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, 1999
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: 252,133,500 shares, common stock, par value $.10 per share at
July 31, 1999.
1
<PAGE>
PART I -FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
FRANKLIN RESOURCES, INC.
Consolidated Statements of Income
Unaudited
Three months ended Nine months ended
(In thousands except per share June 30 June 30
data)
- ------------------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Operating revenues:
Investment management fees $340,515 $373,820 $993,304 $1,073,622
Underwriting and distribution
fees 176,118 252,354 543,128 774,164
Shareholder servicing fees 45,376 40,793 138,872 117,798
Other 4,766 5,629 13,221 13,102
- ------------------------------------------------------------------------------
Total operating revenues 566,775 672,596 1,688,525 1,978,686
- ------------------------------------------------------------------------------
Operating expenses:
Underwriting and distribution 151,353 220,660 467,699 668,378
Compensation and benefits 126,821 152,688 389,451 418,723
Information systems, technology
and occupancy 53,829 37,312 154,419 129,770
Advertising and promotion 26,379 33,782 80,010 92,387
Amortization of deferred sales
commissions 23,600 27,753 71,582 78,174
Amortization of intangible assets 9,283 9,336 27,939 27,280
Other 19,004 22,846 60,579 64,889
Restructuring charges - - 58,455 -
- ------------------------------------------------------------------------------
Total operating expenses 410,269 504,377 1,310,134 1,479,601
- ------------------------------------------------------------------------------
Operating income 156,506 168,219 378,391 499,085
- ------------------------------------------------------------------------------
Other income (expense):
Investment and other income 12,227 15,435 37,253 42,006
Interest expense (4,876) (6,523) (15,825) (16,501)
- ------------------------------------------------------------------------------
Other income (expense), net 7,351 8,912 21,428 25,505
- ------------------------------------------------------------------------------
Income before taxes on income 163,857 177,131 399,819 524,590
Taxes on income 40,550 46,118 105,549 136,393
- ------------------------------------------------------------------------------
Net income $123,307 $131,013 $294,270 $388,197
==============================================================================
Earnings per share:
Basic $0.49 $0.52 $1.17 $1.54
Diluted $0.49 $0.52 $1.16 $1.53
Dividends per share $0.055 $0.05 $0.165 $0.15
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited
June 30 September 30
(In thousands) 1999 1998
- ------------------------------------------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents $734,628 $537,188
Receivables:
Fees from Franklin Templeton funds 221,416 204,826
Other 29,937 25,773
Investment securities,
available-for-sale 466,203 470,065
Prepaid expenses and other 13,726 22,137
- -------------------------------------------------------------------------
Total current assets 1,465,910 1,259,989
- -------------------------------------------------------------------------
Banking/Finance assets:
Cash and cash equivalents 7,948 18,855
Loans receivable, net 142,957 165,074
Investment securities,
available-for-sale 25,192 21,847
Other 4,357 4,991
- -------------------------------------------------------------------------
Total banking/finance assets 180,454 210,767
- -------------------------------------------------------------------------
Other assets:
Deferred sales commissions 107,195 123,508
Property and equipment, net 390,307 349,229
Intangible assets, net 1,212,059 1,253,713
Receivable from banking/finance group 62,748 87,282
Other 156,431 195,561
- -------------------------------------------------------------------------
Total other assets 1,928,740 2,009,293
- -------------------------------------------------------------------------
Total assets $3,575,104 $3,480,049
=========================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited
June 30 September 30
(In thousands except share data) 1999 1998
- -----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Compensation and benefits $131,281 $156,253
Commissions 59,243 53,174
Income taxes 56,791 67,319
Short-term debt 58,925 117,956
Other 122,227 82,691
- -----------------------------------------------------------------------------
Total current liabilities 428,467 477,393
- -----------------------------------------------------------------------------
Banking/finance liabilities:
Deposits:
Interest bearing 56,911 81,615
Non-interest bearing 6,641 6,166
Payable to parent 62,748 87,282
Other 14,455 3,018
- -----------------------------------------------------------------------------
Total banking/finance liabilities 140,755 178,081
- -----------------------------------------------------------------------------
Other Liabilities:
Long-term debt 395,666 494,459
Other 44,053 49,349
- -----------------------------------------------------------------------------
Total other liabilities 439,719 543,808
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Total liabilities 1,008,941 1,199,282
- -----------------------------------------------------------------------------
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; 252,101,635 and
251,741,578 shares
issued and outstanding, respectively 25,210 25,174
Capital in excess of par value 103,998 93,033
Retained earnings 2,447,487 2,194,835
Other (3,527) (4,230)
Accumulated other comprehensive (7,005) (28,045)
income
- -----------------------------------------------------------------------------
Total stockholders' equity 2,566,163 2,280,767
- -----------------------------------------------------------------------------
Total liabilities and
stockholders' equity $3,575,104 $3,480,049
=============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
FRANKLIN RESOURCES, INC.
Consolidated Statements of Cash Flows Nine month ended
Unaudited June 30
(In thousands) 1999 1998
- ------------------------------------------------------------------------------
Net income $294,270 $388,197
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in receivables,
prepaid expenses and other assets (73,857) (23,240)
Increase in deferred sales commissions (55,269) (95,299)
Increase in other current liabilities 40,156 38,161
Restructuring asset write-down 28,948 -
(Decrease) increase in income taxes payable (10,529) 13,049
Increase in commissions payable 6,069 8,847
Increase in compensation and benefits 6,938 23,256
Depreciation and amortization 149,978 139,478
Losses (gains) on disposition of assets 685 (8,474)
- ------------------------------------------------------------------------------
Net cash provided by operating activities 387,389 483,975
- ------------------------------------------------------------------------------
Purchase of investments (555,826) (113,619)
Liquidation of investments 663,903 43,334
Purchase of banking/finance investments (19,967) (9,258)
Liquidation of banking/finance investments 21,931 10,117
Proceeds from securitization of
banking/finance loans 106,375 -
Net (origination) collection of
banking/finance loans (87,317) 6,964
Purchase of property and equipment (92,209) (124,796)
Proceeds from sale of property 2,635 14,517
Other - (64,333)
- ------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 39,525 (237,074)
- ------------------------------------------------------------------------------
Decrease in bank deposits (24,230) (7,492)
Exercise of common stock options 1,095 2,846
Dividends paid on common stock (40,337) (36,627)
Purchase of Company stock (24,434) (2,942)
Issuance of debt 45,430 148,927
Payments on debt (197,905) (87,046)
- ------------------------------------------------------------------------------
Net cash (used in) provided by financing
activities (240,381) 17,666
- ------------------------------------------------------------------------------
Increase in cash and cash equivalents 186,533 264,567
Cash and cash equivalents, beginning of
period 556,043 442,741
- ------------------------------------------------------------------------------
Cash and cash equivalents, end of period $742,576 $707,308
- ------------------------------------------------------------------------------
Supplemental disclosure of non-cash information:
Value of common stock issued, principally
for the Company's incentive plans $33,567 $37,119
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
FRANKLIN RESOURCES, INC.
Notes to Consolidated Financial Statements
June 30, 1999
(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 ("SEC").
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, 1998.
2. Restructuring
-------------
During the quarter ended December 31, 1998, the Company adopted a
restructuring plan estimated to cost approximately $58 million and designed
to reduce costs, improve service levels and reprioritize the Company's
business activities. During that quarter, the Company recorded a pretax
charge of $46.1 million in connection with the plan. Additionally, during the
quarter ended March 31, 1999, the Company recorded a second and final
restructuring pretax charge of $12.3 million, also in connection with the
plan. Approximately 80% of the total estimated charges are expected to be
utilized during the current fiscal year. As of June 30, 1999, the Company has
utilized $41.7 million of the total estimated charges. Approximately $12.8
million of the amounts utilized represented cash payments. The remaining
balance of $16.7 million is included in other current liabilities. See the
table below.
Balance at Additional Restructuring Balance
December 31, restructuring liability at June 30,
(In millions) 1998 liability utilized 1999
---------------------------------------------------------------------------
Asset write-down $31.9 - $(28.9) $3.0
Employee severance
and termination
benefits - $12.3 (8.5) 3.8
Lease termination
charges and other 14.2 - (4.3) 9.9
===========================================================================
Total $46.1 $12.3 $(41.7) $16.7
===========================================================================
6
<PAGE>
The material portion, $31.9 million, of the anticipated total restructuring
charges of approximately $58.4 million was for asset write-downs related to
discontinued products. More specifically, these charges were primarily for
the write-off of intangible and other assets with respect to the termination
of investment management agreements related to several off-shore investment
products and several domestic retail products. The products in question have
either been terminated or are in the process of termination. The largest
single write-down was for $13.7 million of intangible assets related to an
offshore non-retail product.
The other significant component, $12.3 million, of the estimated total
restructuring charges was for severance and termination benefits with respect
to efficiencies made possible by the Company's conversion to one shareholder
servicing system. Approximately 560 positions, or 7% of the Company's
workforce at December 31, 1998, have been eliminated. Although the reductions
were announced during first quarter, the charge was not recognized until
second quarter when the affected employees were notified. Substantially all
of the affected employees had left the Company at June 30, 1999.
3. Debt
----
At June 30, 1999 the Company had interest rate swap agreements, maturing
through October 2000, which effectively fix interest rates on $254.9 million
of commercial paper. The fixed rates of interest range from 6.24% to 6.65%.
At June 30, 1999, the weighted-average effective interest rate, including the
effect of interest-rate swap agreements, was 6.34% on approximately $453.7
million of outstanding debt.
4. Earnings per share
------------------
Earnings per share were computed as follows:
Three months ended Nine months ended
June 30 June 30
(In thousands except per
share amounts) 1999 1998 1999 1998
----------------------------------------------------------------------
Net income $123,307 $131,013 $294,270 $388,197
======================================================================
Weighted-average shares
outstanding - basic 252,103 252,860 252,161 252,771
Incremental shares from
assumed conversions 492 235 524 612
======================================================================
Weighted-average shares
outstanding - diluted 252,595 253,095 252,685 253,383
======================================================================
Earnings per share:
Basic $0.49 $0.52 $1.17 $1.54
Diluted $0.49 $0.52 $1.16 $1.53
---------------------------------------------------------------------
7
<PAGE>
5. Banking/Finance loans receivable
--------------------------------
In May 1999, the Company sold auto loans receivable with a net book value of
$109.7 million to a securitization trust. The sale proceeds of this
securitization were $106.4 million. Gain from the sale of these assets,
computed as the difference between the sale proceeds, net of transaction
costs, and the Company's carrying value of the receivables, plus the present
value of the estimated excess future cash flows to be received by the Company
over the life of the securitization, was not material. Significant
assumptions used in determining the gain were an excess cash flow discount
rate of 12% and a cumulative credit loss rate of 3.44%.
6. Comprehensive Income
--------------------
During the quarter ended December 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." SFAS 130 establishes the disclosure requirements for reporting
comprehensive income in an entity's financial statements. Total comprehensive
income includes net income, unrealized gains and losses on available-for-sale
securities and foreign currency translation adjustments. These amounts were
formerly reported as "Other" within Stockholders' equity and are now reported
under "Accumulated other comprehensive income." Items relating to movements
in the Company's stock, such as deferred compensation in the form of
restricted stock, remain in "Other" within Stockholders' equity. There was no
impact on previously reported net income arising from the adoption of SFAS
130.
Comprehensive income for the three- and nine-month periods ended June 30,
1999 was as follows:
Three months ended Nine months ended
June 30 June 30
(In thousands) 1999 1998 1999 1998
---------------------------------------------------------------------
Net income $123,307 $131,013 $294,270 $388,197
Net unrealized gain
(loss) on
available-for-sale
securities 6,919 (3,471) 17,311 (4,065)
Foreign currency
translation adjustments 2,703 (6,038) 3,729 ( 13,903)
=====================================================================
Comprehensive income $132,929 $121,504 $315,310 $370,229
=====================================================================
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD-LOOKING STATEMENTS
The following discussion contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, which include
phrases with the type of wording further described in Part II, Item 5
"Forward-Looking Statements and Risk Factors," which 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.
8
<PAGE>
GENERAL
Franklin Resources, Inc. and its consolidated subsidiaries (the "Company")
derive substantially all of their revenues and net income from providing
investment management, administration, distribution and related services to the
Franklin, Templeton and Mutual Series funds, institutional accounts and other
investment products (collectively, the "Franklin Templeton Group"). The Company
has a diversified base of assets under management and a full range of investment
products and services to meet the needs of most individuals and institutions.
ASSETS UNDER MANAGEMENT
June 30 June 30
(In billions) 1999 1998
----------------------------------------------------------------
Franklin Templeton Group:
Equity:
Global/international $102.0 $105.4
Domestic (U.S.) 40.4 45.9
----------------------------------------------------------------
Total equity 142.4 151.3
----------------------------------------------------------------
Hybrid funds <F1> 10.8 12.4
Fixed-income:
Tax-free 50.0 49.1
Taxable
Domestic (primarily
U.S. Gov't.) 15.9 15.7
Global/international 3.9 4.1
----------------------------------------------------------------
Total fixed-income 69.8 68.9
----------------------------------------------------------------
Money funds 4.7 4.0
================================================================
Total end of period $227.7 $236.6
================================================================
Monthly average for
the three-month $223.6 $240.5
period
================================================================
Monthly average for
the nine-month $219.2 $229.9
period
================================================================
<F1> Hybrid funds include asset allocation, balanced, flexible and
income-mixed funds as defined by the Investment Company Institute.
Assets under the Company's management at June 30, 1999 decreased by $8.9 billion
(4%) from June 30, 1998. During the three- and nine-month periods ended June 30,
1999, redemptions have exceeded purchases in the equity funds managed by the
Company. Market appreciation for these assets has partially offset this trend
during such three- and nine-month periods.
9
<PAGE>
Equity assets now comprise 63% of total assets under management compared to 64%
at June 30, 1998. Fixed income funds now comprise 31% of total assets under
management, as compared to 29% at June 30, 1998. The shift in the Company's
managed asset mix toward lower fee fixed-income products and lower average
assets has contributed to lower investment management fee revenues for the
three- and nine-month periods ended June 30, 1999, as compared to the same
periods a year ago.
RESULTS OF OPERATIONS
Results of operations
Three months ended Nine months ended
June 30 June 30
(In millions 1999 1998 Change 1999 1998 Change
except per
share amounts)
---------------------------------------------------------------------------
Net income $123.3 $131.0 (6)% $294.3 $388.2 (24)%
Earnings per
share
Basic $0.49 $0.52 (6)% $1.17 $1.54 (24)%
Diluted $0.49 $0.52 (6)% $1.16 $1.53 (24)%
Operating margin 28% 25% 22% 25%
Operating margin
before
restructuring
charges - - 26% -
---------------------------------------------------------------------------
Net income during the three- and nine-month periods ended June 1999 decreased
compared to the same periods last year, as a result of decreased investment
management fees from reduced average assets under management. The $58.4 million
restructuring charge also reduced net income during the nine-month period.
Operating margins for the three months ended June 30, 1999 increased due to
lower Underwriting and distribution expense as a result of lower mutual fund
sales and due to the Company's successful efforts to reduce operating expenses
following the implementation of the restructuring plan.
Operating
revenues
Three months ended Nine months ended
June 30 June 30
(In millions) 1999 1998 Change 1999 1998 Change
-------------------------------------------------------------------------
Investment
management
fees $340.5 $373.8 (9)% $993.3 $1,073.6 (7)%
Underwriting and
distribution fees 176.1 252.4 (30)% 543.1 774.2 (30)%
Shareholder
servicing fees 45.4 40.8 11% 138.9 117.8 18%
Other, net 4.8 5.6 (14)% 13.2 13.1 1%
=========================================================================
Total operating
revenues $566.8 $672.6 (16)% $1,688.5 $1,978.7 (15)%
=========================================================================
10
<PAGE>
Investment management fees, the largest component of the Company's operating
revenues, are generally calculated under fixed-fee arrangements, as a percentage
of the value of assets under management. The Company's investment management fee
revenues are generally affected by market appreciation or depreciation in assets
under management as well as the flow of funds into or out of these portfolios.
There have been no significant changes in the investment management fee
structures for the Franklin Templeton Group in the periods under review.
The Company's effective investment management fee rate (investment management
fees divided by average assets under management) decreased slightly in the
quarter ended June 1999 to 0.61% compared to 0.62% in the same quarter last
year, primarily due to the relative increase in lower fee fixed-income assets
under management. 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. Underwriting and distribution fees decreased
30% over both the same three- and nine-month periods last year primarily as a
result of decreased mutual fund sales and average assets under management.
Shareholder servicing fees are generally fixed charges per account that vary
with the particular type of fund and the service being rendered. During the
periods under review, shareholder servicing fees increased as a result of an
increase in billable shareholder accounts to 10.7 million from 8.7 million a
year ago and an increase in the average per account charge. In accordance with
current agreements with the funds, closed accounts in a given calendar year
remain billable through the second quarter of the following calendar year at a
reduced fee level. At June 30, 1999, there were 2.7 million of such accounts.
Other, net
Three months ended Nine months ended
June 30 June 30
(In millions) 1999 1998 Change 1999 1998 Change
---------------------------------------------------------------------
Revenues $8.6 $10.7 (20)% $24.7 $30.8 (20)%
Provision for loan
losses (1.4) (0.7) 100% (3.9) (4.3) (9)%
Interest expense (2.4) (4.4) (45)% (7.6) (13.4) (43)%
=====================================================================
Total other, net $4.8 $5.6 (14)% $13.2 $13.1 1%
=====================================================================
Other, net consists primarily of revenues from the Company's banking and finance
subsidiaries, net of interest expense and the provision for loan losses. The
revenues and interest expense of the banking and finance subsidiaries have
decreased in the current three- and nine-month periods as a result of the
securitizations of $134.3 million and $109.7 million of consumer auto loans that
took place during September 1998 and May 1999, respectively. Additionally,
interest expense decreased as a result of reduced broker deposits used to
finance loans receivable during the three and nine months under review. The
Company excludes securitized loans and the related allowance for loan losses
from its balance sheet and excludes the associated interest revenues and
provision for loan losses from its results of operations.
11
<PAGE>
Operating expenses
Three months ended Nine months ended
June 30 June 30
(In millions) 1999 1998 Change 1999 1998 Change
------------------------------------------------------------------------
Underwriting and
distribution $151.4 $220.7 (31)% $467.7 $668.4 (30)%
Compensation and
benefits 126.8 152.7 (17)% 389.4 418.7 (7)%
Information systems,
technology and
occupancy 53.8 37.3 44% 154.4 129.7 19%
Advertising and
promotion 26.4 33.8 (22)% 80.0 92.4 (13)%
Amortization of
deferred sales
commissions 23.6 27.8 (15)% 71.6 78.2 (8)%
Amortization of
intangible assets 9.3 9.3 - 27.9 27.3 2%
Other 19.0 22.8 (17)% 60.7 64.9 (6)%
Restructuring
charges - - - 58.4 - -
------------------------------------------------------------------------
Total operating
expenses $410.3 $504.4 (19)% $1,310.1 $1,479.6 (11)%
========================================================================
Underwriting and distribution includes sales commissions and distribution fees
paid to brokers and other third party intermediaries. The decrease in
underwriting and distribution expenses was consistent with the decrease in
mutual fund sales and average assets under management.
Compensation and benefits decreased 17% and 7%, respectively, from the same
three- and nine-month periods in 1998. The decreases were due to the effects of
the reduction in the Company's workforce in accordance with the restructuring
plan. Affected employees were notified on January 14, 1999, and substantially
all had left the Company by June 30, 1999. The Company continues to experience
upward pressure on compensation and benefit levels due to the effects of a very
competitive labor market.
Information systems, technology and occupancy costs increased 44% and 19%,
respectively, from the same three- and nine-month periods in 1998. These
increases were due to expenditures on major systems implementations, the Year
2000 program and European Monetary Unit conversions. The Company anticipates
that such major systems undertakings will continue to have an impact on the
Company's operating results through the year 2000 and beyond. See "Year 2000
Readiness Disclosure" below.
Advertising and promotion expenses decreased over the same periods last year,
mainly due to reduced promotional activity.
Amortization of deferred sales commissions decreased 15% and 8% over the same
three- and nine-month periods in 1998. Sales commissions on certain Franklin
Templeton Group products which are advanced by distribution subsidiaries of the
Company are capitalized and amortized over periods not exceeding eight years --
the period in which management estimates that they will be recovered from
distribution plan payments and from contingent deferred sales charges. Reduced
sales in fiscal 1999 have led to reductions in deferred sales commissions and
the related amortization.
12
<PAGE>
During the nine months ended June 30, 1999, the Company recognized pretax
restructuring charges of $58.4 million (or $0.17 per diluted share after tax).
These charges were related to a plan announced and initiated by management in
the first quarter of fiscal 1999. See Note 2 to the financial statements. The
Company does not expect to incur any additional charges with respect to the plan
during fiscal 1999.
Of the $58.4 million estimated total restructuring charges, approximately 80%
are expected to be utilized during the current fiscal year. The anticipated lost
revenues associated with discontinued products are not expected to have a
material impact on ongoing results of operations. The net impact of the
restructuring plan is also not expected to have a material impact on the results
of operations for the current fiscal year or the results of any one geographic
region or product line.
At the completion of these restructuring efforts, the Company's annual operating
expenses are expected to decrease approximately $100 million from peak levels in
fiscal 1998, assuming a continuation of the business environment at the time of
the restructuring. The operating expense savings in future periods are based on
an analysis of current business activities and a variety of cost-savings
measures. A substantial portion of these anticipated savings are expected to
come from decreased employee and occupancy costs as a result of the reduction in
the workforce discussed above. In the three- and nine-months ended June 30, 1999
the savings recognized from the restructuring plan have been partially offset by
increased information system and technology costs as discussed above.
Other income/(expenses):
Three months ended Nine months ended
June 30 June 30
(In millions) 1999 1998 Change 1999 1998 Change
---------------------------------------------------------------------
Investment and other $12.2 $15.4 (21)% $37.2 $42.0 (11)%
income
Interest expense (4.8) (6.5) (26)% (15.8) (16.5) (4)%
=====================================================================
Other income/(expenses) $7.4 $8.9 (17)% $21.4 $25.5 (16)%
=====================================================================
Investment and other income decreased during the three- and nine-month periods
ended June 1999 compared with the prior year because of reduced realized gains,
partially offset by increased investment income arising from additional
investments purchased during the periods under review.
Interest expense decreased over the same periods a year ago due to a reduction
in debt used to finance operations. During the same periods, debt used to
finance consumer auto loans also decreased resulting in lower interest expense
for the banking/finance group. (See Other, net revenues above).
Taxes on income
The Company's effective income tax rate for the nine months ended June 1999
remained relatively stable at 26% compared to the same period last year. For the
current fiscal year, the Company does not expect a significant change in the
relative contributions of foreign earnings subject to reduced tax rates that are
not currently included in U.S. taxable income.
13
<PAGE>
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999 the Company's assets aggregated $3.6 billion compared to
approximately $3.5 billion at September 30, 1998. Stockholders' equity
approximated $2.6 billion at June 30, 1999 compared to approximately $2.3
billion at September 30, 1998. The increase in stockholders' equity was
primarily a result of net income. Cash generated from operations was used to pay
down long- and short-term debt, reducing outstanding debt to $454.6 million at
June 30, 1999, from $612.4 million at September 30, 1998.
Cash provided by operating activities for the nine months ended June 1999
decreased to $387.4 million from $484.0 million in the same period last year.
This decline was due mainly to lower net income in the current fiscal year. The
decrease in net income was due to lower operating revenues and the restructuring
plan. The Company sold $108.1 million of investment securities, net of its
purchases and received $106.4 million from the securitization of auto loan
receivables. Banking/finance loans and other assets had increased $109.6 million
from September 30, 1998 before the securitization took place. Of the cash
generated from operations and investment sales, $92.2 million was used to
purchase property and equipment, $152.5 million to pay down and service debt,
net of new borrowings and $40.3 million was used to pay dividends on the
Company's common stock. During the nine months ended June 30,1999, the Company
paid $24.4 million to purchase approximately 0.8 million shares of the Company's
Common stock.
As of June 30, 1999, the Company had fixed interest rates on approximately
$414.9 million or 91% of its outstanding debt through its interest-rate swap
agreements and its medium-term note program.
The Company has entered into interim agreements to finance the construction of a
new corporate headquarters on a 32-acre site in San Mateo, California. An
owner-lessor trust has been set up to finance the construction and lease the
completed facility to the Company. The current estimate of construction costs is
approximately $180 million. The Company expects to lease the facility from the
trust under an operating lease agreement which has not been finalized but which
is expected to provide for a substantial residual value guarantee by the
Company. The finalized agreements are not expected to materially impact the
Company's cash flows or financial condition during the lease period, which is
expected to be five years with options to renew the lease for two additional
five-year terms subject to certain conditions. The Company purchased land for
the new facility in a separate transaction for $21.4 million.
Management expects that the principal needs for cash will be to advance sales
commissions, fund property and equipment acquisitions, pay stockholder 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 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 and its ability to issue stock will
be sufficient to meet its present and reasonably foreseeable cash needs.
14
<PAGE>
Year 2000 Readiness Disclosure
Information contained in this section regarding the Company's Year 2000
preparations is provided as of July 31, 1999, unless otherwise stated. Because
the Year 2000 project is an ongoing Company-wide endeavor, the state of the
Company's progress changes daily.
All but one of the Company's mission-critical systems have now been certified as
Year 2000 compliant. Such certified systems include the Company's
mission-critical securities trading systems, portfolio accounting systems,
customer service systems, general ledger systems, and international and domestic
transfer agency systems. The Company intends to have its remaining
mission-critical system, a replacement for an existing sales and marketing
system, certified by the end of September, 1999. The Company uses this sales and
marketing system to warehouse, track and process certain sales data, but it is
not used to perform any investment management or shareholder record-keeping
activities.
In 1999 the Company successfully participated in several nationwide,
industry-wide tests: the Securities Industry Association's "Street Wide Testing"
held over five weekends in March and April; testing of major real-time market
data services in May; and six days of testing interfaces with major
broker/dealers in July. These tests included simulated Year 2000 securities
transactions and market data feeds, and involved the major North American
securities exchanges, securities clearing organizations, news services, market
data services, major banks, brokerages and investment advisory and investment
management companies in the United States. The Company may take part in
additional industry-wide and point-to-point testing when available and
appropriate.
The Company's Year 2000 compliance plan is comprised of four phases: Assessment,
Remediation, Testing and Implementation. When testing a system, the Company
considers it to be Year 2000 compliant when it has passed a number of prescribed
tests either (a) established by the Company and/or the vendor of the system, (b)
viewed as the industry standard, or (c) suggested by regulators. For certain
third-party systems that cannot be tested by the Company, depending upon the
importance of the system to the Company's operations, the Company may rely upon
vendor representations, the results of point-to-point testing, or test scripts
supplied by the vendor. However, no testing can guarantee that a system which
has been certified as Year 2000 compliant will not have difficulties associated
with the Year 2000.
15
<PAGE>
Assessment: systems are inventoried, budgets and strategies are created to
address identified problems.
Remediation: software corrections, upgrades and other fixes are made;
questionnaires requesting Year 2000 compliance assurances are
sent to vendors and, in some cases, test scripts are requested.
Testing: internal systems are tested on a stand-alone basis;
point-to-point testing is conducted for some systems, and the
system is certified as Year 2000 compliant.
Implementation: systems that have been identified as being Year 2000
compliant are put into normal business operation; end-user
training is conducted.
The Company's Year 2000 plan prioritizes the Year 2000 certification of
mission-critical systems over other systems. The following percentages refer
only to mission-critical systems.
Phase of % of Mission-Critical
Project Systems Complete
-------- ---------------------
Assessment 100%
Remediation 100%
Testing 98%
Implementation 98%
The non mission-critical systems of the Company are either maintained by the
Company's Information Systems & Technology ("IS&T") department or are maintained
by internal business users (end-user maintained systems). IS&T-maintained
systems have been given high priority due to their relative importance while
end-user maintained systems have been given lower priorities. The percentages
below include only IS&T-maintained systems.
16
<PAGE>
Phase of % of Non Mission-Critical
Project IS&T-Maintained Systems Complete
-------- --------------------------------
Assessment 100%
Remediation 100%
Testing 91%
Implementation 89%
Third Parties and Year 2000.
- -----------------------------
The Company's business operations are heavily dependent upon a complex worldwide
network of information technology ("IT") systems that are owned and managed in
whole or in part by third parties, including some of the Company's
mission-critical systems. These third-party systems include data feeds, trading
systems, securities transfer agent operations and stock market links. The
Company has contacted all of its major external suppliers of goods and services
to assess their compliance efforts and the Company's exposure in the event of a
failure of third-party compliance efforts. In the process of certifying its
systems, the Company has received responses from certain system suppliers and in
some cases has obtained additional information, written assurances of
certification, or test scripts. In addition, certain of these third parties
assisted the Company with modifying and testing the Company's systems, and
participated in Street Wide Testing with the Company and with one another. To
date, no major third-party supplier has informed the Company that it would not
be Year 2000 compliant or Year 2000 ready by the millennium date, nor has the
Company's testing with third parties revealed any significant non-compliance
issues. Such communication with third parties will continue as the Company
proceeds with its Year 2000 project, and into the Year 2000 to monitor system
functions.
Cost Estimates.
- ---------------
The total estimated costs through March 2000 associated with the Year 2000
project are expected to be between $50 million and $60 million, including an
unallocated amount for unanticipated costs. These estimated costs consist mainly
of internal and third-party labor costs which are expensed as incurred. The
total amount expended on the project through July 31, 1999 was approximately
$36.5 million. The Company's estimate of the total costs to complete the Year
2000 project will continue to be refined in future periods. Further costs are
expected to be incurred before March 2000 for contractors to develop and test
contingency plans, independent validation and verification, test lab activities
and staffing, and event logistics and management for the actual millennium
rollover. The Company believes that its existing liquid assets, together with
expected cash flow from operations, combined with its borrowing capacity under
existing credit facilities will be sufficient to fund anticipated expenditures.
17
<PAGE>
Contingency Planning.
- ----------------------
Extensive preparation efforts cannot guarantee a total absence of Year 2000
problems. Therefore, the Company continues to develop, exercise, and integrate
comprehensive worldwide contingency plans, which are expected to be
substantially completed by September, 1999. The Company expects to refine,
change and update its contingency plans throughout the end of calendar 1999 and
through the rollover date. Through the Company's continued participation in
industry-wide testing, communications with third parties, and use of business
continuity planning specialists and other consultants, the Company seeks to
identify areas of potential disruptions and, to the extent possible, to minimize
such disruptions. However, it is not possible accurately to predict which
internal or external systems or utilities may be affected worldwide, or the
exact nature of all problems that might occur.
The Company has created a worldwide Year 2000 cross-over team with
representatives from each major business function. This cross-over planning
includes anticipating and preparing for operational issues such as increased
shareholder demands for certificates, cash flow related to redemptions, and
market adjustments. The cross-over team is preparing processes to provide a
rapid response to any unanticipated problems that occur and will staff a Year
2000 command center at year end. In light of the complexity of the Company's
business processes there are, in certain cases, limited or no alternatives to
some of its mission-critical systems or public utilities. While redundant
systems and back-up power supplies are in place to address communication or
power interruptions, if certain public utilities fail in multiple locations or
if mission-critical systems fail, there could be a material adverse impact upon
the Company's business, financial condition and results of operations. This is
especially true if such outages or failures were to extend for a period of many
days. Similarly, if the systems of important third parties such as securities
transfer agents, stock exchanges, data providers or others fail, this could have
a material adverse effect on the Company's business, financial condition and
results of operations.
18
<PAGE>
Non-IT Systems.
- ---------------
The Company's business operations are not heavily dependent on non-information
technology components or systems, such as elevators, electrical and security
systems, and devices such as fax machines and copiers ("non-IT systems"), and
none of the Company's mission-critical systems is a non-IT system. Based upon
the Company's review and information received from third parties, all important
non-IT systems are Year 2000 compliant. However, like other businesses, the
Company is dependent upon certain non-information technology systems such as
third-party long distance telephone and data lines, and public utility
electrical power. The Company does not expect to experience any material effects
related to the Year 2000 compliance of non-IT systems unless there are telephone
and data line, or general public utility problems, beyond the Company's control.
European Monetary Unit (the "Euro")
In December 1998, the Company successfully converted its international computer
applications software and its business operations to enable transaction
processing and record keeping using the Euro, and has experienced no material
adverse impact as a result. Many of the Company's managed funds and financial
products have substantial investments in countries whose currencies eventually
will be completely replaced by the Euro. All aspects of the Company's investment
process, including trading, foreign exchange, payments, settlements, cash
accounts, custodial accounts and accounting have been affected by the
implementation of the Euro (the "Euro Issue").
Because the use of the Euro will be phased-in over several years, the Company is
not presently able to assess the cost impact of the Euro Issue on the Company,
but does not presently anticipate that it will have a material adverse effect on
the Company's cash flows, operations or operating results. The Company is
generally expensing costs incurred relating to the Euro Issue during the period
in which they are incurred.
Specific Risks Associated with the Year 2000 and the Euro.
- -------------------------------------------------------------------------------
The Company's ability to manage 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. The Company could become
subject to legal claims in the event of any Year 2000 or Euro problem in the
Company's business operations. In addition, the Company and its subsidiaries are
subject to regulation by various domestic and international authorities which
could impose sanctions or fines or cause the Company to cease certain operations
in the event its systems are not Year 2000 compliant. A general disruption in
securities or capital markets, or withdrawal of funds by investors concerned
about the Year 2000 problem or the Euro Issue, could have a material adverse
effect upon the Company's business, financial condition and results of
operations.
19
<PAGE>
Factors that could influence the impact of the Year 2000 problem include the
success of the Company in identifying systems and programs that are affected.
Other factors include 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, magnitude and availability
of related labor and consulting costs; the success of the Company in correcting
its internal systems and the success of the Company's external partners and
suppliers in addressing their respective Year 2000 problems.
The failure of organizations such as those mentioned above under "Third Parties
and Year 2000" to resolve their own issues with respect to the Year 2000 problem
could have a material adverse effect on the Company's business, financial
condition and results of operations. Although certain third parties may
represent that their systems are Year 2000 ready, there can be no assurance that
their systems are in fact Year 2000 compliant or that they have provided
complete and accurate information to the Company.
In addition, the establishment of the Euro may result in market volatility,
expose investments to currency risk due to fluctuations in multiple currencies,
change the economic environment and behavior of investors, or change the
competitive environment for the Company's business in Europe. Similarly,
companies operating in more than one country, such as the Company, may gain or
lose competitive advantages because of the Euro in ways that are not
predictable. It is not currently possible to predict the impact of the Euro on
the business or financial condition of European issuers which Company-sponsored
funds may hold in their portfolios or the impact on the value of fund shares.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the financial position of the Company is
subjected to a variety of risks, including market risk associated with interest
rate movements. The Company is exposed to changes in interest rates primarily in
its debt transactions. Through its interest-rate swap agreements and its
medium-term note program the Company has effectively fixed the rate of interest
it pays on 91% of its debt outstanding at June 30, 1999. As a result, the
Company does not believe that the effect of reasonably possible near-term
changes in interest rates on the Company's financial position, results of
operations or cash flow would be material.
20
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in the litigation previously reported
in the Form 10-Q of the Company for the period ended December 31,1998, filed
with the SEC on February 12, 1999.
The Company is involved from time to time in litigation relating to claims
arising in the normal course of business. Management is of the opinion that the
ultimate resolution of such claims will not materially affect the Company's
business or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of Franklin Resources, Inc. was
held at 10:00 a.m., Pacific Standard Time, on January 28, 1999 at
the offices of the Company at 777 Mariners Island Boulevard, San
Mateo, California.
The three proposals presented at the meeting were:
1. The election of nine (9) directors to hold office until the next
Annual Meeting of Stockholders or until their successors are elected
and shall qualify.
2. The ratification of the appointment by the Board of Directors of
PricewaterhouseCoopers LLP as the Company's independent accountants
for the fiscal year ending September 30, 1999.
3. The adoption of a 1998 Universal Stock Incentive Plan for the award
of restricted stock, stock options and other performance units for
certain employees of the Company and the ratification of certain
grants thereunder.
(b) Each of the nine nominees for director was elected and received the
number of votes set forth below:
Name For Against
Harmon E. Burns 217,909,487 2,283,778
F. Warren Hellman 198,056,314 22,136,951
Charles B. Johnson 217,899,197 2,294,068
Charles E. Johnson 217,912,754 2,280,511
Rupert H. Johnson, Jr. 217,914,269 2,278,996
Harry O. Kline 217,236,947 2,956,318
James A. McCarthy 218,184,198 2,009,067
Peter M. Sacerdote 217,903,245 2,290,020
Louis E. Woodworth 218,170,923 2,022,342
21
<PAGE>
(c) The ratification of the appointment of PricewaterhouseCoopers LLP as
the Company's independent accountants for the fiscal year ending
September 30, 1999, was approved by a vote of 219,696,618 shares in
favor, 88,199 shares against, and 408,448 shares abstaining.
The adoption of a 1998 Universal Stock Incentive Plan and the ratification of
certain grants thereunder was approved by a vote of 197,072,929 shares in favor,
16,639,174 shares against and 6,481,162 shares abstaining.
Item 5. Other Information
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. All
assumptions, anticipations, expectations and forecasts contained herein are
forward-looking statements that involve risks and uncertainties. Discussions in
"MD&A" about the anticipated effects of the Company's restructuring initiative,
estimated completion dates for phases of the Company's Year 2000 plan, related
cost estimates, statements about possible effects of the Year 2000 problem and
the Euro Issue, and possible contingency plans are also "forward-looking
statements." Such statements are subject to certain risks and uncertainties,
including those discussed 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, and
should be read in conjunction with the risk disclosure below. 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.
22
<PAGE>
General Factors
- ---------------
The ability of the Company to achieve the expected benefits of the restructuring
plan, including improved service levels and profitability and cost reductions,
is not certain and depends in part upon the Company's ability to make certain
internal operational changes and also upon world economic and market conditions.
The Company's revenues and income are derived primarily from the management of a
variety of financial services products. As discussed above, 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.
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. Such competition could negatively impact the Company's market
share, revenues and net income. Sales of mutual fund shares and other financial
services products can also be negatively affected by adverse general securities
market conditions, currency fluctuations, governmental regulations and
recessionary global economic conditions.
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 has caused distribution costs to increase.
The inability of the Company to compete and to distribute and sell its products
effectively would have a negative effect on the Company's level of assets under
management, related revenues and overall business and financial condition.
23
<PAGE>
Many of the Company's competitors have substantially greater resources than the
Company. In addition, there has been a trend of consolidation in the mutual fund
industry which has resulted in stronger competitors. The banking industry also
continues to expand its sponsorship of proprietary funds distributed through
third party distributors. To the extent that banks limit or restrict the sale of
Franklin, Templeton or Mutual Series shares through their distribution systems
in favor of their proprietary mutual funds, assets under management might
decline and the Company's revenues might be adversely affected.
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.
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. From 1992 until mid-1998, equity investments
increased as a percentage of the Company's assets under management. 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. Declines in global securities markets that affect the value
of these equities, recently have caused and in the future will cause, revenue
declines and may have a material adverse impact on the Company's business,
financial condition and results of operations. In addition, the Company derives
higher revenues and income from its equity assets and therefore shifts in assets
from equity to fixed-income would have an adverse impact on the Company's income
and revenues.
The Company's ability to meet anticipated cash needs is dependent upon factors
including the value of the Company's assets, the creditworthiness of the Company
as perceived by lenders and the market value of the Company's stock. Similarly,
the Company's ability to securitize future portfolios of auto loan and credit
card receivables would also be affected by the market's perception of those
portfolios, finance rates offered by competitors, and the general market for
private debt. The Company's inability to meet cash needs for various reasons as
and when required could have a negative affect on the Company's financial
condition and business operations.
24
<PAGE>
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.
A number of mutual fund sponsors presently market their funds without sales
charges. As investor interest in the mutual fund industry has increased,
competitive pressures have increased on sales charges of broker-dealer
distributed funds. In response to such competitive pressures, the Company might
be forced to lower or further adjust sales charges, substantially all of which
are currently paid to broker-dealers and other financial intermediaries. The
reduction in such sales charges could make the sale of shares of the Franklin,
Templeton and Mutual Series funds less attractive to the broker-dealer
community, which could in turn have a material adverse effect on the Company's
revenues. In the alternative, the Company might be required to pay additional
fees, commissions or charges in connection with the distribution of its shares
which could have a negative effect on the Company's earnings.
As a result of increased competitive pressures, in January 1999 the Company
implemented a new share structure using Class A, B and C shares in many of its
funds. Class B shares have not previously been offered by the Company, and
shares previously sold as "Class II shares" are now termed Class C shares. Both
Class B and C shares require certain charges to be paid by the Company or a
subsidiary of the Company to third-party intermediaries, which creates a
significant cash requirement. Past sales of Class C shares, which were first
introduced in 1995, have caused distribution expenses to exceed distribution
revenues for certain products and put increasing pressure on the Company's
profit margins. In addition, sales of Class C shares have increased relative to
the Company's overall sales, resulting in higher distribution expenses. The
Company anticipates that it will be able to finance these charges from its
existing cash flows and other financing arrangements. If the Company is unable
to fund commissions on Class B or C shares using existing cash flow and debt
facilities, the Company's liquidity could be negatively impacted and additional
funding will be necessary. Past sales of Class C shares are not necessarily
indicative of future sales volume, and future sales of Class B or C shares may
be lower or higher than sales of other types of share classes as a result of
changes in investor demand or lessened or unsuccessful sales efforts by the
Company.
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.
25
<PAGE>
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.
26
<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 12 Computations of ratios of earnings to fixed charges
Exhibit 27 Financial Data Schedule. (Filed with the Securities and
Exchange Commission only.)
(b) Reports on Form 8-K:
(i) Form 8-K dated April 21, 1999 reporting under Item 5
"Other Events" the filing of a press release by the
Registrant on April 21, 1999 and including said press
release as an Exhibit under Item 7 "Financial Statements
and Exhibits".
(ii) Form 8-K dated April 22, 1999 reporting under Item 5
"Other Events" the filing of a press release by the
Registrant on April 22, 1999 and including said press
release as an Exhibit under Item 7 "Financial Statements
and Exhibits".
(iii) Form 8-K dated June 16, 1999 reporting under Item 5 "Other
Events" the filing of a press release by the Registrant on
July 15, 1999 and including said press release as an
Exhibit under Item 7 "Financial Statements and Exhibits".
27
<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 12, 1999 /S/ Martin L. Flanagan
----------------------
MARTIN L. FLANAGAN
Senior Vice President
28
Exhibit 12
COMPUTATIONS OF RATIOS OF EARNINGS TO FIXED CHARGES
Three months ended Nine months ended
June 30 June 30
(Dollars in thousands) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Income before taxes $163,857 $177,131 $399,819 $524,590
Add fixed charges:
Interest expense 7,443 10,932 23,623 29,897
Interest factor on
rent 3,416 3,127 10,409 8,957
--------------------------------------------------
Total fixed charges $10,859 $14,059 $34,032 $38,854
--------------------------------------------------
Earnings before fixed
charges and taxes
on income $174,716 $191,190 $433,851 $563,44
==================================================
Ratio of earnings to
fixed charges 16.1 13.6 12.7 14.5
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
FINANCIAL STATEMENTS FOR THE QUARTER ENDED JUNE 30, 1999 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-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 734,628
<SECURITIES> 466,203
<RECEIVABLES> 251,353
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,465,910
<PP&E> 390,307
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,575,104
<CURRENT-LIABILITIES> 428,467
<BONDS> 0
0
0
<COMMON> 25,210
<OTHER-SE> 2,540,953
<TOTAL-LIABILITY-AND-EQUITY> 3,575,104
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<TOTAL-REVENUES> 1,688,525
<CGS> 0
<TOTAL-COSTS> 1,310,134
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<INTEREST-EXPENSE> 15,825
<INCOME-PRETAX> 399,819
<INCOME-TAX> 105,549
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 294,270
<EPS-BASIC> 1.17
<EPS-DILUTED> 1.16
</TABLE>
