FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to______________
Commission File No. 1-9318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2670991
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
777 Mariners Island Blvd., San Mateo, CA 94404
(Address of Principal Executive Offices)
(Zip Code)
(650) 312-2000
(Registrant's telephone number, including area code)
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ______
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES _____ NO ______
APPLICABLE ONLY TO CORPORATE ISSUERS:
Outstanding: : 253,031,290 shares, common stock, par value $.10 per share
at July 31, 1998.
<PAGE>
PART I -FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
FRANKLIN RESOURCES, INC.
Consolidated Statements of Income
Unaudited
Three months ended Nine months ended
June 30 June 30
(In thousands, except per share 1998 1997 1998 1997
data)
- -------------------------------------------------------------------------------
Operating revenues:
Investment management fees $373,820 $314,600 $1,073,622 $855,659
Underwriting and distribution
fees 252,354 219,110 774,164 573,668
Shareholder servicing fees 40,793 36,614 117,798 90,239
Other, net 5,629 2,223 13,102 9,802
- -------------------------------------------------------------------------------
Total operating revenues 672,596 572,547 1,978,686 1,529,368
- -------------------------------------------------------------------------------
Operating expenses:
Underwriting and distribution 220,660 190,867 668,378 495,788
Compensation and benefits 152,688 115,476 418,723 321,830
Information systems,
technology and occupancy 37,312 31,474 129,770 86,673
Advertising and promotion 33,782 28,144 92,387 70,216
Amortization of deferred
sales commissions 27,753 18,773 78,174 40,939
Amortization of intangible
assets 9,336 8,931 27,280 25,333
Other 22,846 23,657 64,889 63,791
- -------------------------------------------------------------------------------
Total operating expenses 504,377 417,322 1,479,601 1,104,570
- -------------------------------------------------------------------------------
Operating income 168,219 155,225 499,085 424,798
Other income/(expenses):
Investment and other income 15,435 8,784 42,006 34,479
Interest expense (6,523) (5,735) (16,501) (19,664)
- -------------------------------------------------------------------------------
Other income, net 8,912 3,049 25,505 14,815
- -------------------------------------------------------------------------------
Income before taxes on income 177,131 158,274 524,590 439,613
Taxes on income 46,118 47,086 136,393 130,785
- -------------------------------------------------------------------------------
Net income $131,013 $111,188 $388,197 $308,828
- -------------------------------------------------------------------------------
Earnings per share:
Basic $0.52 $0.44 $1.54 $1.23
Diluted $0.52 $0.44 $1.53 $1.22
Dividends per share $0.05 $0.045 $0.15 $0.13
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited
As of As of
June 30 September 30
(In thousands) 1998 1997
- -------------------------------------------------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents $693,837 $434,864
Receivables:
Fees from Franklin Templeton funds 225,236 213,547
Other 24,265 20,315
Investment securities,
available-for-sale 187,184 189,674
Prepaid expenses and other 15,510 20,039
- -----------------------------------------------------------------------------
Total current assets 1,146,032 878,439
- -----------------------------------------------------------------------------
Banking/Finance assets:
Cash and cash equivalents 13,471 7,877
Loans receivable, net 290,861 296,188
Investment securities,
available-for-sale 23,402 24,232
Other 4,164 3,739
- -----------------------------------------------------------------------------
Total banking/finance assets 331,898 332,036
- -----------------------------------------------------------------------------
Other assets:
Deferred sales commissions 136,661 119,537
Property and equipment, net 325,959 241,224
Intangible assets, net 1,262,336 1,224,019
Receivable from banking/finance group 206,943 203,787
Other 165,590 96,158
- -----------------------------------------------------------------------------
Total other assets 2,097,489 1,884,725
- -----------------------------------------------------------------------------
Total assets $3,575,419 $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
June 30 September 30
(In thousands except share data) 1998 1997
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Compensation and benefits $142,503 $154,222
Commissions 54,972 46,125
Income taxes 44,957 31,908
Short-term debt 131,279 118,372
Other 69,076 54,873
- -----------------------------------------------------------------------------
Total current liabilities 442,787 405,500
- -----------------------------------------------------------------------------
Banking/finance liabilities:
Deposits:
Interest bearing 82,183 91,433
Non-interest bearing 8,730 6,971
Payable to parent 206,943 203,787
Other 1,909 2,213
- -----------------------------------------------------------------------------
Total banking/finance liabilities 299,765 304,404
- -----------------------------------------------------------------------------
Other Liabilities:
Long-term debt 548,681 493,244
Other 50,385 37,831
- -----------------------------------------------------------------------------
Total other liabilities 599,066 531,075
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Total liabilities 1,341,618 1,240,979
- -----------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $1.00 par value,
1,000,000 shares authorized; none
issued - -
Common stock, $.10 par value,
500,000,000 shares
authorized; 252,947,901 and
126,230,916 shares
issued; 252,947,901 and 126,031,900
shares outstanding, respectively 25,295 12,623
Capital in excess of par value 126,894 91,207
Retained earnings 2,095,169 1,757,536
Less cost of treasury stock - (11,070)
Other (13,557) 3,925
- -----------------------------------------------------------------------------
Total stockholders' equity 2,233,801 1,854,221
- -----------------------------------------------------------------------------
Total liabilities and
stockholders' equity $3,575,419 $3,095,200
=============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FRANKLIN RESOURCES, INC.
Consolidated Statements of Cash Flows
Unaudited
Nine months ended
(In thousands) June 30 June 30
1998 1997
- ---------------------------------------------------------------------------
Net income $388,197 $308,828
Adjustments to reconcile net income to net cash provided by operating
activities:
Increase in receivables,
prepaid expenses and other current assets (23,240) (67,379)
Increase in deferred sales commissions (95,299) (81,474)
Increase in other current liabilities 38,161 5,456
Increase (decrease) in income taxes payable 13,049 (6,635)
Increase in commissions payable 8,847 13,975
Increase in compensation and benefits payable 23,256 61,485
Depreciation and amortization 139,478 87,089
Gains on disposition of assets (8,474) (11,969)
- ---------------------------------------------------------------------------
Net cash provided by operating activities 483,975 309,376
- ---------------------------------------------------------------------------
Purchase of investments (113,619) (82,296)
Liquidation of investments 43,334 79,145
Purchase of banking/finance investments (9,258) (27,118)
Liquidation of banking/finance investments 10,117 27,374
Originations of banking/finance loans
receivable (98,660) (86,076)
Collections of banking/finance loans
receivable 105,624 128,627
Purchase of property and equipment (124,796) (56,535)
Proceeds from sale of property 14,517 -
Acquisition of assets and liabilities of
Heine Securities Corporation (64,333) (550,740)
- ----------------------------------------------------------------------------
Net cash used in investing activities (237,074) (567,619)
- ----------------------------------------------------------------------------
Decrease in bank deposits (7,492) (23,329)
Exercise of common stock options 2,846 1,878
Dividends paid on common stock (36,627) (29,040)
Purchase of Company stock (2,942) (15,356)
Issuance of debt 148,927 374,328
Payments on debt (87,046) (127,300)
Purchase of option rights from subordinated
debenture holders - (91,685)
- ---------------------------------------------------------------------------
Net cash (used in) provided by financing
activities 17,666 89,496
- ---------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents 264,567 (168,747)
Cash and cash equivalents, beginning of
period 442,741 502,189
- ---------------------------------------------------------------------------
Cash and cash equivalents, end of period $707,308 $333,442
- ---------------------------------------------------------------------------
Supplemental disclosure of non-cash information:
Value of stock issued for Heine
acquisition - $65,588
Value of stock issued for redemption of
debentures - $75,015
Value of common stock issued in other
transactions, principally for the
Company's incentive plans $37,119 $31,398
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FRANKLIN RESOURCES, INC.
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
1. Basis of Presentation
- -------------------------
The unaudited interim financial statements of Franklin Resources, Inc. and its
consolidated subsidiaries (the "Company") included herein have been prepared in
accordance with the instructions to Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
all appropriate adjustments necessary to a fair presentation of the results of
operations have been made for the periods shown. All adjustments are of a normal
recurring nature. Certain prior year amounts have been reclassified to conform
to current year presentation. These financial statements should be read in
conjunction with the Company's audited financial statements for the fiscal year
ended September 30, 1997.
2. Debt
- --------
At June 30, 1998, the Company had interest-rate swap agreements, maturing in
years 1998 through 2000, which effectively fixed interest rates on $295 million
of commercial paper. The fixed rates of interest ranged from 6.24% to 6.65%.
These financial instruments are placed with major financial institutions. The
creditworthiness of the counterparties is subject to continuous review and full
performance is anticipated. Any potential loss from failure of the
counterparties to perform is believed to be immaterial. As of June 30, 1998, the
Company had fixed interest rates on approximately $565 million of its debt
through its interest-rate swap agreements and its medium-term note program. At
quarter end, the weighted average effective interest rate, including the effect
of interest-rate swap agreements, was 6.24% on approximately $637 million of
outstanding commercial paper and medium-term notes.
3. Acquisition
- ---------------
On November 1, 1996, the Company acquired (the "Acquisition") the assets and
liabilities of Heine Securities Corporation ("Heine"), the former investment
advisor to Mutual Series Fund Inc., other funds and managed accounts ("Mutual").
One of the Company's subsidiaries, Franklin Mutual Advisers, Inc. ("FMAI"), now
serves as the investment adviser to Mutual. The transaction had an aggregate
value of approximately $616 million. Heine received $551 million in cash and 3.3
million shares of common stock (after the effects of the stock split paid
January 15, 1997 and the stock split paid January 15, 1998). In addition to the
base purchase price, the purchase agreement also provides for contingent
payments to Heine ranging from $96.25 million to $192.5 million under certain
conditions if certain agreed-upon growth targets are met. Agreed-upon growth
targets range from 12.5% to 17.5% of management fee revenues from Mutual over a
five-year period and payments are pro-rated based upon the upper and lower range
of the targets. The first contingent payment of $64.2 million related to these
agreed-upon growth targets was made in the third quarter of fiscal 1998. Other
payments are due in fiscal 2000 and 2001 if growth targets continue to be met.
These contingent payments will be accounted for as goodwill related to
additional purchase price of Heine. The contingent payments are not expected to
have a material impact on the Company's income statement or balance sheet. The
first payment was funded from cash on hand and existing credit facilities. The
Acquisition has been accounted for using the purchase method of accounting.
4. Stockholders' Equity
- ------------------------
On December 12, 1997, the Board of Directors approved a two-for-one stock split
effected in the form of a 100% stock dividend that was paid to shareholders of
record on December 31, 1997. An amount equal to the par value of the common
stock issued has been transferred from retained earnings to common stock. The
number of shares used for purposes of calculating earnings per share and all per
share data have been adjusted for all periods presented to give retroactive
effect to the stock split. Stockholders' equity as of September 30, 1997 has not
been restated.
During the quarter ended December 31, 1997, the Company retired 407,730
post-split shares of treasury stock. For treasury shares retired by the Company,
common stock was charged for the par value of the shares retired and capital in
excess of par value was charged for the excess of cost over the par value.
During the quarter ended June 30, 1998, no shares were purchased by the Company.
5. Employee Stock Investment Plan
- ----------------------------------
The Company's shareholders have approved a qualified, non-compensatory Employee
Stock Investment Plan ("ESIP"), which allows substantially all employees of U.S.
subsidiaries and certain employees of non-U.S. subsidiaries meeting certain
eligibility criteria to purchase shares of the Company's common stock at 90% of
its market value on certain defined dates. Participants made their first
purchase of stock under this plan effective as of July 31, 1998. The Company's
shareholders have approved 4,000,000 (post-split) shares of common stock for
issuance under the ESIP.
As allowed under the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation", the Company has elected to
apply Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations in accounting for its
stock-based plans. Accordingly, the Company has recognized no compensation
expense for the ESIP.
In connection with the ESIP, the Company, at its sole discretion, can provide
matching grants to participants in the ESIP of whole or partial shares of the
Company's common stock. While reserving the right to change such determination,
the Company has initially determined that it will provide one half-share for
each share held by a participant for a minimum holding period of eighteen
months. The fair market value of the Company's matching contribution will be
recognized as compensation expense during the eighteen-month holding period.
6. Adoption of New Statements of Financial Accounting Standards Board
- ----------------------------------------------------------------------
During the first quarter of fiscal 1998, 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 was not material.
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 requires that the Company recognize
all derivatives as assets or liabilities on its balance sheet at their fair
value. FAS 133 will be effective for interim and annual reporting in the first
quarter of fiscal 2000. The Company's derivative instruments and hedging
activities are limited to the interest-rate swap agreements related to its
commercial paper debt. See Note 2 above. The Company does not expect that the
implementation of FAS 133 will have a material effect on its financial
statements.
7. Subsequent events
- ---------------------
Securitization of Auto Loans
On June 15, 1998, Franklin Receivables LLC and FCC Receivables Corp., two
wholly-owned subsidiaries of the Company, filed a Registration Statement with
the SEC for the future securitization of auto loan receivables. The Company
presently plans to securitize approximately $100 million of its auto loan
receivables before the end of calendar 1998, although this is currently subject
to SEC review and approval. No material impact to the Company's net income is
anticipated.
Pricing Structure Underwriting and distribution fees
On August 3, 1998, the Company effected changes in the pricing structure of a
number of its mutual funds. The minimum initial and subsequent investment
amounts for most Franklin Templeton funds were increased. Also on this date, the
maximum initial sales charge for Class I shares of a number of equity products
was changed to create a standard pricing structure across the Franklin Templeton
funds. The Company does not expect that the change in pricing structure will
have a material effect on net income, because a significant portion of the
Company's underwriting and distribution revenues are paid to selling
intermediaries.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
Franklin Resources, Inc. and its consolidated subsidiaries (the "Company")
derive substantially all of their revenues and net income from providing
investment management, administration, distribution and related services to the
Franklin, Templeton and Mutual Series funds, institutional accounts and other
investment products (collectively the "Franklin Templeton Group"). The Company
has a diversified base of assets under management and a full range of investment
products and services to meet the needs of a variety of individuals and
institutions.
I. Material Changes in Results of Operations
Results of operations
Three months ended Nine months ended
June 30 June 30
(In millions) 1998 1997 Change 1998 1998 Change
- --------------------------------------------------------------------------------
Net income $131.0 $111.1 18% $388.2 $308.8 26%
Earnings per share
Basic $0.52 $0.44 18% $1.54 $1.23 25%
Diluted $0.52 $0.44 18% $1.53 $1.22 25%
Operating margin 19% 19% - 20% 20% -
- --------------------------------------------------------------------------------
Net income during the periods ended June 30, 1998 increased as compared to the
same periods in the previous fiscal year primarily due to an increase in
investment management fees as a result of a 25% increase in average assets under
management. Previously reported earnings per share have been retroactively
restated to reflect the two-for-one stock split effected in the form of a stock
dividend on January 15, 1998. During 1998, the Company has maintained its
operating margins while engaging in a number of long-term information systems
and technology initiatives.
Operating revenues will continue to be dependent upon the amount and composition
of assets under management, mutual fund sales and the number of mutual fund
investors and institutional clients. Operating expenses are expected to increase
with the Company's ongoing expansion, increased competition and the Company's
plan to improve its products and services. These endeavors will likely result in
increased underwriting and distribution costs, compensation and benefits costs
and information systems and technology costs.
Assets under management
As of
June 30 %
(In billions) 1998 1997 Change
- --------------------------------------------------------------------------------
Franklin Templeton Group:
Equity:
Global/international $106.6 $99.0 8%
Domestic (U.S.) 57.1 43.1 32%
- --------------------------------------------------------------------------------
Total equity 163.7 142.1 15%
- --------------------------------------------------------------------------------
Fixed-income:
Tax-free 49.1 44.4 11%
Domestic (primarily U.S. Gov't.) 15.7 15.1 4%
Global/international 4.1 3.5 17%
- --------------------------------------------------------------------------------
Total fixed-income 68.9 63.0 9%
- --------------------------------------------------------------------------------
Money funds 4.0 3.7 8%
================================================================================
Total Franklin Templeton Group
- end of period $236.6 $208.8 13%
================================================================================
Monthly average for the
three-month period $240.5 $198.2 21%
================================================================================
Monthly average for the
nine-month period $229.9 $183.7 25%
================================================================================
End of period assets under the Company's management decreased by $3.1 billion
(1%) from March 31, 1998 and increased $27.8 billion (13%) from June 30, 1997.
The relative composition of assets under management is similar to that of the
prior quarter and the same period in fiscal 1997. Equity assets now make up 69%
of total assets under management compared to 70% in March 1998 and 68% in June
1997. Fixed income funds comprise 29% of total assets under management at June
1998, as compared to 28% and 30% in March 1998 and June 1997, respectively. The
recent volatility of global equity markets has led to a slight increase in the
fixed income funds' share of total assets under management.
Operating revenue
Three months ended Nine months ended
June 30 June 30
(In millions) 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------
Investment
management fees $373.8 $314.6 19% $1,073.6 $855.7 25%
Underwriting and
distribution fees 252.4 219.1 15% 774.2 573.7 35%
Shareholder
servicing fees 40.8 36.6 11% 117.8 90.2 31%
Other, net 5.6 2.2 155% 13.1 9.8 34%
==============================================================================
Total operating
revenues $672.6 $572.5 17% $1,978.7 $1,529.4 29%
==============================================================================
Investment management fees are derived primarily from contractual fixed-fee
arrangements that are based upon the level of assets under management with
open-end and closed-end investment companies and managed portfolios. The
majority of fund investment management contracts are subject to periodic
approval by each fund's Board of Directors/Trustees. There have been no
significant changes in the management fee structures for the Franklin Templeton
Group in the periods under review. The previous statement notwithstanding,
during the current quarter of the fiscal year, the Company has reclassified
revenues related to the distribution component of Canadian all-in fees from
Investment management to Underwriting and distribution fees. The Company
believes this change more accurately reflects its pricing structure in Canada
and more closely matches revenue generation with the expenses incurred. Prior
periods have also been reclassified. Investment management fees increased when
compared to the prior year due to the 21% and 25% increase in average assets in
the three- and nine-month periods, respectively. Future changes in the
composition of assets under management may affect the effective investment
management fee rates earned by the Company.
Certain subsidiaries of the Company act as distributors for its sponsored funds
and receive commissions and distribution fees. Underwriting commissions are
earned primarily from fund sales. Distribution fees are generally based on the
level of assets under management. These distribution fees include 12b-1 fee,
paid by the funds in reimbursement for distribution expenses incurred up to a
maximum allowed by each fund. A significant portion of underwriting commissions
and distribution fees are paid to selling intermediaries. See the discussion of
the reclassification of Investment management fees above.
Underwriting and distribution fees increased 15% and 35% over the same three-
and nine-month periods last year primarily as a result of increases in retail
mutual fund sales and due to 21% and 25% increases in average assets under
management in the three- and nine-month periods, respectively.
Shareholder servicing fees are generally fixed charges per account that vary
with the particular type of fund and the service being rendered. Shareholder
servicing fees increased principally as a result of a 24% increase in fund
shareholder accounts to 8.7 million from 7.0 million a year ago, and also as a
result of an increase in the average per account charge for certain funds
effective February 1998.
Other, net
Three months ended Nine months ended
June 30 June 30
(In millions) 1998 1997 Change 1998 1997 Change
- --------------------------------------------------------------------------------
Revenues $10.7 $9.3 15% $30.8 $29.1 6%
Provision for loan
losses (0.7) (1.9) (63)% (4.3) (3.0) 43%
Interest expense (4.4) (5.2) (15)% (13.4) (16.3) (18)%
================================================================================
Total other, net $5.6 $2.2 155% $13.1 $9.8 34%
================================================================================
Other, net consists primarily of revenues from the Company's banking and finance
subsidiaries, net of interest expense and the provision for loan losses.
Compared to the corresponding three- and nine-month periods in the prior year,
other, net increased by 155% and 34%, respectively. Revenues have remained
relatively stable despite a 6% decline in average loan receivables as a result
of increased effective yields. The provision for loan losses has increased over
the nine-month period in the prior year, even as charge-offs decreased, due to
the Company's decision in the last quarter of fiscal 1997 to maintain a higher
level of reserves. Interest expense decreased in the current periods due to a
reduction in the average borrowing requirements of the banking/finance group
combined with a reduction in effective interest rates.
Operating expenses
Three months ended Nine months ended
June 30 June 30
(In millions) 1998 1997 Change 1998 1997 Change
- --------------------------------------------------------------------------------
Underwriting and
distribution $220.7 $190.9 16% $668.4 $495.8 35%
Compensation and
benefits 152.7 115.5 32% 418.7 321.8 30%
Information systems,
technology and
occupancy 37.3 31.5 18% 129.7 86.7 50%
Advertising and
promotion 33.8 28.1 20% 92.4 70.2 32%
Amortization of
deferred sales
commissions 27.8 18.8 48% 78.2 40.9 91%
Amortization of
intangible assets 9.3 8.9 4% 27.3 25.4 7%
Other 22.8 23.6 (3)% 64.9 63.8 2%
===============================================================================
Total operating
expenses $504.4 $417.3 21% $1,479.6 $1,104.6 34%
================================================================================
Increases in operating expenses principally resulted from the general expansion
of the Company's business, increased distribution costs and the Company's
investment in information systems and technology.
Underwriting and distribution include sales commissions and distribution fees
paid to brokers and other third-party intermediaries. The increases in
underwriting and distribution expenses were consistent with the increases in
underwriting and distribution fee revenue in the periods under review.
Compensation and benefits costs increased 32% and 30% over the same three- and
nine-month periods in 1997 as a result of increased headcount, increased
temporary labor costs and increased payments under the Company's incentive plans
that are based on the Company's profitability. The Company continues to
experience upward pressure on compensation and benefits due to the Company's
growth and expansion and due to the effects of a very competitive labor market.
Information systems, technology and occupancy costs have increased 18% and 50%
over the prior three- and nine-month periods, respectively, due to the Company's
investment in infrastructure. During the past eighteen months, the Company has
embarked upon major systems implementations, Year 2000 corrections and European
Monetary Unit preparations, and has upgraded its network, desktop and internet
environments. The Company anticipates that such major systems undertakings will
continue to have an impact on the Company's operating results through the year
2000.
To date the Company has incurred external costs of approximately $4.3 million in
respect of its Year 2000 compliance efforts. See "Other Information - Year
2000".
Advertising and promotion expenses increased during the comparative three- and
nine-month periods mainly due to increased promotional activity and new
marketing campaigns.
Sales commissions on certain Franklin Templeton Group products sold without a
front-end sales charge are capitalized and amortized over periods not exceeding
six years - the period in which management estimates that they will be recovered
from distribution plan payments and from contingent deferred sales charges.
Amortization of deferred sales commissions increased 48% and 91% during the
periods under review as sales of products by the Company's Canadian subsidiary
increased.
The Company's effective income tax rate decreased from approximately 30% in
fiscal 1997 to approximately 26% of pretax income for the first nine months of
fiscal 1998 due to the relative proportion of non-U.S. pretax income and the
effects of tax law changes. The effective tax rate will continue to be
reflective of the relative contributions of foreign earnings that are subject to
reduced tax rates and that are not currently included in U.S. taxable income.
Other income/(expenses):
Three months ended Nine months ended
June 30 June 30
(In millions) 1998 1997 Change 1998 1997 Change
- --------------------------------------------------------------------------------
Investment and
other income 15.4 8.8 75% 42.0 34.5 22%
Interest
expense (6.5) (5.8) 12% (16.5) (19.7) (16)%
================================================================================
Other
income, net 8.9 3.0 97% 25.5 14.8 72%
================================================================================
As a result of significant growth in the Company's cash equivalents during the
periods under review, investment and other income have risen 75% and 22% in the
three- and nine-month periods of fiscal 1998 over amounts reported in the prior
fiscal year. Interest expense has increased 12% and decreased 16% in the three-
and nine-month periods of fiscal 1998 when compared to the same periods in the
prior year. These changes were due to a decrease in the Company's overall
effective borrowing rate and the Company's capitalization of interest costs
associated with the financing of buildings under construction. During the third
fiscal quarter of 1998 the majority of these buildings were placed in service
and accordingly, the Company ceased capitalizing interest on these properties.
II. Material Changes in Financial Condition, Liquidity and Capital Resources
At June 30, 1998, the Company's assets aggregated $3.6 billion, up from $3.1
billion at September 30, 1997. Stockholders' equity approximated $2.2 billion
compared to approximately $1.9 billion at September 30, 1997. The increase in
assets and stockholders' equity was primarily a result of increased net income.
Cash provided by operating activities for the nine months ended June 30, 1998
increased 57% to $485.3 million, from $309.4 million for the same period in
fiscal 1997. The increase in cash from operations was the result of changes in
income before depreciation and amortization. The Company invested $124.8 million
in property and equipment during the period. Property and equipment purchases in
the current fiscal year include $74.9 related to information systems and
technology. Net cash provided by financing activities during the period was
$17.7 million as the Company increased its total debt while continuing to make
regular dividend payments to shareholders and servicing its existing debt.
During the fiscal year to date, the Company paid $36.6 million in cash dividends
to stockholders and purchased 62,762 post-split shares of its common stock for
$2.9 million. The Company may continue from time to time to purchase its own
shares in the open market and in private transactions when it believes the
market price of its shares merits such action.
In October 1997, the Company sold and leased back an office building in San
Mateo, California. Proceeds of $14.5 million were received in this transaction.
The gain on sale was deferred and will be amortized on a straight-line basis
through June 30, 2000, the end of the lease period.
At June 30, 1998, the Company held $707.3 million in cash and cash equivalents,
as compared to $442.7 million at September 30, 1997. Liquid assets, which
consist of cash and cash equivalents, investments available-for-sale and current
receivables increased to $1,167.4 million at June 30, 1998 from $889.7 million
at September 30, 1997. Revolving credit facilities at June 30, 1998 aggregated
$500 million of which $200 million was under a 364-day revolving credit
facility. The remaining $300 million facility has a five-year term. At June 30,
1998, approximately $483.1 million was available to the Company under unused
commercial paper and medium-term note programs.
In April 1998, the Company issued $50 million in medium-term notes at a fixed
rate of 5.96% that will mature in April 2000. The cash was used to make the
contingent payment related to the Acquisition. See Note 3 to the condensed
financial statements.
Management expects that the principal needs for cash will be to advance sales
commissions, fund increased property and equipment acquisitions, pay shareholder
dividends and service debt. Any future increases in the Company's investment in
its consumer lending activities are expected to be financed through existing
debt facilities, operating cash flows, or through the securitization of a
portion of the receivables receivables from such consumer lending activities.
Management believes that the Company's existing liquid assets, together with the
expected continuing cash flow from operations, its borrowing capacity under
current credit facilities and its ability to issue stock will be sufficient to
meet its present and reasonably foreseeable cash needs.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
During the reporting period hereunder there were no material changes or
developments to the litigation previously reported in the Company's Form 10-Q
for the three-month period ended March 31, 1998 as filed with the SEC on May 15,
1998.
Item 5. Other Information
Year 2000
Many of the world's computer systems currently record years in a two-digit
format. Such computer systems may be unable to recognize, interpret or use dates
beyond the year 1999 correctly. In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems. A few systems
may also be affected by the dates in the month of September 1999. Because the
activities of many businesses are affected by dates or are date-related, the
inability to use such date information correctly could lead to business
disruptions both in the United States and internationally (the "Year 2000
Problem"). The costs and uncertainties associated with the Year 2000 Problem
will depend upon a number of factors, including computer software, computer
hardware and the nature of the industry in which a company operates.
The following discussion contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements regarding the Year 2000 Problem include the types of phrases with the
wording described more specifically under the caption "Risk Factors and
Cautionary Statements" elsewhere in this document and statements such as the
following: estimated timetables for implementation and completion of the phases
of the Company's Year 2000 plan; projections of expenditures and financial items
regarding the Year 2000 plan; statements regarding the possible effects of the
Year 2000 Problem on the Company's business and that of third parties with whom
the Company does business; and possible contingency plans of the Company. Such
statements are subject to certain risks and uncertainties, including those
discussed in the paragraphs below and under the captions "Special Concerns" and
"Risk Factors and Cautionary Statements" below, that could cause actual results
to differ materially from historical results and those presently anticipated or
projected. The Company cautions readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made.
A substantial number of the Company's current computer systems will require
modification to avoid being adversely affected by the Year 2000 Problem. In
addition, the Company coordinates and interacts on a daily basis with numerous
other companies and persons to exchange data electronically. Many of these
third-party systems will also require modification to resolve the Year 2000
Problem.
To help ensure that the Company's computer systems and those of the third
parties with whom the Company interacts will function properly in and after 1999
("Year 2000 Compliant"), a team of information technology professionals began
preparing for the Year 2000 Problem in 1996. The Company has completed a
preliminary assessment of its systems and programs and has identified those that
contain two-digit year codes or other elements that might be affected by the
Year 2000 Problem. The Company is in various stages of reviewing, testing and
making software repairs and upgrades to those systems and programs that it
believes will be affected by the millenial date. Because the Year 2000 project
is an ongoing companywide endeavor, the state of the Company's progress changes
daily. With the exception of the financial figures, which are provided as of
June 30, 1998, the information contained in this disclosure is made as of July
15, 1998, which is the latest practical date for providing such information. The
Company's Year 2000 compliance plan includes the comprehensive testing and Year
2000 Compliant certification of all major Company hardware and software systems
and is comprised of four phases: Assessment, Remediation, Testing and
Implementation.
Assessment:
- -----------
The Assessment phase includes preparing an inventory of
systems that the Company's anticipates will be affected by the millenial change
as well as creating a budget and a strategy to evaluate and address potential
problems of each system. The Company's Year 2000 plan prioritizes the
information technology ("IT") systems over non-IT systems in all phases, and
further prioritizes mission critical IT systems over other IT systems. The
Company currently plans to complete a final Assessment of the approximately 60
systems that have been validated to date as mission critical, including the
platforms and networks upon which they run, by September 1, 1998 and of other IT
systems by December 31, 1998.
Remediation:
- ------------
In this phase software corrections, upgrades, software patches and bug fixes
will be made to remedy identified Year 2000 deficiencies in software, hardware,
operating systems, network devices and phone systems. The Remediation phase also
includes sending questionnaires requesting Year 2000 compliance assurances to
vendors of such systems and, in some cases, requesting test scripts which the
Company can use to test Year 2000 compliance. The majority of the Company's
mission critical systems, approximately 45 systems, are currently in the
Remediation phase. The Company has prioritized the Remediation and Testing of
mission critical IT systems over other systems and currently plans to complete
Remediation of mission critical components by December 31, 1998 and of other IT
systems as soon as possible thereafter, but in any event by December 31, 1999.
The Company is continuing to evaluate the most effective means to achieve Year
2000 compliance for its systems in a cost efficient manner. In the event it is
determined that it would be more efficient to upgrade to a new system or to a
later version of a system, even if the existing system is or will be Year 2000
Compliant by December 31, 1998, the Company may defer testing of such new or
upgraded system until after December 31, 1998. Certain IT systems that are
insignificant to the Company's operations may not be made Year 2000 Compliant by
December 31, 1999 but the Company does not anticipate that this would have a
materially adverse impact on the Company's business, results of operations or
financial condition.
Testing:
- ---------
The Testing phase includes testing of internal systems on a stand-alone basis
using Company-generated hypothetical dates and scenarios or test scripts
provided by the vendor. Testing will be conducted on both existing and new
systems which may be affected by the Year 2000 Problem as well as systems that
have been fixed, upgraded or otherwise altered in the Remediation phase. Testing
will be conducted in one of the five test labs that the Company has established
near its major centers of operations in the U.S. If required, additional labs
will be established in the future. Because the majority of the Company's mission
critical systems are operated and managed in the U.S., the Company has no
current plans to establish foreign test centers but will continue to evaluate
this possibility. The Company has prioritized the Remediation and Testing of
mission critical IT systems and currently approximately 12 mission critical
systems are in the Testing phase. Subject to possible system upgrades described
above, the Company plans to complete Testing of most mission critical systems by
December 31, 1998 and of other IT systems as soon as possible thereafter, but in
any event by December 31, 1999.
Testing includes point-to-point testing, which is testing the communication
links and data exchange capabilities between the Company's internal systems and
the internal systems of third parties. For example, sending a sample trade order
dated after the millenial date from a mutual fund to a broker-dealer. The
Company currently plans to complete point-to-point Testing of mission critical
systems by February 28, 1999, and of other systems by June 30, 1999. It is the
Company's present intention to participate in industry-wide testing of
securities processing sponsored by the Securities Industry Association which is
presently scheduled to commence in March of 1999.
Implementation:
- ---------------
In the Implementation phase, a system that has been identified as being Year
2000 Compliant is put into normal business operation. End-user training is also
conducted as part of the Implementation phase. Some IT systems of the Company,
including approximately 3 mission critical systems, have been tested,
implemented and are currently in use. The Company currently plans to complete
Implementation of mission critical systems by February 28, 1999 and of other
systems as soon as possible thereafter but in any event by December 31, 1999.
Other than third-party long distance telephone and data lines and public utility
suppliers of electrical power, the Company's business operations are not heavily
dependent on non-information technology components, systems or third-party
vendors, and none of the Company's mission critical systems is a non-IT system.
In addition, most of the Company's non-IT components have manual override
features that are designed to allow the component to operate in the event of an
internal computer malfunction. The Company is conducting an assessment of the
Company-owned or -managed non-IT components including building, mechanical, air
conditioning, electrical, security and conveyance systems for Year 2000
compliance, which assessment is approximately 50% complete companywide. Most of
these non-IT systems cannot easily be tested for Year 2000 compliance; however,
the Company does not believe that the failure of any of its non-IT systems,
other than electrical or long distance data and voice lines, would have a
materially adverse effect upon its business, results of operation or financial
condition.
Third Parties
- -------------
The Company is taking steps designed to verify the Year 2000 readiness of
material third-party vendors and suppliers whose lack of Year 2000 readiness
could cause a materially adverse impact on the Company's business, results of
operations or financial condition. The Company has contacted all of its major
external suppliers of goods, services and data (other than suppliers of
electricity or long distance data and voicelines) to assess their compliance
efforts and the Company's exposure in the event of a failure of third-party
compliance efforts. The Company is in the process of validating and reviewing
the responses from these suppliers of mission critical systems and in some cases
is seeking additional information or certification.
The Company's business operations are heavily dependent upon a complex worldwide
network of IT systems that contain date fields, including data feeds to the
Company, trading systems, securities transfer agent operations and stock market
links. The Company's ability to minimize the effects of the Year 2000 Problem is
highly dependent upon the efforts of third parties. The failure of organizations
such as securities exchanges, securities clearing organizations, banks, vendors,
clients or domestic or foreign governmental regulatory agencies to resolve their
own processing issues with respect to the Year 2000 Problem in a timely manner
could have a materially adverse effect on the Company's business, results of
operations or financial condition.
Cost Estimates
- --------------
The Company has taken a number of actions since it began preparing for its Year
2000 project in 1996, however, Year 2000 readiness expenditures were first
tracked as a separate expense item beginning in fiscal year 1998. The Company
has incurred approximately $4.3 million in such costs during the fiscal year.
The Company is assessing the scope of the Year 2000 compliance effort that will
be needed for all parts of its business and is conducting this investigation by
prioritizing IT mission critical systems over other IT systems and non-IT
components. A definitive estimate of Year 2000 costs has not yet been completed
because the full scope of effort needed to address the Company's Year 2000
readiness is not yet completely known. The Company presently expects that it
will incur expenses in the range of $30 to $40 million on Year 2000 compliance
efforts. This is a preliminary estimate comprised of IT expenses only, including
third-party consulting, software and hardware expenses that will be utilized
solely to combat the Year 2000 problem. Costs incurred relating to making the
Company's systems Year 2000 Compliant are being expensed in the period in which
they are incurred. In the event that additional cash commitments are required in
connection with the Year 2000 Problem, the Company believes that its current
cash position, cash flows and lines of credit provide sufficient liquidity to
fund any unanticipated increased expenditures.
The amount above does not include the allocation of the internal time of a
substantial number of employees working on the Year 2000 Problem. Such internal
employee costs principally represent the redeployment of existing personnel to
the Year 2000 Problem, not the addition of new employees. Such employees have
and will spend significant administrative time and effort in addressing the Year
2000 Problem. The Company is presently unable to determine the cost of such
employee resource allocation to the Year 2000 Problem.
The Company expects that its Year 2000 cost estimates will continue to change as
the millenial date approaches, during which time the Company's Year 2000
readiness efforts are expected to become more defined. Expenditures related to
Year 2000 are expected to increase as the Company moves the majority of its
efforts from the relatively inexpensive phase of assessment to the more costly
testing, remediation and implementation phases.
The Company presently expects that the majority of its costs are yet to be
incurred in the remediation, testing and implementation phases of its Year 2000
efforts. The Company has retained outside consultants and plans to hire more in
order to complete its Year 2000 project. Such consultants are in great demand,
command high fees and are expected to demand increasingly higher fees as the
millenial date approaches, which could cause the Company's current cost
estimates to be inaccurate. In addition, there can be no assurances that the
Company will be able to retain its current employees or hire consultants with
the required skills to complete the Company's Year 2000 project at the times
that they are needed for the Company's projects, at reasonable fees, or at all.
The Company may re-allocate its internal IT employees to have them focus on the
Year 2000 project, which may cause the Company to delay or cancel other planned
projects, which could in turn have a materially adverse effect on the Company's
business, results of operations or financial condition.
Although the Company does not currently have specific Year 2000 contractual
obligations, in the event that the Company's business operations experience
problems due to lack of Year 2000 readiness, it is likely that the Company's
customers and business partners would assert claims against the Company. In
addition, the Company and its subsidiaries are subject to substantial regulation
by state, federal and foreign regulatory authorities which could impose
sanctions, fines, or order the Company or various subsidiaries to cease
operations in the event of Year 2000 non-compliance.
The Company is beginning to develop a contingency plan, including identification
of those mission critical systems for which it is practical to develop a
contingency plan. However, in an operation as complex and geographically
distributed as the Company's business the alternatives to use of normal systems,
especially mission critical systems, or supplies of electricity or long distance
voice and data lines are limited. For example, in the non-IT area, the Company
has installed back-up electrical generators at its principal data facilities in
the U.S. However, such generators are dependent on the availability of fuel,
which cannot be stockpiled at the Company's facilities due to environmental
regulations. Major electrical disruptions in data center locations could impact
both fuel supply and fuel demand. Although manual work-arounds exist for some
portions of the Company's operations, certain mission critical IT systems
contain and transfer such enormous amounts of data that the inability of these
systems to function would materially and adversely affect the majority of the
Company's operations. A broader failure of third-party systems, in particular
externally-managed data lines, communication systems, telephone or electrical
systems would materially and adversely affect the Company's ability to carry on
business operations in any regular fashion. Although the Company is
investigating alternative solutions, it is not clear that any adequate
contingency plan can be developed for such failures.
European Monetary Unit
On January 1, 1999, a single currency for the European Economic and Monetary
Union (the "Euro") is scheduled to replace the national currency for
participating member countries which include countries in which the Company has
offices or with which it does substantial business. Many of the Company's
managed funds and financial products have substantial investments in countries
whose currencies will be replaced by the Euro. All aspects of the Company's
investment process, including trading, foreign exchange, payments, settlements,
cash accounts, custodial accounts and accounting will be affected by the
implementation of the Euro (the "Euro Issue").
The Company has created an interdepartmental team consisting of information
system and technology, accounting, administrative portfolio and investment
operations personnel to determine changes that will be required in connection
with the Euro Issue in order to process transactions accurately with minimal
disruption to business activities. The Company is also communicating with its
external partners and vendors to assess their readiness to manage the Euro Issue
without disruption to the Company's business or operations.
The Company is not presently able to assess the cost impact of the Euro Issue on
the Company, but does not presently anticipate that such impact will materially
affect the Company's cash flows, operations or operating results. Costs incurred
relating to the Euro Issue are generally being expensed by the Company during
the period in which they are incurred.
Special Concerns
The Company's expectations as to the future costs associated with the Year 2000
Problem and the Euro Issue are subject to uncertainties beyond its control that
could cause actual results to differ materially from what has been discussed
above. Factors that could influence the amount and timing of future costs
include the success of the Company in identifying systems and programs that are
affected by the Year 2000 Problem and the Euro Issue, the nature and amount of
testing, remediation, programming, installation and systems work required to
upgrade or to replace each of the affected programs or systems, the rate and
magnitude of related labor and consulting costs, and the success of the
Company's external partners and suppliers in addressing their respective Year
2000 Problems and the Euro Issue. By way of example, industry-wide testing could
uncover additional problems within the Company or third parties which could
require greater expenditures or cause greater disruptions. While the Company is
in the process of developing contingency plans for the failure of third parties
to achieve Year 2000 compliance or to manage the Euro Issue, the Company's
ability to minimize the effects of the Year 2000 Problem and the Euro Issue is
highly dependent upon the efforts of third parties; in particular as these
issues may affect certain of the Company's key information systems. The failure
of organizations such as securities exchanges, securities clearing
organizations, banks, vendors, clients or domestic or foreign governmental
regulatory agencies to resolve their own processing issues with respect to the
Year 2000 Problem or the Euro Issue in a timely manner could have a materially
adverse effect on the Company's business, results of operations or financial
condition.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
When used in this Form 10-Q and in future filings by the Company with the SEC,
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 cautions readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made. The Company wishes to advise readers that the factors listed
below could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company will not undertake and specifically declines any obligation to
release publicly any data or information the result of which might be to revise
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Risk Factors and Cautionary Statements
General Factors
- ---------------
The Company's revenues and income are derived primarily from the management of a
variety of financial services products. The level of assets under management may
be impacted by a number of factors such as general economic and market
conditions (both domestic and global); changes in interest rates and/or
inflation rates; the level of fund sales and redemptions; and competition within
the financial services industry, which also affect sales and redemptions.
Competition within the industry also impacts the level of expenses related to
fund distribution. Sales of mutual fund shares and other financial services
products can also be negatively affected by burdensome domestic or foreign
governmental regulations.
Assets Under Management
- -----------------------
The world's securities exchanges are currently experiencing the longest "bull
market" in history with unprecedented levels of investor demand for equity
securities. As a result of this financial environment, the Company's equity
holdings under management have increased in value, which has contributed to
increased assets under management and increased revenues. The valuation of the
equity portion of the Company's assets under management is especially subject to
the securities markets, which are cyclical and subject to periodic corrections.
A downturn in these financial markets would have an adverse effect on the value
of the equity portion of the Company's assets under management, which in turn
would have a negative effect on the Company's revenues. In addition, the Company
derives higher revenues from its equity assets and therefore a future shift in
assets from equity to fixed-income would, in most instances, have an adverse
impact on the Company's income and revenues.
A significant portion of the Company's assets under management is fixed-income
securities. Fluctuations in interest rates and in the yield curve will have an
effect on fixed-income assets under management as well as on the flow of monies
to and from fixed-income funds and, therefore, on the Company's revenues from
such funds. In addition, the impact of changes in the equity marketplace may
significantly affect assets under management. The effects of the foregoing
factors on equity funds and fixed-income funds often operate inversely and it
is, therefore, difficult to predict the net effect of any particular set of
conditions on the level of assets under management. In addition, the shift in
the Company's asset mix from primarily fixed-income to a combination of
fixed-income and global equities has increased the possibility of volatility in
the value of the Company's managed portfolios due to the increased percentage of
equity investments managed.
The Company's assets under management include a significant number of global
equities, which may increase the volatility of the Company's managed portfolios
and its revenue and income streams. Certain portions of the Company's managed
portfolios are invested in various securities of corporations located or doing
business in developing regions of the world commonly known as emerging markets.
These portfolios and the Company's revenues derived from the management of such
portfolios are subject to significant risks of loss from unfavorable political
and diplomatic developments, currency fluctuations, social instability, changes
in governmental policies, expropriation, nationalization, confiscation of assets
and changes in legislation relating to foreign ownership. Foreign trading
markets, particularly in some emerging market countries are often smaller, less
liquid, less regulated and significantly more volatile.
Competition
- -----------
The financial services industry is highly and increasingly competitive. Such
competition could negatively impact the Company's market share, which could
affect assets under management, from which the bulk of the Company's revenues
and income arise.
The Company is in competition with the financial services and other investment
alternatives offered by stock brokerage and investment banking firms, insurance
companies, banks, savings and loan associations and other financial
institutions. Many of these competitors have substantially greater resources
than the Company. In addition, there has been a trend of consolidation in the
products industry which has resulted in stronger competitors. The banking
industry also continues to expand its sponsorship of proprietary funds
distributed through third-party distributors. To the extent that any of these
financial institutions, which remain the principal distribution channel for the
Company's shares, limit or restrict the sale of Franklin, Templeton or Mutual
Series shares through their distribution systems in favor of their proprietary
mutual funds, assets under management might decline and the Company's revenues
might be adversely affected. In addition, as the number of competitors in the
investment management industry increases, greater demands are placed on existing
distribution channels, which may cause distribution costs to increase.
As investor interest in the mutual fund industry has continued to increase, the
methods and costs of distribution of mutual fund shares has become more complex
in all segments of the industry. A multiple pricing structure has become
increasingly common in what were previously two separate distribution channels,
those with sales charges and those without sales charges. This has and will have
the effect of increasing the Company's costs of distribution and has and will
increase the amount of cash required for the advancement of sales commissions
and similar charges. If the Company is unable to fund commissions on deferred
sales charge mutual fund shares using existing cash flow and debt facilities,
additional funding will be necessary. Such increased sales costs and cash
requirements could have a material adverse effect on the Company's revenues and
earnings.
Other
- -----
The Company may also be subject to a variety of risks arising out of the Year
2000 Problem and the Euro Issue as more particularly set forth above.
The Company's real estate activities are subject to fluctuations in the real
estate marketplace as well as to significant competition from companies with
much larger real estate portfolios giving them significantly greater economies
of scale.
The Company's auto loan receivables business and credit card receivable
activities are subject to significant fluctuations in those consumer
marketplaces as well as to significant competition from companies with much
larger receivable portfolios. In addition, certain of the Company's competitors
in the auto receivables marketplace finance auto loans as an adjunct to their
primary automobile manufacturing businesses and may at times provide auto loans
at significantly below then-market interest rates in order to further the sale
of their automobiles.
The consumer loan market is highly competitive. The Company competes with many
types of institutions including banks, finance companies, credit unions and the
finance subsidiaries of large automobile manufacturers. The interest rates that
the Company can charge and, therefore, the yields on such vary based on this
competitive environment. The Company is reliant on its relationships with
various automobile dealers and this relationship is highly dependent on the
rates and service that the Company provides. There is no guarantee that in this
competitive environment the Company can maintain its relationships with these
dealers. Auto loan and credit card portfolio losses can also be influenced
significantly by trends in the economy and credit markets which negatively
impact borrowers' ability to repay loans.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of the report:
Exhibit 3(i)(a)Registrant's Certificate of Incorporation, as filed
November 28, 1969, incorporated by reference to Exhibit (3)(i) to
the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994 (the
"1994 Annual Report")
Exhibit 3(i)(b)Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1, 1985, incorporated by reference
to Exhibit (3)(ii) to the 1994 Annual Report
Exhibit 3(i)(c)Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1, 1987, incorporated by reference
to Exhibit (3)(iii) to the 1994 Annual Report
Exhibit 3(i)(d)Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated by
reference to Exhibit (3)(iv) to the 1994 Annual Report
Exhibit(3)(ii) Registrant's By-Laws incorporated by reference to Exhibit 3(v) to
the Company's Form 10-Q for the Quarterly Period ended December
31, 1994
Exhibit 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 April 21, 1998 reporting under Item 5 "Other
Events" the filing of an earnings press release by the Registrant
on April 21, 1998 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: August 14, 1998 /S/ Martin L. Flanagan
MARTIN L. FLANAGAN
Senior Vice President,
Chief Financial Officer
<PAGE>
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 Nine months ended
June 30 June 30
- --------------------------------------------------------------------------------
(Dollars and shares in 1998 1997 1998 1997
thousands)
- --------------------------------------------------------------------------------
Weighted average shares
outstanding 252,860 252,186 252,771 251,803
Incremental shares from
assumed conversions 235 574 612 656
=============================================
Adjusted weighted average
shares outstanding 253,095 252,760 253,383 252,459
=============================================
Net income $131,013 $111,188 $388,197 $308,828
Earnings per share:
Basic $0.52 $0.44 $1.54 $1.23
Diluted $0.52 $0.44 $1.53 $1.22
Exhibit 12
COMPUTATIONS OF RATIOS OF EARNINGS TO FIXED CHARGES
Three months ended Nine months ended
June 30 June 30
(Dollars in thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
Income before taxes $177,131 $158,274 $524,590 $439,613
Add fixed charges:
Interest expense 10,932 10,869 29,897 35,930
Interest factor on
rent 3,127 2,330 8,957 6,759
--------------------------------------------------
Total fixed charges $14,059 $13,199 $38,854 $42,689
--------------------------------------------------
Earnings before fixed
charges and taxes
on income $191,190 $171,473 $563,444 $482,302
==================================================
Ratio of earnings to
fixed charges 13.6 13.0 14.5 11.3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 693,837
<SECURITIES> 187,184
<RECEIVABLES> 249,501
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,146,032
<PP&E> 325,959
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,575,419
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0
0
<COMMON> 25,295
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<INCOME-TAX> 136,393
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<EPS-PRIMARY> 1.54
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</TABLE>
