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 March 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: 243,544,864 shares, common stock, par value $.10 per share at
April 30, 2000.
1
<PAGE>
PART I -FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
FRANKLIN RESOURCES, INC.
Consolidated Income Statements
Unaudited
Three months ended Six months ended
March 31 March 31
(In thousands, except per share data) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
Operating revenues:
Investment management fees $356,009 $322,419 $700,051 $652,789
Underwriting and distribution fees 200,133 178,406 364,376 367,010
Shareholder servicing fees 53,202 47,762 104,961 93,496
Other 3,182 5,484 8,805 8,455
-------------------------------------------
Total operating revenues 612,526 554,071 1,178,193 1,121,750
-------------------------------------------
Operating expenses:
Underwriting and distribution 176,876 153,300 320,044 316,346
Compensation and benefits 134,581 128,816 265,430 262,630
Information systems, technology
and occupancy 51,441 52,111 103,072 100,590
Advertising and promotion 25,895 25,393 48,440 53,631
Amortization of deferred sales
commissions 21,600 22,963 42,231 47,982
Amortization of intangible assets 9,283 9,283 18,566 18,656
Other 20,773 18,770 40,698 41,575
Restructuring charges - 12,315 - 58,455
-------------------------------------------
Total operating expenses 440,449 422,951 838,481 899,865
-------------------------------------------
Operating income 172,077 131,120 339,712 221,885
-------------------------------------------
Other income (expense):
Investment and other income 19,752 14,490 36,431 25,026
Interest expense (3,180) (4,776) (6,544) (10,949)
-------------------------------------------
Other income (expense), net 16,572 9,714 29,887 14,077
-------------------------------------------
Income before taxes on income 188,649 140,834 369,599 235,962
Taxes on income 45,275 38,363 88,703 64,999
-------------------------------------------
Net income $143,374 $102,471 $280,896 $170,963
===========================================
Earnings per share:
Basic $0.58 $0.41 $1.13 $0.68
Diluted $0.58 $0.41 $1.13 $0.68
Dividends per share $0.06 $0.055 $0.12 $0.11
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited
March 31 September 30
(In thousands) 2000 1999
- --------------------------------------------------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents $1,067,985 $811,300
Receivables:
Sponsored investment products 229,261 225,132
Other 23,795 33,178
Investment securities, available-for-sale 210,564 392,022
Prepaid expenses and other 13,287 24,257
- --------------------------------------------------------------------------------
Total current assets 1,544,892 1,485,889
- --------------------------------------------------------------------------------
Banking/Finance assets:
Cash and cash equivalents 8,981 7,944
Loans receivable, net 166,183 186,185
Investment securities, available-for-sale 21,487 20,484
Other 2,769 3,165
- --------------------------------------------------------------------------------
Total banking/finance assets 199,420 217,778
- --------------------------------------------------------------------------------
Other assets:
Deferred sales commissions 85,550 103,289
Property and equipment, net 430,540 416,395
Intangible assets, net 1,184,212 1,202,777
Receivable from banking/finance group 78,812 107,148
Other 138,063 133,514
- --------------------------------------------------------------------------------
Total other assets 1,917,177 1,963,123
- --------------------------------------------------------------------------------
Total assets $3,661,489 $3,666,790
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited
March 31 September 30
(In thousands except share data) 2000 1999
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Compensation and benefits $119,833 $162,842
Current maturities of long-term debt 59,097 108,985
Accounts payable and accrued expenses 66,963 80,966
Commissions 66,181 61,971
Income taxes 43,710 57,968
Other 9,639 13,758
- --------------------------------------------------------------------------------
Total current liabilities 365,423 486,490
- --------------------------------------------------------------------------------
Banking/finance liabilities:
Payable to Parent 78,812 107,148
Deposits 55,553 58,216
Other 15,836 11,042
- --------------------------------------------------------------------------------
Total banking/finance liabilities 150,201 176,406
- --------------------------------------------------------------------------------
Other liabilities:
Long-term debt 381,241 294,260
Other 56,453 52,640
- --------------------------------------------------------------------------------
Total other liabilities 437,694 346,900
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total liabilities 953,318 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 sharesauthorized; 243,553,681 and
251,006,541 shares issued and outstanding,
for March and September, respectively 24,355 25,101
Capital in excess of par value - 69,631
Retained earnings 2,673,329 2,566,048
Other (4,204) (3,532)
Accumulated other comprehensive income 14,691 (254)
- --------------------------------------------------------------------------------
Total stockholders' equity 2,708,171 2,656,994
- --------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $3,661,489 $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 Six months ended
March 31
(In thousands) 2000 1999
- --------------------------------------------------------------------------------
Net income $280,896 $170,963
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease (increase) in receivables, prepaid expenses
and other current assets 5,938 (32,448)
Advances of deferred sales commissions (24,491) (28,935)
(Decrease) increase in restructuring liabilities (2,564) 24,703
Increase in other current liabilities 2,162 12,038
Decrease in income taxes payable (20,030) (34,002)
Increase in commissions payable 4,210 2,671
Decrease in accrued compensation and benefits (16,024) (25,305)
Depreciation and amortization 99,550 114,074
(Gains) losses on disposition of assets (1,913) 1,171
- --------------------------------------------------------------------------------
Net cash provided by operating activities 327,734 204,930
- --------------------------------------------------------------------------------
Purchase of investments (78,271) (289,507)
Liquidation of investments 279,295 482,007
Purchase of banking/finance investments (13,373) (16,222)
Liquidation of banking/finance investments 12,342 21,146
Proceeds from securitization of loans receivable 123,048 -
Net origination of loans receivable (102,602) (51,726)
Purchase of property and equipment (51,224) (47,839)
Other - 2,635
- --------------------------------------------------------------------------------
Net cash provided by investing activities 169,215 100,494
- --------------------------------------------------------------------------------
Decrease in bank deposits (2,663) (22,270)
Exercise of common stock options 378 476
Dividends paid on common stock (28,725) (26,473)
Purchase of stock (249,395) (23,459)
Issuance of debt 312,802 40,030
Payments on debt (271,624) (198,451)
- --------------------------------------------------------------------------------
Net cash used in financing activities (239,227) (230,147)
- --------------------------------------------------------------------------------
Increase in cash and cash equivalents 257,722 75,277
Cash and cash equivalents, beginning of period 819,244 556,043
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of period $1,076,966 $631,320
- --------------------------------------------------------------------------------
Supplemental disclosure of non-cash information:
Value of common stock issued,
principally restricted stock $29,229 $33,014
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
FRANKLIN RESOURCES, INC.
Notes to Consolidated Financial Statements
March 31, 2000
(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. 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 $58.4 million and designed to reduce costs, improve service levels
and reprioritize our business activities. Substantially all of the total
estimated charges were utilized at March 31, 2000.
3. Debt
----
At March 31, 2000, we had interest-rate swap agreements, maturing through
October 2000, that effectively fix interest rates on $90 million of commercial
paper. The fixed rates of interest range from 6.36% to 6.64%. At March 31, 2000,
our overall weighted average interest rate on outstanding commercial paper and
medium-term notes was 6.1%. Through our interest-rate swap agreements and
medium-term note program, we have effectively fixed the rate of interest we pay
on 55% of debt outstanding at March 31, 2000.
4. Comprehensive Income
--------------------
Comprehensive income for the three- and six-month periods ended March 31, 2000
was as follows:
Three months ended Six months ended
March 31 March 31
(In thousands) 2000 1999 2000 1999
-------------------------------------------------------------------------------
Net income $143,374 $102,471 $280,896 $170,963
Net unrealized gain on
available-for-sale securities 5,424 4,863 18,683 10,392
Foreign currency translation
adjustments (5,696) (2,099) (3,738) 1,026
===============================================================================
Comprehensive income $143,102 $105,235 $295,841 $182,381
===============================================================================
6
<PAGE>
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 three- and six-
month periods ended March 31, 2000 and 1999 is presented in the table below.
Operating revenues of the banking/finance segment are reported net of interest
expense.
Three months ended Six months ended
March 31 March 31
(In thousands) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
Operating revenues:
Investment management $609,357 $549,097 $1,170,420 $1,114,261
Banking/finance 3,169 4,974 7,773 7,489
- --------------------------------------------------------------------------------
Company Totals $612,526 $554,071 $1,178,193 $1,121,750
Income before taxes:
Investment management $189,949 $139,485 $370,034 $235,737
Banking/finance (1,300) 1,349 (435) 225
- --------------------------------------------------------------------------------
Company Totals $188,649 $140,834 $369,599 $235,962
================================================================================
Operating segment assets were as follows:
(In thousands) March 31, 2000 September 30, 1999
- --------------------------------------------------------------------------------
Investment management $3,462,069 $3,449,012
Banking/finance 199,420 217,778
- --------------------------------------------------------------------------------
Company Totals $3,661,489 $3,666,790
================================================================================
7
<PAGE>
6. Earnings per share
------------------
Earnings per share were computed as follows:
Three months ended Six months ended
March 31 March 31
(In thousands except per share
amounts) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
Net income $143,374 $102,471 $280,896 $170,963
================================================================================
Weighted-average shares
outstanding - basic 246,826 252,189 248,629 252,025
Incremental shares from assumed
conversions 172 390 163 779
- --------------------------------------------------------------------------------
Weighted-average shares
outstanding -diluted 246,998 252,579 248,792 252,804
================================================================================
Earnings per share:
Basic $0.58 $0.41 $1.13 $0.68
Diluted $0.58 $0.41 $1.13 $0.68
7. Stock repurchases
------------------
During the current fiscal year, we continued our policy of repurchasing shares
of our common stock in the market. During the three-month period ended March 31,
2000, we repurchased 5.2 million shares at a cost of $151.0 million. During the
six-month period ended March 31, 2000, we repurchased 8.4 million shares at a
cost of $249.4 million. These repurchases were partially offset by the issuance
of approximately 0.9 million shares primarily during the first quarter of fiscal
2000 for the company's restricted stock and employee stock purchase plans.
8. Securitization of loans receivable
-----------------------------------
In March 2000, we sold auto loans receivable with a net book value of $124.9
million to a securitization trust. The sale proceeds of this securitization were
$123.1 million. Loss from the sale of these assets was not material. Significant
assumptions used in determining the loss were an excess cash flow discount rate
of 12% and a cumulative credit loss rate of 3.66%.
8
<PAGE>
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.
ASSETS UNDER MANAGEMENT
March 31 March 31
(In billions) 2000 1999
- --------------------------------------------------------------------------------
Equity:
Global/international $106.2 $91.4
Domestic 49.3 37.4
- --------------------------------------------------------------------------------
Total equity 155.5 128.8
- --------------------------------------------------------------------------------
Hybrid Funds 9.0 10.7
Fixed-income:
Tax-free 44.6 51.6
Taxable:
Domestic 15.0 16.1
Global/international 3.6 4.0
- --------------------------------------------------------------------------------
Total fixed-income 63.2 71.7
- --------------------------------------------------------------------------------
Money funds 5.7 4.8
- --------------------------------------------------------------------------------
Total end of period $233.4 $216.0
================================================================================
Simple monthly average for the three-month period <F1> $231.0 $216.4
- --------------------------------------------------------------------------------
Simple monthly average for the six-month period<F1> $226.5 $216.2
================================================================================
<F1>Investment management fees from approximately 60% of our assets under
management are calculated using a daily average.
9
<PAGE>
Total assets under management at March 31, 2000 increased $17.4 billion (8%)
from a year ago. Most of these increases were in equity products. During the
three- and six- month periods ended March 31, 2000 and 1999, market appreciation
has offset net redemptions in our sponsored investment products. Despite
continued net redemptions, sales of our sponsored investment products increased
in both periods compared to the same periods a year ago.
Equity assets now comprise 67% of total assets under management as compared to
60% at March 31, 1999. Fixed income funds now comprise 27% of total assets under
management as compared to 33% at March 31, 1999.
RESULTS OF OPERATIONS
Three months ended Six months ended
March 31 March 31
2000 1999 Change 2000 1999 Change
- --------------------------------------------------------------------------------
Net income (millions) $143.4 $102.5 40% $280.9 $171.0
Earnings per share
Basic $0.58 $0.41 41% $1.13 $0.68 66%
Diluted $0.58 $0.41 41% 1.13 $0.68 66%
Without restructuring
charge $0.58 $0.45 29% $1.13 $0.85 33%
Operating margin
As reported 28% 24% 29% 20%
Without restructuring
charge 28% 26% 29% 25%
EBITDA margin<F2>
As reported 35% 30% 36% 26%
Without restructuring
charge 35% 32% 36% 31%
- --------------------------------------------------------------------------------
<F2> 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 during the three- and six-month periods ended March 31, 2000
increased compared to the same periods last year, as a result of increased
investment management fees from increased average assets under management as
well as a restructuring charge in 1999. During the three- and six- month periods
ended March 31, 2000, both the operating and EBITDA margins without
restructuring charges increased primarily due to increased operating revenues.
10
<PAGE>
Operating revenues
Three months ended Six months ended
March 31 March 31
(In millions) 2000 1999 Change 2000 1999 Change
- --------------------------------------------------------------------------------
Investment management
fees $356.0 $322.4 10% $700.0 $652.8 7%
Underwriting and
distribution fees 200.1 178.4 12% 364.4 367.0 (1)%
Shareholder
servicing fees 53.2 47.8 11% 105.0 93.5 12%
Other, net 3.2 5.5 (42)% 8.8 8.5 4%
================================================================================
Total operating revenues $612.5 $554.1 11% $1,178.2 $1,121.8 5%
================================================================================
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 to our sponsored investment products. 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 three- and six-month periods ended March
31, 2000 increased 10% and 7% over the same periods last year. This increase was
mainly due to the increases in both the simple monthly average and daily average
assets under management between these periods, and a shift in our asset mix
toward higher fee equity products. This shift toward equity products led to an
increase in our effective investment management fee rate (investment management
fees divided by simple monthly average assets under management) in the quarter
ended March 31, 2000 to 0.62% compared to 0.60% in the same period last year.
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 during the three- and six-month periods ended
March 31, 2000 increased 12% and decreased 1% over the same periods last year.
Both the three- and six-month periods experienced increased mutual fund sales
and average assets under management. This was offset by a decrease in
commissionable sales, principally of Class A retail mutual fund shares, which
led to reduced sales margins. Distribution fees during both the three- and
six-month periods increased primarily due to increased average assets under
management.
11
<PAGE>
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 11% and 12% respectively, from the same
three- and six-month periods in 1999. This was due to increased fees from funds
whose servicing fees are based on assets under management and increases in the
per account charge.
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 decreased $2.3 million and increased $0.3 million during the three-
and six- month periods ended March 31, 2000 compared with the same periods a
year ago. Securitization of auto loans took place in March 2000. As a result,
banking/finance revenues decreased in the current three-month period. The
provision for loan losses remained relatively stable in the current quarter as
compared to the same periods a year ago.
Operating expenses
Three months ended Six months ended
March 31 March 31
(In millions) 2000 1999 Change 2000 1999 Change
- --------------------------------------------------------------------------------
Underwriting and distribution $176.8 $153.3 15% $320.0 $316.3 1%
Compensation and benefits 134.6 128.8 5% 265.4 262.6 1%
Information systems,
technology and occupancy 51.4 52.1 (1)% 103.1 100.6 2%
Advertising and promotion 25.9 25.4 2% 48.5 53.6 (10)%
Amortization of deferred sales
commissions 21.6 23.0 (6)% 42.2 48.0 (12)%
Amortization of intangible
assets 9.3 9.3 - 18.6 18.7 (1)%
Other 20.8 18.8 11% 40.7 41.7 (2)%
Restructuring charges - 12.3 - - 58.4 -
- --------------------------------------------------------------------------------
Total operating expenses $440.4 $423.0 4% $838.5 $899.9 (7)%
================================================================================
12
<PAGE>
Underwriting and distribution includes sales commissions and distribution fees
paid to brokers and other third-party intermediaries. The increases in
underwriting and distribution expenses were consistent with the increases in
mutual fund sales and average assets under management during the three- and
six-month periods.
Compensation and benefits increased 5% and 1%, respectively, from the same
three- and six-month periods in 1999, primarily due to annual salary increases
awarded in October 1999, partially offset by a decrease of 13% in the number of
employees as of March 31, 2000 as compared to March 31, 1999. 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 decreased slightly and
increased 2% over the same three- and six-month periods in 1999. This was due
primarily to an increase in large projects subject to capitalization and a
reduction in Year 2000 efforts, which were expensed as incurred. During the past
six months, we have embarked on a number of significant systems projects and
successfully transitioned to the Year 2000. We are also developing e-business
strategies to improve our service levels and productivity. We expect that such
major systems undertakings will continue to have an impact on our overall
expenditures through fiscal 2000 and beyond.
Advertising and promotion expenses increased 2% and decreased 10% over the same
periods last year, mainly due to varying promotional activity. In the current
fiscal year, we have initiated a number of campaigns to increase the visibility
of our three major brand names - Franklin, Templeton and Mutual Series.
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 6% and 12% during the three- and six-month periods ended March 31,
2000 over the same periods last year. 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 has contributed to the
decrease in amortization levels in the periods ended March 31, 2000.
13
<PAGE>
During fiscal 1999, we recognized pretax restructuring charges of $58.4 million,
of which $46.1 million was recognized during first quarter, and the remaining
$12.3 million during the second fiscal 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, substantially all was utilized
at March 31, 2000. The anticipated lost revenues associated with discontinued
products are not expected to have a material impact on ongoing results of
operations.
Other income/(expenses):
Three months ended Six months ended
March 31 March 31
(In millions) 2000 1999 Change 2000 1999 Change
- --------------------------------------------------------------------------------
Investment and other
income $19.8 $14.5 37% $36.4 $25.0 46%
Interest expense (3.2) (4.8) (33)% (6.5) (10.9) (40)%
================================================================================
Other income/(expenses) $16.6 $9.7 71% $29.9 $14.1 112%
================================================================================
Investment income exceeded that earned in the prior year, due to higher average
investments and realized gains. Interest expense decreased over the same periods
last year, following a reduction in our average outstanding debt.
Taxes on income
Our effective income tax rate for the six months ended March 31, 2000 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.
14
<PAGE>
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, our assets decreased slightly to $3,661.5 million compared to
$3,666.8 million at September 30, 1999. Stockholders' equity increased to
$2,708.2 million compared to $2,657.0 million at September 30, 1999. Outstanding
debt (long-term and short-term) increased by $37.1 million (9%) at March 31,
2000, from $403.2 million at September 30, 1999.
Cash provided by operating activities for the six months ended March 31, 2000
was $327.7 million, compared to $204.9 million in the same period last year.
This increase was due mainly to higher net income in the current year. The
increase in net income was due to lower operating expenses, increased revenues
and a reduced effective tax rate. We sold $201.0 million of our investments in
the period, net of purchases; generated net cash of $20.4 million from the sale
of banking/finance loans, net of originations; and used $51.2 million to
purchase property and equipment, providing $169.2 million from investing
activities in the period. The net issuance of debt raised $41.2 million. We used
$249.4 million in cash to purchase 8.4 million shares of common stock and paid
$28.7 million of cash dividends. Overall, for the period, we used $239.2 million
in cash for financing activities.
As of March 31, 2000, through our interest-rate swap agreements and medium-term
note-program, we had fixed the rates of interest we pay on 55% of our
outstanding debt.
We expect that the principal uses of cash will be to increase assets under
management through business expansion, advance sales commissions, fund property
and equipment acquisitions, purchase company stock, pay shareholder dividends
and to repay 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 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, sales commission
financing arrangement and our ability to issue stock will be sufficient to meet
our present and reasonably foreseeable cash needs.
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.
15
<PAGE>
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
intermediaries. 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
intermediaries 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.
16
<PAGE>
GLOBAL ECONOMIC CONDITIONS, INTEREST RATES, INFLATION RATES AND OTHER FACTORS
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.
17
<PAGE>
OUR 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.
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 55% of its debt outstanding at March 31, 2000.
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 previously reported in the Form 10-Q of Franklin Templeton for the period
ended December 31, 1999, filed with the SEC on February 14, 2000, that three
individual plaintiffs filed a consolidated complaint in the U. S. District Court
for the Southern District of Florida against Templeton Vietnam Opportunities
Fund, Inc. (now known as Templeton Vietnam and Southeast Asia Fund, Inc.);
Templeton Asset Management, Ltd., an indirect wholly-owned subsidiary of
Franklin Resources, Inc. ("FRI") and the investment manager of the closed-end
investment company; certain of the fund's officers and directors; FRI; and
Templeton Worldwide, Inc., an FRI subsidiary. The plaintiffs in that action,
captioned In Re: Templeton Securities Litigation (Civil Action No. 98-6059),
recently moved to certify a class with respect to certain claims raised in the
consolidated complaint. There have otherwise been no material developments in
the litigation previously reported.
18
<PAGE>
Management believes that this lawsuit is without merit and intends to defend
this suit vigorously.
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.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of Franklin Resources, Inc. was held at
10:00 a.m., Pacific Standard Time, on January 27, 2000 at the offices of the
Company at 777 Mariners Island Boulevard, San Mateo, California.
The two proposals presented at the meeting were:
1. The election of nine (9) directors to hold office until the next Annual
Meeting of Stockholders or until their successors are elected and shall qualify.
2. The ratification of the appointment by the Board of Directors of
PricewaterhouseCoopers LLP as the Company's independent accountants for the
fiscal year ending September 30, 2000.
(b) Each of the nine nominees for director was elected and received the number
of votes set forth below:
Name For Against
Harmon E. Burns 222,967,055 2,852,850
F. Warren Hellman 200,006,214 25,813,691
Charles B. Johnson 222,982,728 2,837,177
Charles E. Johnson 222,837,265 2,982,640
Rupert H. Johnson, Jr. 222,905,956 2,913,949
Harry O. Kline 222,924,136 2,895,769
James A. McCarthy 223,053,487 2,766,418
Peter M. Sacerdote 222,844,134 2,975,771
Louis E. Woodworth 223,066,804 2,753,101
(c) The ratification of the appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants for the fiscal year ending September 30, 2000,
was approved by a vote of 225,105,221 shares in favor, 179,511 shares against,
and 535,173 shares abstaining.
19
<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 January 27, 2000 reporting under Item 5
"Other Events" the filing of an earnings press release by
the Registrant on January 27, 2000 and including said press
release as an Exhibit under Item 7 "Financial Statements and
Exhibits."
20
<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: May 15, 2000 /S/ Martin L. Flanagan
MARTIN L. FLANAGAN
President, Member-Office of the President, Chief
Financial Officer and Chief Operating Officer
Exhibit 12
COMPUTATIONS OF RATIOS OF EARNINGS TO FIXED CHARGES
Three months ended Six months ended
March 31 March 31
(Dollars in thousands) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
Income before taxes $188,649 $140,834 $369,599 $235,962
Add fixed charges:
Interest expense 6,548 7,443 12,703 16,180
Interest factor on rent 4,360 3,416 8,796 6,993
--------------------------------------------------
Total fixed charges 10,908 $10,859 21,499 23,173
--------------------------------------------------
Earnings before fixed charges
and taxes on income $199,557 $151,693 $391,098 $259,135
==================================================
Ratio of earnings to fixed
Charges 18.3 14.0 18.2 11.2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> MAR-31-1999
<CASH> 1,067,985
<SECURITIES> 210,564
<RECEIVABLES> 253,056
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,544,892
<PP&E> 430,540
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,661,489
<CURRENT-LIABILITIES> 365,423
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0
0
<COMMON> 24,355
<OTHER-SE> 2,683,816
<TOTAL-LIABILITY-AND-EQUITY> 3,661,489
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<INCOME-PRETAX> 369,599
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