FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended December 31, 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: 252,652,244 shares, common stock, par value $.10 per share at
January 31, 1999.
<PAGE>
PART I -FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
FRANKLIN RESOURCES, INC.
Consolidated Statements of Income
Unaudited
Three months ended
December 31
(In thousands, except per share data) 1998 1997
- --------------------------------------------------------------------------------
Operating revenues:
Investment management fees $330,370 $348,562
Underwriting and distribution fees 188,604 243,188
Shareholder servicing fees 45,734 37,606
Other, net 2,971 3,043
- --------------------------------------------------------------------------------
Total operating revenues 567,679 632,399
- --------------------------------------------------------------------------------
Operating expenses:
Underwriting and distribution 163,046 205,312
Compensation and benefits 133,814 133,291
Information systems, technology and occupancy 48,479 46,596
Advertising and promotion 28,238 27,362
Amortization of deferred sales commissions 25,019 23,896
Amortization of intangible assets 9,373 8,995
Other 22,805 19,505
Restructuring charge 46,140 -
- --------------------------------------------------------------------------------
Total operating expenses 476,914 464,957
- --------------------------------------------------------------------------------
Operating income 90,765 167,442
Other income/(expenses):
Investment and other income 10,536 14,975
Interest expense (6,173) (6,152)
- --------------------------------------------------------------------------------
Other income, net 4,363 8,823
- --------------------------------------------------------------------------------
Income before taxes on income 95,128 176,265
Taxes on income 26,636 45,750
- --------------------------------------------------------------------------------
Net income $68,492 $130,515
- --------------------------------------------------------------------------------
Earnings per share:
Basic $0.27 $0.52
Diluted $0.27 $0.52
Dividends per share $0.055 $0.05
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited
As of As of
December 31 September 30
(In thousands) 1998 1998
- --------------------------------------------------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents $634,178 $537,188
Receivables:
Fees from Franklin Templeton funds 212,094 204,826
Other 38,628 25,773
Investment securities,
available-for-sale 271,815 470,065
Prepaid expenses and other 20,353 22,137
- -----------------------------------------------------------------------------
Total current assets 1,177,068 1,259,989
- -----------------------------------------------------------------------------
Banking/Finance assets:
Cash and cash equivalents 16,992 18,855
Loans receivable, net 192,730 165,074
Investment securities,
available-for-sale 22,122 21,847
Other 3,794 4,991
- -----------------------------------------------------------------------------
Total banking/finance assets 235,638 210,767
- -----------------------------------------------------------------------------
Other assets:
Deferred sales commissions 108,327 123,508
Property and equipment, net 365,093 349,229
Intangible assets, net 1,244,340 1,253,713
Receivable from banking/finance group 112,989 87,282
Other 154,698 195,561
- -----------------------------------------------------------------------------
Total other assets 1,985,447 2,009,923
- -----------------------------------------------------------------------------
Total assets $3,398,153 $3,480,049
=============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited As of As of
December 31 September 30
(In thousands except share data) 1998 1998
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Compensation and benefits $73,059 $156,253
Commissions 56,170 53,174
Income taxes 37,386 67,319
Short-term debt 58,516 117,956
Other 134,589 82,691
- -----------------------------------------------------------------------------
Total current liabilities 359,720 477,393
- -----------------------------------------------------------------------------
Banking/finance liabilities:
Deposits:
Interest bearing 74,569 81,615
Non-interest bearing 5,647 6,166
Payable to parent 112,989 87,282
Other 8,225 3,018
- -----------------------------------------------------------------------------
Total banking/finance liabilities 201,430 178,081
- -----------------------------------------------------------------------------
Other Liabilities:
Long-term debt 413,233 494,459
Other 56,953 49,349
- -----------------------------------------------------------------------------
Total other liabilities 470,186 543,808
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Total liabilities 1,031,336 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; 252,441,498 and
252,715,488 shares
issued and outstanding, respectively 25,244 25,174
Capital in excess of par value 115,038 93,033
Retained earnings 2,249,443 2,194,835
Other (3,517) (4,230)
Accumulated other comprehensive income (19,391) (28,045)
- -----------------------------------------------------------------------------
Total stockholders' equity 2,366,817 2,280,767
- -----------------------------------------------------------------------------
Total liabilities and
stockholders' equity $3,398,153 $3,480,049
=============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FRANKLIN RESOURCES, INC.
Consolidated Statements of Cash Flows
Unaudited Three months ended
December 31
(In thousands) 1998 1997
- ---------------------------------------------------------------------------
Net income $68,492 $130,515
Adjustments to reconcile net income to net cash provided by operating
activities:
(Increase) decrease in receivables,
prepaid expenses and other current assets (39,970) 21,889
Increase in deferred sales commissions (9,838) (51,223)
Increase in restructuring liabilities 46,140 -
Increase in other current liabilities 18,998 32
(Decrease) increase in income taxes payable (29,933) 28,214
Increase in commissions payable 2,996 3,023
Decrease in compensation and benefits (55,425) (40,536)
Depreciation and amortization 51,553 42,448
Losses (gains) on disposition of assets 2,546 (4,036)
- ---------------------------------------------------------------------------
Net cash provided by operating activities 55,559 130,326
- ---------------------------------------------------------------------------
Purchase of investments (61,671) (74,599)
Liquidation of investments 325,479 21,799
Purchase of banking/finance investments (8,319) (214)
Liquidation of banking/finance investments 7,986 -
Net (origination) collections of loans
receivable (27,792) 8,203
Purchase of property and equipment (31,658) (58,058)
Proceeds from sale of property 176 14,517
Other - (1,424)
- ----------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 204,201 (89,776)
- ----------------------------------------------------------------------------
Increase (decrease) in bank deposits (7,566) 1,662
Exercise of common stock options 476 1,039
Dividends paid on common stock (12,587) (11,345)
Purchase of common/treasury stock (7,113) (2,942)
Issuance of debt 40,000 22,986
Payments on debt (177,843) (41,898)
- ----------------------------------------------------------------------------
Net cash used in financing activities (164,633) (30,498)
- ----------------------------------------------------------------------------
Increase in cash and cash equivalents 95,127 10,052
Cash and cash equivalents, beginning of
period 556,043 442,741
- ---------------------------------------------------------------------------
Cash and cash equivalents, end of period $651,170 $452,793
- ---------------------------------------------------------------------------
Supplemental disclosure of non-cash information:
Value of common stock issued in other
transactions, principally for the
Company's incentive plans $27,769 $30,595
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FRANKLIN RESOURCES, INC.
Notes to Consolidated Financial Statements
December 31, 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 ("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 first fiscal quarter of 1999, the Company announced a total
estimated restructuring charge of $58 million and recorded a pretax
restructuring charge of $46.1 million. Of the $46.1 million, approximately
$10.8 million is expected to be paid in cash. The Company expects to record
an additional $12.3 million pretax restructuring charge during the second
quarter of fiscal 1999 relating to employee severance and termination
benefits.
The restructuring charges reflect the estimated future costs of achieving the
benefits outlined in a restructuring plan developed and approved by
management during the first quarter of fiscal 1999 and subsequently approved
by the Company's Board of Directors. The plan is aimed at improving service
levels and profitability, reducing costs and reprioritizing the Company's
business activities.
The components of the restructuring charge are as follows:
(In millions) As of December 31, 1998
------------------------------------------------------------
Asset write-down $31.9
Lease termination charges 5.8
Other 8.4
====================================================
$46.1
====================================================
Asset write-down includes a discontinued investment management contract and
other assets related to certain other discontinued products.
3. Debt
During the first quarter of fiscal 1999, interest rate swap agreements which
fixed interest rates on $40 million of commercial paper, expired. The
remaining interest rate swap agreements, maturing through October 2000,
effectively fix interest rates on $255 million of commercial paper. The fixed
rates of interest range from 6.24% to 6.645%. At quarter end, the weighted
average effective interest rate, including the effect of interest-rate swap
agreements, was 6.17% on approximately $431.6 million of outstanding
commercial paper and medium-term notes.
4. Adoption of Statement of Financial Accounting Standards Board
During this quarter 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 investments and foreign currency
translation adjustments. Accumulated other comprehensive income, a component
of stockholders' equity, was formerly reported as "Other", and consists of
total net unrealized losses on available-for-sale securities and foreign
currency adjustments. There was no impact on previously reported net income
arising from the adoption of SFAS 130.
The following table shows comprehensive income for the three months ended
December 31, 1998 and 1997.
(In thousands) 1998 1997
----------------------------------------------------------------------------
Net income $68,492 $130,515
Net unrealized gain (loss) on
available-for-sale securities 5,529 (6,785)
Foreign currency translation adjustment 3,125 (9,380)
============================================================================
Comprehensive income $77,146 $ 114,350
============================================================================
5. Subsequent events
On January 4, 1999, the Company's principal distribution subsidiary began
selling a new class of mutual fund shares, B shares, to the public. These
shares are sold without an upfront sales charge to the shareholder. The
distribution subsidiary will pay eligible third-party intermediaries a sales
commission of between 3% and 4%. Shareholder redemptions will be subject to a
contingent deferred sales charge of 4%, declining to 0% over a six-year
period. The shares will be subject to 12b-1 fees similar to other Company
products. The Company expects to finance the sales commissions through
existing cash flows and other financing arrangements.
On January 28, 1999, the Company's shareholders approved the 1998 Universal
Stock Incentive Plan (the "New Plan"); similar in most respects to the
Universal Stock Plan approved in 1994. The New Plan allows for stock grants
to participating employees of up to a total of 10,000,000 shares.
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.
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
As of
December 31 September 30 December 31
(In billions) 1998 1998 1997
- -----------------------------------------------------------------------------
Franklin Templeton Group:
Equity:
Global/international $92.8 $84.8 $98.3
Domestic (U.S.) 37.4 34.8 37.6
- -----------------------------------------------------------------------------
Total equity 130.2 119.6 135.9
- -----------------------------------------------------------------------------
Hybrid Funds <F1> 14.5 14.0 14.9
Fixed-income:
Tax-free 50.9 50.5 47.0
Taxable
Domestic (primarily U.S. Gov't.) 16.0 16.0 15.5
Global/international 4.0 3.7 3.8
- -----------------------------------------------------------------------------
Total fixed-income 70.9 70.2 66.3
- -----------------------------------------------------------------------------
Money funds 4.6 4.8 3.9
=============================================================================
Total end of period $220.2 $208.6 $221.0
=============================================================================
Monthly average for the three-month
period $217.0 $221.6 $220.6
=============================================================================
<F1> Hybrid funds include asset allocation, balanced, flexible and
income-mixed funds as defined by the Investment Company Institute. Previously
these funds had been included primarily in the equity category.
Since September 30, 1998, although redemptions have exceeded purchases in the
equity funds managed by the Company, market appreciation has resulted in an
increase in these assets to $130.2 billion as of December 31, 1998 and an
overall increase in the Company's assets under management to $220.2 billion.
Compared to December 31, 1997, the Company's assets under management at
December 31, 1998 have declined slightly. As a result of turmoil in global
equity markets in the preceding eighteen months, and associated market
depreciation, the Company's assets under management in equity funds declined
to $119.6 billion at September 30, 1998, resulting in a decline in total
assets under management to $208.6 billion as of September 30, 1998.
Equity assets now comprise 59% of total assets under management compared to
57% in September 1998 and 61% in December 1997. Fixed income funds now
comprise 32% of total assets under management, as compared to 34% and 30% in
September 1998 and December 1997, respectively. The shift in the Company's
managed asset mix toward lower fee fixed-income products and lower average
assets in the first quarter of 1999 when compared to the same quarter a year
ago, has resulted in lower investment management fee revenues for the three
months ended December 31, 1998, as compared to the same period a year ago.
RESULTS OF OPERATIONS
Three months ended
December 31 Percent
1998 1997 Change
- --------------------------------------------------------------------------------
Net income (millions) $68.5 $130.5 (48)%
Earnings per share
Basic $0.27 $0.52 (48)%
Diluted $0.27 $0.52 (48)%
Operating margin 16% 26%
Operating margin before restructuring
change 24% -
- --------------------------------------------------------------------------------
Net income during the quarter ended December 31, 1998 decreased compared to
the same quarter last year, as a result of a restructuring charge taken in
the quarter as well as decreased investment management fees from reduced
average assets under management. Operating margins decreased to 16% due
primarily to the restructuring charge. Operating margins before the
restructuring charge declined to 24% due to reduction in operating revenues
associated with decreased assets under management and the changing
composition of those assets.
Operating revenue
Three months ended
December 31 Percent
(In millions) 1998 1997 Change
- --------------------------------------------------------------------------------
Investment management fees $330.4 $348.6 (5)%
Underwriting and distribution fees 188.6 243.2 (22)%
Shareholder servicing fees 45.7 37.6 22%
Other, net 3.0 3.0 -
- --------------------------------------------------------------------------------
Total operating revenues $567.7 $632.4 (10)%
- --------------------------------------------------------------------------------
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 December 1998 to 0.61% compared to 0.63% 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.
During fiscal 1998, the Company reclassified revenues relating to the
distribution component of Canadian revenues from Investment management fees
to Underwriting and distribution fees. The Company believes this change more
closely matches revenue generated from distribution services with the
expenses incurred. The quarter ended December 31, 1997 has been reclassified
accordingly. Investment management fees for the quarter ended December 1998
decreased 5% over the same period last year, due to the 2% decrease in
average assets under management between these periods, and to the shift to
relatively lower fee fixed-income products.
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 22% over the same period 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. Shareholder
servicing fees increased 22% as a result of a 28% increase in billable
shareholder accounts to 10.2 million from 8.0 million a year ago and an
increase in the average per account charge.
Other, net
Three months ended
December 31
(In millions) 1998 1997 Change
- --------------------------------------------------------------------------------
Revenues $7.1 $9.7 (27)%
Provision for loan losses (1.5) (2.1) (29)%
Interest expense (2.6) (4.6) (43)%
================================================================================
Total other, net $3.0 $3.0 -
================================================================================
Other, net consists primarily of revenues from the Company's banking and
finance subsidiaries, net of interest expense and the provision for loan
losses. Other, net remained relatively stable in the quarter ended December
1998 compared with the same quarter last year, although each of the component
parts decreased. Revenues and the provision for loan losses decreased as a
result of securitization of auto loans in September 1998. Banking/finance
interest expense decreased in the current quarter 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
December 31
(In millions) 1998 1997 Change
- --------------------------------------------------------------------------------
Underwriting and distribution $163.1 $205.3 (21)%
Compensation and benefits 133.8 133.3 -
Information systems, technology and
occupancy 48.5 46.6 4%
Advertising and promotion 28.2 27.4 3%
Amortization of deferred sales commissions 25.0 23.9 5%
Amortization of intangible assets 9.4 9.0 4%
Other 22.8 19.5 17%
Restructuring charge 46.1 - 100%
================================================================================
Total operating expenses $476.9 $465.0 3%
================================================================================
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 for the quarter ended December 1998 remained at the
previous year's levels. Despite an increase of 20% in the Company's workforce
since this time last year, attempts at reducing temporary labor costs and
overtime in the current fiscal year have been successful. The Company
continues to experience upward pressure on compensation and benefits due to
the effects of a very competitive labor market.
Information systems, technology and occupancy costs increased 4% over the
same period last year. During the past two years, the Company has experienced
a significant increase in its workforce and 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 and beyond. See "Year 2000 Readiness Disclosure" below.
Advertising and promotion expenses increased 3% over the same period last
year, mainly due to increased promotional activity and new marketing
campaigns.
Amortization of deferred sales commissions increased 5% over the same period
last year as cumulative sales of these products increased. Sales commissions
on certain Franklin Templeton Group products sold without a front-end sales
charge are capitalized and amortized over periods not exceeding four years --
the period in which management estimates that they will be recovered from
distribution plan payments and from contingent deferred sales charges. Sales
commissions on B shares, which were introduced in January, 1999, will be
capitalized and amortized over a period not exceeding eight years. As a
result of the capitalization and amortization of these charges, any decrease
in sales levels will not immediately be reflected in decreased expenses.
Restructuring charges of $46.1 million ($35.5 million, or $0.14 per diluted
share after tax) were recorded with respect to a plan initiated by management
during the first quarter aimed at improving service levels and profitability
and reducing costs. The plan details the reprioritization of global business
activities, discontinuing certain products and writing off investments and
other assets related to those products. In connection with this plan, the
value of one management contract, recorded as an intangible asset, was
written off. The plan also recognizes efficiencies from the recent conversion
of all U.S. funds onto a single shareholder record-keeping system by
eliminating approximately 560 positions principally in the United States.
Severance costs of approximately $12.3 million related to this element of the
plan are expected in the second fiscal quarter of 1999. At the completion of
these restructuring efforts, the Company's annual operating expenses are
expected to decrease approximately $100 million from peak levels at the end
of fiscal 1998, assuming a continuation of the current business environment.
Other income/(expenses):
Three months ended
December 31
(In millions) 1998 1997 Change
- --------------------------------------------------------------------------------
Investment and other income $10.5 $15.0 (30)%
Interest expense (6.2) (6.2) -
================================================================================
Other income, net 4.3 8.8 (51)%
================================================================================
Investment and other income for the quarter ended December 1998 decreased 30%
from the same period last year. Interest income for the current quarter
exceeded that earned in the prior year, due to higher average levels of
investment in fiscal 1999, but this increase was offset by realized losses
from the sale of investments in the current quarter, compared to realized
gains in the prior year. Interest expense remained stable over the same
period last year, despite a reduction in total debt in the first fiscal
quarter of 1999. The reduction in expense following the paydown of debt
resulting from the securitization of auto loans in September 1998 was
attributed to the banking/finance group (see Other, net revenues above).
Taxes on income
The Company's effective income tax rate for the quarter ended December 1998
has increased to 28%, compared to 26% for the same period last year. This
increase reflects the decrease in the relative contributions of foreign
earnings that are subject to reduced tax rates and that are not currently
included in U.S. taxable income.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL
RESOURCES
At December 31, 1998, the Company's assets aggregated $3.4 billion, down from
$3.5 billion at September 30, 1998. Stockholders' equity approximated $2.4
billion compared to approximately $2.3 billion at September 30, 1998. The
increase in stockholders' equity was primarily a result of increased net
income. Outstanding debt (long-term and short-term) decreased by $140.7
million (23%) at December 31, 1998, from $612.4 million at September 30,
1998.
Cash provided by operating activities for the quarter ended December 1998
decreased 57% from $130.3 million in the same quarter last year. This decline
was due mainly to lower net income in the current quarter. The decrease in
net income was due to lower operating revenues and the restructuring plan,
which required little incremental cash expenditure in the first quarter. The
decrease in income taxes payable was due to lower taxable income in the
current year. The Company sold $325.5 million of its investments in the
period and used $31.7 million to purchase property and equipment, providing
$204.2 million from its investing activities in the quarter. $177.8 million
of these funds were used to pay down and service debt, resulting in cash used
in financing activities of $164.6 million. During the quarter ended December
1998, the Company paid $12.6 million in cash dividends to stockholders.
As of December 31, 1998, the Company had fixed interest rates on
approximately $415 million of its debt through its interest-rate swap
agreements and its medium-term note program.
Management expects that the principal needs for cash will be to advance sales
commissions, fund 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 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.
Year 2000 Readiness Disclosure
In connection with the Company's preparation for the Year 2000, the Company's
mission-critical securities trading systems, portfolio accounting systems and
general ledger systems have now been certified as Year 2000 compliant and are
currently operating in production. In addition, the Company has completed the
prerequisite point-to-point and extended point-to-point testing and
certification of mission-critical and non mission-critical systems necessary
to participate in the Securities Industry Association ("SIA") "Streetwide
Testing" to be held over five weekends beginning in March 1999.
The Company's Year 2000 plan prioritizes the Year 2000 certification of core
mission-critical information technology ("IT") systems over other IT systems
and further prioritizes IT systems in general over non-IT systems. Because
the Year 2000 project is an ongoing Company-wide endeavor, the state of the
Company's progress changes daily. The information provided in this Form 10-Q
about our Year 2000 progress is provided as of February 11, 1999.
The Company's Year 2000 compliance plan is comprised of four phases:
Assessment, Remediation, Testing and Implementation. The Company currently
plans to complete all phases of its Year 2000 plan with respect to
mission-critical IT systems by September 1999 and with respect to other
important systems as soon as possible thereafter, but in any event by
December 31, 1999. During the quarter ended December 31, 1998, the Company
completed the inventory of its end user computing systems. A number of end
user computer systems were identified as mission-critical systems and the
Company re-evaluated which systems it considered to be mission critical. As a
result of this re-evaluation, certain systems which the Company had
previously considered to be mission-critical, and which were close to
certification, were removed from the pool of mission-critical systems. In
addition, certain end user computing systems that had not yet been assessed
were added to the pool of mission-critical systems. Together, these changes
caused the completion percentage of mission-critical systems in the
categories of Testing and Implementation to remain at the same level as was
reported for the quarter ended September 30, 1998.
Phase of % of Mission
Project Critical Complete
-----------------------------------
Assessment 95%
Remediation 79%
Testing 30%
Implementation 30%
The non mission-critical systems of the Company are either maintained by the
Company's Information Systems & Technology ("IS&T") department or are end user
systems. These systems are prioritized with "high", "medium" or "low" in the
Company's Year 2000 plan. The IS&T systems have been given high priority,
while the end user systems have been given lower priorities. The percentages
below include only the IS&T-managed systems, which represent approximately 95
systems.
Phase of % of Non Mission Critical
Project IS&T Systems Complete
-------------------------------------------
Assessment 100%
Remediation 99%
Testing 82%
Implementation 74%
During the past quarter, the Company's Canadian subsidiary, Templeton
Management Limited, was asked by the Ontario Securities Commission to
participate in industry-wide testing in Canada. In order to complete work to
allow participation in this testing, the Company delayed planned Year 2000
certification of a key mission critical system in Canada, the shareholder
management system. However, the Company believes that this system is Year
2000 compliant and currently plans to complete certification of this system
in March 1999.
The Company experienced some delays in its Year 2000 plan during the quarter
because of the need to devote employee and system resources to the successful
implementation of the Euro on January 1, 1999 and the Company's first
offering of B shares, which began on January 4, 1999. The Company is
currently in the process of testing one of its most mission-critical systems,
the domestic transfer agency system. This system and related subsystems make
up approximately 17% of the Company's mission critical systems. Although the
Company is behind its original schedule in this testing due to various
delays, the Year 2000 certification of this system is progressing, including
testing of related sub-systems. No material problems have been encountered to
date.
Non-IT Systems. Other than third-party long distance telephone and data lines
and public utility electrical power, the Company's business operations are
not heavily dependent on non-IT components or systems, and none of the
Company's mission-critical systems is a non-IT system. The Company estimates
that it has completed assessment of approximately 90% of the Company-owned or
-managed non-IT components, and approximately 50% to 75% of third-party owned
components, including building, mechanical, air conditioning, electrical and
security systems. Based on the Company's assessment to date and information
received from third parties, the majority of the Company's non-IT systems
will not require remediation. With the exception of potential general public
utility problems, the Company does not expect to experience any material
effects related to the Year 2000 compliance of non-IT systems.
Third Parties and Year 2000. The Company's business operations are heavily
dependent upon a complex worldwide network of IT systems that are owned and
managed by third parties; including data feeds, trading systems, securities
transfer agent operations and stock market links. 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 received to date from these suppliers
of mission-critical systems and in some cases is seeking additional
information, written assurances of certification, or test scripts. As of
February 11, 1999, no mission-critical third-party supplier had informed the
Company that it would not be Year 2000 compliant by the millenium date.
Cost Estimates. The total estimated costs associated with the required
modifications to become Year 2000 compliant range from $50 million to $60
million, not all of which is incremental to the Company's operations. The
estimated costs consist mainly of internal and third-party labor costs which
are expensed as incurred. The total amount expended on the project through
December 31, 1998 was approximately $20.6 million. The Company's estimates of
the total costs to complete the Year 2000 project will continue to be refined
in future periods. As is indicated in the analysis above, approximately 60%
to 66% of the expected costs of the Year 2000 project have not yet been
incurred. 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.
Contingency Planning. 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. The Company currently plans to
complete its contingency plan in September 1999. However, in an operation as
complex and geographically distributed as the Company's business there are
limited alternatives to certain of its mission-critical systems or public
utilities. If certain public utilities or mission-critical systems are not
made Year 2000 compliant or fail, there would be a material adverse impact
upon the Company's business, financial condition and results of operations.
Although the Company is investigating alternative solutions, it is unlikely
that any adequate contingency plan can be developed for such failures.
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 governmental 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. Also,
investors concerned about the Year 2000 Problem or the Euro Issue could
withdraw monies from the Company's funds resulting in a decline in assets
under management which could have a material adverse effect upon the
Company's business, financial condition and results of operations.
Factors that could influence the effect of the Year 2000 Problem include the
success of the Company in identifying systems and programs that are affected
by the Year 2000 Problem (for example, it is possible that the SIA testing
may reveal connectivity problems between the Company's systems and those of
third parties). Other facts 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.
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.
During the last fiscal year the balance of loans receivable for the Company's
banking and finance subsidiaries constituted less than 10% of corporate
assets. The Company considered the potential impact on consolidated results
from a reasonably possible near-term movement in interest rates and judged
that this impact would not be material.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company has previously reported a complaint filed in September 1998 in
the U.S. District Court for the Southern District of Florida, against
Templeton Asset Management, Ltd., an indirect wholly-owned subsidiary of the
Company and the investment manager of the closed-end investment company,
Templeton Vietnam Opportunities Fund, Inc. (now known as Templeton Vietnam
and Southeast Asia Fund, Inc.); certain of the fund's officers and directors;
the Company; and Templeton Worldwide, Inc., a Company subsidiary.
On January 8, 1999 the Company and the other defendants moved to dismiss the
complaint, captioned Richard Waksman, plaintiff on behalf of himself and all
others similarly situated v. Templeton Asset Management Ltd., et al., (Civil
Action No.98-7059) on various legal grounds, including the fact that the
lawsuit mischaracterizes the "fundamental policies" of the Fund and fails to
acknowledge the basic investment objective of the Fund to pursue long-term
capital appreciation. Management believes that this lawsuit is without merit
and intends to defend this action vigorously.
Other than as stated above, there have been no material developments in the
litigation previously reported in the Form 10-K/A of the Company filed with
the SEC on December 29, 1998.
In addition, 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 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.
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.
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.
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.
The consumer loan market is highly competitive. The Company competes with
many types of institutions including banks, finance companies, credit unions
and the finance subsidiaries of large automobile manufacturers. Interest
rates the Company can charge and, therefore, its yields vary based on this
competitive environment. The Company is reliant on its relationships with
various automobile dealers and this relationship is highly dependent on the
rates and service that the Company provides. There is no guarantee that in
this competitive environment the Company can maintain its relationships with
these dealers. Auto loan and credit card portfolio losses can also be
influenced significantly by trends in the economy and credit markets which
negatively impact borrowers' ability to repay loans.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of the report:
Exhibit 3(i)(a) Registrant's Certificate of Incorporation, as filed
November 28, 1969, incorporated by reference to Exhibit (3)(i)
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994 (the "1994 Annual Report")
Exhibit 3(i)(b) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1, 1985, incorporated by
reference to Exhibit (3)(ii) to the 1994 Annual Report
Exhibit 3(i)(c) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1, 1987, incorporated by
reference to Exhibit (3)(iii) to the 1994 Annual Report
Exhibit 3(i)(d) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated by
reference to Exhibit (3)(iv) to the 1994 Annual Report
Exhibit (3)(ii) Registrant's By-Laws incorporated by reference to
Exhibit 3(v) to the Company's Form 10-Q for the Quarterly
Period ended December 31, 1994
Exhibit 10.1 Representative Variable Insurance Fund Fund
Participation Agreement among Templeton Variable
Products Series Fund or Franklin Valuemark Fund,
Franklin Templeton Distributors, Inc. and an insurance
company
Exhibit 11 Computations of per share earnings
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 October 23, 1998 reporting under Item 5 "Other
Events" the filing of an earnings press release by the
Registrant on October 23, 1998 and including said press release
as an Exhibit under Item 7 "Financial Statements and Exhibits".
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN RESOURCES, INC.
Registrant
Date: February 11, 1999 /S/ Martin L. Flanagan
MARTIN L. FLANAGAN
Senior Vice President,
Chief Financial Officer
Exhibit 10.1
PARTICIPATION AGREEMENT
AMONG TEMPLETON VARIABLE PRODUCTS SERIES FUND,
FRANKLIN TEMPLETON DISTRIBUTORS, INC. and
[ ] INSURANCE COMPANY
THIS AGREEMENT made as of ____________, 1999, among Templeton Variable
Products Series Fund (the "Trust"), an open-end management investment company
organized as a business trust under Massachusetts law, Franklin Templeton
Distributors, Inc., a California corporation, the Trust's principal underwriter
("Underwriter"), and [ ] Insurance Company, a life insurance company organized
as a corporation under [ ] law (the "Company"), on its own behalf and on behalf
of each segregated asset account of the Company set forth in Schedule A, as may
be amended from time to time (the "Accounts").
W I T N E S S E T H:
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and has an
effective registration statement relating to the offer and sale of the various
series of its shares under the Securities Act of 1933, as amended (the "1933
Act");
WHEREAS, the Trust and the Underwriter desire that Trust shares be used as
an investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts to be offered by life
insurance companies which have entered into fund participation agreements with
the Trust (the "Participating Insurance Companies");
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets, and certain of those series, named in
Schedule B, (the "Portfolios") are to be made available for purchase by the
Company for the Accounts; and
WHEREAS, the Trust has received an order from the SEC, dated November 16,
1993 (File No. 812-8546), granting Participating Insurance Companies and their
separate accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a)
and 15(b) of the 1940 Act, and Rules 6e-2 (b) (15) and 6e-3 (T) (b) (15)
thereunder, to the extent necessary to permit shares of the Trust to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Shared Funding Exemptive Order");
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act unless an exemption from registration
under the 1940 Act is available and the Trust has been so advised; and has
registered or will register certain variable annuity contracts and variable life
insurance policies, listed on Schedule C attached hereto, under which the
portfolios are to be made available as investment vehicles (the "Contracts")
under the 1933 Act unless such interests under the Contracts in the Accounts are
exempt from registration under the 1933 Act and the Trust has been so advised;
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such account on Schedule A hereto, to set aside
and invest assets attributable to one or more Contracts; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and is a member in good standing of the National
Association of Securities Dealers, Inc. ("NASD"); and
WHEREAS, each investment adviser listed on Schedule B (each, an "Adviser")
is duly registered as an investment adviser under the Investment Advisers Act of
1940, as amended ("Advisers Act") and any applicable state securities laws;
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid Contracts and the Underwriter
is authorized to sell such shares to unit investment trusts such as each Account
at net asset value;
NOW THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I.
Purchase and Redemption of Trust Portfolio Shares
1.1. For purposes of this Article I, the Company shall be the Trust's
agent for receipt of purchase orders and requests for redemption relating to
each Portfolio from each Account, provided that the Company notifies the Trust
of such purchase orders and requests for redemption by 9:00 a.m. Eastern time on
the next following Business Day, as defined in Section 1.3.
1.2. The Trust agrees to make shares of the Portfolios available to the
Accounts for purchase at the net asset value per share next computed after
receipt of a purchase order by the Trust (or its agent), as established in
accordance with the provisions of the then current prospectus of the Trust
describing Portfolio purchase procedures on those days on which the Trust
calculates its net asset value pursuant to rules of the SEC, and the Trust shall
use its best efforts to calculate such net asset value on each day on which the
New York Stock Exchange ("NYSE") is open for trading. The Company will transmit
orders from time to time to the Trust for the purchase of shares of the
Portfolios. The Trustees of the Trust (the "Trustees") may refuse to sell shares
of any Portfolio to any person, or suspend or terminate the offering of shares
of any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or if, in the sole discretion of the Trustees acting in good
faith and in light of their fiduciary duties under federal and any applicable
state laws, such action is deemed in the best interests of the shareholders of
such Portfolio. Without limiting the foregoing, the Trustees have determined
that there is a significant risk that the Trust and its shareholders may be
adversely affected by investors whose purchase and redemption activity follows a
market timing pattern, and have authorized the Trust, the Underwriter and the
Trust's transfer agent to adopt procedures and take other action (including
without limitation rejecting specific purchase orders) as they deem necessary to
reduce, discourage or eliminate market timing activity.
1.3 The Company shall submit payment for the purchase of shares of a
Portfolio on behalf of an Account no later than the close of business on the
next Business Day after the Trust receives the purchase order. Payment shall be
made in federal funds transmitted by wire to the Trust or its designated
custodian. Upon receipt by the Trust of the federal funds so wired, such funds
shall cease to be the responsibility of the Company and shall become the
responsibility of the Trust for this purpose. "Business Day" shall mean any day
on which the NYSE is open for trading and on which the Trust calculates its net
asset value pursuant to the rules of the SEC.
1.4 The Trust will redeem for cash any full or fractional shares of any
Portfolio, when requested by the Company on behalf of an Account, at the net
asset value next computed after receipt by the Trust (or its agent) of the
request for redemption, as established in accordance with the provisions of the
then current prospectus of the Trust describing Portfolio redemption procedures.
The Trust shall make payment for such shares in the manner established from time
to time by the Trust. Redemption with respect to a Portfolio will normally be
paid to the Company for an Account in federal funds transmitted by wire to the
Company before the close of business on the next Business Day after the receipt
of the request for redemption. Such payment may be delayed if, for example, the
Portfolio's cash position so requires or if extraordinary market conditions
exist, but in no event shall payment be delayed for a greater period than is
permitted by the 1940 Act.
1.5 Payments for the purchase of shares of the Trust's Portfolios by the
Company under Section 1.3 and payments for the redemption of shares of the
Trust's Portfolios under Section 1.4 may be netted against one another on any
Business Day for the purpose of determining the amount of any wire transfer on
that Business Day.
1.6 Issuance and transfer of the Trust's Portfolio shares will be by book
entry only. Stock certificates will not be issued to the Company or the Account.
Portfolio Shares purchased from the Trust will be recorded in the appropriate
title for each Account or the appropriate subaccount of each Account.
1.7 The Trust shall furnish, on or before the ex-dividend date, notice to
the Company of any income dividends or capital gain distributions payable on the
shares of any Portfolio of the Trust. The Company hereby elects to receive all
such income dividends and capital gain distributions as are payable on a
Portfolio's shares in additional shares of the Portfolio. The Trust shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.8 The Trust shall calculate the net asset value of each Portfolio on
each Business Day, as defined in Section 1.3. The Trust shall make the net asset
value per share for each Portfolio available to the Company or its designated
agent on a daily basis as soon as reasonably practical after the net asset value
per share is calculated (normally by 6:30 p.m. Eastern time) and shall use
reasonable efforts to make such net asset value per share available by 7:00 p.m.
Eastern time each Business Day.
1.9 The Trust agrees that its Portfolio shares will be sold only to
Participating Insurance Companies and their separate accounts and to certain
qualified pension and retirement plans to the extent permitted by the Shared
Funding Exemptive Order. No shares of any Portfolio will be sold directly to the
general public. The Company agrees that it will use Trust shares only for the
purposes of funding the Contracts through the Accounts listed in Schedule A, as
amended from time to time.
1.10 The Company agrees that all net amounts available under the Contracts
shall be invested in the Trust, in such other Funds advised by an Adviser or its
affiliates as may be mutually agreed to in writing by the parties hereto, or in
the Company's general account, provided that such amounts may also be invested
in an investment company other than the Trust if: (a) such other investment
company, or series thereof, has investment objectives or policies that are
substantially different from the investment objectives and policies of the
Portfolios; or (b) the Company gives the Trust and the Underwriter 45 days
written notice of its intention to make such other investment company available
as a funding vehicle for the Contracts; or (c) such other investment company is
available as a funding vehicle for the Contracts at the date of this Agreement
and the Company so informs the Trust and the Underwriter prior to their signing
this Agreement (a list of such investment companies appearing on Schedule D to
this Agreement); or (d) the Trust or Underwriter consents to the use of such
other investment company.
1.11 The Trust agrees that all Participating Insurance Companies shall
have the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding to those contained in Section 2.10 and
Article IV of this Agreement.
1.12 Each party to this Agreement shall have the right to rely on
information or confirmations provided by any other party (or by any affiliate of
any other party), and shall not be liable in the event that an error results
from any incorrect information or confirmations supplied by any other party. If
an error is made in reliance upon incorrect information or confirmations, any
amount required to make a Contract owner's account whole shall be borne by the
party who provided the incorrect information or confirmation.
ARTICLE II.
Obligations of the Parties; Fees and Expenses
2.1 The Trust shall prepare and be responsible for filing with the SEC and
any state regulators requiring such filing all shareholder reports, notices,
proxy materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of the Trust.
The Trust shall bear the costs of registration and qualification of its shares
of the Portfolios, preparation and filing of the documents listed in this
Section 2.1 and all taxes to which an issuer is subject on the issuance and
transfer of its shares.
2.2 At the option of the Company, the Trust or the Underwriter shall
either (a) provide the Company with as many copies of portions of the Trust's
current prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments or supplements to any of the foregoing,
pertaining specifically to the Portfolios as the Company shall reasonably
request; or (b) provide the Company with a camera ready copy of such documents
in a form suitable for printing and from which information relating to series of
the Trust other than the Portfolios has been deleted to the extent practicable.
The Trust or the Underwriter shall provide the Company with a copy of its
current statement of additional information, including any amendments or
supplements, in a form suitable for duplication by the Company. Expenses of
furnishing such documents for marketing purposes shall be borne by the Company
and expenses of furnishing such documents for current contract owners invested
in the Trust shall be borne by the Trust or the Underwriter.
2.3 The Trust (at its expense) shall provide the Company with copies of
any Trust-sponsored proxy materials in such quantity as the Company shall
reasonably require for distribution to Contract owners. The Company shall bear
the costs of distributing proxy materials (or similar materials such as voting
solicitation instructions), prospectuses and statements of additional
information to Contract owners. The Company assumes sole responsibility for
ensuring that such materials are delivered to Contract owners in accordance with
applicable federal and state securities laws.
2.4 If and to the extent required by law, the Company shall: (i) solicit
voting instructions from Contract owners; (ii) vote the Trust shares in
accordance with the instructions received from Contract owners; and (iii) vote
Trust shares for which no instructions have been received in the same proportion
as Trust shares of such Portfolio for which instructions have been received; so
long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable contract owners. The Company
reserves the right to vote Trust shares held in any segregated asset account in
its own right, to the extent permitted by law.
2.5 Except as provided in section 2.6, the Company shall not use any
designation comprised in whole or part of the names or marks "Franklin" or
"Templeton" or any other Trademark relating to the Trust or Underwriter without
prior written consent, and upon termination of this Agreement for any reason,
the Company shall cease all use of any such name or mark as soon as reasonably
practicable.
2.6 The Company shall furnish, or cause to be furnished to the Trust or
its designee, at least one complete copy of each registration statement,
prospectus, statement of additional information, retirement plan disclosure
information or other disclosure documents or similar information, as applicable
(collectively "disclosure documents"), as well as any report, solicitation for
voting instructions, sales literature and other promotional materials, and all
amendments to any of the above that relate to the Contracts or the Accounts
prior to its first use. The Company shall furnish, or shall cause to be
furnished, to the Trust or its designee each piece of sales literature or other
promotional material in which the Trust or an Adviser is named, at least 15
Business Days prior to its use. No such material shall be used if the Trust or
its designee reasonably objects to such use within five Business Days after
receipt of such material. For purposes of this paragraph, "sales literature or
other promotional material" includes, but is not limited to, portions of the
following that use any Trademark related to the Trust or Underwriter or refer to
the Trust or affiliates of the Trust: advertisements (such as material published
or designed for use in a newspaper, magazine or other periodical, radio,
television, telephone or tape recording, videotape display, signs or billboards,
motion pictures or electronic communication or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts or
any other advertisement, sales literature or published article or electronic
communication), educational or training materials or other communications
distributed or made generally available to some or all agents or employees, and
disclosure documents, shareholder reports and proxy materials.
2.7 The Company and its agents shall not give any information or make any
representations or statements on behalf of the Trust or concerning the Trust,
the Underwriter or an Adviser in connection with the sale of the Contracts other
than information or representations contained in and accurately derived from the
registration statement or prospectus for the Trust shares (as such registration
statement and prospectus may be amended or supplemented from time to time),
annual and semi-annual reports of the Trust, Trust-sponsored proxy statements,
or in sales literature or other promotional material approved by the Trust or
its designee, except as required by legal process or regulatory authorities or
with the written permission of the Trust or its designee.
2.8 The Trust shall use its best efforts to provide the Company, on a
timely basis, with such information about the Trust, the Portfolios and each
Adviser, in such form as the Company may reasonably require, as the Company
shall reasonably request in connection with the preparation of disclosure
documents and annual and semi-annual reports pertaining to the Contracts.
2.9 The Trust shall not give any information or make any representations
or statements on behalf of the Company or concerning the Company, the Accounts
or the Contracts other than information or representations contained in and
accurately derived from disclosure documents for the Contracts (as such
disclosure documents may be amended or supplemented from time to time), or in
materials approved by the Company for distribution including sales literature or
other promotional materials, except as required by legal process or regulatory
authorities or with the written permission of the Company.
2.10 So long as, and to the extent that, the SEC interprets the 1940 Act
to require pass-through voting privileges for Contract owners, the Company will
provide pass-through voting privileges to Contract owners whose Contract values
are invested, through the registered Accounts, in shares of one or more
Portfolios of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner established by the Trust. With respect to each registered Account,
the Company will vote shares of each Portfolio of the Trust held by a registered
Account and for which no timely voting instructions from Contract owners are
received in the same proportion as those shares held by that registered Account
for which voting instructions are received. The Company and its agents will in
no way recommend or oppose or interfere with the solicitation of proxies for
Portfolio shares held to fund the Contracts without the prior written consent of
the Trust, which consent may be withheld in the Trust's sole discretion.
2.11 The Trust and Underwriter shall pay no fee or other compensation to
the Company under this Agreement except as provided on Schedule E, if attached.
Nevertheless, the Trust or the Underwriter or an affiliate may make payments
(other than pursuant to a Rule 12b-1 Plan) to the Company or its affiliates or
to the Contracts' underwriter in amounts agreed to by the Underwriter in writing
and such payments may be made out of fees otherwise payable to the Underwriter
or its affiliates, profits of the Underwriter or its affiliates, or other
resources available to the Underwriter or its affiliates.
ARTICLE III.
Representations and Warranties
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of its state of incorporation
and that it has legally and validly established each Account as a segregated
asset account under such law as of the date set forth in Schedule A.
3.2 The Company represents and warrants that, with respect to each
Account, (1) the Company has registered or, prior to any issuance or sale of the
Contracts, will register the Account as a unit investment trust in accordance
with the provisions of the 1940 Act to serve as a segregated asset account for
the Contracts, or (2) if the Account is exempt from registration as an
investment company under Section 3(c) of the 1940 Act, the Company will make
every effort to maintain such exemption and will notify the Trust and the
Adviser immediately upon having a reasonable basis for believing that such
exemption no longer applies or might not apply in the future.
3.3 The Company represents and warrants that, with respect to each
Contract, (1) the Contract will be registered under the 1933 Act, or (2) if the
Contract is exempt from registration under Section 3(a)(2) of the 1933 Act or
under Section 4(2) and Regulation D of the 1933 Act, the Company will make every
effort to maintain such exemption and will notify the Trust and the Adviser
immediately upon having a reasonable basis for believing that such exemption no
longer applies or might not apply in the future. The Company further represents
and warrants that the Contracts will be sold by broker-dealers, or their
registered representatives, who are registered with the SEC under the 1934 Act
and who are members in good standing of the NASD; the Contracts will be issued
and sold in compliance in all material respects with all applicable federal and
state laws; and the sale of the Contracts shall comply in all material respects
with state insurance suitability requirements.
For any unregistered Accounts which are exempt from registration under the
`40 Act in reliance upon Sections 3(c)(1) or 3(c)(7) thereof, the Company
represents and warrants that:
(a) each Account and sub-account thereof has a principal underwriter
which is registered as a broker-dealer under the Securities Exchange
Act of 1934, as amended;
(b) Trust shares are and will continue to be the only
investment securities held by the corresponding Account
sub-accounts; and
(c) with regard to each Portfolio, the Company, on behalf
of the corresponding sub-account, will:
(1) seek instructions from all Contract owners with regard to the
voting of all proxies with respect to Trust shares and vote such
proxies only in accordance with such instructions or vote such
shares held by it in the same proportion as the vote of all
other holders of such shares; and
(2) refrain from substituting shares of another security for such
shares unless the SEC has approved such substitution in the
manner provided in Section 26 of the `40 Act.
3.4 The Trust represents and warrants that it is duly organized and
validly existing under the laws of the State of Massachusetts and that it does
and will comply in all material respects with the 1940 Act and the rules and
regulations thereunder.
3.5 The Trust represents and warrants that the Portfolio shares offered
and sold pursuant to this Agreement will be registered under the 1933 Act and
the Trust shall be registered under the 1940 Act prior to and at the time of any
issuance or sale of such shares. The Trust shall amend its registration
statement under the 1933 Act and the 1940 Act from time to time as required in
order to effect the continuous offering of its shares. The Trust shall register
and qualify its shares for sale in accordance with the laws of the various
states only if and to the extent deemed advisable by the Trust or the
Underwriter.
3.6 The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements for variable
annuity, endowment or life insurance contracts set forth in Section 817(h) of
the Internal Revenue Code of 1986, as amended ("Code"), and the rules and
regulations thereunder, including without limitation Treasury Regulation
1.817-5, and will notify the Company immediately upon having a reasonable basis
for believing any Portfolio has ceased to comply or might not so comply and will
in that event immediately take all reasonable steps to adequately diversify the
Portfolio to achieve compliance within the grace period afforded by Regulation
1.817-5.
3.7 The Trust represents and warrants that it is currently qualified as a
"regulated investment company" under Subchapter M of the Code, that it will make
every effort to maintain such qualification and will notify the Company
immediately upon having a reasonable basis for believing it has ceased to so
qualify or might not so qualify in the future.
3.8 The Trust represents and warrants that should it ever desire to make
any payments to finance distribution expenses pursuant to Rule 12b-1 under the
1940 Act, the Trustees, including a majority who are not "interested persons" of
the Trust under the 1940 Act ( "disinterested Trustees" ), will formulate and
approve any plan under Rule 12b-1 to finance distribution expenses.
3.9 The Trust represents and warrants that it, its directors, officers,
employees and others dealing with the money or securities, or both, of a
Portfolio shall at all times be covered by a blanket fidelity bond or similar
coverage for the benefit of the Trust in an amount not less that the minimum
coverage required by Rule 17g-1 or other regulations under the 1940 Act. Such
bond shall include coverage for larceny and embezzlement and be issued by a
reputable bonding company.
3.10 The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals or entities
dealing with the money and/or securities of the Trust are and shall be at all
times covered by a blanket fidelity bond or similar coverage for the benefit of
the Trust, in an amount not less than $5 million. The aforesaid bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company. The Company agrees to make all reasonable efforts to see that
this bond or another bond containing these provisions is always in effect, and
agrees to notify the Trust and the Underwriter in the event that such coverage
no longer applies.
3.11 The Underwriter represents that each Adviser is duly organized and
validly existing under applicable corporate law and that it is registered and
will during the term of this Agreement remain registered as an investment
adviser under the Advisers Act.
3.12 The Trust currently intends for one or more classes of shares (each,
a "Class") to make payments to finance its distribution expenses, including
service fees, pursuant to a Plan adopted under Rule 12b-1 under the 1940 Act
("Rule 12b-1"), although it may determine to discontinue such practice in the
future. To the extent that any Class of the Trust finances its distribution
expenses pursuant to a Plan adopted under Rule 12b-1, the Trust undertakes to
comply with any then current SEC and SEC staff interpretations concerning Rule
12b-1 or any successor provisions.
ARTICLE IV.
Potential Conflicts
4.1 The parties acknowledge that a Portfolio's shares may be made
available for investment to other Participating Insurance Companies. In such
event, the Trustees will monitor the Trust for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
Participating Insurance Companies. An irreconcilable material conflict may arise
for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by variable annuity contract and variable life insurance contract owners; or (f)
a decision by an insurer to disregard the voting instructions of contract
owners. The Trust shall promptly inform the Company of any determination by the
Trustees that an irreconcilable material conflict exists and of the implications
thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Shared Funding
Exemptive Order by providing the Trustees with all information reasonably
necessary for the Trustees to consider any issues raised including, but not
limited to, information as to a decision by the Company to disregard Contract
owner voting instructions. All communications from the Company to the Trustees
may be made in care of the Trust.
4.3 If it is determined by a majority of the Trustees, or a majority of
the disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its own expense and to the extent reasonably practicable (as determined by
the Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Portfolio
and reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Trust, or submitting the question of
whether or not such withdrawal should be implemented to a vote of all affected
Contract owners and, as appropriate, withdrawal of the assets of any appropriate
group (i.e. , annuity contract owners, life insurance policy owners, or variable
contract owners of one or more Participating Insurance Companies) that votes in
favor of such withdrawal, or offering to the affected Contract owners the option
of making such a change; and (b) establishing a new registered management
investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Trust's election, to withdraw the affected Account's
investment in the Trust and terminate this Agreement with respect to such
Account; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested Trustees. Any such withdrawal
and termination must take place within six (6) months after the Trust gives
written notice that this provision is being implemented. Until the end of such
six (6) month period, the Trust shall continue to accept and implement orders by
the Company for the purchase and redemption of shares of the Trust.
4.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with a
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Trust and terminate this Agreement with respect to
such Account within six (6) months after the Trustees inform the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested Trustees. Until the
end of such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of shares of the
Trust.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a majority
of the disinterested Trustees shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Trust be required to establish a new funding medium for the Contracts. In
the event that the Trustees determine that any proposed action does not
adequately remedy any irreconcilable material conflict, then the Company will
withdraw the Account's investment in the Trust and terminate this Agreement
within six (6) months after the Trustees inform the Company in writing of the
foregoing determination; provided, however, that such withdrawal and termination
shall be limited to the extent required by any such material irreconcilable
conflict as determined by a majority of the disinterested Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Shared Funding
Exemptive Order, and said reports, materials and data shall be submitted more
frequently if reasonably deemed appropriate by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then the Trust and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable.
ARTICLE V.
Indemnification
5.1 Indemnification By the Company
(a) The Company agrees to indemnify and hold harmless the
Underwriter, the Trust and each of its Trustees, officers, employees
and agents and each person, if any, who controls the Trust within the
meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually the "Indemnified Party" for purposes of
this Article V) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written
consent of the Company, which consent shall not be unreasonably
withheld) or expenses (including the reasonable costs of
investigating or defending any alleged loss, claim, damage, liability
or expense and reasonable legal counsel fees incurred in connection
therewith) (collectively, "Losses"), to which the Indemnified Parties
may become subject under any statute or regulation, or at common law
or otherwise, insofar as such Losses are related to the sale or
acquisition of Trust Shares or the Contracts and
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in a
disclosure document for the Contracts or in the Contracts
themselves or in sales literature generated or approved by the
Company on behalf of the Contracts or Accounts (or any amendment
or supplement to any of the foregoing) (collectively, "Company
Documents" for the purposes of this Article V), or arise out of
or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading,
provided that this indemnity shall not apply as to any
Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and was
accurately derived from written information furnished to the
Company by or on behalf of the Trust for use in Company
Documents or otherwise for use in connection with the sale of
the Contracts or Trust shares; or
(ii) arise out of or result from statements or
representations (other than statements or representations
contained in and accurately derived from Trust Documents as
defined in Section 5.2 (a)(i)) or wrongful conduct of the
Company or persons under its control, with respect to the sale
or acquisition of the Contracts or Trust shares; or
(iii) arise out of or result from any untrue statement or
alleged untrue statement of a material fact contained in Trust
Documents as defined in Section 5.2(a)(i) or the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading if such statement or omission was made in reliance
upon and accurately derived from written information furnished
to the Trust by or on behalf of the Company; or
(iv) arise out of or result from any failure by the Company
to provide the services or furnish the materials required under
the terms of this Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company.
(b) The Company shall not be liable under this indemnification
provision with respect to any Losses to which an Indemnified Party
would otherwise be subject by reason of such Indemnified Party's
willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Trust or Underwriter, whichever is
applicable. The Company shall also not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified
the Company in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the
claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on
any designated agent), but failure to notify the Company of any such
claim shall not relieve the Company from any liability which it may
have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case
any such action is brought against the Indemnified Parties, the
Company shall be entitled to participate, at its own expense, in the
defense of such action. The Company also shall be entitled to assume
the defense thereof, with counsel satisfactory to the party named in
the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel
retained by it, and the Company will not be liable to such party
under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
(c) The Indemnified Parties will promptly notify the Company of
the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Trust shares or the
Contracts or the operation of the Trust.
5.2 Indemnification By The Underwriter
(a) The Underwriter agrees to indemnify and hold harmless the
Company, the underwriter of the Contracts and each of its directors and
officers and each person, if any, who controls the Company within the
meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually an "Indemnified Party" for purposes of this
Section 5.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Underwriter, which consent shall not be unreasonably withheld) or expenses
(including the reasonable costs of investigating or defending any alleged
loss, claim, damage, liability or expense and reasonable legal counsel
fees incurred in connection therewith) (collectively, "Losses") to which
the Indemnified Parties may become subject under any statute, at common
law or otherwise, insofar as such Losses are related to the sale or
acquisition of the Trust's Shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in the
Registration Statement, prospectus or sales literature of the Trust
(or any amendment or supplement to any of the foregoing)
(collectively, the "Trust Documents") or arise out of or are based
upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such
statement or omission of such alleged statement or omission was made
in reliance upon and in conformity with information furnished to the
Underwriter or Trust by or on behalf of the Company for use in the
Registration Statement or prospectus for the Trust or in sales
literature (or any amendment or supplement) or otherwise for use in
connection with the sale of the Contracts or Trust shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations contained
in the disclosure documents or sales literature for the Contracts not
supplied by the Underwriter or persons under its control) or wrongful
conduct of the Trust, Adviser or Underwriter or persons under their
control, with respect to the sale or distribution of the Contracts or
Trust shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a disclosure document or
sales literature covering the Contracts, or any amendment thereof or
supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, if such
statement or omission was made in reliance upon information furnished
to the Company by or on behalf of the Trust; or
(iv) arise as a result of any failure by the Trust to provide
the services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in good
faith or otherwise, to comply with the qualification representation
specified in Section 3.7 of this Agreement and the diversification
requirements specified in Section 3.6 of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this
Agreement or arise out of or result from any other material breach of
this Agreement by the Underwriter; as limited by and in accordance
with the provisions of Sections 5.2(b) and 5.2(c) hereof.
(b) The Underwriter shall not be liable under this indemnification
provision with respect to any Losses to which an Indemnified Party would
otherwise be subject by reason of such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement or to
each Company or the Account, whichever is applicable.
(c) The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Underwriter in
writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been
served upon such Indemnified Party (or after such Indemnified Party shall
have received notice of such service on any designated agent), but failure
to notify the Underwriter of any such claim shall not relieve the
Underwriter from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Underwriter will be entitled to participate, at
its own expense, in the defense thereof. The Underwriter also shall be
entitled to assume the defense thereof, with counsel satisfactory to the
party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the
Indemnified Party shall bear the expenses of any additional counsel
retained by it, and the Underwriter will not be liable to such party under
this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
(d) The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the
Contracts or the operation of each Account.
5.3 Indemnification By The Trust
(a) The Trust agrees to indemnify and hold harmless the Company, and
each of its directors and officers and each person, if any, who controls
the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 5.3)
against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Trust, which
consent shall not be unreasonably withheld) or litigation (including legal
and other expenses) to which the Indemnified Parties may become subject
under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof)
or settlements result from the gross negligence, bad faith or willful
misconduct of the Board or any member thereof, are related to the
operations of the Trust, and arise out of or result from any material
breach of any representation and/or warranty made by the Trust in this
Agreement or arise out of or result from any other material breach of this
Agreement by the Trust; as limited by and in accordance with the
provisions of Section 5.3(b) and 5.3(c) hereof. It is understood and
expressly stipulated that neither the holders of shares of the Trust nor
any Trustee, officer, agent or employee of the Trust shall be personally
liable hereunder, nor shall any resort be had to other private property
for the satisfaction of any claim or obligation hereunder, but the Trust
only shall be liable.
(b) The Trust shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against any Indemnified Party as such may
arise from such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties or
by reason of such Indemnified Party's reckless disregard of obligations
and duties under this Agreement or to the Company, the Trust, the
Underwriter or each Account, whichever is applicable.
(c) The Trust shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Trust in writing
within a reasonable time after the summons or other first legal process
giving information of the nature of the claims shall have been served upon
such Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but failure to
notify the Trust of any such claim shall not relieve the Trust from any
liability which it may have to the Indemnified Party against whom such
action is brought otherwise than on account of this indemnification
provision. In case any such action is brought against the Indemnified
Parties, the Trust will be entitled to participate, at its own expense, in
the defense thereof. The Trust also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Trust to such party of the Trust's election
to assume the defense thereof, the Indemnified Party shall bear the fees
and expenses of any additional counsel retained by it, and the Trust will
not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
(d) The Company and the Underwriter agree promptly to notify the
Trust of the commencement of any litigation or proceedings against it or
any of its respective officers or directors in connection with this
Agreement, the issuance or sale of the Contracts, with respect to the
operation of either the Account, or the sale or acquisition of share of
the Trust.
ARTICLE VI.
Termination
6.1 This Agreement may be terminated by any party in its entirety or with
respect to one, some or all Portfolios or any reason by sixty (60) days advance
written notice delivered to the other parties, and shall terminate immediately
in the event of its assignment, as that term is used in the 1940 Act.
6.2 This Agreement may be terminated immediately by either the Trust or
the Underwriter following consultation with the Trustees upon written notice to
the Company if :
(a) the Company notifies the Trust or the Underwriter that the
exemption from registration under Section 3(c) of the 1940 Act no longer
applies, or might not apply in the future, to the unregistered Accounts,
or that the exemption from registration under Section 4(2) or Regulation D
promulgated under the 1933 Act no longer applies or might not apply in the
future, to interests under the unregistered Contracts; or
(b) either one or both of the Trust or the Underwriter
respectively, shall determine, in their sole judgment exercised in good
faith, that the Company has suffered a material adverse change in its
business, operations, financial condition or prospects since the date of
this Agreement or is the subject of material adverse publicity; or
(c) the Company gives the Trust and the Underwriter the written
notice specified in Section 1.10 hereof and at the same time such notice
was given there was no notice of termination outstanding under any other
provision of this Agreement; provided, however, that any termination under
this Section 6.2(c) shall be effective forty-five (45) days after the
notice specified in Section 1.10 was given; or
6.3 If this Agreement is terminated for any reason, except under Article
IV (Potential Conflicts) above, the Trust shall, at the option of the Company,
continue to make available additional shares of any Portfolio and redeem shares
of any Portfolio pursuant to all of the terms and conditions of this Agreement
for all Contracts in effect on the effective date of termination of this
Agreement. If this Agreement is terminated pursuant to Article IV, the
provisions of Article IV shall govern.
6.4 The provisions of Articles II (Representations and Warranties) and V
(Indemnification) shall survive the termination of this Agreement. All other
applicable provisions of this Agreement shall survive the termination of this
Agreement, as long as shares of the Trust are held on behalf of Contract owners
in accordance with Section 6.3, except that the Trust and the Underwriter shall
have no further obligation to sell Trust shares with respect to Contracts issued
after termination.
6.5 The Company shall not redeem Trust shares attributable to the
Contracts (as opposed to Trust shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract owner initiated or
approved transactions, (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"), or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. Upon
request, the Company will promptly furnish to the Trust and the Underwriter the
opinion of counsel for the Company (which counsel shall be reasonably
satisfactory to the Trust and the Underwriter) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption. Furthermore,
except in cases where permitted under the terms of the Contracts, the Company
shall not prevent Contract owners from allocating payments to a Portfolio that
was otherwise available under the Contracts without first giving the Trust or
the Underwriter 90 days notice of its intention to do so.
ARTICLE VII.
Notices.
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust or the Underwriter:
Templeton Variable Products Series Fund or
Franklin Templeton Distributors, Inc.
500 E. Broward Boulevard
Fort Lauderdale, FL 33394-3091
Attention: Barbara J. Green, Trust Secretary
WITH A COPY TO
Franklin Resources, Inc.
777 Mariners Island Boulevard
San Mateo, CA 94404
Attention:Karen L. Skidmore, Senior Corporate
Counsel
If to the Company:
[ ] Insurance Company
Attention: [ ]
ARTICLE VIII.
Miscellaneous
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Florida. It
shall also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the SEC granting exemptive
relief therefrom and the conditions of such orders. Copies of any such orders
shall be promptly forwarded by the Trust to the Company.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the SEC, the NASD, and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
8.7 Each party hereto shall treat as confidential the names and addresses
of the Contract owners and all information reasonably identified as confidential
in writing by any other party hereto, and, except as permitted by this Agreement
or as required by legal process or regulatory authorities, shall not disclose,
disseminate, or utilize such names and addresses and other confidential
information until such time as they may come into the public domain, without the
express written consent of the affected party. Without limiting the foregoing,
no party hereto shall disclose any information that such party has been advised
is proprietary, except such information that such party is required to disclose
by any appropriate governmental authority (including, without limitation, the
SEC, the NASD, and state securities and insurance regulators).
8.8 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
8.9 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect, except as provided in Section
1.10.
8.10 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the other party.
8.11 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Participation Agreement as of the date and year first
above written.
The Company:
[ ]Insurance Company
By its authorized officer
By:
Name:
Title:
The Trust:
Templeton Variable Products Series Fund
By its authorized officer
By:
Name: Karen L. Skidmore
Title: Assistant Vice President, Assistant
Secretary
The Underwriter:
Franklin Templeton Distributors, Inc.
By its authorized officer
By:
Name: Deborah R. Gatzek
Title: Senior Vice President, Assistant
Secretary
SCHEDULE A
Separate Accounts of
[ ] Insurance Company
1. [ ]
Date Established:
SEC Registration Number:
2. [ ]
Date Established:
SEC Registration Number:
SCHEDULE B
Trust Portfolios and Classes Available
Templeton Variable Products Series Adviser
SCHEDULE C
Variable Annuity Contracts
Issued by [ ] Insurance Company
- -----------------------------------------------------------------------
Contract 1 Contract 2 Contract 3
- -----------------------------------------------------------------------
Contract/Product
Name
- -----------------------------------------------------------------------
Registered
(Y/N)
- -----------------------------------------------------------------------
SEC
Registration
Number
- -----------------------------------------------------------------------
Representative
Form Numbers
- -----------------------------------------------------------------------
Separate
Account Name
- -----------------------------------------------------------------------
SEC
Registration
Number
- -----------------------------------------------------------------------
Templeton
Variable
Products
Series
Portfolios
and Classes
(Adviser)
- -----------------------------------------------------------------------
SCHEDULE D
Other Portfolios Available under the Contracts
SCHEDULE E
RULE 12B-1 PLANS
Compensation Schedule
Each Portfolio named below shall pay the following amounts pursuant to the terms
and conditions referenced below under its Class 2 Rule 12b-1 Distribution Plan,
stated as a percentage per year of Class 2's average daily net assets
represented by shares of Class 2.
Portfolio Name Maximum Annual Payment Rate
Agreement Provisions
If the Company, on behalf of any Account, purchases Trust Portfolio shares
("Eligible Shares") which are subject to a Rule 12b-1 Plan adopted under the
1940 Act (the "Plan"), the Company may participate in the Plan.
To the extent the Company or its affiliates, agents or designees
(collectively "you") you provide administrative and other services which assist
in the promotion and distribution of Eligible Shares or Variable Contracts
offering Eligible Shares, the Underwriter, the Trust or their affiliates
(collectively, "we") may pay you a Rule 12b-1 fee. "Administrative and other
services" may include, but are not limited to, furnishing personal services to
owners of Contracts which may invest in Eligible Shares ("Contract Owners"),
answering routine inquiries regarding a Portfolio, coordinating responses to
Contract Owner inquiries regarding the Portfolios, maintaining such accounts or
providing such other enhanced services as a Trust Portfolio or Contract may
require, maintaining customer accounts and records, or providing other services
eligible for service fees as defined under NASD rules. Your acceptance of such
compensation is your acknowledgment that eligible services have been rendered.
All Rule 12b-1 fees, shall be based on the value of Eligible Shares owned by the
Company on behalf of its Accounts, and shall be calculated on the basis and at
the rates set forth in the Compensation Schedule stated above. The aggregate
annual fees paid pursuant to each Plan shall not exceed the amounts stated as
the "annual maximums" in the Portfolio's prospectus, unless an increase is
approved by shareholders as provided in the Plan. These maximums shall be a
specified percent of the value of a Portfolio's net assets attributable to
Eligible Shares owned by the Company on behalf of its Accounts (determined in
the same manner as the Portfolio uses to compute its net assets as set forth in
its effective Prospectus).
You shall furnish us with such information as shall reasonably be
requested by the Trust's Boards of Trustees ("Trustees") with respect to the
Rule 12b-1 fees paid to you pursuant to the Plans. We shall furnish to the
Trustees, for their review on a quarterly basis, a written report of the amounts
expended under the Plans and the purposes for which such expenditures were made.
The Plans and provisions of any agreement relating to such Plans must be
approved annually by a vote of the Trustees, including the Trustees who are not
interested persons of the Trust and who have no financial interest in the Plans
or any related agreement ("Disinterested Trustees"). Each Plan may be terminated
at any time by the vote of a majority of the Disinterested Trustees, or by a
vote of a majority of the outstanding shares as provided in the Plan, on sixty
(60) days' written notice, without payment of any penalty. The Plans may also be
terminated by any act that terminates the Underwriting Agreement between the
Underwriter and the Trust, and/or the management or administration agreement
between Franklin Advisers, Inc. or Templeton Investment Counsel, Inc. or their
affiliates and the Trust. Continuation of the Plans is also conditioned on
Disinterested Trustees being ultimately responsible for selecting and nominating
any new Disinterested Trustees. Under Rule 12b-1, the Trustees have a duty to
request and evaluate, and persons who are party to any agreement related to a
Plan have a duty to furnish, such information as may reasonably be necessary to
an informed determination of whether the Plan or any agreement should be
implemented or continued. Under Rule 12b-1, the Trust is permitted to implement
or continue Plans or the provisions of any agreement relating to such Plans from
year-to-year only if, based on certain legal considerations, the Trustees are
able to conclude that the Plans will benefit each affected Trust Portfolio and
class. Absent such yearly determination, the Plans must be terminated as set
forth above. In the event of the termination of the Plans for any reason, the
provisions of this Schedule E relating to the Plans will also terminate.
Any obligation assumed by the Trust pursuant to this Agreement shall be limited
in all cases to the assets of the Trust and no person shall seek satisfaction
thereof from shareholders of the Trust. You agree to waive payment of any
amounts payable to you by Underwriter under a Plan until such time as the
Underwriter has received such fee from the Fund.
The provisions of the Plans shall control over the provisions of the
Participation Agreement, including this Schedule E, in the event of any
inconsistency.
You agree to provide complete disclosure as required by all applicable statutes,
rules and regulations of all rule 12b-1 fees received from us in the prospectus
of the contracts.
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.
Three months ended
December 31
- ---------------------------------------------------------------------------
(Dollars and shares in thousands) 1998 1997
- ---------------------------------------------------------------------------
Weighted average shares outstanding 251,860 252,692
Incremental shares from assumed
conversions 195 493
=============================
Adjusted weighted average shares
outstanding 252,055 253,185
=============================
Net income
$68,492 $130,515
Earnings per share:
Basic $0.27 $0.52
Diluted $0.27 $0.52
Exhibit 12
COMPUTATIONS OF RATIOS OF EARNINGS TO FIXED CHARGES
Three months ended
December 31
(Dollars in thousands) 1998 1997
- ----------------------------------------------------------------------------
Income before taxes
$95,128 $176,265
Add fixed charges:
Interest expense 8,737 10,747
Interest factor on rent 3,577 2,891
--------------------------------
Total fixed charges
$12,314 $13,638
--------------------------------
Earnings before fixed charges
and taxes on income $107,442 $189,903
================================
Ratio of earnings to fixed charges 8.73 13.9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
FINANCIAL STATEMENTS FOR THE QUARTER ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 634,178
<SECURITIES> 271,815
<RECEIVABLES> 250,722
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,177,068
<PP&E> 365,093
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,398,153
<CURRENT-LIABILITIES> 359,720
<BONDS> 0
0
0
<COMMON> 25,244
<OTHER-SE> 2,341,573
<TOTAL-LIABILITY-AND-EQUITY> 3,398,153
<SALES> 0
<TOTAL-REVENUES> 567,679
<CGS> 0
<TOTAL-COSTS> 476,914
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,173
<INCOME-PRETAX> 95,128
<INCOME-TAX> 26,636
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,492
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
