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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to______________
Commission File No. 1-9318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2670991
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
777 Mariners Island Blvd., San Mateo, CA 94404
(Address of Principal Executive Offices)
(Zip Code)
(650) 312-2000
(Registrant's telephone number, including area code)
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ______
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES _____ NO ______
APPLICABLE ONLY TO CORPORATE ISSUERS:
Outstanding: 248,652,854 shares, common stock, par value $.10 per share at
January 30, 2000.
1
<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) 1999 1998
- -------------------------------------------------------------------------------
Operating revenues:
Investment management fees $344,042 $330,370
Underwriting and distribution fees 164,243 188,604
Shareholder servicing fees 51,759 45,734
Other, net 5,623 2,971
- -------------------------------------------------------------------------------
Total operating revenues 565,667 567,679
- -------------------------------------------------------------------------------
Operating expenses:
Underwriting and distribution 143,168 163,046
Compensation and benefits 130,849 133,814
Information systems, technology and occupancy 51,631 48,479
Advertising and promotion 22,545 28,238
Amortization of deferred sales commissions 20,631 25,019
Amortization of intangible assets 9,283 9,373
Other 19,925 22,805
Restructuring charge - 46,140
- -------------------------------------------------------------------------------
Total operating expenses 398,032 476,914
- -------------------------------------------------------------------------------
Operating income 167,635 90,765
Other income/(expenses):
Investment and other income 16,679 10,536
Interest expense (3,364) (6,173)
- -------------------------------------------------------------------------------
Other income, net 13,315 4,363
- -------------------------------------------------------------------------------
Income before taxes on income 180,950 95,128
Taxes on income 43,428 26,636
- -------------------------------------------------------------------------------
Net income $137,522 $68,492
- -------------------------------------------------------------------------------
Earnings per share:
Basic $0.55 $0.27
Diluted $0.55 $0.27
Dividends per share $0.06 $0.055
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited
December 31 September 30
(In thousands) 1999 1999
- -------------------------------------------------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents $951,169 $811,300
Receivables:
Sponsored investment products 229,846 225,132
Other 27,141 33,178
Investment securities, available-for-sale 254,772 392,022
Prepaid expenses and other 14,818 24,257
- -------------------------------------------------------------------------------
Total current assets 1,477,746 1,485,889
- -------------------------------------------------------------------------------
Banking/Finance assets:
Cash and cash equivalents 9,148 7,944
Loans receivable, net 237,580 186,185
Investment securities, available-for-sale 15,045 20,484
Other 3,703 3,165
- -------------------------------------------------------------------------------
Total banking/finance assets 265,476 217,778
- -------------------------------------------------------------------------------
Other assets:
Deferred sales commissions 101,504 103,289
Property and equipment, net 420,900 416,395
Intangible assets, net 1,193,494 1,202,777
Receivable from banking/finance group 154,860 107,148
Other 135,312 133,514
- -------------------------------------------------------------------------------
Total other assets 2,006,070 1,963,123
- -------------------------------------------------------------------------------
Total assets $3,749,292 $3,666,790
===============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited
December 31 September 30
(In thousands except share data) 1999 1999
- -----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Compensation and benefits $89,631 $162,842
Current maturities of long-term debt 59,134 108,985
Accounts payable and accrued expenses 81,296 80,966
Commissions 65,231 61,971
Income taxes 63,183 57,968
Other 10,750 13,758
- -----------------------------------------------------------------------------
Total current liabilities 369,225 486,490
- -----------------------------------------------------------------------------
Banking/finance liabilities:
Payable to Parent 154,860 107,148
Deposits 55,583 58,216
Other 9,006 11,042
- -----------------------------------------------------------------------------
Total banking/finance liabilities 219,449 176,406
- -----------------------------------------------------------------------------
Other liabilities:
Long-term debt 377,379 294,260
Other 58,849 52,640
- -----------------------------------------------------------------------------
Total other liabilities 436,228 346,900
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Total liabilities 1,024,902 1,009,796
- -----------------------------------------------------------------------------
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;
248,675,576 and 251,006,541 shares
issued and outstanding, for December 24,868 25,101
and September, respectively
Capital in excess of par value 237 69,631
Retained earnings 2,688,649 2,566,048
Other (4,327) (3,532)
Accumulated other comprehensive income 14,963 (254)
- -----------------------------------------------------------------------------
Total stockholders' equity 2,724,390 2,656,994
- -----------------------------------------------------------------------------
Total liabilities and
stockholders' equity $3,749,292 $3,666,790
=============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
FRANKLIN RESOURCES, INC.
Consolidated Statements of Cash Flows
Unaudited Three months ended
December 31
(In thousands) 1999 1998
- -------------------------------------------------------------------------------
Net income $137,522 $68,492
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease (increase) in receivables,
prepaid expenses and other current assets 2,097 (39,970)
Advances of deferred sales commissions (18,846) (9,838)
(Decrease) increase in restructuring liabilities (1,190) 46,140
Increase in other current liabilities 3,160 18,998
Increase (decrease) in income taxes payable 5,216 (29,933)
Increase in commissions payable 3,260 2,996
Decrease in accrued compensation and benefits (46,291) (55,425)
Depreciation and amortization 48,762 51,553
Losses on disposition of assets 455 2,546
- -------------------------------------------------------------------------------
Net cash provided by operating activities 134,145 55,559
- -------------------------------------------------------------------------------
Purchase of investments (41,597) (61,671)
Liquidation of investments 197,429 325,479
Purchase of banking/finance investments (2,744) (8,319)
Liquidation of banking/finance investments 8,172 7,986
Net origination of loans receivable (52,196) (27,792)
Purchase of property and equipment (22,496) (31,658)
Proceeds from sale of property - 176
- -------------------------------------------------------------------------------
Net cash provided by investing activities 86,568 204,201
- -------------------------------------------------------------------------------
Decrease in bank deposits (2,633) (7,566)
Exercise of common stock options 266 476
Dividends paid on common stock (13,799) (12,587)
Purchase of stock (98,423) (7,113)
Issuance of debt 190,583 40,000
Payments on debt (155,634) (177,843)
- -------------------------------------------------------------------------------
Net cash used in financing activities (79,640) (164,633)
- -------------------------------------------------------------------------------
Increase in cash and cash equivalents 141,073 95,127
Cash and cash equivalents, beginning of period 819,244 556,043
- -------------------------------------------------------------------------------
Cash and cash equivalents, end of period $960,317 $651,170
- -------------------------------------------------------------------------------
Supplemental disclosure of non-cash information:
Value of common stock issued,
principally restricted stock $28,531 $27,769
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
FRANKLIN RESOURCES, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(Unaudited)
1. Basis of Presentation
---------------------
We have prepared these unaudited interim financial statements of Franklin
Resources, Inc. and its consolidated subsidiaries ("Franklin Templeton") in
accordance with the instructions to Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). We have condensed
or omitted certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles pursuant to such rules and regulations. In our opinion, 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. We have reclassified certain prior year amounts have been to
conform to current year presentation. You should read these financial statements
in conjunction with our audited financial statements for the fiscal year ended
September 30, 1999.
2. Restructuring
-------------
In December 1998, we adopted a restructuring plan estimated to cost
approximately $58 million and designed to reduce costs, improve service levels
and reprioritize our business activities. Approximately 87% of the total
estimated charges were utilized at December 31, 1999 and the remaining $7.7
million is expected to be utilized during the second quarter of fiscal 2000.
Approximately $19.9 million of the amounts utilized represented cash payments.
The remaining balance of $7.7 million is included in other current liabilities.
The following table shows the component parts and utilization of the
restructuring liability:
Restructuring Additional Restructuring Restructuring
liability liability liability liability
(In millions) Dec-98 Jan-99 utilized Dec-99
- --------------------------------------------------------------------------------
Asset write-down $31.9 - $(29.1) $2.8
Employee severance and
termination benefits - 12.3 (12.3) -
Lease termination charges
and other 14.2 - (9.3) 4.9
=================================================================== ============
Total $46.1 $12.3 $(50.7) $7.7
=================================================================== ============
3. Debt
----
During the quarter ended December 31, 1999, we repaid $50 million of our
medium-term notes at maturity. 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 $90 million of commercial paper. The fixed rates of interest
range from 6.36% to 6.64%. At December 31, 1999, our overall weighted average
interest rate on outstanding commercial paper and medium-term notes was 6.2%.
6
<PAGE>
4. Comprehensive Income
--------------------
The following table shows comprehensive income for the three months ended
December 31, 1999 and 1998.
(In thousands) 1999 1998
- -----------------------------------------------------------------------------
Net income $137,522 $68,492
Net unrealized gain on available-for-sale
securities 13,259 5,529
Foreign currency translation adjustment 1,958 3,125
=============================================================================
Comprehensive income $152,739 $77,146
=============================================================================
5. Segment information
-------------------
Franklin Templeton has two operating segments; investment management and
banking/finance. The investment management segment derives substantially all of
its revenues and net income from providing investment advisory, fund
administration, distribution and related services to our sponsored investment
products. The banking/finance segment offers consumer lending and selected
retail banking services to individuals.
Financial information for our two operating segments for the quarters ending
December 31, 1999 and 1998 is presented in the table below. Operating revenues
of the banking/finance segment are reported net of interest expense.
Assets Income before Operating
(In thousands) taxes revenues
- --------------------------------------------------------------------------------
December 1999
Investment management $3,483,884 $180,085 $561,062
Banking/finance 265,408 865 4,605
================================================================================
Company Totals $3,749,292 $180,950 $565,667
================================================================================
Assets Income before Operating
taxes revenues
- --------------------------------------------------------------------------------
December 1998
Investment management $3,161,975 $96,252 $565,164
Banking/finance 236,178 (1,124) 2,515
================================================================================
Company Totals $3,398,153 $95,128 $567,679
================================================================================
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<PAGE>
6. Earnings per share
------------------
Earnings per share were computed as follows:
Three months ended
December 31
(In thousands except per share
amounts) 1999 1998
-------------------------------------------------------------------------
Net income $137,522 $68,492
=========================================================================
Weighted-average shares
outstanding - basic 250,432 251,860
Incremental shares from assumed
conversions 160 195
=========================================================================
Weighted-average shares outstanding -
diluted 250,592 252,055
=========================================================================
Earnings per share:
Basic $0.55 $0.27
Diluted $0.55 $0.27
-------------------------------------------------------------------------
7. Adoption of Statement of Position 98-1
--------------------------------------
We adopted Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), on October 1,
1999. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use. The adoption of SOP 98-1 did
not materially affect our net income or financial condition for the quarter.
8. Subsequent Event
----------------
On February 5, 2000, Franklin Templeton purchased and retired approximately 1.5
million shares of its common stock for $51.8 million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
In this section, we discuss our results of operations and our financial
condition. We also make some statements relating to the future, which are called
"forward-looking" statements. Although we do our best to make clear and accurate
forward-looking statements, the actual results and outcomes could be
significantly different from those that we discuss in this document. For this
reason, you should not rely too heavily on these forward-looking statements. We
encourage you to look at the "Risk Factors" section below, where we discuss
these statements in more detail.
GENERAL
The majority of our operating revenues, operating expenses and net income are
derived from providing investment advisory and related services to retail mutual
funds, institutional and private accounts, and other investment products. This
is our primary business activity and operating segment.
Our sponsored investment products include a broad range of domestic and
global/international equity, fixed-income and money market mutual funds, as well
as other investment products that meet a wide variety of investment needs of
individuals and institutions.
8
<PAGE>
ASSETS UNDER MANAGEMENT
December 31 September 30 December 31
(In billions) 1999 1999 1998
- ------------------------------------------------------------------------------
Equity:
Global/international $111.0 $96.8 $92.8
Domestic 44.3 37.6 40.4
- ------------------------------------------------------------------------------
Total equity 155.3 134.4 133.2
- ------------------------------------------------------------------------------
Hybrid Funds 9.6 10.2 11.5
Fixed-income:
Tax-free 45.2 48.2 50.9
Taxable
Domestic 15.4 15.8 16.0
Global/international 3.9 3.9 4.0
- ------------------------------------------------------------------------------
Total fixed-income 64.5 67.9 70.9
- ------------------------------------------------------------------------------
Money funds 5.6 5.6 4.6
==============================================================================
Total end of period $235.0 $218.1 $220.2
==============================================================================
Simple monthly average for the
three-month period <F1> $224.1 $223.3 $217.0
==============================================================================
<F1>Investment management fees from approximately 70% of our assets under
management are calculated using a daily average.
Total assets under management increased $16.9 billion (8%) and $14.8 billion
(7%) from September 1999 and December 1998, respectively. Most of these
increases were in equity products. During the periods under review, market
appreciation has offset cash outflows in most categories of our sponsored
investment products.
Equity assets now comprise 66% of total assets under management compared to 60%
at December 31, 1998. Fixed income funds now comprise 27% of total assets under
management, as compared to 32% at December 31, 1998. The shift in our managed
asset mix toward higher fee equity products and higher average assets has
resulted in higher investment management fee revenues for the three months ended
December 31, 1999, as compared to the same period a year ago.
9
<PAGE>
RESULTS OF OPERATIONS
Three months ended
December 31 Percent
1999 1998 Change
- --------------------------------------------------------------------------------
Net income (millions) $137.5 $68.5 101%
Earnings per share
Basic $0.55 $0.27 104%
Diluted $0.55 $0.27 104%
Without restructuring charge $0.55 $0.41 34%
Operating margin
As reported 30% 16%
Without restructuring charge 30% 24%
EBITDA margin<F1>
As reported 37% 22%
Without restructuring charge 37% 30%
- --------------------------------------------------------------------------------
<F1> EBITDA margin is earnings before interest, taxes on income, depreciation
and the amortization of intangibles (not including amortization of deferred
sales commission) divided by total revenues.
Net income and operating margins during the quarter ended December 31, 1999
increased compared to the same quarter last year, as a result of a restructuring
charge taken in the quarter ended December 31, 1998 and reduced operating
expenses in the current quarter. EBITDA margins improved principally as a result
of improved operating margins in the current quarter.
Operating revenue
Three months ended
December 31 Percent
(In millions) 1999 1998 Change
- --------------------------------------------------------------------------------
Investment management fees $344.0 $330.4 4%
Underwriting and distribution fees 164.3 188.6 (13)%
Shareholder servicing fees 51.8 45.7 13%
Other, net 5.6 3.0 87%
- --------------------------------------------------------------------------------
Total operating revenues $565.7 $567.7 -
- --------------------------------------------------------------------------------
Investment management fees, the largest component of our operating revenues,
include both investment advisory and fund administration fees. These fees are
generally calculated under fixed-fee arrangements as a percentage of the value
of assets under management. In return for these fees, we provide investment
advisory and administrative services. There have been no significant changes in
these fee structures for the funds and accounts that we manage in the periods
under review.
Investment management fees during the quarter ended December 31, 1999 increased
4% over the same period last year, mainly due to the 3% increase in the simple
monthly average assets under management between these periods.
Our effective investment management fee rate (investment management fees divided
by simple monthly average assets under management) remained constant at 0.61%
from December 31, 1998.
10
<PAGE>
Underwriting commissions are earned from the sale of certain classes of mutual
funds that have a front-end sales commission. Distribution fees are paid by our
sponsored mutual funds in return for sales and marketing efforts on their
behalf. Distribution fees include 12b-1 plan fees that are subject to maximum
pay-out levels, based upon a percentage of the assets in each fund. A
significant portion of underwriting commissions and distribution fees are paid
to the brokers and other intermediaries who sell funds to the public on our
behalf. See the description of underwriting and distribution expenses below.
Underwriting and distribution fees decreased 13% over the same period last year
due to a decrease in commissionable sales, principally of Class A retail mutual
fund shares. Distribution fees remained relatively constant.
Shareholder servicing fees are primarily fixed charges per shareholder account
that vary with the particular type of fund and the service being rendered. For
certain products, particularly outside the U.S. and Canada, shareholder
servicing fees are calculated as a percentage of assets under management. Fees
are received as compensation for providing transfer agency services, which
include providing customer statements, transaction processing, customer service
and tax reporting. In accordance with current agreements with most U.S. funds,
closed accounts in a given calendar year remain billable through the second
quarter of the following calendar year at a reduced rate.
Shareholder servicing fees increased 13% as a result of increases in the total
number of billable accounts and the per account charge. In addition, fees
increased from funds whose servicing fees are based on assets under management.
Other, net consists primarily of revenues from the banking/finance operating
segment:
- - Operating revenues, consisting primarily of interest and servicing income
- - Interest expense, and
- - Provision for loan losses.
Other, net increased compared with the same quarter last year, primarily due to
banking/finance segment revenues from increased auto loans outstanding.
Securitizations of auto loans took place in September 1998 and May 1999 and a
further securitization is planned for the second quarter of fiscal 2000.
Banking/finance interest expense increased 9% as the borrowing requirements of
the group increased to finance the expansion in loans outstanding. The provision
for loan losses remained relatively stable in the current quarter as compared to
the same period a year ago.
Operating expenses
Three months ended
December 31
(In millions) 1999 1998 Change
-------------------------------------------------------------------------------
Underwriting and distribution $143.2 $163.1 (12)%
Compensation and benefits 130.9 133.8 (2)%
Information systems, technology and 51.6 48.5 6%
occupancy
Advertising and promotion 22.5 28.2 (20)%
Amortization of deferred sales commissions 20.6 25.0 (18)%
Amortization of intangible assets 9.3 9.4 (1)%
Other 19.9 22.8 (13)%
Restructuring charge - 46.1 -
===============================================================================
Total operating expenses $398.0 $476.9 (17)%
===============================================================================
11
<PAGE>
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
underwriting and distribution revenues.
Compensation and benefits costs during the quarter ended December 31, 1999
decreased 2% over the same period last year primarily due to a decrease in the
number of employees offset by annual salary increases awarded in October 1999.
In January 1999, we announced that we were eliminating 560 positions, primarily
as a result of efficiencies gained from conversion to one domestic transfer
agency system. In addition, employee headcount further decreased by 1,200
persons due to attrition. In order to hire and retain our key employees in the
current low unemployment labor market, we are committed to keeping our salaries
and benefit packages competitive, which means that the level of compensation and
benefits may increase more quickly than our revenues.
Information systems, technology and occupancy costs increased 6% over the same
period last year. During the past year, we have embarked on a number of
significant systems projects, made further enhancements to our transfer agency
system, and increased spending on our Year 2000 project. We are also developing
e-business strategies to meet the needs of our distribution network and our
mutual fund shareholders. We expect that such major systems undertakings will
continue to have an impact on our operating results through fiscal 2000 and
beyond.
Advertising and promotion expenses decreased 20% over the same period last year,
mainly due to decreased promotional activity and to reduced production and
printing costs. However, we are currently embarking on a number of new
advertising campaigns that will be run during the second quarter of fiscal 2000.
Certain fund classes are sold without a front-end sales charge to shareholders,
while, at the same time, we pay a commission to selling brokers and other
intermediaries. We expect to recover the payments in distribution revenues and
contingent deferred sales charges over periods of up to a maximum of eight years
following the sale. Accordingly, the payments are deferred and amortized over
periods not exceeding eight years. Amortization of deferred sales commissions
decreased 18% over the same period last year primarily due to the decrease in
the sale of these products. Also, in the second quarter of 1999, our sponsored
Canadian funds arranged for financing of their sales commissions directly with a
third party. This new arrangement contributed to the decrease in
period-over-period amortization levels.
During fiscal 1999, we recognized pretax restructuring charges of $58.4 million,
of which $46.1 million was recognized during first quarter. These charges were
related to a plan announced and initiated by management in the first quarter of
fiscal 1999. See Note 2 to the condensed financial statements. We do not expect
to incur any incremental charges with respect to the plan during fiscal 2000.
Of the $58.4 million total restructuring charge, approximately 87% was utilized
at December 31, 1999. The anticipated lost revenues associated with discontinued
products are not expected to have a material impact on ongoing results of
operations. Substantially all of the remaining restructuring liability is
expected to be utilized during the second quarter of fiscal year 2000.
12
<PAGE>
Other income/(expenses):
Three months ended
December 31
(In millions) 1999 1998 Change
- --------------------------------------------------------------------------
Investment and other income $16.7 $10.5 59%
Interest expense (3.4) (6.2) (45)%
- --------------------------------------------------------------------------
Other income, net $13.3 $4.3 209%
==========================================================================
Investment and other income increased 209% from the same period last year.
Investment income for the current quarter exceeded that earned in the prior
year, due to higher interest income and realized gains. Interest expense
decreased over the same period last year, following a reduction in our
outstanding debt.
Taxes on income
Our effective income tax rate for the quarter ended December 31, 1999 has
decreased to 24%, compared to 28% for the same period last year. This decrease
reflects the increase 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. The effective tax rate will continue to be reflective of the relative
contributions of foreign earnings that are subject to reduced tax rates and that
are not currently included in U.S. taxable income.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999 and September 30, 1999, our assets aggregated $3.7 billion,
and stockholders' equity approximated $2.7 billion. Outstanding debt (long-term
and short-term) increased by $33.3 million (8%) at December 31, 1999, from
$403.2 million at September 30, 1999.
Cash provided by operating activities for the quarter ended December 31, 1999
was $134.1 million, compared to $55.6 million in the same quarter last year.
This increase was due mainly to higher net income in the current quarter. The
increase in net income was due to lower operating expenses and the restructuring
plan, which required little incremental cash expenditure in the first quarter of
fiscal 2000. We sold $161.3 million of our investments in the period, net of
purchases, originated $52.2 million of new banking/finance loans and used $22.5
million to purchase property and equipment, providing $86.6 million from
investing activities in the quarter. The net issuance of debt raised $34.9
million. We used $98.4 million in cash to purchase 3.2 million shares of common
stock and paid $13.8 million of cash dividends. Overall, for the quarter, $79.6
million in cash was used in financing activities.
As of December 31, 1999, through our interest-rate swap agreements and medium
term note-program, we had fixed the rates of interest we pay on 54% of our
outstanding debt. Interest-rate swaps with notional amounts aggregating $40
million matured during the quarter ended December 1999.
We expect that the principal uses of cash will be to advance sales commissions,
fund property and equipment acquisitions, purchase company stock, pay
shareholder dividends and service debt. We expect to finance future increases in
investment in our banking/finance activities through existing debt facilities,
operating cash flows, or through the securitization of a portion of the
receivables from such consumer lending activities. We believe that our existing
liquid assets, together with the expected continuing cash flow from operations,
our borrowing capacity under current credit facilities and our ability to issue
stock will be sufficient to meet our present and reasonably foreseeable cash
needs.
13
<PAGE>
YEAR 2000 READINESS DISCLOSURE
Year 2000 Readiness
- ----------------------
As of the date of this filing, all of our mission-critical systems and important
non-mission critical systems, including non-IT systems, have successfully
transitioned to the Year 2000 and are operating in production. We will continue
to monitor system compliance into the year. We will pay special attention to
February 29, 2000, which falls in a non-standard leap year that could
potentially cause Year 2000-related problems. We utilized this unusual leap year
date in our test procedures and do not anticipate any material system problems.
Third Parties and Year 2000
- ----------------------------
During the cross-over to the Year 2000, we did not experience, and were not
alerted to, any material problems involving third-party systems, some of which
are Franklin Templeton's mission-critical systems and upon which we are heavily
reliant. Communication with third parties will continue as we proceed with our
Year 2000 project, through the leap year date, and into the Year 2000 to monitor
system functions.
Contingency Planning
- ---------------------
Franklin Templeton's worldwide contingency plans for the Year 2000 were in place
over the cross-over weekend but no material problems were experienced. Our
contingency planning also includes the upcoming leap year date.
Cost Estimates
- ---------------
Unless unanticipated problems arise in connection with the leap year date, the
total estimated costs through March 2000 associated with the Year 2000 project
should not exceed $50 million. These estimated costs are mainly internal and
third-party labor costs which are expensed as incurred. The total amount
expended on the project through January 31, 2000 was approximately $47.5
million.
Liquidity
- ---------
Franklin Templeton arranged for two short-term special lines of credit,
aggregating approximately $1.0 billion, for certain of its sponsored retail
mutual funds to assist in meeting liquidity requirements that could arise out of
Year 2000 concerns. As of the date of this filing, no such liquidity
requirements have materialized, and the lines of credit have not been utilized.
One of the lines of credit remained open until February 11, 2000 and the other
remains open until March 1, 2000.
Specific Risks Associated with the Year 2000
- ---------------------------------------------
Although our computer systems have successfully transitioned to the year 2000,
our ability to manage Year 2000 issues, in general and in relation to the
upcoming leap year date, is still subject to uncertainties beyond our control.
Franklin Templeton could become subject to legal claims or regulatory actions in
the event of any Year 2000 problem in our business operations. If there are Year
2000 market disruptions or investor panic, system interruptions or failures of
important third parties, such as securities transfer agents, stock exchanges,
data providers or providers of our mission-critical systems, this could have a
material adverse effect on our business, financial condition and results of
operations.
14
<PAGE>
RISK FACTORS
FRANKLIN TEMPLETON FACES STRONG GLOBAL COMPETITION FROM NUMEROUS AND SOMETIMES
LARGER COMPANIES. We compete with numerous stock brokerage and investment
banking firms, investment management companies, insurance companies, banks,
online and Internet investment sites, savings and loan associations and other
financial institutions. These companies also offer financial services and other
investment alternatives. In recent years, there has been a trend of
consolidation in the financial services industry, resulting in stronger
competitors, some with greater financial resources than Franklin Templeton.
There has also been a trend toward online Internet financial services. We are
currently expanding our Internet e-business, but there can be no assurance that
our e-business will compete effectively with other alternatives available to
investors. To the extent that existing customers stop investing with us and
instead invest with our competitors, or if potential customers decide to invest
with other companies instead, this could cause our market share, revenues and
net income to decline.
COMPETING SECURITIES DEALERS AND BANKS COULD RESTRICT SALES OF OUR FUNDS.
Although we rely on securities dealers to sell and distribute Franklin,
Templeton and Mutual Series fund shares, many of those securities dealers also
have mutual funds under their own names that compete directly with our products.
The banking industry also continues to expand its sponsorship of proprietary
funds. These firms or banks could decide to limit or restrict the sale of our
fund shares, which could lower our future sales, increase redemption rates, and
cause our revenues to decline.
WE CURRENTLY RELY UPON OUR DISTRIBUTION CHANNELS. Franklin Templeton derives a
significant portion of its income from sales made by broker/dealers and other
similar investment advisors, and we are heavily dependent upon these
distribution channels. However, there is increasing competition for access to
these channels, which has caused our distribution costs to rise and could cause
further increases in the future as competition continues and service
expectations increase. Higher distribution costs lower our net revenues and
earnings. If one of these major financial advisors had to cease operations, even
for a few days, it could have a significant adverse impact on our revenues and
earnings. Similarly, Franklin Templeton relies upon these business relationships
and there is no guarantee that good relations can be maintained. If we cannot
effectively compete, distribute and sell our products, this would have a
negative effect on our level of assets under management, related revenues and
overall business and financial condition.
SALES OF B AND C SHARE CLASSES BRING IN LOWER REVENUES IN THE YEAR OF SALE THAN
THE TRADITIONAL A SHARE CLASS. Franklin Templeton receives no or reduced sales
charges at the time of an initial investment in B and C shares but still must
pay or finance the related dealer commission. In most instances, Franklin
Templeton will realize lower operating margins on C share assets as compared to
A or B share assets.
IF OUR ASSET MIX SHIFTS TO PREDOMINANTLY FIXED-INCOME, OUR REVENUES WOULD
DECLINE. We derive higher fee revenues and income from the equity assets that we
manage. A shift in our asset mix towards fixed-income products has caused in the
past, and would cause in the future, a decline in our income and revenue.
WE HAVE BECOME SUBJECT TO AN INCREASED RISK OF ASSET VOLATILITY FROM CHANGES IN
THE GLOBAL EQUITY MARKETS. As Franklin Templeton's asset mix has shifted since
1992 from predominantly fixed-income to a majority of equity assets, we have
become subject to an increased risk of asset volatility from changes in global
equity markets. U.S. equity markets have been experiencing extraordinary returns
for an unusually long period of time which, due to the cyclical nature of these
markets, could decline in the future. Declines in these markets - whether in
general, or in certain geographic regions or investment sectors - have caused in
the past, and would cause in the future, a decline in our income and revenue. 15
<PAGE>
GLOBAL ECONOMIC CONDITIONS, INTEREST RATES, INFLATION RATES AND OTHER FACTOR
WHICH ARE DIFFICULT TO PREDICT AFFECT THE MIX, MARKET VALUES, AND LEVELS OF OUR
ASSETS UNDER MANAGEMENT. Fluctuations in interest rates and in the yield curve
affect the value of fixed-income assets under management as well as the flow of
monies to and from fixed-income funds. In turn, this affects our revenues from
those funds. In addition, changes in the equity marketplace may significantly
affect the level of our assets under management. The multiplicity of factors
impacting asset mix make it difficult to predict the net effect of any
particular set of conditions.
GENERAL ECONOMIC AND SECURITIES MARKETS FLUCTUATIONS AFFECT OUR BUSINESS.
Adverse general securities market conditions, currency fluctuations,
governmental regulations and recessionary global economic conditions could lower
Franklin Templeton's mutual fund share sales and other financial services
product sales.
AN INABILITY TO MEET CASH NEEDS COULD HAVE A NEGATIVE EFFECT ON OUR FINANCIAL
CONDITION AND BUSINESS OPERATIONS. Franklin Templeton's ability to meet
anticipated cash needs depends upon factors including our asset value, our
creditworthiness as perceived by lenders and the market value of our stock.
Similarly, our 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.
WE FACE INCREASED COMPETITION IN HIRING AND RETAINING QUALIFIED EMPLOYEES. Our
continued success will depend upon our ability to attract and retain qualified
personnel. The competition from other companies to hire these kinds of employees
has increased, particularly in certain geographic locations where the majority
of our workforce is employed. We may be forced to offer compensation and
benefits to these employees at a level that exceeds our revenue growth. With
historically low unemployment in the United States and other nations in which we
operate, qualified personnel are now moving between firms and starting their own
companies with greater frequency. If Franklin Templeton is not able to attract
and retain these employees, our overall business condition and revenues could
suffer.
OUR EMERGING MARKET PORTFOLIOS AND RELATED REVENUES ARE SUBJECT TO INCREASED
RISKS. These portfolios and our revenues derived from managing these portfolios
are subject to significant risks of loss from political and diplomatic
developments, currency fluctuations, social instability, changes in governmental
polices, expropriation, nationalization, asset confiscation and changes in
legislation related to foreign ownership. Foreign trading markets, particularly
in some emerging market countries are often smaller, less liquid, less regulated
and significantly more volatile.
OUR SECURITIZED CONSUMER RECEIVABLES BUSINESS IS SUBJECT TO MARKETPLACE
FLUCTUATION AND COMPETES WITH BUSINESSES WITH SIGNIFICANTLY LARGER PORTFOLIOS.
Auto loan and credit card portfolio losses can be influenced significantly by
trends in the economy and credit markets which reduce borrowers' ability to
repay loans.
DIVERSE AND STRONG COMPETITION LIMITS THE INTEREST RATES THAT WE CAN CHARGE ON
CONSUMER LOANS. We compete with many types of institutions for consumer loans,
including the finance subsidiaries of large automobile manufacturers. Some of
these competitors can provide loans at significantly below market interest rates
in connection with automobile sales. We rely on our relationships with various
automobile dealers and there is no guarantee that we can maintain relationships
with these dealers.
16
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, Franklin Templeton's financial position is
subjected to a variety of risks, including market risk associated with interest
rate movements. Franklin Templeton is exposed to changes in interest rates
primarily in its debt transactions. Through its interest-rate swap agreements
and its medium-term note program Franklin Templeton has effectively fixed the
rate of interest it pays on 54% of its debt outstanding at December 31, 1999.
Franklin Templeton does not believe that the effect of reasonably possible
near-term changes in interest rates on Franklin Templeton's financial position,
results of operations or cash flow would be material.
We have considered the potential impact of the effect on the banking/finance
segment of a 100 basis point (1%) movement in market interest rates and we do
not expect it would have a material impact on our operating revenues or results
of operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We have previously reported three complaints filed by the same law firm, in
January 1998, February 1998, and 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 Franklin Resources, Inc. ("FRI") 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.) (the "fund"); certain of the fund's officers and directors; FRI; and
Templeton Worldwide, Inc., a direct wholly-owned FRI subsidiary.
We have also previously reported that all defendants moved to dismiss those
complaints. In December, 1999, the trial court granted those motions in part and
denied them in part, permitting the plaintiffs the option to amend their
complaints. The plaintiffs, James C. Roumell, Michael J. Wetta and Richard
Waksman, chose to amend and on January 6, 2000 they filed a single, first
amended and consolidated class action complaint, captioned In Re: Templeton
Securities Litigation (Civil Action No. 98-6059).
The consolidated complaint alleges that the defendants, including the fund,
committed violations of the Investment Company Act of 1940 in connection with
the fund's decision to conduct a tender offer commencing at the end of 1997.
Also, plaintiff Wetta asserts a claim under Maryland state law on behalf of the
fund and against the other defendants. The consolidated complaint seeks damages
in excess of $40 million from all defendants. Wetta's claim also seeks equitable
and monetary relief from the defendants other than the fund in favor of the
fund.
Management believes that this lawsuit is without merit and intends to defend
this suit vigorously.
Other than as stated above, there have been no material developments in this
litigation since the report made in our Form 10-K for the period ended September
30, 1999 filed with the SEC on December 21, 1999.
Franklin Templeton 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 Franklin
Templeton's business or financial position.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of the report:
Exhibit 3(i)(a) Registrant's Certificate of Incorporation, as filed
November 28, 1969, incorporated by reference to Exhibit
(3)(i) to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1994
(the "1994 Annual Report")
Exhibit 3(i)(b) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1, 1985, incorporated by
reference to Exhibit (3)(ii) to the 1994 Annual Report
Exhibit 3(i)(c) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1, 1987, incorporated by
reference to Exhibit (3)(iii) to the 1994 Annual Report
Exhibit 3(i)(d) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated
by reference to Exhibit (3)(iv) to the 1994
Annual Report
Exhibit (3)(ii) Registrant's By-Laws incorporated by reference to
Exhibit 3(ii) to the Company's Form 10-K for the
fiscal year ended September 30, 1999
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 14, 1999 reporting Year 2000
Readiness Disclosure under Item 5 "Other Events."
(ii) Form 8-K dated October 21, 1999 reporting under Item 5
"Other Events" the filing of an earnings press release
by the Registrant on October 21, 1999 and including
said press release as an Exhibit under Item 7
"Financial Statements and Exhibits."
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN RESOURCES, INC.
Registrant.
Date: February 14, 2000 /S/ Martin L. Flanagan
MARTIN L. FLANAGAN
President, Member - Office of the President
and Principal Financial Officer
Exhibit 12
COMPUTATIONS OF RATIOS OF EARNINGS TO FIXED CHARGES
Three months ended
December 31
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------
Income before taxes $180,950 $95,128
Add fixed charges:
Interest expense 6,154 8,737
Interest factor on rent 4,436 3,577
-------------------------------------
Total fixed charges $10,590 $12,314
-------------------------------------
Earnings before fixed charges
and taxes on income $191,540 $107,442
=====================================
Ratio of earnings to fixed charges 18.1 8.7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
FINANCIAL STATEMENTS FOR THE QUARTER ENDED DECEMBER 31, 1999 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-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 951,169
<SECURITIES> 254,772
<RECEIVABLES> 256,987
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,477,746
<PP&E> 420,900
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,749,292
<CURRENT-LIABILITIES> 369,225
<BONDS> 0
0
0
<COMMON> 24,868
<OTHER-SE> 2,699,522
<TOTAL-LIABILITY-AND-EQUITY> 3,749,292
<SALES> 0
<TOTAL-REVENUES> 565,667
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<INTEREST-EXPENSE> 3,364
<INCOME-PRETAX> 180,950
<INCOME-TAX> 43,428
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<EPS-BASIC> 0.55
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