:
Value of stock issued for Heine acquisition - $65,558
Value of stock issued for redemption of - $75,015
debentures
Value of common stock issued in other
transactions, principally for the
Company's incentive plans $30,595 $26,444
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FRANKLIN RESOURCES, INC.
Notes to Consolidated Financial Statements
December 31, 1997
(Unaudited)
1. Basis of Presentation
The unaudited interim financial statements of Franklin Resources, Inc. and its
consolidated subsidiaries (the "Company") included herein have been prepared in
accordance with the instructions to Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
all appropriate adjustments necessary to a fair presentation of the results of
operations have been made for the periods shown. All adjustments are of a normal
recurring nature. Certain prior year amounts have been reclassified to conform
to current year presentation. These financial statements should be read in
conjunction with the Company's audited financial statements for the fiscal year
ended September 30, 1997.
2. Debt
At December 31, 1997, the Company had interest-rate swap agreements, maturing in
years 1998 through 2000, which effectively fixed interest rates on $295.0
million of commercial paper. The fixed rates of interest ranged from 6.24% to
6.65%. These financial instruments are placed with major financial institutions.
The creditworthiness of the counterparties is subject to continuous review and
full performance is anticipated. Any potential loss from failure of the
counterparties to perform is deemed to be immaterial. As of December 31, 1997,
the weighted average effective interest rate, including the effect of
interest-rate swap agreements, was 6.35% on approximately $549 million of
outstanding commercial paper and medium-term notes.
3. Acquisition
On November 1, 1996, the Company acquired (the "Acquisition") the assets and
liabilities of Heine Securities Corporation ("Heine"), the former investment
advisor to Mutual Series Fund Inc.,other funds and managed accounts ("Mutual").
One of the Company's subsidiaries, Franklin Mutual Advisers, Inc. ("FMAI"), now
serves as the investment adviser to Mutual. The transaction had an aggregate
value of approximately $616 million. 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. Heine received $551 million in cash and 1.1 million
shares of common stock (before the effects of the stock split paid January 15,
1997 and the stock split paid January 15, 1998). The Acquisition has been
accounted for using the purchase method of accounting. The Company has agreed to
make its first payment of $64 million related to the performance criteria in the
Acquisition agreement during the third quarter of fiscal year 1998. The payment
is not expected to have a material impact on the Company's income statement or
balance sheet. The amount is expected to be funded from cash on hand and
existing credit facilities.
<PAGE>
4. Stockholders' Equity
On December 12, 1997, the Board of Directors approved a two-for-one stock split,
to be effected in the form of a 100% stock dividend, payable to shareholders of
record on December 31, 1997. An amount equal to the par value of the common
stock issued was transferred from retained earnings to common stock in the
December 31, 1997 balance sheet. The number of shares used for purposes of
calculating earnings per share and all per share data have been adjusted for
both periods presented to give retroactive effect to the stock split.
During the quarter ended December 31, 1997, the Company retired 407,730
post-split shares of treasury stock. For shares purchased and retired by the
Company, common stock was charged for the par value of the shares retired and
capital in excess of par value was charged for the excess of cost over the par
value. Although the Company plans to continue its periodic purchase of its own
common stock, such stock will now be retired when purchased.
5. Adoption of New Statement of Financial Accounting Standards Board
During the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 requires that the Company retroactively restate prior period earnings per
share ("EPS") data. The impact on previously reported EPS is not material.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
Franklin Resources, Inc. and its consolidated subsidiaries (the "Company")
derive substantially all of their revenues and net income from providing
investment management, administration, distribution and related services to the
Franklin Templeton 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 management
products and services to meet the needs of a variety of individuals and
institutions.
I. Material Changes in Results of Operations Results of operations
Three months ended
December 31 %
(In millions) 1997 1996 Change
- -------------------------------------------------------------------------
Net income $130.5 $96.2 36%
Earnings per share
Primary $.52 $.38 37%
Fully-diluted $.52 $.38 37%
Operating margin 26% 29%
- --------------------------------------------------------------------------
Net income during the quarter ended December 31, 1997 increased as compared to
the same quarter in the previous fiscal year primarily due to an increase in
investment management fees as a result of a 33% increase in average assets under
management and a lower effective tax rate. Earnings per share have been restated
for the prior period to reflect the two-for-one stock split effected in the form
of a stock dividend on January 15, 1998. Operating margins decreased to 26% due
primarily to increased technology and distribution costs.
Operating revenues will continue to be dependent upon the amount and composition
of assets under management, mutual fund sales and the number of mutual fund
investors and institutional clients. Operating expenses are expected to increase
with the Company's ongoing expansion, the increase in competition and the
Company's commitment to improve its products and services. These endeavors will
likely result in increased compensation and benefits, information systems and
occupancy and other expenses.
The contributions to the Company's operating profit from its non-U.S. operations
increased in the quarter ended December 31, 1997 over the same quarter in the
prior year principally as a result of increased fee revenues from investment
management services provided by its foreign subsidiaries. This trend will
continue to be dependent on the amount and composition of assets managed by the
Company's non-U.S. subsidiaries.
<PAGE>
Assets under management
As of
December 31 %
(In billions) 1997 1996 Change
- --------------------------------------------------------------------------------
Franklin Templeton Group:
Fixed-income :
Tax-free $47.0 $43.2 9%
U.S. government (primarily GNMA's) 15.5 15.9 (3)%
Taxable and tax-free money funds 3.9 3.5 11%
Global/international 3.8 3.2 19%
- --------------------------------------------------------------------------------
Total fixed-income 70.2 65.8 7%
- --------------------------------------------------------------------------------
Equity:
Global/international 94.8 75.0 26%
U.S. 56.0 40.1 40%
- --------------------------------------------------------------------------------
Total equity 150.8 115.1 31%
- --------------------------------------------------------------------------------
================================================================================
Total Franklin Templeton Group - end $221.0 $180.9 22%
of period
================================================================================
Average for the period $220.6 $166.3 33%
================================================================================
Assets under the Company's management decreased by $5 billion (2%) from
September 30, 1997 and increased $40.1 billion (22%) from December 31, 1996. The
decrease in assets under management was the result of market depreciation in
excess of net sales, predominantly of the global/international equity assets.
Equity assets grew to 68% of total assets under management, down 2% from
September 30, 1997, but up from 64% a year earlier. Global/international equity
assets grew by 26% over the prior year. The growth in U.S. equity funds was
largely attributable to Mutual, which has increased 57% over 1996 levels. The
growth in fixed income funds was due to increased sales.
Operating revenue
Three months ended
December 31 %
(In millions) 1997 1996 Change
- -------------------------------------------------------------------------
Investment management fees $376.5 $273.2 38%
Underwriting and distribution fees 215.3 136.5 58%
Shareholder servicing fees 37.6 24.8 52%
Other, net 3.0 3.1 (3)%
=========================================================================
Total operating revenues $632.4 $437.6 45%
=========================================================================
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. There have been no
significant changes in the management fee structures for the Franklin Templeton
Group in the periods under review. Investment management fees increased due to
the 33% increase in average assets and an increase in the proportion of
higher-fee equity funds and an additional month of Mutual investment management
fees in the current quarter as compared to a year ago.
Underwriting commissions 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, including 12b-1 fees, from those
funds in reimbursement for distribution expenses incurred up to a maximum
allowed by each fund. A significant portion of underwriting commissions and
distribution fees are paid to selling intermediaries.
Underwriting and distribution fees increased 58% over the same period last year
primarily as a result of increased U.S. retail mutual fund sales and assets
under management. Shareholder servicing fees are generally fixed charges per
account which vary with the particular type of fund and the service being
rendered.
Shareholder servicing fees increased as a result of an increase in the average
per account charge and a 29% increase in retail fund shareholder accounts to 8.0
million from 6.2 million a year ago.
Other, net
Three months ended
December 31 %
(In millions) 1997 1996 Change
- -----------------------------------------------------------------------
Revenues $9.7 $10.2 (5)%
Provision for loan losses (2.1) (1.3) (62)%
Interest expense (4.6) (5.8) 21%
=======================================================================
Total other, net $3.0 $3.1 (3)%
=======================================================================
Other revenues, net consist primarily of the revenues from the Company's bank
and finance subsidiaries, which are shown net of interest expense and the
provision for loan losses. Compared to the corresponding period in the prior
year, other revenues remained broadly constant. An increase in the provision for
loan losses was offset by a reduction in interest expense. The provision for
loan losses has increased even as charge-offs decreased due to the Company's
decision in 1997 to maintain a higher level of reserves. Auto loan charge-offs
decreased $1 million (56%) and total delinquencies decreased $8 million (48%)
compared to the same period in the prior year. Interest expense decreased in the
period due to a $62 million (17%) reduction in the average borrowing
requirements of the banking/finance group.
<PAGE>
Operating expenses
Three months ended
December 31 %
(In millions) 1997 1996 Change
- ------------------------------------------------------------------------
Underwriting and distribution $205.3 $132.3 55%
Compensation and benefits 133.3 99.6 34%
Information systems, technology
and occupancy 46.6 25.8 81%
Advertising and promotion 27.4 18.7 47%
Amortization of deferred sales
commissions 23.9 10.6 125%
Amortization of intangible
assets 9.0 7.3 23%
Other 19.5 17.8 10%
========================================================================
Total operating expenses $465.0 $312.1 49%
========================================================================
Increases in operating expenses principally resulted from the general expansion
of the Company's business, increased distribution costs and the Acquisition.
Underwriting and distribution includes sales commissions and distribution fees
paid to brokers and other third party intermediaries. The increase in
underwriting and distribution expenses was consistent with the increase in U.S.
retail mutual fund sales.
Compensation and benefits costs increased 34% over the same period in 1996 as a
result of a 31% increase in the number of employees, increased temporary labor
costs and increased payments under the Company's incentive plans that are based
on the Company's profitability.
Information systems, technology and occupancy costs have increased 81% over the
prior period due to costs related to several major system implementations, as
well as upgrades to network, desktop and internet environments.
Advertising and promotion expenses increased during the comparative three-month
period mainly due to increased promotional activity and new marketing campaigns.
Amortization of deferred sales commissions increased 125% as sales of products
by the Company's Canadian subsidiary increased substantially.
Amortization of intangible assets increased as a result of the Acquisition that
took place in the second month of fiscal year 1997.
Other expenses increased during the period due to the general expansion of the
Company.
The Company's effective income tax rate decreased from approximately 30% to
approximately 26% of pretax income due to the anticipated effects of tax law
changes and the relative proportion of non-US pretax income. The effective tax
rate will continue to be reflective of the relative contributions of foreign
earnings that are subject to reduced tax rates and are not currently included in
US taxable income.
II. Material Changes in Financial Condition, Liquidity and Capital Resources
At December 31, 1997, the Company's assets aggregated $3.2 billion, up from $3.1
billion at September 30, 1997. Stockholders' equity approximated $2.0 billion
compared to approximately $1.9 billion at September 30, 1997. The increase in
assets and stockholders' equity was primarily a result of net income. Cash
provided by operating activities for the three months ended December 31, 1997
decreased 10% from $145.3 million in the quarter ended December 31, 1996,
primarily as a result of the increase in deferred sales commissions related to
non-U.S. products. The Company invested $58.1 million in property and equipment
associated with software upgrades and with new offices. Net cash used by
financing activities during the period was $30.5 million as the Company used
cash flows to pay down debt and purchase common stock. During the period, the
Company paid $11.3 million in cash dividends to stockholders and purchased
62,762 post-split shares of its common stock for $2.9 million. The Company will
continue from time to time to purchase its own shares in the open market and in
private transactions for use in connection with various corporate employee
incentive programs and when it believes the market price of its shares merits
such action.
In October 1997, the Company sold, but continued to occupy an office building in
San Mateo pursuant to a lease. Proceeds of $14.5 million were received in this
transaction. The gain on sale was deferred and will be amortized on a straight
line basis through June 30, 2000.
At December 31, 1997, the Company held $452.8 million in cash and cash
equivalents, as compared to $442.7 million at September 30, 1997. Liquid assets,
which consist of cash and cash equivalents, investments available-for-sale and
current receivables increased to $921.1 million at December 31, 1997 from $889.7
million at September 30, 1997. Revolving credit facilities at December 31, 1997
aggregated $500 million of which $200 million was under a 364-day revolving
credit facility. The remaining $300 million facility has a five-year term. At
December 31, 1997, approximately $568.8 million was available to the Company
under unused commercial paper and medium-term note programs.
Management expects that the principal needs for cash 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 needs.
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information.
When used in this Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and in oral
statements made with the approval of an authorized executive officer, the words
or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties, including those discussed under the caption "Risk
Factors and Cautionary Statements" below, that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed below could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company will not undertake and specifically declines any obligation to
release publicly the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Risk Factors and Cautionary Statements
The Company's revenues and income are derived primarily from the management of a
variety of financial services products. The financial services industry is
highly competitive. Such competition could negatively impact the Company's
market share, which could impact assets under management, from which the bulk of
the Company's revenues and income arise.
Sales of mutual fund shares and other financial services products can also be
negatively affected by adverse general securities market conditions, burdensome
governmental regulations and recessionary global economic conditions. In
addition, securities dealers, whose large retail distribution systems play an
important role in the sale of shares of the Franklin, Templeton and Mutual
Series funds, also sponsor competing proprietary mutual funds. To the extent
that these firms limit or restrict the sale of Franklin, Templeton or Mutual
Series funds shares through their brokerage systems in favor of their
proprietary mutual funds, future sales may be negatively impacted and the
Company's revenues might be adversely affected. In addition, as the number of
competitors in the investment management industry increases, greater demands are
placed on existing distribution channels, which may cause distribution costs to
increase.
The Company's assets under management include a significant number of global
equities, which 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 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 financial
institutions 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.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of the report:
Exhibit 3(i)(a) Registrant's Certificate of Incorporation, as filed
November 28, 1969, incorporated by reference to Exhibit(3)(i)
to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1994 (the "1994 Annual Report")
Exhibit 3(i)(b) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1,1985, incorporated by reference
to Exhibit (3)(ii) to the 1994 Annual Report
Exhibit 3(i)(c) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1,1987, incorporated by reference
to Exhibit (3)(iii) to the 1994 Annual Report
Exhibit 3(i)(d) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated by
reference to Exhibit (3)(iv) to the 1994 Annual Report
Exhibit (3)(ii) Registrant's By-Laws incorporated by reference to
Exhibit 3(v) to the Company's Form 10-Q for the Quarterly
Period ended December 31, 1994
Exhibit 10.1 Amendment No. 3 to the Agreement to Merge the Businesses of
Heine Securities Corporation, Elmore Securities Corporation and
Franklin Resources, Inc., dated December 27, 1997
Exhibit 11 Computations of per share earnings.
Exhibit 12 Computations of ratios of earnings to fixed charges
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K:
(i) Form 8-K dated October 23, 1997 reporting under Item 5 "Other
Events" the filing of an earnings press release by the
Registrant on October 23, 1997 and including said press release
as an Exhibit under Item 7 "Financial Statements and Exhibits".
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN RESOURCES, INC.
Registrant
Date: February 13, 1998 /S/ Martin L. Flanagan
MARTIN L. FLANAGAN
Senior Vice President,
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
Exhibit
Exhibit 3(i)(a) Registrant's Certificate of Incorporation, as filed
November 28, 1969, incorporated by reference to Exhibit(3)(i)
to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1994 (the "1994 Annual Report")
Exhibit 3(i)(b) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1,1985, incorporated by reference
to Exhibit (3)(ii) to the 1994 Annual Report
Exhibit 3(i)(c) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1,1987, incorporated by reference
to Exhibit (3)(iii) to the 1994 Annual Report
Exhibit 3(i)(d) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated by
reference to Exhibit (3)(iv) to the 1994 Annual Report
Exhibit (3)(ii) Registrant's By-Laws incorporated by reference to
Exhibit 3(v) to the Company's Form 10-Q for the Quarterly
Period ended December 31, 1994
Exhibit 10.1 Amendment No. 3 to the Agreement to Merge the Businesses of
Heine Securities Corporation, Elmore Securities Corporation and
Franklin Resources, Inc., dated December 27, 1997
Exhibit 11 Computations of per share earnings.
Exhibit 12 Computations of ratios of earnings to fixed charges
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K:
(i) Form 8-K dated October 23, 1997 reporting under Item 5 "Other
Events" the filing of an earnings press release by the
Registrant on October 23, 1997 and including said press release
as an Exhibit under Item 7 "Financial Statements and Exhibits".
<PAGE>
AMENDMENT No. 3 TO THE AGREEMENT TO MERGE
THIS AMENDMENT No. 3 (this "Amendment") to that certain Agreement to
Merge the Businesses of Heine Securities Corporation, a Delaware
corporation ("Heine"), Franklin Mutual Advisers, Inc. (f/k/a Elmore
Securities Corporation), a Delaware corporation ("FMAI"), and Franklin
Resources, Inc., a Delaware corporation ("FRI"), dated as of June 25, 1996,
as amended by Amendment No. 1 thereto, dated as of August 28, 1996, and by
Amendment No. 2 thereto, dated as of October 31, 1996 (the "Agreement"), is
made and entered into as of the 24th day of December, 1997 by and among
FMAI, FRI, and Michael F. Price, individually and as sole distributee of
the assets of Heine pursuant to its dissolution and liquidation ("MFP").
W I T N E S S E T H:
WHEREAS, the parties hereto desire to further amend the Agreement, in
accordance with Section 11.1 thereof, as set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements of the parties, the undersigned hereby agree as follows:
SECTION 1. Capitalized terms used and not otherwise defined in this
Amendment are used in this Amendment as defined in the Agreement.
SECTION 2. Section 2.6 of the Agreement, and Exhibit A thereto, are
hereby amended and restated in their entirety to read as set forth on Annex
A hereto.
SECTION 3. FRI hereby agrees to pay to Goldman, Sachs & Co. ("GS") or
its designee, concurrently with the final determination of the amount, and
the payment to MFP, of any Additional Consideration pursuant to Section
2.6(c) of the Agreement, an amount in cash, by wire transfer of immediately
available funds to the account designated in writing by GS not less than
three (3) business days prior to the date of such payment, equal to 0.8% of
such payment of Additional Consideration (less any interest thereon
pursuant to Section 2.6(c) of the Agreement), in satisfaction of certain
fees that may become payable by Heine (or assumed by MFP) to GS in
connection with the transactions contemplated by the Agreement. It is
understood that neither FRI nor FMAI shall, by virtue of the foregoing, be
deemed to undertake any liability or obligation to GS other than as set
forth in the preceding sentence.
SECTION 4. FRI hereby waives and releases MFP from his obligation, if
any, pursuant to that certain memorandum from Kenneth Lewis of FRI to MFP,
dated September 4, 1997, to pay or reimburse FRI for certain costs and
expenses incurred in connection with the transactions contemplated by the
Agreement as provided in Section 6.14 of the Agreement.
SECTION 5. The Agreement, as amended by this Amendment, the legal
relations between the parties and the adjudication and the enforcement
thereof, shall be governed by and interpreted and construed exclusively in
accordance with the substantive laws of the State of Delaware, without
regard to applicable choice of law provisions thereof.
SECTION 6. Except as expressly amended hereby, the Agreement shall
survive and continue pursuant to its terms, in full force and effect.
SECTION 7. This Amendment may be executed in multiple counterparts
which, taken together, shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the undersigned have, as appropriate, executed
this Amendment or caused this Amendment to be executed by their respective
duly authorized representatives, as of the 24th day of December, 1997.
FRANKLIN RESOURCES, INC.
-----------------------
By: /s/Leslie M. Kratter
Name: Leslie M. Kratter
Title: Vice President
FRANKLIN MUTUAL ADVISERS, INC.
-----------------------
By: /s/ Leslie M. Kratter
Name: Leslie M. Kratter
Title: Vice President
------------------------
/s/ Michael F. Price
Michael F. Price, individually
and as sole distributee of the
assets of Heine Securities
Corporation pursuant to its
dissolution and liquidation
<PAGE>
ANNEX A TO AMENDMENT No. 3
Section 2.6 Additional Consideration. (a) In addition to the Purchase
Price, Buyer or Buyer Parent shall pay to Seller an amount, if any, as
follows:
(i) on April 15, 1998, Buyer or Buyer Parent shall pay to Seller
$64,200,000.
(ii) if the Anniversary Applicable Ratio represents a cumulative
increase of 17.5% or more per year, compounded annually, on any of the
fourth or fifth anniversary of the Closing Date, then Buyer or Buyer Parent
shall pay to Seller (or its designee):
On the Fourth Anniversary $60,800,000
On the Fifth Anniversary $75,000,000
(iii) if the Anniversary Applicable Ratio represents a cumulative
increase of 12.5% per year, compounded annually, on any of the fourth or
fifth anniversary of the Closing Date, then Buyer or Buyer Parent shall pay
to Seller (or its designee):
On the Fourth Anniversary $23,300,000
On the Fifth Anniversary $37,500,000
(iv) if the Anniversary Applicable Ratio represents a cumulative
increase of more than 12.5% per year, but less than 17.5% per year,
compounded annually, on any of the fourth or fifth anniversary of the
Closing Date, then Buyer or Buyer Parent shall pay to Seller (or its
designee) an amount pro rated between the amounts Seller would have
received under clauses (ii) and (iii) above.
(v) if, on the fourth anniversary of the Closing Date, the Anniversary
Applicable Ratio does not represent a cumulative increase of 17.5% or more
per year, compounded annually, and Seller achieves an increase of at least
12.5% per year, compounded annually, with respect to which no Additional
Consideration has been paid on the fifth anniversary of the Closing Date,
then Buyer or Buyer Parent shall pay to Seller (or its designee) with
respect to the fifth anniversary such additional amount of consideration
that Seller would have been paid with respect to the fourth anniversary had
Seller achieved such increases on the fourth anniversary. Examples of these
computations are described in Exhibit A attached hereto.
(b) The additional consideration payable pursuant to Section 2.6(a)
(the "Additional Consideration"), other than the amount of Additional
Consideration set forth in clause (i) of Section 2.6(a), shall be
calculated by Buyer or Buyer Parent, and the amount of such Additional
Consideration shall be certified to Seller not later than the fifteenth
(15th) business day after the applicable anniversary of the Closing Date.
If Seller disputes such calculation then, within five (5) days after
receipt of the certificate, Seller shall notify Buyer and Buyer Parent, and
all of the parties hereto shall use their best efforts to resolve such
dispute. If such dispute is not resolved within ten (10) days after Seller
has notified Buyer and Buyer Parent of the dispute, then such dispute shall
be referred to an Independent Accounting Firm selected by Seller and Buyer.
Each of Seller and Buyer shall bear one-half of the fees and expenses of
the Independent Accounting Firm.
(c) The Additional Consideration shall be paid by Buyer or Buyer
Parent to Seller (or its designee) in U.S. dollars by wire transfer of
immediately available funds to one or more accounts, such accounts to be
specified in writing by Seller (or its designee) to Buyer and Buyer Parent
not less than three (3) business days prior to the payment of such
Additional Consideration. Ninety (90%) of the estimated Additional
Consideration pursuant to clauses (ii) through (v) of Section 2.6(a), if
any, shall be paid within one (1) business day after the applicable
anniversary of the Closing Date, and the balance, if any, shall be paid
within five (5) business days after the applicable anniversary of the
Closing Date. Any payments to be made to Seller (or its designee) pursuant
to this Section shall be made together with interest at the base rate (as
announced publicly by Citibank, N.A., from time to time, as its base rate)
from the date of the applicable anniversary to the date immediately
preceding the date of payment. If the amount of any estimated Additional
Consideration paid pursuant to clauses (ii) through (v) of Section 2.6(a)
exceeds the finally calculated Additional Consideration with respect
thereto, then Buyer shall notify Seller (or its designee) of such excess
payment, and Seller (or its designee) shall repay such excess amount to
Buyer within two (2) business days after such notice, together with
interest thereon at the base rate from the date Seller (or its designee)
received such excess amount to the date immediately preceding the date of
repayment. If the amount of any finally calculated Additional Consideration
payable pursuant to clauses (ii) through (v) of Section 2.6(a) exceeds the
amount of the estimated Additional Consideration paid to Seller (or its
designee) with respect thereto, then Buyer or Buyer Parent shall pay such
excess amount within five (5) business days after such Additional
Consideration has been finally calculated.
(d) The amount of the Additional Consideration that may be payable to
Seller with respect to the fifth anniversary of the Closing Date shall be
reduced by one-half of the aggregate amount paid to the Key Employees
pursuant to the Performance Award Pool under Section 3.2(d) of the
employment agreements between Seller and the Key Employees (which reduction
shall not exceed $7,500,000).
<PAGE>
Exhibit A to the Agreement to Merge, as amended
Additional Consideration Examples
With respect to Section 2.6(a)(v), assume that:
1. On the fourth anniversary of the Closing Date, the Anniversary
Applicable Ratio is 1 and on the fifth anniversary of the Closing Date, the
Anniversary Applicable Ratio represents a cumulative increase of 17.5% per
year, compounded annually, since the Closing Date. Seller would receive
$135,800,000 as Additional Consideration on the fifth anniversary (subject
to Section 2.6 (d)).
2. On the fourth anniversary of the Closing Date, the Anniversary
Applicable Ratio is 1 and on the fifth anniversary of the Closing Date, the
Anniversary Applicable Ratio represents a cumulative increase of 15% per
year, compounded annually, since the Closing Date. Seller would receive
$98,300,000 as Additional Consideration on the fifth anniversary (subject
to Section 2.6 (d)).
Exhibit 11
COMPUTATIONS OF PER SHARE EARNINGS
Earnings per share are based on net income divided by the average number of
shares outstanding including incremental shares from assumed conversions during
the period. The number of shares used for purposes of calculating earnings per
share and all per share data have been adjusted for both periods presented to
reflect a two-for-one stock split effected January 15, 1998.
Three months
ended
December 31
- -------------------------------------------------------------------------
(Dollars and shares in thousands) 1997 1996
- -------------------------------------------------------------------------
Weighted average shares outstanding 252,692 250,946
Incremental shares from assumed conversions 493 656
========================
Adjusted weighted average shares outstanding 253,185 251,602
========================
Net income $130,515 $96,229
Earnings per share:
Basic $0.52 $0.38
Diluted $0.52 $0.38
Exhibit 12
COMPUTATIONS OF RATIOS OF EARNINGS TO FIXED CHARGES
Three months ended
December 31
(Dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------
Income before taxes $176,265 $136,984
Add fixed charges:
Interest expense 10,747 14,007
Interest factor on rent 2,891 2,092
---------------------------
Total fixed charges $13,638 $16,099
---------------------------
Earnings before fixed charges
and taxes on income $189,903 $153,083
===========================
Ratio of earnings to fixed charges 13.9 9.5
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
REGISTRANT'S FINANCIAL STATEMENTS FOR THE QUARTER ENDED DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 440,474
<SECURITIES> 234,000
<RECEIVABLES> 209,851
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 901,334
<PP&E> 258,184
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,167,548
<CURRENT-LIABILITIES> 348,166
<BONDS> 0
0
0
<COMMON> 25,272
<OTHER-SE> 1,841,598
<TOTAL-LIABILITY-AND-EQUITY> 3,167,548
<SALES> 0
<TOTAL-REVENUES> 632,399
<CGS> 0
<TOTAL-COSTS> 464,957
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,152
<INCOME-PRETAX> 176,265
<INCOME-TAX> 45,750
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 130,515
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
</TABLE>
