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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2001
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 number 1-9318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2670991
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Franklin Parkway, San Mateo, CA 94403
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code (650)312-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.10 per share New York Stock Exchange,
Pacific Exchange and
London Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) or 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 at least the past 90 days.
YES X NO
---- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of $35.94 on November 28, 2001 on the
New York Stock Exchange was $5,297,201,086. Calculation of holdings by
non-affiliates is based upon the assumption, for these purposes only, that
executive officers, directors, nominees, Registrant's Profit Sharing Plan and
persons holding 5% or more of Registrant's Common Stock are affiliates. Number
of shares of the Registrant's common stock outstanding at November 28, 2001:
261,297,294
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the Registrant's proxy statement for its Annual Meeting of
Stockholders to be held on January 25, 2002, which was filed under cover of
Schedule 14A with the Securities and Exchange Commission (the "SEC") on December
14, 2001 (the "Proxy Statement"), are incorporated by reference into Part III of
this report.
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INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE
NUMBER
REFERENCE TO THIS
FORM 10-K 2001 ANNUAL REPORT
REQUIRED INFORMATION ON FORM 10-K
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PART I
ITEM 1. BUSINESS................................................ 4
Introduction.......................................... 4
Company History and Acquisitions...................... 4
Lines of Business..................................... 5
Investment Advisory, Management and Related Services.5
Banking/Finance Operations..........................19
Regulatory Considerations.............................19
Competition...........................................21
Financial Information About Industry Segments.........22
Intellectual Property.................................22
Employees.............................................22
ITEM 2. PROPERTIES..............................................22
ITEM 3. LEGAL PROCEEDINGS.......................................23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.........................24
Information About Franklin Templeton Investments'
Common Stock..........................................24
ITEM 6. SELECTED FINANCIAL DATA.................................24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.......................................35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..................61
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......61
Proxy: "Proposal 1: Election of Directors"*
ITEM 11. EXECUTIVE COMPENSATION..................................63
Proxy: "Proposal 1: Election of Directors"*
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PAGE
NUMBER
REFERENCE TO THIS
FORM 10-K 2001 ANNUAL REPORT
REQUIRED INFORMATION ON FORM 10-K
- -------------------- ------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..........................................63
Proxy: "Principal Holders of Voting Securities" and
"Security Ownership of Management"*
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........63
Proxy: "Proposal 1: Election of Directors -
Certain Relationships and Related Transactions" *
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.................................63
Consolidated Financial Statements
Reports on Form 8-K
List of Exhibits
* Incorporated by reference to the Proxy Statement.
Franklin Resources, Inc. files reports with the United States Securities and
Exchange Commission (the "SEC"). Copies of any of these filings can be obtained
from the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Information on the operation of the Public Reference Room can be obtained
by calling the SEC at 1-800-SEC-0330.
We also file reports with the SEC electronically via the Internet. The SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC, at http://www.sec.gov. Additional information about Franklin
Resources, Inc. can also be obtained at our website at
http://www.franklintempleton.com.
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PART I
"Forward-Looking Statements." When used in this Annual Report on Form 10-K,
words or phrases about the future such as "expected to," "could have," "will
continue," "anticipates," "estimates," or similar expressions are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Statements in "Business," "Management's Discussion and
Analysis" ("MD&A"), and elsewhere in this document that speculate about future
events are "forward-looking statements". These forward-looking statements are
subject to certain risks and uncertainties as described below, including the
risk factors explained in MD&A, which would cause actual results to differ
materially from those reflected in the forward-looking statements.
Forward-looking statements are our best prediction at the time that they are
made, and you should not rely on them. If a circumstance occurs that causes any
of our forward-looking statements to be inaccurate, Franklin Resources, Inc.
does not have an obligation to publicly announce the change to our expectations,
or to make any revision to the forward-looking statements.
ITEM 1. BUSINESS
I. Introduction
------------
Franklin Resources, Inc. ("FRI" or the "Company"), is a diversified financial
services company, which is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"), and as a financial
holding company under the Gramm-Leach-Bliley Act (the "GLB Act"). Through our
wholly-owned direct and indirect subsidiary companies, we provide a broad range
of investment advisory, investment management and related services to open-end
investment companies, including our own family of retail mutual funds,
institutional accounts, high net worth families, individuals and separate
accounts in the United States and internationally. Our 245 "sponsored investment
products" include a broad range of domestic and global/international equity,
balanced, fixed-income, sector and money market mutual funds as well as other
investment products, which are sold to the public under the Franklin, Templeton,
Mutual Series, Bissett and Fiduciary brand names. As of September 30, 2001, we
had $246 billion in assets under our management with approximately 8.4 million
shareholder accounts worldwide. In support of our primary business segment,
investment management, we also provide certain related services, including
transfer agency, fund administration, distribution, shareholder processing,
custodial, trustee and other fiduciary services. In our secondary business
segment, banking/finance, we provide clients with select retail, private
banking, consumer loan and other credit services through our bank subsidiaries.
The common stock of FRI is traded in the United States ("U.S.") primarily on the
New York Stock Exchange and the Pacific Exchange under the ticker symbol "BEN"
and under the ticker symbol "FKR" on the London Stock Exchange. The term
"Franklin(R) Templeton(R) Investments" as used in this document, refers to
Franklin Resources, Inc. and its consolidated subsidiaries.
II. Company History and Acquisitions
--------------------------------
Franklin Templeton Investments and its predecessors have been engaged in the
financial services business since 1947. Franklin Resources, Inc. was
incorporated in Delaware in November 1969. We originated our mutual fund
business with the Franklin family of funds (now known as the Franklin Funds(R)).
We expanded our business, in part, by acquiring companies engaged in the
investment advisory and investment management business.
In October 1992, we acquired substantially all of the assets and liabilities of
the investment adviser to the Templeton, Galbraith & Hansberger Ltd. financial
services business. This acquisition added the Templeton family of funds to our
company. The Templeton funds are known for their international and global
investment objectives and value style of investing.
In November 1996, we acquired certain assets and liabilities of Heine Securities
Corporation, which provided investment management services to various accounts
and investment companies, including Mutual Series Fund Inc., now known as
Franklin Mutual Series Fund Inc. ("Mutual Series"). The Mutual Series funds are
primarily value oriented equity funds.
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We expanded our business in Korea in July 2000 when we purchased all of the
remaining outstanding shares of a Korean asset management company, in which we
previously held a partial interest.
On October 2, 2000, we acquired all of the outstanding shares of Bissett &
Associates Investment Management, Ltd. ("Bissett") for approximately $95
million. Bissett now operates as part of our Canadian subsidiary Franklin
Templeton Investments Corp. ("FTIC"). With the addition of Bissett, we added 12
of Bissett's family of mutual funds to our existing Canadian based funds and
expanded our investment advisory services throughout Canada to a broad range of
clients, including institutional clients such as pension plans, municipalities,
universities, charitable foundations and private clients of both Bissett and
other financial institutions.
On April 10, 2001, we acquired Fiduciary Trust Company International, a bank
organized under the New York State Banking Law ("Fiduciary"). Following the
acquisition, Fiduciary became a wholly-owned subsidiary of Franklin Templeton
Investments. Pursuant to the Agreement and Plan of Acquisition, each outstanding
share of common stock, par value $1.00 per share, of Fiduciary ("Fiduciary
Common Stock") was exchanged for 2.7744 shares of common stock, par value $0.10
per share of common stock of FRI (the "Share Exchange"). The stock transaction
was valued at approximately $776 million on closing. In connection with the loss
of certain employees during the September 11, 2001 tragedy, we accelerated
payments to the families of such employees who qualified under an $85 million
retention pool, which had been aimed at retaining key employees of Fiduciary.
Fiduciary has a reputation as one of the leading providers of investment
management and related trust and custody services to high net worth families and
individuals. With the acquisition of Fiduciary, we also added Fiduciary's U.S.
and non-U.S. mutual funds to our product line.
III. Lines of Business
-----------------
Investment Advisory, Management and Related Services
----------------------------------------------------
We derive substantially all of our revenues from our investment advisory and
management operating segment, which is our principal line of business. When used
in this report "Franklin Templeton mutual funds" means all of the Franklin,
Templeton, Mutual Series, Bissett, and Fiduciary mutual funds; "sponsored
investment products" means all of the Franklin, Templeton mutual funds together
with closed-end investment companies, foreign-based investment products, and
other U.S. and international private, institutional, high net worth and separate
accounts.
Our sponsored investment products are offered to retail, institutional, high net
worth and separate accounts, which include individual investors, qualified
groups, trustees, tax-deferred (such as IRA) or money purchase plans, employee
benefit and profit sharing plans, trust companies, bank trust departments and
institutional investors in over 128 countries.
Our revenues and income are dependent upon many factors, including those
described in the following sections:
a. Assets Under Management
b. Types of Investment Management and Related Services
c. Types of Share Classes Offered by Our Funds
d. Underwriting, Distribution and Related Services
e. Shareholder Servicing
f. Investment Objectives of Sponsored Investment Products
g. Product Categorization
h. Fund Introductions, Mergers and Liquidations
a. Assets Under Management ("AUM")
-------------------------------
Franklin Templeton Investments' revenues depend to a large extent upon the
dollar value of assets under management, because we earn most of our revenues
based upon fees linked to the amount of assets in the accounts that we advise.
As of September 30, 2001, our U.S. retail assets, including U.S.-registered
mutual funds, insurance product funds, wrap fee and partnership accounts and
closed-end funds, accounted for $158.1 million of our assets under management.
Our U.S. and foreign high net worth, institutional and separate accounts,
foreign-based investment products and closed-end investment companies accounted
for $88.3 billion of our assets
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under management. As of September 30, 2001, the type of assets under management
by investment objective held by investors on a worldwide basis was:
Type of Assets Value in Billions % of Total AUM
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Equity $124.7 51%
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Growth potential, income potential or various combinations thereof.
Fixed-income $ 80.0 32%
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Both long and short-term.
Hybrid Funds $ 36.1 15%
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Asset allocation, balanced, flexible and income-mixed funds.
Money Funds $ 5.6 2%
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Short-term liquid assets.
The acquisitions of Bissett and Fiduciary in fiscal 2001 increased our assets
under management by $3.7 and $45.8 billion, respectively as of the dates of such
acquisitions.
Broadly speaking, the change in the net assets of the sponsored investment
products depends upon two factors: (1) the level of sales (inflows) as compared
to the level of redemptions (outflows); and (2) the increase or decrease in the
market value of the securities held in the portfolio of investments. As our
asset mix has shifted since 1992 from predominantly fixed-income securities to a
majority of equity assets, we have become subject to an increased risk of asset
volatility, and therefore revenue, resulting from changes in the domestic and
global equity markets. In addition, because we generally derive higher revenues
and income from our equity assets, a shift in assets from equity to fixed-income
and hybrid funds has a greater than proportional reduction on total revenue and
thus, income. Despite such volatility, we believe that in the long run we are
more competitive as a result of the greater diversity of sponsored investment
products available to our customer base.
Many factors affect market values, including the general condition of national
and world economies, the political climate, movements in currency exchange rates
and the direction and volume of changes in interest rates and/or inflation
rates. 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. The
multiplicity of factors impacting asset mix make it difficult to predict the net
effect of any particular set of conditions during any particular time frame.
b. Types of Investment Management and Related Services
---------------------------------------------------
RETAIL INVESTMENT MANAGEMENT
A majority of our revenues are derived from providing investment advisory,
investment management, administration, distribution and related services for the
Franklin Templeton mutual funds. We advise, manage and implement the investment
activities of and provide other administrative services necessary to operate our
registered investment companies, the related U.S.-open-end and closed-end funds
or series and our many non-U.S. sponsored investment products. This business is
primarily conducted through our wholly-owned direct and indirect subsidiary
companies, including, among others, the following:
FIDUCIARY INTERNATIONAL, INC. ("FII"), a registered investment adviser under the
Investment Advisers Act of 1940 (the "Advisers Act"), provides investment
advisory and portfolio management to certain mutual funds and separate accounts,
including FTI Funds and one series of funds within Fiduciary Trust Global Fund,
an umbrella unit trust;
FRANKLIN ADVISERS, INC. ("FAV"), a registered investment adviser with the SEC
under the Advisers Act, provides investment advisory, portfolio management and
administrative services to a majority of the Franklin Templeton mutual funds;
FRANKLIN ADVISORY SERVICES, LLC ("FAS"), a registered investment adviser under
the Advisers Act, provides investment advisory and portfolio management services
to certain of the Franklin Templeton mutual funds and also provides sub-advisory
services to non-affiliated entities;
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FRANKLIN MUTUAL ADVISERS, LLC ("FMA"), a registered investment adviser under the
Advisers Act, provides investment and portfolio management services to the
Mutual Series funds;
FRANKLIN TEMPLETON COMPANIES, LLC ("FTC"), our principal contracting and
corporate services subsidiary, through which property management, human
resources, information systems, technology, legal, accounting, treasury,
payroll, employment, purchasing, contracting, tax and similar functions are
conducted;
FRANKLIN TEMPLETON INVESTMENT MANAGEMENT LIMITED ("FTIML"), a registered
investment adviser in the United Kingdom and under the Advisers Act, provides
and serves as an investment adviser to various of our investment companies
registered in foreign jurisdictions, including Europe;
FRANKLIN TEMPLETON INVESTMENTS CORP. ("FTIC"), a registered investment advisor
in Canada, a mutual fund dealer with the Ontario Securities Commission and
Alberta Securities Commission and an investment adviser under the Advisers Act,
provides investment advisory, portfolio management, distribution and
administrative services for Canadian registered retail funds;
FRANKLIN TEMPLETON INVESTMENTS (ASIA) LIMITED ("FTILHK"), a registered
investment adviser in Hong Kong and under the Advisers Act, provides investment
advisory and management services to our sponsored investment products with
mandates in the emerging markets;
FRANKLIN/TEMPLETON DISTRIBUTORS, INC. ("FTDI"), a registered broker/dealer with
the SEC and member of the National Association of Securities Dealers, Inc. (the
"NASD"), provides distribution services to our U.S.-registered retail mutual
funds;
TEMPLETON ASSET MANAGEMENT LTD. ("TAML"), a registered investment adviser in
Singapore, Hong Kong and under the Advisers Act, provides investment advisory
and related services to certain Templeton developing funds and portfolios;
TEMPLETON GLOBAL ADVISORS LIMITED ("TGAL"), a registered investment adviser
under the Advisers Act, provides investment advisory, portfolio management, and
administrative services to certain of the Templeton funds; and
TEMPLETON WORLDWIDE, INC. ("TWW"), a holding company for the Templeton
investment and administrative businesses worldwide.
Subsidiary companies conduct research and provide the investment advisory
services and determine which securities the funds will purchase, hold or sell as
directed by each fund's board of trustees, directors or administrative managers.
In addition, the subsidiary companies take all steps necessary to implement such
decisions, including selecting brokers and dealers, executing and settling
trades in accordance with detailed criteria set forth in the management
agreement for each fund, and applicable law and practice. In addition, certain
of our subsidiary companies also provide similar investment management and
administrative services to a number of non-U.S. open-end and closed-end
investment companies, as well as other U.S. and international private and
institutional accounts, including certain Franklin Templeton sponsored
investment companies organized in Luxembourg (SICAV funds) and Ireland (umbrella
unit trusts).
Our investment advisory services include fundamental investment research and
valuation analyses, including original economic, political, industry and company
research, company visits and inspections, and the utilization of such sources as
company public records and activities, management interviews, company prepared
information, and other publicly available information, as well as analyses of
suppliers, customers and competitors. In addition, research services provided by
brokerage firms are used to support our findings.
Investment management and related services are provided pursuant to agreements
in effect with each of our U.S.-registered open-end and closed-end funds.
Comparable agreements are in effect with foreign-registered funds and with
private accounts. In general, the management agreements for our U.S.-registered
open-end and closed-end funds must be renewed each year, and must be
specifically approved at least annually by a vote of such funds' board of
trustees or directors or by a vote of the holders of a majority of such funds'
outstanding voting securities. Foreign-registered funds have various termination
rights, review and renewal provisions that are not discussed in this report.
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Each U.S. management or advisory agreement between Franklin Templeton
Investments and each fund automatically terminates in the event of its
"assignment", as defined in the Investment Company Act of 1940 (the " '40 Act").
In addition, either party may terminate the agreement without penalty after
written notice ranging from 30 to 60 days.
If management agreements representing a significant portion of our assets under
management were terminated, it would have a material adverse impact on our
company. To date, none of our management agreements with any of our retail
Franklin Templeton mutual funds have been involuntarily terminated.
Generally, the funds themselves have no paid employees. In the majority of
cases, we provide and pay the salaries of personnel who serve as officers of the
Franklin Templeton mutual funds, including the President and other
administrative personnel as necessary to conduct such funds' day-to-day business
operations. These personnel provide information, ensure compliance with
securities regulations, maintain accounting systems and controls, prepare annual
reports and perform other administrative activities. Various subsidiaries have
contracts with the funds to provide additional services including maintaining a
fund's portfolio records, answering shareholder inquiries, and creating and
publishing literature.
The funds generally pay their own expenses such as legal, custody and audit
fees, reporting costs, board and shareholder meeting costs, SEC and state
registration fees and similar expenses. The funds also pay Franklin Templeton
Investments a fee payable monthly in arrears based upon a fund's average daily
net assets. Annual fee rates under the various global investment management
agreements generally range from 0.15% to a maximum of 2.25% and are often
reduced as net assets exceed various threshold levels.
Our investment management agreements permit us to serve as an adviser to more
than one fund so long as our ability to render services to each of the funds is
not impaired, and so long as purchases and sales for various advised funds are
made on an equitable basis. Our management personnel and the fund directors or
boards of trustees regularly review the fund advisory and other administrative
fee structures in light of fund performance, the level and range of services
provided, industry conditions and other relevant factors. Advisory and other
administrative fees are generally waived or voluntarily reduced when a new fund
is established and then increased to contractual levels within an established
timeline or as net asset values reach certain levels.
We use a "master/feeder" fund structure in limited situations. This structure
allows an investment adviser to manage a single portfolio of securities at the
"master fund" level and have multiple "feeder funds" invest all of their
respective assets into the master fund. Individual and institutional
shareholders invest in the "feeder funds" which can offer a variety of service
and distribution options. An advisory fee is charged at the master fund level,
and administrative and shareholder servicing fees are charged at the feeder fund
level.
HIGH NET WORTH INVESTMENT MANAGEMENT
Through our recently acquired subsidiaries Fiduciary and Bissett, we have
broadened our ability to provide global investment management and related trust
and custody services and market and sell our sponsored investment products to
high net worth individuals and families. These services focus on managing family
wealth from generation to generation through a full service package including
wealth management, estate planning, private funds, private banking, and custody
services. Our high net worth client business seeks to maintain relationships
that span generations and help families plan the best method of
intergenerational wealth transfer. The minimum asset balance for an individual
client is generally $2 million.
Individual client assets are held in accounts separately managed by individual
portfolio managers. These portfolio managers determine asset allocation and
stock selection for client accounts, taking into consideration each client's
specific long-term objectives while utilizing our macroeconomic and individual
stock research.
We offer clients personalized attention and estate planning expertise in an
integrated package of services under the Family Resource Management(R) ("FRM")
brand. Services under FRM provide clients with an integrated strategy to
optimize wealth accumulation and maximize after-tax wealth transfer to the next
generation. These services include advice concerning strategic planning and
asset allocation, investment management, and custody and reporting.
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INSTITUTIONAL INVESTMENT MANAGEMENT
We provide a broad array of investment management services to institutional
clients, focusing on foundations, endowment funds and government and corporate
pension funds. Our subsidiaries offer a wide range of both domestic and
international equity, fixed income and real estate services through a variety of
investment vehicles, including separate and commingled accounts and open-ended
domestic and offshore mutual funds.
We primarily attract new institutional business through our strong relationships
with management consultants. Additionally, we build strong direct relationships
with trustees and fund executives where new business can be generated through
additional mandates from existing clients.
Our subsidiary, Templeton Investment Counsel, LLC, is one of the principal
investment advisers for our managed and institutional accounts. In September of
2001, we announced that in fiscal 2002 we were combining our institutional
investment management product line and support functions of Fiduciary with that
of Franklin Templeton Investments to form one global sales and marketing
platform under a new subsidiary, FTI Institutional, LLC. This new entity will
continue to distribute and market the sponsored investment products to our
institutional accounts under the Franklin, Templeton, Mutual Series, Bissett and
Fiduciary brand names, utilizing the investment advisory services of many of our
subsidiaries described earlier.
During fiscal 2001 we also created the Strategic Alliances Group, a division of
our subsidiary Franklin/Templeton Distributors, Inc. ("Distributors") to service
sponsors of defined contribution plans, including 401(k)'s, and variable annuity
products. This business unit will allow us to focus on expanding sales of our
asset management capabilities to the insurance industry by offering a number of
investment options, including sub-advised portfolios, mutual funds and variable
insurance trusts.
SEPARATE ACCOUNTS
Through our subsidiaries Franklin Private Client Group, Inc. ("FPCG"), a
registered investment adviser, and Templeton Private Client Group ("TPCG"), a
division of Templeton/Franklin Investment Services, Inc. ("TFIS"), we provide
private portfolio management services and advisory services through third party
broker/dealer wrap fee programs. Our subsidiary, TFIS, also serves as a direct
marketing broker/dealer for institutional investors in the Franklin Templeton
mutual funds. We also market and distribute our sponsored investment products to
individually managed and separate accounts.
TRUST AND CUSTODY
As the result of our recent acquisition of Fiduciary, we have expanded our trust
and custody business to include global master custody and support services to
high net worth and institutional clients. Through various trust company
subsidiaries, including Fiduciary, we offer a wide range of investment-related
services, including, custody and administration, trust services, estate
planning, tax planning, securities brokerage, trade clearance and private
banking, to high net worth individuals, families and institutional clients in
the United States and abroad. In addition to custody services, we also offer
clients with a series of other services, including foreign exchange, performance
measurement, securities lending and brokerage services. We provide planned
giving administration for non-profit organizations and related custody services,
including pooled income funds, charitable remainder trusts, charitable lead
trusts and gift annuities, for which we may or may not act as trustee.
Our other trust company subsidiaries, many of which were added as part of the
Fiduciary acquisition, include Fiduciary Investment Corporation, an investment
company incorporated under New York State Banking Law and the holding company
for many of the trust company subsidiaries; Fiduciary Trust International of the
South, a Florida state-chartered, limited purpose trust company; Fiduciary Trust
International of California, a California state-chartered limited purpose trust
company; Fiduciary Trust International of Delaware, a Delaware state-chartered
limited purpose trust company; FTI-Banque Fiduciary Trust, a Swiss bank based in
Geneva, Switzerland; FTCI (Cayman) Ltd., an offshore trust company, licensed as
a bank and trust company (with a type "B" license) in the Cayman Islands; and
Franklin Templeton Bank & Trust, F.S.B. ("FTB&T"). FTB&T, among other things,
exercises full trust powers and serves primarily as custodian of Individual
Retirement Accounts ("IRA") and business retirement plans.
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c. Types of Share Classes Offered by Our Funds
-------------------------------------------
Most of our U.S. and non-U.S. registered retail funds have a multi-class share
structure. We adopted this share structure to provide investors with greater
sales charge alternatives for their investments. Class A shares represent a
traditional fee structure whereby the investor pays a commission at the time of
purchase. Class B shares, which are available in many of our funds globally,
have no front-end sales charges but instead have a declining schedule of sales
charges (called contingent deferred sales charges) if the investor redeems
within a number of years from original purchase date. For Class B shares, the
broker/dealer's commission is paid by the fund's distributor from contingent
deferred sales charges, distribution and service (12b-1) fees and its other
resources. Class C shares have a hybrid, level load pricing structure combining
aspects of conventional front-end, back-end and level-load pricing.
Globally, we offer Advisor Class shares in our Franklin Templeton mutual funds
and in the U.S. we offer Z Class shares in Mutual Series funds on a limited
basis, both of which have no sales charges. FTI Funds, managed by our subsidiary
FII, offers 7 series of funds with no sales charges. The Advisor and Z Class
shares are sold to our officers, directors and current and former employees, and
are also offered to institutions and investment advisory clients (both
affiliated and unaffiliated), as well as individuals investing $5 million or
more. In addition, shareholders who held shares of any Mutual Series funds on
October 31, 1996, may continue to purchase Z Class shares. We also sell money
market funds to investors without a sales charge. Under the terms and conditions
described in the prospectuses or the statements of additional information for
some funds, certain investors can purchase shares at net asset value or at
reduced sales charges. In addition, investors may generally exchange their
shares of a fund at net asset value for shares within the same class of another
fund in the Franklin Templeton Investments group without having to pay
additional sales charges.
The Franklin Templeton insurance product funds offered in the U.S., generally
have a two class share structure, Class 1 and Class 2, which are offered at net
asset value without a sales load directly to the insurance company separate
accounts (the shareholder). The only difference between the two classes is that
Class 2 shares are assessed a distribution and service fee ("12b-1 fee") (as
described below in "Distribution, Marketing and Related Services") to Franklin
Templeton Investments, the insurance company or others for the expenses of
activities that are primarily intended to sell shares of the class or variable
contracts offering shares of the class. These 12b-1 fees are generally assessed
quarterly at an annual rate of 0.25% of the average daily net assets of the
class.
10
- --------------------------------------------------------------------------------
The following table summarizes the sales charges and distribution and service
fee structure for various share classes of our U.S.-registered retail mutual
funds. The fees below generally apply to our U.S.-registered retail mutual
funds, however, there are exceptions to this fee schedule for some funds.
Sales Charges and Distribution and Service Fees Paid to Franklin Templeton Investments
- --------------------------------------------------------------------------------------
for Most U.S.-Registered Retail Funds
- -------------------------------------
U.S. Retail Funds Class A shares Class B shares (c) Class C shares (d)
- -------------------------------------------------------------------------------------------------
Sales Charge at Time of Sale
Equity 5.75% (a) None. 1.00%
Fixed-income 4.25% (a) None. 1.00%
- -------------------------------------------------------------------------------------------------
Contingent Deferred Sales Charge None. (b) 4% maximum 1% if shareholder
declining to zero sells shares
after 6 years of within 18 months
each investment. of investment.
- -------------------------------------------------------------------------------------------------
Maximum Yearly 12b-1 Plan Fees
Equity 0.25% 1.00% 1.00%
Fixed-income
Taxable 0.25% 0.65% 0.65%
Tax-free 0.10% 0.65% 0.65%
- -------------------------------------------------------------------------------------------------
Types of investors that may
purchase this share class Any. Any. Any.
- -------------------------------------------------------------------------------------------------
U.S. Retail Funds FTI Fund shares Advisor Class shares Z Class shares (e)
- -------------------------------------------------------------------------------------------------
Sales Charge None. None. None.
At Time of Sale
Equity
Fixed-income
- -------------------------------------------------------------------------------------------------
Contingent Deferred
Sales Charge None. None. None.
- -------------------------------------------------------------------------------------------------
Maximum Yearly 12b-1
Plan Fees 0.25% None. None.
- -------------------------------------------------------------------------------------------------
Types of investors that Clients of Officers, directors Officers, directors and
may purchase this share Fiduciary or our and current and current and former
class Fiduciary related former employees of employees of Franklin
subsidiaries. Franklin Templeton Templeton Investments;
Investments; institutions, investment
institutions, advisory clients,
investment advisory individuals investing $5
clients, million or more in Mutual
individuals Series funds and
investing $5 shareholders that hold
million or more in shares of the Mutual
Franklin or Series funds reclassified
Templeton funds. as Z shares.
- -------------------------------------------------------------------------------------------------
(a) Reductions in the maximum sales charges may be available depending upon the
amount invested and the type of investor. In some cases noted in each
fund's prospectus or statement of additional information, certain investors
may invest in Class A shares at net asset value (with no load). In
connection with certain of these no-load purchases, Distributors may make a
payment out of its own resources to a broker/dealer involved with that
sale.
(b) For NAV purchases over $1 million, a contingent deferred sales charge of
1.0% may apply to shares redeemed within one year of investment.
(c) Class B shares convert to Class A shares after eight (8) years of
ownership.
(d) Distributors pays a 2% dealer commission to brokers of record of Class C
Shares, which consists of a 1% sales charge assessed to the investor at the
time of sale, and 1% of which is paid by Distributors. Distributors
recovers a portion of the amount it pays to brokers by retaining certain
12b-1 fees assessed during the first 12 months and from collecting
contingent deferred sales charges on any redemptions made within 18 months
of the time of sale.
(e) When the Company entered into management contracts for the Mutual Series
funds, the outstanding shares of Mutual Series funds were reclassified as Z
Class shares on October 31, 1996. Current Shareholders who held shares of
any Mutual Series funds on October 31, 1996 may continue to purchase Z
Class shares of any Mutual Series fund. Shareholders of the Z Class shares
may also exchange into Advisor Class shares of other Franklin Templeton
mutual funds if otherwise meeting the Advisor Class shares' eligibility
requirements. Alternatively, Z Class shareholders may exchange into Class A
shares of other Franklin Templeton mutual funds at net asset value, which
are subject to 12b-1 fees. Distributors may make a payment out of its own
resources to a broker/dealer involved in selling Z Class shares.
11
- --------------------------------------------------------------------------------
d. Underwriting, Distribution and Related Services
-----------------------------------------------
Franklin/Templeton Distributors, Inc. ("Distributors"), a wholly-owned
subsidiary of the Company, acts as the principal underwriter and distributor of
shares of our U.S.-registered open-end mutual funds. Distributors has entered
into underwriting agreements with the funds, which generally provide for
Distributors to pay the commission expenses for sales of fund shares. Franklin
Templeton mutual fund shares are sold primarily through a large network of
independent intermediaries, including broker/dealers, banks and other similar
investment advisers. We are heavily dependent upon these distribution channels
and business relationships. 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. In addition, many intermediaries also have mutual funds
offered for sale under their own names that compete directly with our products.
These intermediaries 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. As of September 30, 2001, approximately 3,800 local,
regional and national securities brokerage firms offered shares of the U.S.
registered Franklin Templeton mutual funds for sale to the investing public. In
the United States, Franklin Templeton Investments has approximately 64 general
wholesalers and six (6) retirement plan wholesalers who interface with the
broker/dealer community.
Broker/dealers receive various fees from Distributors, including fees from
investors and the funds, for services in matching investors with funds whose
investment objectives match such investors' goals and risk profiles.
Broker/dealers may also receive fees for their assistance in explaining the
operations of the funds, in servicing the investor's account, reporting and
various other distribution services.
Most of the U.S.-registered Franklin Templeton mutual funds, with the exception
of certain Franklin Templeton money market funds, have adopted distribution
plans (the "Plans") under Rule 12b-1 promulgated under the '40 Act ("Rule
12b-1"). The Plans are established for an initial term of one (1) year and,
thereafter, must be approved annually by the particular fund's board and by a
majority of disinterested fund directors. All such Plans are subject to
termination at any time by a majority vote of the disinterested directors or by
the particular fund shareholders. The Plans permit the funds to bear certain
expenses relating to the distribution of their shares, such as expenses for
marketing, advertising, printing and sales promotion. Fees under the Plans for
the different share classes are shown above in the table under "Types of Share
Classes Offered by Our Funds." The implementation of the Plans provided for a
lower fee on Class A shares acquired prior to the adoption of such Plans. Fees
from the Plans are paid primarily to third-party dealers who provide service to
the shareholder accounts, and engage in distribution activities. Distributors
may also receive reimbursement from the funds for various expenses that
Distributors incurs in distributing the funds, such as marketing, advertising,
printing and sales promotion subject to the Plans' limitations on amounts. Each
fund has a percentage limit for these type of expenses based on average daily
net assets under management.
Class B and C shares are generally more costly to us in the year of sale, but
they allow us to be competitive by increasing our presence in various
distribution channels. We finance payments of the Class B and certain Class C
share broker commissions. We have arranged to finance certain deferred
commissions arising from our U.S., Canadian and European operations through
Lightning Finance Company Limited, a company in which we have an ownership
interest. The repayment of the financing advances is limited to the cash flows
generated by the funds' 12b-1 Plans and by any contingent deferred sales charges
collected in connection with early redemptions (within six years after purchase
on Class B shares).
12
- --------------------------------------------------------------------------------
The fees below generally apply to our U.S.-registered retail funds, however,
there are exceptions to this fee schedule for some funds.
Sales Commissions and Other Payments Paid to Qualifying Broker/Dealers and
- --------------------------------------------------------------------------
Other Intermediaries for Most U.S.-Registered Retail Funds
- ----------------------------------------------------------
U.S. Retail Funds Class A Shares Class B Shares Class C Shares
- ----------------------------------------------------------------------------------------------
Dealer Commission at Time of Sale
Equity 5.00% 4.00% 2.00%
Fixed-income 4.00% 3.00% (b) 2.00%
- ----------------------------------------------------------------------------------------------
Maximum Yearly 12b-1 Plan Fees
Equity 0.25% (a) 1.00% (c) 1.00% (e)
Fixed-income
Taxable 0.25% (a) 0.65% (d) 0.65% (f)
Tax-free 0.10% 0.65% (d) 0.65% (f)
- ----------------------------------------------------------------------------------------------
(a) The fees referenced above generally apply, however, there are certain
individual funds that may apply a different fee structure, including the
Rising Dividends Fund whose 12b-1 fee is 0.50%, certain equity funds whose
12b-1 fees are 0.35% and certain taxable fixed income funds whose 12b-1
fees are 0.15%.
(b) Certain fixed income funds now pay 4.00%.
(c) Franklin Templeton Investments receives a fee equal to 0.75% and pays 0.25%
to the broker/dealer on the daily average assets in the account. After 8
years from the date of the investment, Class B shares are converted into
Class A shares.
(d) Franklin Templeton Investments receives a fee equal to 0.50% and pays 0.15%
to the broker/dealer on the daily average assets in the account. After 8
years from the date of the investment, Class B shares are converted into
Class A shares.
(e) Franklin Templeton Investments retains a fee equal to 0.75% and pays 0.25%
to the dealer/broker on the average assets in the account for the first
twelve (12) months following the sale, after which the full 12b-1 fee is
paid to the broker/dealer.
(f) Franklin Templeton Investments retains a fee equal to 0.50% and pays 0.15%
to the dealer/broker on the assets in the account for the first twelve (12)
months following the sale, after which it is paid to the broker/dealer.
e. Shareholder Servicing
---------------------
Our subsidiary, Franklin Templeton Investor Services, LLC ("FTIS"), provides
shareholder record keeping services and acts as transfer agent and
dividend-paying agent for the U.S.-registered Franklin Templeton open-end funds.
FTIS is registered with the SEC as a transfer agent under the Securities
Exchange Act of 1934 (the " '34 Act"). FTIS is compensated under an agreement
with each fund on the basis of an annual fee per account, which varies with the
fund and the type of services being provided, and is reimbursed for
out-of-pocket expenses. In addition, certain funds compensate FTIS based on
assets under management. Other subsidiaries provide the same services to the
open-end funds offered for sale in Canada, Europe and Asia under similar fee
arrangements. As of September 30, 2001, there were approximately 8.4 million
shareholder accounts in the Franklin Templeton Investments group worldwide.
f. Investment Objectives of Funds
------------------------------
Our sponsored investment products accommodate a variety of investment goals,
including growth or value styles, capital appreciation, growth and income,
income, tax-free income and preservation of capital. In seeking to achieve such
objectives, each portfolio emphasizes different investment securities.
Our equity investment products include some that are value-oriented, others that
reflect a growth style of investing and some that use a combination of growth
and value. Value investing focuses on identifying companies which our research
analysts and portfolio managers believe are undervalued based on a number of
factors. Portfolios that seek capital appreciation invest primarily in equity
securities in a wide variety of international and U.S. markets;
13
- --------------------------------------------------------------------------------
some seek broad national market exposure, while others focus on narrower sectors
such as precious metals, health care, emerging technology, large-cap companies,
small-cap companies, real estate securities and utilities. Growth investing
relies on the review of macro-economic, industry and sector trends to identify
companies that exhibit superior growth potential relative to industry peers and
the broad market. Unlike other management styles that focus on short-term market
trends, our growth portfolio investment management team invests in companies
demonstrating long-term growth potential, based mainly on proprietary in-house
analysis and research.
Portfolios seeking income generally focus on taxable and tax-exempt money market
instruments, tax-exempt municipal bonds, global fixed-income securities,
fixed-income debt securities of corporations and of the U.S. government and its
agencies and instrumentalities such as the Government National Mortgage
Association, the Federal National Mortgage Association, and the Federal Home
Loan Mortgage Corporation. Still others focus on investments in particular
countries and regions, such as emerging markets.
Again, we also provide investment management and related services to a number of
closed-end investment companies whose shares are traded on various major U.S.
and some international stock exchanges. In addition, we provide investment
management, marketing and distribution services to SICAV funds and umbrella unit
trusts organized in Luxembourg and Ireland, respectively, which are distributed
in international market places, as well as to locally organized funds in various
countries outside the U.S.
Our sponsored investment products also include portfolios managed for some of
the world's largest corporations, endowments, charitable foundations, pension
funds, wealthy individuals and other institutions. We use various investment
techniques to focus on specific client objectives for these specialized
portfolios.
g. Product Categorization
----------------------
As of September 30, 2001 we had $246.4 billion in assets under management. Our
U.S.-registered open-end mutual funds accounted for $146.7 billion of our assets
under management. As of September 30, 2001, the net assets under management of
our five (5) largest funds were Franklin California Tax-Free Income Fund, Inc.
($14.1 billion), Templeton Growth Fund ($12.0 billion), Templeton Foreign Fund
($8.9 billion), Franklin Small-Mid Cap Growth Fund ($8.0 billion) and Franklin
Government Securities Fund ($7.9 billion). These five (5) mutual funds
represented, in the aggregate, 20.6% of all sponsored investment products assets
under management.
Franklin Templeton Variable Insurance Products Trust, our insurance products
trust, offers 27 funds, with assets of $7.4 billion as of September 30, 2001.
The insurance product funds are available as investment options through variable
insurance contracts and certain pension plans. Most of the funds have been
fashioned after some of the more popular funds offered to the general public and
are managed, in most cases, by the same investment adviser. One of the funds in
the trust includes a third class that is offered exclusively to pension plans.
Our U.S. closed-end funds accounted for $5.4 billion of our assets under
management. U.S. wrap fee, partnership and trust accounts made up $4.1 billion
of our assets under management. On a Company-wide basis, separate accounts
accounted for $60.8 billion of assets under management. In addition, $22 billion
of our assets under management were held in foreign-based funds and open-end and
closed-end accounts whose investment objectives vary, but are primarily
international and global equity-oriented.
The following table shows the types of our U.S.-registered open-end mutual funds
and dedicated insurance product funds as of September 30, 2001, and is
categorized using the Investment Company Institute ("ICI") definitions, which
are more detailed than the broad investment objective definitions used in "MD&A"
and in our Consolidated Financial Statements. /1/
- ---------------------------------------
/1/ The table excludes wrap fee, trust and partnership accounts and closed-end
funds. A significant number of institutional assets are invested in U.S.
open-end mutual funds and are disclosed in the table.
14
- --------------------------------------------------------------------------------
U.S.-REGISTERED OPEN-END MUTUAL FUNDS
CATEGORY NO. OF
(and approximate assets under NO. OF INSURANCE
management, in billions MUTUAL PRODUCT
as of September 30, 2001) INVESTMENT OBJECTIVE FUNDS FUNDS
- --------------------------------------------------------------------------------------------------
I. EQUITY FUNDS ($81.2)
- --------------------------------------------------------------------------------------------------
A. Capital Appreciation Funds Seek capital appreciation;
($20.2) dividends are not a primary
consideration.
- --------------------------------------------------------------------------------------------------
1. Aggressive Growth Invest primarily in common stocks
Funds of small, growth companies. 4 2
- --------------------------------------------------------------------------------------------------
2. Growth Funds Invest primarily in common stocks
of well-established companies. 8 2
- --------------------------------------------------------------------------------------------------
3. Sector Funds Invest primarily in common stocks
of companies in related fields. 8 4
- --------------------------------------------------------------------------------------------------
B. World Equity Funds ($41.5) Invest primarily in stocks of
foreign companies.
- --------------------------------------------------------------------------------------------------
1. Emerging Market Funds Invest primarily in companies based
in developing regions of the world. 2 1
- --------------------------------------------------------------------------------------------------
2. Global Equity Funds Invest primarily in equity
securities traded worldwide,
including those of U.S. companies. 12 3
- --------------------------------------------------------------------------------------------------
3. International Equity Must invest in equity securities of
Funds companies located outside the U.S.
and cannot invest in U.S. company 3 2
stocks.
- --------------------------------------------------------------------------------------------------
4. Regional Equity Funds Invest in companies based in a
specific part of the world. 3 0
- --------------------------------------------------------------------------------------------------
C. Total Return Funds ($19.5) Seek a combination of current
income and capital appreciation.
- --------------------------------------------------------------------------------------------------
1. Growth and Income Invest primarily in common stocks
Funds of established companies with the
potential for growth and a
consistent record of dividend 7 4
payments.
- --------------------------------------------------------------------------------------------------
May invest in a mix of equity,
II. HYBRID FUNDS ($8.5) fixed-income securities and
derivative instruments.
- --------------------------------------------------------------------------------------------------
A. Asset Allocation Funds Invest in various asset classes
($0.5) including, but not limited to,
equities, fixed-income securities
and money market instruments. They
seek high total return by
maintaining precise weightings in 3 1
asset classes.
- --------------------------------------------------------------------------------------------------
B. Income-mixed Funds ($8.0) Invest in a variety of
income-producing securities,
including equities and fixed-income
securities. These funds seek a
high level of current income 1 1
without regard to capital
appreciation.
- --------------------------------------------------------------------------------------------------
III. TAXABLE BOND FUNDS ($12.4)
- --------------------------------------------------------------------------------------------------
A. High Yield Funds ($2.6) Invest two-thirds or more of their
portfolios in lower rated U.S.
corporate bonds (Baa or lower by
Moody's and BBB or lower by 1 1
Standard and Poor's rating services).
- --------------------------------------------------------------------------------------------------
15
- --------------------------------------------------------------------------------
CATEGORY NO. OF
(and approximate assets under NO. OF INSURANCE
management, in billions MUTUAL PRODUCT
as of September 30, 2001) INVESTMENT OBJECTIVE FUNDS FUNDS
- --------------------------------------------------------------------------------------------------
B. World Bond Funds ($0.3) Invest in debt securities offered
by foreign companies and
governments. They seek the highest
level of current income available
worldwide.
- --------------------------------------------------------------------------------------------------
1. Global Bonds Funds: Invest in worldwide debt securities
General with no stated average maturity or
an average maturity of five years
or more. These funds may invest up
to 25% of assets in companies 1 2
located in the U. S.
- --------------------------------------------------------------------------------------------------
2. Global Bond Funds: Invest in debt securities worldwide
Short Term with an average maturity of one to
five years. These funds may invest
up to 25% of assets in companies
located in the U.S. 1 0
- --------------------------------------------------------------------------------------------------
3. Other World Bonds Such as international bond and
Funds emerging market debt funds, invest
in foreign government and corporate
debt instruments. 1 0
- --------------------------------------------------------------------------------------------------
C. Government Bond Funds Invest in U.S. Government bonds of
($8.9) varying maturities. They seek high
current income.
- --------------------------------------------------------------------------------------------------
1. Government Bond Funds: Invest two-thirds or more of their
Intermediate Term portfolios in U.S. Government
securities with an average maturity
of five to ten years. Securities
utilized by investment managers may
change with market conditions. 0 1
- --------------------------------------------------------------------------------------------------
2. Government Bond Funds: Invest two-thirds or more of their
Short Term portfolios in U.S. Government
securities with an average maturity
of one to five years. Securities
utilized by investment managers may
change with market conditions. 1 0
- --------------------------------------------------------------------------------------------------
3. Mortgage-backed Funds Invest two-thirds or more of their
portfolios in pooled
mortgage-backed securities. 3 0
- --------------------------------------------------------------------------------------------------
D. Strategic Income Funds Invest in a combination of U.S.
($0.5) fixed-income securities to provide
a high level of current income. 2 2
- --------------------------------------------------------------------------------------------------
E. Corporate Bond Funds
($0.1) Short Term 1 0
- --------------------------------------------------------------------------------------------------
IV. TAX-FREE BOND FUNDS ($47.4)
- --------------------------------------------------------------------------------------------------
A. State Municipal Bond Funds Invest primarily in municipal bonds
($33.1) issued by a particular state.
These funds seek high after-tax
income for residents of individual
states.
- --------------------------------------------------------------------------------------------------
1. State Municipal Bond Invest primarily in the
Funds: general single-state municipal bonds with
an average maturity of greater than
five years or no specific stated
maturity. The income from these
funds is largely exempt from
federal as well as state income tax 30 0
for residents of the state.
- --------------------------------------------------------------------------------------------------
16
- --------------------------------------------------------------------------------
CATEGORY NO. OF
(and approximate assets under NO. OF INSURANCE
management, in billions MUTUAL PRODUCT
as of September 30, 2001) INVESTMENT OBJECTIVE FUNDS FUNDS
- --------------------------------------------------------------------------------------------------
B. National Municipal Bond Invest primarily in the bonds of
Funds ($14.3) various municipal issuers in the
U.S. These funds seek high current
income free from federal tax.
- --------------------------------------------------------------------------------------------------
1. National Municipal Bond Invest primarily in municipal bonds
Funds: general with an average maturity of more
than five years or no specific
stated maturity. 4 0
- --------------------------------------------------------------------------------------------------
V. MONEY MARKET FUNDS ($4.6)
- --------------------------------------------------------------------------------------------------
A. Taxable Money Market Invest in short-term, high-grade
Funds ($3.7) money market securities and must
have average maturity of 90 days or
less. These funds seek the highest
level of income consistent with
preservation of capital (i.e.
maintaining a stable share price).
- --------------------------------------------------------------------------------------------------
1. Taxable Money Market Invest primarily in U.S. Treasury
Funds: government obligations and other financial
instruments issued or guaranteed by
the U.S. Government, its agencies
or its instrumentalities. 2 0
- --------------------------------------------------------------------------------------------------
2. Taxable Money Market Invest in a variety of money market
Funds: non-government instruments, including certificates
of deposit from large banks,
commercial paper and bankers' 5 1
acceptances.
- --------------------------------------------------------------------------------------------------
B. Tax Exempt Money Market Invest in short-term municipal
Funds ($0.9) securities and must have average
maturities of 90 days or less.
These funds seek the highest level
of income - free from federal and,
in some cases, state and local taxes -
consistent with preservation of capital.
- --------------------------------------------------------------------------------------------------
1. National Tax-Exempt Invest primarily in short-term
Money Market Funds securities of various U.S. 1 0
municipal issuers.
- --------------------------------------------------------------------------------------------------
2. State Tax-Exempt Money Invest primarily in short-term
Market Funds securities of municipal issuers in
a single state to achieve the
highest level of tax-free income 2 0
for residents of that state.
- --------------------------------------------------------------------------------------------------
17
- --------------------------------------------------------------------------------
The following table sets forth the types of our non-U.S. open-end mutual funds
as of September 30, 2001 and is categorized by investment objectives and sales
region. /1/
NON-U.S. OPEN-END MUTUAL FUNDS
CATEGORY
(and approximate assets under NO. OF MUTUAL
management, in billions FUNDS BY
as of September 30, 2001) INVESTMENT OBJECTIVE SALES REGION
- --------------------------------------------------------------------------------------------------
I. EQUITY FUNDS ($14.4)
- --------------------------------------------------------------------------------------------------
A. Global Equity/International Invest in equity securities of Asia Pacific: 12
($13.5) companies traded worldwide, Canada: 17
including foreign and U.S. UK/Europe: 26
companies.
- --------------------------------------------------------------------------------------------------
B. Domestic (U.S.) Equity Invest in equity securities of U.S. Canada: 6
($0.9) companies. UK/Europe: 7
- --------------------------------------------------------------------------------------------------
II. FIXED INCOME FUNDS
($3.5)
- --------------------------------------------------------------------------------------------------
A. Global Fixed Income ($1.8) Invest worldwide in debt securities Asia Pacific: 6
offered by foreign companies and Canada: 2
governments. These funds may UK/Europe: 7
invest assets in debt securities
offered by companies located in the
U.S.
- --------------------------------------------------------------------------------------------------
B. Domestic Fixed Income Invest in debt securities offered UK/Europe: 3
($1.7) by U.S. companies and the U.S.
government and/or municipalities
located in the U.S.
- --------------------------------------------------------------------------------------------------
III. HYBRID FUNDS ($0.4) May invest in a mix of global Asia Pacific: 4
equity, fixed-income securities and Canada: 4
derivative instruments. UK/Europe: 2
- --------------------------------------------------------------------------------------------------
IV. TAXABLE MONEY Invest in a variety of money market Asia Pacific: 1
FUNDS ($1.0) securities offered by large banks, Canada: 3
U.S. Treasury obligations and other UK/Europe: 2
financial instruments issued or
guaranteed by the U.S. Government,
its agencies or its
instrumentalities.
- --------------------------------------------------------------------------------------------------
h. Fund Introductions, Mergers and Liquidations
--------------------------------------------
From time to time, as market conditions or investor demand warrants, we
introduce new funds, merge existing funds or liquidate existing funds. During
the fiscal year ended September 30, 2001, we added and introduced a number of
funds both within the U.S. and internationally.
In the U.S., we expanded our product line by launching a number of new funds or
series of funds. We also added a family of mutual funds through our acquisition
of Fiduciary.
Internationally, through our indirect wholly-owned investment management and
advisory subsidiaries and joint ventures, we expanded our business in and
launched new funds and investment products to target country specific markets.
For example, in Korea, we leveraged our status as the first completely foreign
owned investment trust management company and were able to expand our
distribution channels to retail banks, securities companies and the
institutional market in that region. In other parts of Asia, including Hong
Kong, India and Japan, we launched new funds and introduced various sponsored
investment products. In Canada, we added, among others, a series of funds known
as the Tax Class Funds and added the Bissett family of funds through our
acquisition
- ---------------------------------------
/1/ Does not include the Fiduciary Trust Global Funds nor the Fiduciary
Emerging Markets Bond Fund. For purposes of this table, we consider the
sales region to be where a fund is based and primarily sold and not
necessarily the region where a particular fund is invested. Many funds are
also distributed across different sales regions (e.g. SICAV funds are
based, primarily sold in and therefore considered to be within the
U.K./Europe sales region, although distributed in the Asia Pacific sales
region), but are only designated a single sales region in the table.
18
- --------------------------------------------------------------------------------
of Bissett. Europe was another region where our business continued to expand. We
introduced funds in, among other regions, France (e.g. the Fund of funds),
Ireland (e.g. the Franklin Floating Rate Fund) and South Africa; we also added
an additional series of our SICAV funds. Through our acquisition of Fiduciary we
added certain funds under an umbrella unit trust organized in Ireland, which are
registered in the United Kingdom, Germany, Sweden and Switzerland.
During the fiscal year ended September 30, 2001, the following fund mergers and
liquidations took place: 1 variable annuity fund matured and was terminated; 1
variable annuity fund was terminated and transferred its assets to another
variable annuity fund; 4 Templeton mutual funds merged into a single Templeton
fund; and 1 Franklin fund merged into another Franklin fund.
Banking/Finance Operations
--------------------------
Our secondary business segment is banking/finance, which offers select retail,
consumer, private banking and credit related services.
Our subsidiary, Fiduciary, is a New York state chartered bank and provides
private banking services primarily to high net worth clients who maintain trust,
custody and or investment management accounts with Fiduciary. Fiduciary's
private banking and credit products include, among others, loans secured by
marketable securities, foreign exchange services, deposit accounts and other
credit services. As discussed in Types of Investment Management and Related
Services, Fiduciary also offers investment management, trust and estate, custody
and related services to institutional accounts and high net worth individual and
families.
Franklin Capital Corporation ("FCC") is a subsidiary of FRI formed to expand
Franklin Templeton Investments' lending activities related primarily to the
purchase, securitization and servicing of retail installment sales contracts
("automobile contracts") originated by independent automobile dealerships. FCC,
headquartered in Utah, conducts its business primarily in the Western region of
the United States and is a finance company organized and licensed under the laws
of Utah. As of September 30, 2001, FCC's total assets included $289.8 million of
outstanding automobile contracts. During fiscal 2001, FCC securitized
approximately $142.5 million of automobile contract receivables for which it
maintains servicing rights. FCC continues to service $211 million of receivables
that have been securitized to date. See Note 4 in the Notes to the Financial
Statements.
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. A more detailed analysis of the financial effects of loan losses
and delinquency rates in Franklin Templeton Investments' consumer lending and
dealer auto loan business, as well as the funding of this activity, is contained
in Note 4 in the Notes to the Financial Statements.
Franklin Templeton Bank & Trust, F.S.B. ("FTB&T"), a subsidiary of FRI, with
total assets of $122.3 million, as of September 30, 2001, provides FDIC insured
deposit accounts and general consumer loan products such as credit card loans
and auto loans. FTB&T (formerly known as Franklin Bank) became chartered as a
federal savings bank on May 1, 2000 when the Office of Thrift Supervision
approved FTB&T's application to convert from a California state banking charter
to a Federal thrift charter. Immediately following the conversion of FTB&T's
state charter to a federal thrift charter, Franklin Templeton Trust Company, a
California chartered trust company, was merged into FTB&T and continues to
perform its prior activities as a division of FTB&T.
Our other banking subsidiaries include, FTI-Banque Fiduciary Trust, a Swiss bank
based in Geneva, Switzerland, which provides an array of private banking trust
and investment services to clients outside of the United States, and FTCI
(Cayman) Ltd., a licensed bank and trust company in the Cayman Islands.
IV. Regulatory Considerations
-------------------------
Virtually all aspects of Franklin Templeton Investments' businesses, including
those conducted through our various subsidiaries, are subject to various
federal, state, and foreign regulation, and supervision. Domestically, Franklin
Templeton Investments is subject to regulation and supervision by, among others,
the SEC, the National
19
- --------------------------------------------------------------------------------
Association of Securities Dealers ("NASD"), the Federal Reserve Board, the
Federal Deposit Insurance Corporation ("FDIC"), the Office of Thrift Supervision
and the New York State Banking Department. Globally, we are subject to
regulation and supervision by, among others, the Ontario and Alberta Securities
Commissions in Canada, the Monetary Authority of Singapore, the Investment
Management Regulatory Organization in the United Kingdom, the Central Bank of
Ireland, the Securities and Futures Commission of Hong Kong, the Korean Ministry
of Finance and Economy and the Financial Supervisory Commission in Korea and the
Securities Exchange Board of India. The Investment Advisers Act imposes numerous
obligations on our subsidiaries, which are registered as investment advisers,
including record keeping, operating and marketing requirements, disclosure
obligations and prohibitions on fraudulent activities. The Investment Company
Act imposes similar obligations on our subsidiaries that are registered as
investment companies. The SEC is authorized to institute proceedings and impose
sanctions for violations of the Investment Advisers Act and the Investment
Company Act, ranging from fines and censure to termination of an investment
adviser's registration.
Since 1993, the NASD Conduct Rules have limited the amount of aggregate sales
charges which may be paid in connection with the purchase and holding of
investment company shares sold through brokers. The effect of the rule might be
to limit the amount of fees that could be paid pursuant to a fund's 12b-1 Plan
to Distributors, a subsidiary of FRI that earns underwriting commissions on the
distribution of fund shares. Such limitations would apply in a situation where a
fund has no, or limited, new sales for a prolonged period of time. None of the
Franklin Templeton mutual funds are in, or close to, that situation at the
present time.
Following the acquisition of Fiduciary, in fiscal 2001, Franklin Resources, Inc.
became a bank holding company subject to supervision and regulation by the
Federal Reserve Board ("FRB") and a financial holding company under the BHC Act.
Pursuant to the GLB Act, which became effective on March 11, 2000, Franklin
Templeton Investments, as a qualifying bank holding company, was permitted to
become a financial holding company, and thereby affiliate with a far broader
range of financial companies than had previously been permitted for bank holding
companies. Permitted affiliates include securities brokers, underwriters and
dealers, investment managers, mutual fund distributors, insurance companies and
companies engaged in other activities that are "financial in nature or
incidental thereto" or "complementary" to a financial activity. The FRB has
issued interim rules specifying that organizing, sponsoring, and managing a
mutual fund are activities that are permissible for financial holding companies
under certain guidelines. A bank holding company may elect to become a financial
holding company if, as in the case of Franklin Templeton Investments, each of
its subsidiary banks and other depository institution subsidiaries is well
capitalized, is well managed and has at least a "satisfactory" rating under the
Community Reinvestment Act (the "CRA").
The FRB may impose limitations, restrictions, or prohibitions on the activities
or acquisitions of a financial holding company if the FRB believes that the
Company does not have the appropriate financial and managerial resources to
commence or conduct an activity, make an acquisition, or retain ownership of a
company. The GLB Act establishes the FRB as the umbrella supervisor for
financial holding companies and adopts an administrative approach to regulation
that requires the FRB to defer to the actions and requirements of the U.S.
"functional" regulators of subsidiary broker/dealers, investment advisers,
investment companies, insurance companies, and other regulated non-depository
institutions.
FRB policy provides that, as a matter of prudent banking, a bank holding company
generally should not pay dividends unless its net income is sufficient to fully
fund the dividends and the prospective rate of earnings retention appears to be
consistent with the capital needs, asset quality and overall financial condition
of the holding company and its bank and thrift institution subsidiaries. As we
are a bank holding company, this policy may be applied to us even though we are
also a financial holding company.
Almost every aspect of the operations and financial condition of our banking and
thrift subsidiaries are subject to extensive regulation and supervision and to
various requirements and restrictions under Federal and state law, including
requirements governing capital adequacy, management practices, liquidity,
branching, earnings, loans, dividends, investments, reserves against deposits,
and the provision of services. Under Federal law, a depository institution is
prohibited from paying a dividend if the depository institution would thereafter
be "undercapitalized" as determined by the Federal bank regulatory agencies. The
relevant Federal banking regulatory agencies,
20
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and the state banking regulatory agencies, also have authority to prohibit a
bank or a bank holding company from engaging in what, in the opinion of the
regulatory body, constitutes an unsafe or unsound practice.
Each of our banking subsidiaries is subject to restrictions under Federal law
that limit transactions with Franklin Templeton Investments and its non-bank
subsidiaries, including loans and other extensions of credit, investments or
asset purchases. These and various other transactions, including any payment of
money to Franklin Templeton Investments, must be on terms and conditions that
are, or in good faith would be, offered to companies that are not affiliated
with Franklin Templeton Investments.
Federal banking agencies are required to take prompt supervisory and regulatory
actions with respect to institutions that do not meet minimum capital standards.
There are five defined capital tiers, the highest of which is "well
capitalized." A depository institution is generally prohibited from making
capital distributions, including paying dividends, or paying management fees to
a holding company if the institution would thereafter be undercapitalized.
Undercapitalized institutions may not accept, renew or roll over brokered
deposits. To remain a financial holding company, each company's banking
subsidiaries must be well capitalized and well managed. As of September 30,
2001, our bank and thrift subsidiaries continued to be considered "well
capitalized" and "well managed". See "Management's Discussion and Analysis of
Financial Condition".
The FRB has adopted various capital guidelines for bank holding companies. The
GLB Act authorizes the FRB to establish consolidated capital requirements for
financial holding companies. The GLB Act prohibits the FRB from imposing capital
requirements on functionally regulated non-bank subsidiaries of a financial
holding company, such as broker/dealers and investment advisers. The FRB has not
published consolidated capital requirements specific to financial holding
companies, but may do so in the future.
The Federal banking agencies have broad enforcement powers, including the power
to terminate deposit insurance, impose substantial fines and other civil and
criminal penalties and appoint a conservator or receiver. Failure to comply with
applicable laws, regulations and supervisory agreements could subject Franklin
Templeton Investments, our thrift and banking subsidiaries, as well as officers,
directors and other so-called "institution-affiliated parties" of these
organizations, to administrative sanctions and potentially substantial civil
money penalties. In addition, the appropriate Federal banking agency may appoint
the FDIC as conservator or receiver for a banking institution, or the FDIC may
appoint itself if any one or more of a number of circumstances exist.
V. Competition
-----------
The financial services industry is highly competitive and has increasingly
become a global industry. There are approximately 8,300 open-end investment
companies of varying sizes, investment policies and objectives whose shares are
being offered to the public in the United States. Due to our international
presence and varied product mix, it is difficult to assess our market position
relative to other investment managers on a worldwide basis, but we believe that
we are one of the more widely diversified investment managers in the United
States. We believe that our equity and fixed-income asset mix coupled with our
global presence will serve our competitive needs well over the long term. We
continue to focus on service to customers, performance of investment products
and extensive marketing activities with our strong broker/dealer and other
financial institution distribution network.
We face strong competition from numerous investment management, stock brokerage
and investment banking firms, insurance companies, banks, savings and loan
associations and other financial institutions which also offer a wide range of
financial services. In recent years, there has been a trend of consolidation in
the financial services industry, resulting in stronger competitors with greater
financial resources than us.
Although we rely largely on intermediaries to sell and distribute Franklin
Templeton mutual fund shares, many of these intermediaries 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
intermediaries could decide to limit or restrict the sale of our fund shares,
which could lower our future sales and cause our revenues to decline. We have
and continue to pursue sales relationships with all types of intermediaries to
broaden our distribution network.
21
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We are currently expanding our Internet e-business to compete with the rapidly
developing and evolving capabilities being offered with this technology.
Together with several large financial services companies, we recently made a
capital investment in the development of an industry-wide Internet portal, known
as advisorcentral.com, which is designed to provide our customers, including
brokers, dealers and investment advisors, to view their clients' holdings using
one log-in ID. It is not currently possible to predict the effect of the
Internet on Franklin Templeton Investments or on the financial services industry
overall.
As investor interest in the mutual fund industry has increased, competitive
pressures have increased on sales charges of broker/dealer distributed funds. We
believe that, although this trend will continue, a significant portion of the
investing public still relies on the services of the broker/dealer or financial
adviser community, particularly during weaker market conditions. We have
experienced increased demand for payments to its distribution channels and
anticipates that this trend will continue.
We believe that we are well positioned to deal with changes in marketing trends
as a result of our already extensive advertising activities and broad based
marketplace recognition. Franklin Templeton Investments does significant
advertising and conducts sales promotions through various media sources to
promote brand recognition. We advertise in major national financial
publications, as well as on radio and television to promote brand name
recognition and to assist its distribution network. Such activities included
purchasing network and cable programming, sponsorship of sporting events, such
as the "Franklin Templeton Shoot-Out", sponsorship of The Nightly Business
Report on public television, and extensive newspaper and magazine advertising.
Diverse and strong competition affects the banking/finance segment of our
business as well, and limits the fees for our services. For example, in the
banking segment we compete with many types of institutions for consumer loans,
including the finance subsidiaries of large automobile manufacturers, which
limits the interest rates that we can charge on consumer loans.
VI. Financial Information About Industry Segments
---------------------------------------------
Information on Franklin Templeton Investments' operations in various geographic
areas of the world and a breakout of business segment information is contained
in Note 7 in the Notes to the Financial Statements.
VII. Intellectual Property
---------------------
We have used, registered, and/or applied to register certain trademarks and
service marks to distinguish our sponsored investment products and services from
those of our competitors in the United States and in foreign countries and
jurisdictions, including Franklin(R), Templeton(R), Bissett(R), Mutual
Series(R), and FiduciaryTM. We enforce our trademark, service mark and trade
name rights in the United States and abroad.
VIII. Employees
---------
As of September 30, 2001, we employed approximately 6,800 employees at our
offices located in 29 countries. We consider our relations with our employees to
be satisfactory.
ITEM 2. PROPERTIES
We conduct our worldwide operations using a combination of leased and owned
facilities. While we believe we have sufficient facilities to conduct business
during fiscal 2002, we will continue to lease, acquire and dispose of facilities
throughout the world as necessary.
We lease space domestically in California, Delaware, Florida, New Jersey, New
York, Utah and the District of Columbia, and internationally in Abu Dhabi,
Australia, Belgium, Brazil, Canada, England, France, Germany, Holland, Hong
Kong, India, Italy, Japan, Korea, Luxembourg, Poland, Russia, Scotland,
Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Turkey and
Venezuela. As of September 30, 2001, we leased and occupied approximately 1.33
million square feet of leased space. We also subleased to third parties a total
of 345,503 square feet of space.
22
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In addition, Franklin Templeton Investments owns 7 buildings near Sacramento,
California, as well as 6 buildings in St. Petersburg, Florida, 2 buildings in
Nassau, Bahamas, as well as space in office buildings in Argentina, China and
Singapore. The buildings we own consist of approximately 1.29 million square
feet. Since we operate on a unified basis, corporate activities, fund related
activities, accounting operations, sales, real estate and banking operations,
auto loans and credit cards, management information system activities,
publishing and printing operations, shareholder service operations and other
business activities and operations take place in a variety of such locations. In
fiscal 2001 we sold one of our buildings located in St. Petersburg, Florida for
$4.1 million.
We had previously entered into a series of agreements to finance the
construction of our new corporate headquarters on a 32-acre site in San Mateo,
California. An owner-lessor trust was set up to finance the construction and
lease the completed facility. The construction was substantially completed and
we moved into our new headquarters in fiscal 2001. We have entered into an
operating lease for our new corporate headquarters and in connection with this
lease, we are contingently liable under residual guarantees for approximately
$145 million, representing approximately 85% of the total construction costs of
$170 million. The lease includes renewal options that can be exercised at the
end of the initial lease period, and purchase options that can be exercised
prior to the expiration of the lease term.
ITEM 3. LEGAL PROCEEDINGS
We previously reported that three individual plaintiffs, James C. Roumell,
Michael J. Wetta and Richard Waksman, 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 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 (Civil Action No. 98-6059). On November 15,
2001, the Court preliminarily approved a settlement entered into among the
parties. Under the terms of the settlement agreement, the plaintiffs and
defendants agreed to resolve all claims for $6.5 million, including plaintiff's
attorneys fees and costs of administering the proposed settlement, of which a
minimum of $2 million will be paid to the Fund.
We also previously reported that on June 22, 2001 plaintiffs Richard Nelson and
Dorothy Nelson filed a First Amended complaint captioned Richard Nelson, et. al.
v. AIM Advisors, Inc. et. al. in the United States District Court of the
Southern District of Illinois, Case Number 01-282-DRH, which added additional
plaintiffs and named as defendants advisory and distribution entities from 25
different mutual fund complexes, including Franklin Advisers, Inc. and
Franklin/Templeton Distributors, Inc., both wholly-owned subsidiaries of FRI and
Templeton Global Advisors Limited, an indirect wholly-owned subsidiary of FRI
(collectively, the "Franklin Defendants"). On September 17, 2001, the plaintiffs
filed a Second Amended Complaint, which dismissed certain previously named
defendants. The Second Amended Complaint alleges, among other things, violations
of the Investment Company Act of 1940 with respect to distribution and advisory
contracts of funds advised or distributed by the defendants, including the
Franklin Defendants. The plaintiffs are seeking actual and punitive damages, as
well as equitable and other relief. Management believes this lawsuit is without
merit and intends to vigorously defend the action.
Other than as stated above, there have been no material developments in the
above referenced litigation. We are 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 our business or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of security holders.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information About Franklin Templeton Investments' Common Stock
- --------------------------------------------------------------
FRI's common stock is traded on the New York Stock Exchange ("NYSE"), the
Pacific Exchange under the ticker symbol BEN, and the London Stock Exchange
under the ticker symbol FKR. On September 30, 2001, the closing price of FRI's
common stock on the NYSE was $34.67 per share. At November 28, 2001, there were
approximately 5,050 shareholders of record. Based on nominee solicitation, we
believe that there are approximately 27,800 beneficial shareholders whose shares
are held in street name.
The following table sets forth the high and low sales prices for FRI's common
stock on the NYSE.
2001 Fiscal Year 2000 Fiscal Year
---------------- ----------------
Quarter High Low High Low
- --------------------------------------------------------------------------------
October-December $45.50 $34.00 $35.00 $27.44
January-March $48.30 $34.20 $39.19 $24.63
April-June $47.40 $36.05 $36.25 $28.19
July-September $46.07 $31.65 $45.63 $30.00
Franklin Templeton Investments declared dividends of $0.26 per share in fiscal
2001 and $0.24 per share in fiscal 2000. Franklin Templeton Investments expects
to continue paying dividends on a quarterly basis to common stockholders
depending upon earnings and other relevant factors.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(in millions, except assets under management, per share amounts and employee headcount)
AS OF AND FOR THE
YEARS ENDED SEPTEMBER 30, 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Operating Revenues $2,354.8 $2,340.1 $2,262.5 $2,577.3 $2,163.3
Net Income 484.7 562.1 426.7 500.5 434.1
FINANCIAL DATA
Total Assets 6,265.7 4,042.4 3,666.8 3,480.0 3,095.2
Long-Term Debt 566.0 294.1 294.3 494.5 493.2
Stockholders' Equity 3,977.9 2,965.5 2,657.0 2,280.8 1,854.2
Operating Cash Flow 553.2 701.7 584.5 693.7 428.5
ASSETS UNDER MANAGEMENT (in billions)
Period Ending 246.4 229.9 218.1 208.6 226.0
Simple Monthly Average 243.4 227.7 219.8 226.9 192.0
PER COMMON SHARE
Earnings
Basic 1.92 2.28 1.69 1.98 1.72
Diluted 1.91 2.28 1.69 1.98 1.71
Cash Dividends 0.26 0.24 0.22 0.20 0.17
Book Value 15.25 12.17 10.59 9.06 7.36
EMPLOYEE HEADCOUNT 6,868 6,489 6,650 8,678 6,441
24
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ITEM 7. 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 read 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, high net-worth and private accounts, and other investment
products. This is our primary business activity and operating segment. The
mutual funds and other products that we advise, collectively called our
sponsored investment products, are distributed to the public globally via five
distinct names:
* Franklin
* Templeton
* Mutual Series
* Bissett
* Fiduciary
Our sponsored investment products include a broad range of domestic and
global/international equity, balanced, fixed-income, sector and money market
mutual funds, as well as other investment products that meet a wide variety of
specific investment needs of individuals and institutions.
In fiscal 2001, we broadened our product lines with funds currently offered by
two companies. In October 2000, the acquisition of Bissett and Associates
Investment Management Ltd. ("Bissett"), added 12 funds to our Canadian product
line, primarily in the balanced and growth asset classes. It also brought a
number of institutional and private clients to the group. In April 2001, we
completed the acquisition of Fiduciary Trust Company International
("Fiduciary"), a global investment management organization providing services to
institutions and private clients through its bank and trust charters.
The level of our revenues is largely dependent upon the level and relative
composition of assets under management. To a lesser degree, our revenues are
also dependent on the level of mutual fund sales and the number of mutual fund
shareholder accounts. The fees charged for our services are based on contracts
between our subsidiary entities and our sponsored investment products or our
clients. These arrangements could change in the future.
Our secondary business activity and operating segment is banking/finance. Our
banking/finance group offers selected retail-banking services to high net-worth
individuals and corporations and consumer lending.
At September 30, 2001, we employed over 6,800 people in 29 countries, serving
customers on six different continents.
25
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ASSETS UNDER MANAGEMENT
(in billions)
2001 2000
AS OF SEPTEMBER 30, 2001 2000 1999 vs 2000 vs 1999
- ------------------------------------------------------------------------------------------
EQUITY
Global/international $80.2 $97.6 $96.8 (18)% 1%
Domestic (U.S.) 44.5 53.9 37.6 (17)% 43%
TOTAL EQUITY 124.7 151.5 134.4 (18)% 13%
- ------------------------------------------------------------------------------------------
HYBRID 36.1 9.3 10.2 288% (9)%
FIXED-INCOME
Tax-free 48.4 44.0 48.2 10% (9)%
Taxable
Domestic 24.4 15.6 15.8 56% (1)%
Global/international 7.2 4.2 3.9 71% 8%
TOTAL FIXED-INCOME 80.0 63.8 67.9 25% (6)%
- ------------------------------------------------------------------------------------------
MONEY 5.6 5.3 5.6 6% (5)%
- ------------------------------------------------------------------------------------------
TOTAL $246.4 $229.9 $218.1 7% 5%
- ------------------------------------------------------------------------------------------
Simple monthly average for the year /1/ $243.4 $227.7 $219.8 7% 4%
- ---------------------------------------
/1/ Investment management fees from approximately 45% of our assets under
management at September 30, 2001 are calculated using daily average assets under
management.
Our assets under management at the end of fiscal 2001 were $246.4 billion, 7%
higher than the prior fiscal year end. The simple monthly average value of these
assets during fiscal 2001 was $243.4 billion as compared to $227.7 billion in
fiscal 2000, a 7% increase. The change in simple monthly average assets under
management is generally more indicative of investment management fee revenue
trends than the period end change year over year.
The following table shows the relative composition of assets under management.
AS OF SEPTEMBER 30, 2001 2000 1999
- --------------------------------------------------------------------------------
PERCENTAGE OF TOTAL ASSETS UNDER MANAGEMENT
Equity 51% 66% 61%
Fixed income 32% 28% 31%
Hybrid 15% 4% 5%
Money 2% 2% 3%
- --------------------------------------------------------------------------------
Total 100% 100% 100%
The change in the composition of assets under management was largely due to the
inclusion of the Fiduciary assets under management in fiscal 2001 and the market
depreciation in equity assets. Approximately 64% of Fiduciary's assets under
management were classified as hybrid assets at the time of acquisition in April
2001. This change in mix had the additional effect of lowering our effective fee
rate on assets managed as a greater percentage of assets under management are in
the fixed income and hybrid categories which generally carry a lower management
fee than equity assets.
26
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The change in our assets under management was as follows.
(in billions) 2001 2000
YEAR ENDED SEPTEMBER 30, 2001 2000 1999 vs 2000 vs 1999
- -----------------------------------------------------------------------------------------
Beginning assets under management $229.9 $218.1 $208.6 5% 5%
Sales 58.5 51.7 41.8 13% 24%
Reinvested dividends 9.0 8.7 3.9 3% 123%
Redemptions (58.6) (62.8) (59.5) (7)% 6%
Acquisitions 49.5 1.5 - 3,200% 100%
(Depreciation) appreciation (41.9) 12.7 23.3 N/A (45)%
- -----------------------------------------------------------------------------------------
Ending assets under management $246.4 $229.9 $218.1 7% 5%
The acquisitions of Bissett in October 2000 and Fiduciary in April 2001
increased our assets under management by $3.7 and $45.8 billion, respectively.
During fiscal 2001, our sponsored investment products experienced overall net
cash inflows, including reinvested dividends, in contrast to the net cash
outflows experienced in fiscal 2000 and 1999. Gross product sales increased 13%
while redemptions decreased 7%. We experienced sales increases in the fixed
income, hybrid, and money market products which more than offset a decline in
equity product sales. The chart below summarizes changes in assets by product
class.
(in billions)
Global/ Domestic Hybrid Tax-free Taxable Money Total
YEAR ENDED SEPTEMBER 30, 2001 international equity income fixed funds
equity income
- --------------------------------------------------------------------------------------------------------------
Beginning assets under $97.6 $53.9 $9.3 $44.0 $19.8 $5.3 $229.9
management
Sales 18.5 12.9 1.8 5.4 7.9 12.0 58.5
Reinvested dividends 3.8 2.4 0.5 1.2 0.7 0.4 9.0
Redemptions (23.3) (9.7) (1.9) (4.5) (6.2) (13.0) (58.6)
Acquisitions 5.4 3.7 30.2 0.1 10.1 - 49.5
(Depreciation) (21.8) (18.7) (3.8) 2.2 (0.7) 0.9 (41.9)
appreciation
- --------------------------------------------------------------------------------------------------------------
Ending assets under
management $80.2 $44.5 $36.1 $48.4 $31.6 $5.6 $246.4
Global/ Domestic Hybrid Tax-free Taxable Money Total
YEAR ENDED SEPTEMBER 30, 2000 international equity income fixed funds
equity income
- --------------------------------------------------------------------------------------------------------------
Beginning assets under $96.8 $37.6 $10.2 $48.2 $19.7 $5.6 $218.1
management
Sales 21.0 15.3 0.7 3.1 4.9 6.7 51.7
Reinvested dividends 3.1 2.9 0.5 1.2 0.6 0.4 8.7
Redemptions (27.8) (12.5) (2.3) (7.4) (4.6) (8.2) (62.8)
Acquisitions - - - - 0.7 0.8 1.5
Appreciation 4.5 10.6 0.2 (1.1) (1.5) - 12.7
(depreciation)
- --------------------------------------------------------------------------------------------------------------
Ending assets under
management $97.6 $53.9 $9.3 $44.0 $19.8 $5.3 $229.9
Despite a relative improvement in the investment performance of our sponsored
investment products, we experienced market depreciation in fiscal 2001, mainly
in the final quarter of the year, as a result of an overall decline in domestic
and global equity markets. The market depreciation led to the decline in assets
under management absent the addition of the Bissett and Fiduciary acquisitions.
In fiscal 2000 and fiscal 1999, net outflows were offset by market appreciation
thereby allowing our ending assets under management to grow by 5% in both years.
27
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RESULTS OF OPERATIONS
The table below presents the highlights of our operations for the last three
fiscal years.
(in millions except per share amounts)
2001 2000
2001 2000 1999 vs 2000 vs 1999
- -------------------------------------------------------------------------------------------------
NET INCOME $484.7 $562.1 $426.7 (14%) 32%
EARNINGS PER COMMON SHARE
Basic $1.92 $2.28 $1.69 (16%) 35%
Diluted $1.91 $2.28 $1.69 (16%) 35%
Without restructuring charge $1.91 $2.28 $1.86 (16%) 23%
OPERATING MARGIN
As reported 22% 28% 24% - -
Without restructuring charge 22% 28% 26% - -
EBITDA MARGIN /1/
As reported 33% 36% 30% - -
Without restructuring charge 33% 36% 33% - -
/1/ EBITDA margin is earnings before interest, taxes on income, depreciation and
the amortization of intangibles divided by total revenues.
Net income and diluted earnings per share decreased by 14% and 16% respectively
in fiscal 2001. Slightly higher revenue and investment income this fiscal year
over the prior fiscal year were offset by higher operating expenses resulting
from cost increases in distribution, compensation and benefits, information
systems, technology and occupancy, advertising and intangibles amortization.
Earnings per share in fiscal 2001 decreased 16% from the prior year primarily
due to decreased net income and an increase in the number of the company's
shares outstanding, primarily resulting from the Fiduciary acquisition which was
paid for through the issuance of company stock. Net income and diluted earnings
per share for fiscal 2000 increased by 32% and 35%, respectively, principally as
a result of increased investment management fee revenue from increased average
assets under management, higher investment income, and lower operating costs
driven predominantly from the restructuring charge taken in fiscal 1999.
The table below presents the percentage change in each category between fiscal
2001 and fiscal 2000 and between fiscal 2000 and fiscal 1999.
OPERATING REVENUES
2001 2000 AS A PERCENTAGE OF TOTAL REVENUES
vs 2000 vs 1999 2001 2000 1999
- ------------------------------------------------------------------------------------------
Investment management fees 1% 4% 60% 60% 59%
Underwriting and distribution fees - (1)% 30% 30% 32%
Shareholder servicing fees (6)% 14% 8% 9% 8%
Other, net 90% 12% 2% 1% 1%
- ------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUES 1% 3% 100% 100% 100%
- ------------------------------------------------------------------------------------------
SUMMARY
In fiscal 2001, total operating revenues increased 1% over the prior year. The
acquisition of Fiduciary in April provided higher investment management fees
from higher average assets under management, despite lower effective fee rates
resulting from the change in the mix of assets under management, and increased
banking revenues included in other, net. These increases were offset by a
decrease in shareholder servicing revenue, resulting from a decline
28
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in shareholder billable accounts year over year. In fiscal 2000, total operating
revenues increased 3% due primarily to increased simple monthly average assets
under management and shareholder servicing fee increases.
INVESTMENT MANAGEMENT FEES
Investment management fees, accounting for 60% of our operating revenues in
fiscal 2001, include both investment advisory and business management fees.
These fees are generally calculated under contractual arrangements with our
sponsored investment products as a percentage of the market value of assets
under management. Annual rates vary by product, region and investment objective
and, in certain instances, decline as the average net assets of the individual
portfolios exceed certain threshold levels. In return for these fees, we provide
investment advisory, administrative and other management services.
Investment management fees increased 1% in fiscal 2001, primarily due to the
Fiduciary acquisition, which increased the simple monthly average assets under
management in the latter half of the fiscal year. This increase was partially
offset by a shift in our asset mix toward lower management fee fixed-income and
hybrid investment products. This shift toward fixed-income and hybrid investment
products led to a decrease in our effective investment management fee rate
(investment management fees divided by simple monthly average assets under
management) in fiscal 2001. The effective investment management fee rate
declined to 0.58% for the 2001 fiscal year compared to 0.61% in fiscal 2000. In
the latest quarter, the effective fee rate reflects the full impact of the
current change in asset mix and was calculated as 0.55%. In fiscal 2000,
investment management fees increased 4%, primarily due to 4% higher simple
monthly average assets under management.
UNDERWRITING AND DISTRIBUTION FEES
Underwriting commissions are earned from the sale of certain classes of
sponsored investment products that have a sales commission paid at the time of
purchase. Distribution fees are paid by our sponsored investment products in
return for sales, marketing and distribution efforts on their behalf. While
other contractual arrangements exist in other locations, in the United States,
distribution fees include 12b-1 plan fees, which 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 our sponsored investment products to the investing
public on our behalf. See the description of underwriting and distribution
expenses below.
Overall, underwriting and distribution fees remained constant in fiscal 2001,
despite a 13% increase in product sales. Sales at reduced or zero commissions
are offered on certain classes of shares and for sales to shareholders or
intermediaries that exceed specified minimum amounts. Thus, as the mix of sales
change, so will our commission revenue. Commission revenues remained constant
with the prior year due to a greater percentage of sales at no or lower
commission levels offsetting the sales increase in fiscal 2001. Distribution
fees also remained consistent with the prior fiscal year as the increase in
simple average assets under management was largely caused by the Fiduciary
acquisition. The Fiduciary assets under management are not subject to
distribution fees; therefore, these assets did not affect distribution fee
income as would be expected with a year over year increase in average assets
under management. We experienced similar trends in fiscal 2000 where
underwriting and distribution fees decreased 1% in fiscal 2000, despite a 24%
increase in product sales.
SHAREHOLDER SERVICING FEES
Shareholder servicing fees are generally fixed charges per shareholder account
that vary with the particular type of fund and the service being rendered,
although some funds are charged fees based on the level 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 the U.S., transfer agency services
agreements provide that closed accounts in a given calendar year remain billable
through the second quarter of the following calendar year at a reduced rate. In
Canada, the agreements provide that accounts closed in the previous calendar
year remain billable for four months after the end of the calendar year.
Accordingly, the level of fees will vary with the split of total billable
accounts between open and closed accounts, the date on which accounts are no
longer billable, and the growth in new accounts.
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Shareholder servicing fees decreased 6% during fiscal 2001 as a result of a
decrease in the total number of billable accounts. In fiscal 2000, shareholder
servicing fees increased 14% over fiscal 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, partially offset by a decrease in the
average number of billable accounts for the fiscal year.
OTHER, NET
Other, net consists primarily of revenues from the banking/finance operating
segment and custody services related to Fiduciary. Revenues from the
banking/finance operating segment include operating revenues, consisting
primarily of interest income on loans, servicing income, and investment income
on banking/finance investment securities, which are offset by interest expense,
and the provision for anticipated loan losses.
Other, net increased 90% in fiscal 2001. This increase was principally due to
the addition of the Fiduciary banking and custody activities from the date of
acquisition to those of Franklin Templeton Bank and Trust, F.S.B and Franklin
Capital Corporation. Other, net remained relatively constant during fiscal 2000.
Securitization of a portion of the auto loan portfolio in March 2000 resulted in
a loss that was offset by revenues from the residual portfolio. In January 2001,
we sold auto loans receivable with a net book value of $142.5 million. The gross
sales proceeds of this securitization, including interest and before
underwriting discount, were $139.3 million. A gain of $2.9 million has been
recorded on the transaction.
OPERATING EXPENSES
2001 2000 AS A PERCENTAGE OF TOTAL EXPENSES
vs 2000 vs 1999 2001 2000 1999
- -----------------------------------------------------------------------------------------
Underwriting and distribution 2% 0% 35% 37% 36%
Compensation and benefits 15% 4% 33% 32% 30%
Information systems, technology
and occupancy 23% 1% 14% 13% 12%
Advertising and promotion 5% (4)% 6% 6% 6%
Amortization of deferred sales
commissions (18)% (13)% 4% 5% 6%
Amortization of intangible assets 52% 0% 3% 2% 2%
Other 7% 5% 5% 5% 5%
Restructuring charges 0% (100)% N/A N/A 3%
September 11, 2001 expense, net 100% 0% - N/A N/A
Total operating expenses 10% (3)% 100% 100% 100%
- ----------------------------------------------------------------------------------------
SUMMARY
Operating expenses increased 10% during fiscal 2001 primarily caused by
increased compensation and benefits, information systems, technology and
occupancy costs, the addition of the operating costs of Fiduciary, increased
underwriting and distribution expenses and increased amortization of intangible
assets. In fiscal 2000, operating expenses decreased 3% primarily due to the
restructuring charge of fiscal 1999.
UNDERWRITING AND DISTRIBUTION
Underwriting and distribution includes sales commissions and distribution fees
paid to brokers and other third parties for selling, distributing and providing
ongoing services to investors in our sponsored investment products. During
fiscal 2001, underwriting and distribution expenses increased 2%. Total sales
increased in fiscal 2001 by 13%, but a significant number of those additional
sales were at a low or zero commission rate, resulting in a smaller proportional
increase in the commissions paid to intermediaries in fiscal 2001 compared to
fiscal 2000. Distribution fee expense was consistent with the prior fiscal year
distribution expense. We experienced similar trends in fiscal 2000.
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COMPENSATION AND BENEFITS
Compensation and benefits increased 15% during fiscal 2001. This increase was
primarily due to the addition of approximately 790 Fiduciary employees from the
date of acquisition, retention bonuses for Fiduciary employees, annual salary
increases, and an increase in employee benefit and recruiting costs. Salary
awards are normally given annually in October and are based upon the performance
of the individual employee. The number of employees at September 30, 2001 was
more than 6,800 as compared to the approximately 6,500 at the same time last
year. Compensation and benefits increased 4% in fiscal 2000, primarily due to
annual salary increases awarded in October 1999 and market adjustments awarded
throughout fiscal 2000 for certain employees, partially offset by a 14% decrease
in the average employee headcount during fiscal 2000 as compared to fiscal 1999.
In order to hire and retain our key employees, we are committed to keeping our
salaries and benefit packages competitive, which means that the level of
compensation and benefits may increase more quickly or decrease more slowly than
our revenues at certain points in our growth cycle.
INFORMATION SYSTEMS, TECHNOLOGY AND OCCUPANCY
Information systems, technology and occupancy costs increased 23% in fiscal
2001. This increase was primarily due to continued expenditure on new technology
initiatives, an investment in the technology infrastructure of the company, the
charges and costs in connection with IBM's assumption of the management of our
data center and distributed server operations, and the added technology and
occupancy costs of the Fiduciary acquisition. During the past year, we embarked
on a number of hardware upgrades, purchased, developed and installed new
software applications, re-engineered our technology infrastructure and global
network architecture, replaced or upgraded older versions of software
applications, and developed e-business strategies to improve our service levels,
work environment and productivity. We expect that similar activities will
continue to impact our overall expenditures through fiscal 2002 and beyond, as
the organization looks to technology and process enhancement to improve
efficiency, lower costs and add capacity as our business continues to expand
globally. We also experienced an increase in occupancy costs related to our
expansion in Asia, Canada, and Europe as well as costs related to the relocation
to our new worldwide headquarters in San Mateo, California.
Information systems, technology and occupancy costs increased 1% in fiscal 2000.
This increase was not indicative of the actual increase in technology expenses,
as we significantly increased our expenditure on technology initiatives in
fiscal 2000. However, that increase was offset by a decrease in Year 2000
expenses and increased capitalization of technology costs following the adoption
of a new accounting rule. In addition, during fiscal 2000, we incurred slightly
higher occupancy costs related to our site consolidation efforts, new facilities
and the pending relocation to our San Mateo worldwide headquarters.
Details of capitalized information systems and technology costs were as follows.
(in thousands)
2001 2000 1999
- ---------------------------------------------------------------------------------------
Net book value at beginning of period $156,895 $138,566 $133,715
Additions during period, net of disposals and other
adjustments 69,794 71,884 46,644
Net assets acquired through acquisitions 11,266 - -
Amortization during period (75,098) (53,555) (41,793)
- ---------------------------------------------------------------------------------------
Net book value at end of period $162,857 $156,895 $138,566
=======================================================================================
ADVERTISING AND PROMOTION
Advertising and promotion increased 5% during fiscal 2001. This increase
resulted primarily from increased promotion and advertising activity in the
latter half of the fiscal year to assist in educating the sales channels and the
investing public about the strong relative investment performance of our
sponsored investment products during the year. Advertising and promotion
expenses decreased 4% in fiscal 2000 due primarily to cost efficiencies
associated with printing and marketing material production expenditures.
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AMORTIZATION OF DEFERRED SALES COMMISSIONS
Amortization of deferred sales commissions decreased 18% in fiscal 2001 and 13%
in fiscal 2000. This decrease was principally as a result of the financing
arrangements described below. Certain fund classes, namely class B, are sold
without a front-end sales charge to shareholders, while, at the same time, our
distribution subsidiaries pay a commission to selling brokers and other
intermediaries. Similarly, class A shares are sold without a front-end sales
charge to shareholders when certain minimum investment criteria are met, yet our
U.S. distribution subsidiaries pay a commission on the sale. We have arranged to
finance certain deferred commission assets ("DCA") arising from our U.S.,
Canadian and European operations through Lightning Finance Company Limited
("LFL"), a company in which we have an ownership interest. DCA that are recorded
on our balance sheet, principally consisting of commissions arising from the
sale of class A, B and C shares sold in the U.S., including DCA financed through
LFL, are amortized. As a result of the arrangement with LFL, all Canadian and
European DCA are no longer recorded in our financial statements. Generally, U.S.
DCA sold to LFL under the U.S. agreement are retained in our financial
statements since they are not considered sold under this agreement until resold
by LFL, which occurs at least once annually. During fiscal 2001, we sold or
financed sales commissions globally totaling $84.7 million to LFL, compared to
$56.0 million in fiscal 2000.
OTHER INCOME (EXPENSE)
Investment and other income is comprised primarily of:
* dividends from investments in our sponsored mutual funds
* interest income from investments in bonds and government securities
* realized gains and losses on investments
* foreign currency exchange gains and losses
* other miscellaneous income, including gain or loss on disposal of company
property
Other income (expense) increased 65% in fiscal 2001, primarily due to higher
realized gains. During fiscal 2001, we recognized net realized gains of
approximately $34.2 million from the sale of certain sponsored investment
products held by the company for investment. In addition, other realized gains
of $24.6 million were recognized related to the sale of our headquarters
building in San Mateo. Investment income increased 61% in fiscal 2000, due to
higher average available cash balances to invest, higher interest rates, and
greater realized gains.
Interest expense decreased 24% in fiscal 2001. This decrease was mainly due to
the relatively low interest rate of 1.875% on the convertible notes issued in
May 2001, the redemption of outstanding commercial paper, and generally lower
interest rates in fiscal 2001. Interest expense decreased 33% in fiscal 2000
following a reduction in our average outstanding debt during the fiscal year.
TAXES ON INCOME
Our effective income tax rate for fiscal 2001 and 2000 remained constant at 24%
on an annual basis compared to 26% in fiscal 1999. 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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, we had $569.0 million in cash and cash equivalents, as
compared to $746.0 million at September 30, 2000. Liquid assets, which consist
of cash and cash equivalents, investments available-for-sale and current
receivables increased to $2,377.4 million at September 30, 2001 from $1,677.1
million at September 30, 2000. At September 30, 2001, approximately $850 million
was available to us under unused commercial paper and medium-term note programs.
In addition, in fiscal 2001 we filed a shelf registration statement with the
Securities and Exchange Commission permitting the issuance of debt and equity
securities of up to $300 million. Our revolving credit facilities at September
30, 2001 totaled $500 million, of which, $200 million was under a 364-day
facility. The remaining $300 million facility will expire in May 2003. We also
have $350 million available in uncommitted bank lines under the Federal Reserve
Funds system.
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Cash provided by operating activities decreased to $553.2 million in fiscal 2001
from $701.7 million in fiscal 2000. This decrease was due mainly to lower
operating income resulting from higher operating expenses offsetting a small
increase in operating revenues. During fiscal 2001, we used a total of $779.6
million for investing activities, including $484.3 million related to the
purchase of investments, net of liquidations; $99.3 million in connection with
the banking/finance segment; and $99.1 million primarily related to the
Fiduciary and Bissett acquisitions. Net cash provided by financing activities in
fiscal 2001 was $49.4 million as net debt issued of approximately $215.5 million
exceeded other uses of cash in financing activities, including stock repurchases
of $172.1 million.
Outstanding debt increased to $574.4 million at September 30, 2001 compared to
$362.9 million at September 30, 2000. After May 2001, debt consists primarily of
the convertible notes. The convertible notes carry a yield to maturity of 1.875%
per annum to maturity. Prior to May 2001, debt primarily consisted of commercial
paper that carried interest at variable rates and fixed-interest medium-term
notes. During the quarter ended June 30, 2001, our remaining commercial paper
was redeemed. Other long-term debt totaling $61.3 million has various maturity
dates through fiscal 2006 and thereafter.
We had previously entered into a series of agreements to finance the
construction of a new corporate headquarters on a 32-acre site in San Mateo,
California. An owner-lessor trust was set up to finance the construction and
lease the completed facility. The construction was completed and we moved into
our new headquarters in fiscal 2001. The lease agreement is not expected to
impact our cash flows or financial condition materially during the initial
five-year lease period.
We have arranged with LFL for non-recourse financing of sales commissions
advanced on sales of our B shares globally. The cumulative sales commissions
that we have financed through LFL since inception approximated $300.3 million at
September 30, 2001.
We expect that the principal uses of cash will be to increase assets under
management through expansion of our business, make strategic acquisitions, fund
property and equipment acquisitions, pay operating expenses of the business,
enhance our technology infrastructure, improve our business processes, pay
shareholder dividends, repay and service debt, and acquire shares of the
company. We expect to finance future increases in investment in our
banking/finance activities through operating cash flows, debt, 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, our ability to issue debt or equity securities and our sales
commission financing arrangement will be sufficient to meet our present and
reasonably foreseeable operating cash needs.
RISK FACTORS
"FORWARD-LOOKING STATEMENTS." When used in this Annual Report, words or phrases
about the future such as "expected to," "will continue," "anticipates,"
"estimates," or similar expressions are "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995. Statements about our
future cash needs, our anticipated uses of cash, the expected sources of future
cash inflows, and the anticipated costs related to the September 11, 2001
tragedy, are also "forward-looking statements." These types of statements are
subject to certain risks and uncertainties, such as the factors described in the
risk factors outlined below. These risks and uncertainties could cause our
current expectations and predictions in the forward-looking statements to be
wrong. Forward-looking statements are our best prediction at the time that they
are made, and you should not rely on them. Rather, you should read the
forward-looking statements in conjunction with the risk disclosures in this
Annual Report. If a circumstance occurs that causes any of our forward-looking
statements to be inaccurate, we have no obligation to publicly announce the
change in our expectations, or to revise the forward-looking statements.
WE FACE STRONG COMPETITION FROM NUMEROUS AND SOMETIMES LARGER COMPANIES. We
compete with numerous investment management companies, stock brokerage and
investment banking firms, insurance companies, banks, savings and loan
associations and other financial institutions. Continuing consolidation in the
financial services industry has created stronger competitors with greater
financial resources and broader distribution channels than our own.
Additionally, competing securities dealers whom we rely upon to distribute our
mutual funds also sell their
33
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own proprietary funds and investment products, which could limit the
distribution of our investment products. To the extent that existing or
potential customers, including securities dealers, decide to invest in or
distribute the products of our competitors, the sales of our products as well as
our market share, revenues and net income could decline.
CHANGES IN THE DISTRIBUTION CHANNELS ON WHICH WE DEPEND COULD REDUCE OUR
REVENUES AND HINDER OUR GROWTH. We derive nearly all of our fund sales through
broker/dealers and other similar investment advisors. Increasing competition for
these distribution channels has caused our distribution costs to rise and could
cause further increases in the future. Higher distribution costs lower our net
revenues and earnings. Additionally, if one of the major financial advisors who
distribute our products were to cease their operations, it could have a
significant adverse impact on our revenues and earnings. Moreover, our failure
to maintain strong business relationships with these advisors would impair our
ability to distribute and sell our products, which would have a negative effect
on our level of assets under management, related revenues and overall business
and financial condition.
WE HAVE BECOME SUBJECT TO AN INCREASED RISK OF ASSET VOLATILITY FROM CHANGES IN
THE GLOBAL EQUITY MARKETS. We have become subject to an increased risk of asset
volatility from changes in the domestic and global equity markets due to the
recent terrorist attacks. Declines in these markets have caused in the past, and
would cause in the future, a decline in our revenue and income.
THE LEVELS OF OUR ASSETS UNDER MANAGEMENT, WHICH IN TURN IMPACT REVENUES, ARE
SUBJECT TO SIGNIFICANT FLUCTUATIONS. Global economic conditions, changes in the
equity market place, interest rates, inflation rates, the yield curve and other
factors that are difficult to predict affect the mix, market values, and levels
of our assets under management. Changing market conditions may cause a shift in
our asset mix towards fixed-income products and a related decline in our revenue
and income, since we derive higher fee revenues and income from equity assets
than from fixed-income products we manage. Similarly, our securitized consumer
receivables business is subject to marketplace fluctuation.
WE FACE RISKS ASSOCIATED WITH CONDUCTING OPERATIONS IN NUMEROUS FOREIGN
COUNTRIES. We sell mutual funds and offer investment advisory and related
services in many different regulatory jurisdictions around the world, and intend
to continue to expand our operations internationally. Regulators in these
jurisdictions could change their policies or laws in a manner that might
restrict or otherwise impede our ability to distribute or register investment
products in their respective markets.
OUR INABILITY TO MEET CASH NEEDS COULD HAVE A NEGATIVE EFFECT ON OUR FINANCIAL
CONDITION AND BUSINESS OPERATIONS. Our 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 and hedge future loan portfolios and credit card receivables, and
to obtain continued financing for class B shares, is also subject to the
market's perception of those assets, finance rates offered by competitors, and
the general market for private debt. If we are unable to obtain these funds and
financing, we may be forced to incur unanticipated costs or revise our business
plan.
WE FACE COMPETITION IN HIRING AND RETAINING QUALIFIED EMPLOYEES. Our continued
success will depend upon our ability to attract and retain qualified personnel.
If we are not able to attract and retain qualified employees, our overall
business condition and revenues could suffer.
OUR EMERGING MARKET PORTFOLIOS AND RELATED REVENUES ARE VULNERABLE TO
MARKET-SPECIFIC POLITICAL AND ECONOMIC RISKS. Our emerging market portfolios and
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 than the U.S. and other established markets.
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,
which can provide loans at significantly below-market interest rates in
connection with automobile sales. Our inability to compete effectively against
these companies or to maintain
34
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our relationships with the various automobile dealers through whom we offer
consumer loans could limit the growth of our consumer loan business. Economic
and credit market downturns could reduce the ability of our customers to repay
loans, which could cause our consumer loan portfolio losses to increase.
THE SEPTEMBER 11, 2001 WORLD TRADE CENTER TRAGEDY MAY ADVERSELY AFFECT OUR
ABILITY TO ACHIEVE THE BENEFITS WE EXPECT FROM THE RECENT ACQUISITION OF
FIDUCIARY. The September 11, 2001 tragedy at the World Trade Center resulted in
the destruction of our Fiduciary headquarters, loss of 87 of our employees,
additional operating expenses to re-establish and relocate our operations, and
asset write-offs, all of which could adversely affect or delay our ability to
achieve the anticipated benefits from the acquisition. Overcoming this tragedy
and achieving the anticipated benefits of the acquisition will depend on close
collaboration between management and key personnel of the two companies in a
timely and efficient manner.
THE FIDUCIARY ACQUISITION COULD ADVERSELY AFFECT OUR COMBINED FINANCIAL RESULTS
OR THE MARKET PRICE OF OUR COMMON STOCK. If the benefits of the acquisition over
time do not exceed the costs associated with the acquisition, including the
costs arising from the September 11, 2001 tragedy and any dilution to our
shareholders resulting from the issuance of shares in connection with the
acquisition, our financial results, including earnings per share, could be
adversely affected.
WE ARE SUBJECT TO FEDERAL RESERVE BOARD REGULATION. Upon completion of our
acquisition of Fiduciary, we became a bank holding company and a financial
holding company subject to the supervision and regulation of the Federal Reserve
Board under the Bank Holding Company Act of 1956. The Federal Reserve Board may
impose limitations, restrictions, or prohibitions on our activities if the
Federal Reserve Board believes that we do not have the appropriate financial and
managerial resources to commence or conduct an activity or make an acquisition,
and the Federal Reserve Board may take actions as appropriate to enforce
applicable federal law.
TECHNOLOGY AND OPERATING RISK COULD CONSTRAIN OUR OPERATIONS. We are highly
dependent on the integrity of our technology, operating systems and premises.
Although we have in place certain disaster recovery plans, we may experience
system delays and interruptions as a result of natural disasters, power
failures, acts of war, and third party failures, which could negatively impact
our operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, our financial position is subject to market
risk: the potential loss due to changes in the value of investments resulting
from fluctuations in interest rates, foreign exchange and/or equity prices.
Management is responsible for managing this risk. We have also established a
Risk Management Committee to provide a framework to assist management to
identify, assess and manage market and other risks.
We are exposed to changes in interest rates primarily in our debt transactions
and portfolio debt holdings available for sale, which are carried at fair value.
As of September 30, 2001, a significant percentage of our outstanding debt is at
fixed interest rates. In our banking/finance segment, we monitor the net
interest rate margin and the average maturity of interest earning assets and
funding sources. In addition, we have considered the potential impact of the
effect on the banking/finance segment, our outstanding debt and portfolio debt
holdings, individually and collectively, of a 100 basis point (1%) movement in
market interest rates. We do not expect this change would have a material impact
on our operating revenues or results of operations in either scenario.
We operate primarily in the United States, but also provide services and earn
revenues in Canada, the Bahamas, Europe, Asia, South America, Africa and
Australia. The majority of these revenues and associated expenses, however, are
denominated in U.S. dollars. Therefore, our exposure to foreign currency
fluctuations in our revenues and expenses is not material at this time. This
situation may change in the future as our business continues to grow outside the
United States.
We are exposed to equity price fluctuations. Investments available for sale are
carried at fair value. To mitigate this risk, we maintain a diversified
investment portfolio.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index of Consolidated Financial Statements for the years ended September 30,
2001, 2000 and 1999.
CONTENTS
Consolidated Financial Statements of Franklin Resources, Inc.:
Page
Consolidated Statements of Income
for the years ended September 30, 2001, 2000, and 1999 37
Consolidated Balance Sheets
as of September 30, 2001 and 2000 38
Consolidated Statements of Stockholders' Equity and Comprehensive Income
as of and for the years ended September 30, 2001, 2000, and 1999 40
Consolidated Statements of Cash Flows
for the years ended September 30, 2001, 2000, and 1999 42
Notes to Consolidated Financial Statements 43
Report of Independent Accountants 60
All schedules have been omitted as the information is provided in the financial
statements or in related notes thereto or is not required to be filed as the
information is not applicable.
36
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CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
FOR THE YEARS ENDED SEPTEMBER 30, 2001 2000 1999
- -------------------------------------------------------------------------------------------------
OPERATING REVENUES
Investment management fees $1,407,202 $1,399,121 $1,340,612
Underwriting and distribution fees 709,476 709,285 718,871
Shareholder servicing fees 199,525 211,416 184,948
Other, net 38,640 20,318 18,066
- -------------------------------------------------------------------------------------------------
Total operating revenues 2,354,843 2,340,140 2,262,497
OPERATING EXPENSES
Underwriting and distribution 636,868 623,144 620,047
Compensation and benefits 615,281 535,710 515,137
Information systems, technology and occupancy 263,297 213,670 212,495
Advertising and promotion 106,261 101,196 105,935
Amortization of deferred sales commissions 68,977 83,627 95,948
Amortization of intangible assets 56,590 37,163 37,220
Other 87,925 82,187 78,152
Restructuring charges - - 58,455
September 11, 2001 expense, net 7,649 - -
- -------------------------------------------------------------------------------------------------
Total operating expenses 1,842,848 1,676,697 1,723,389
Operating income 511,995 663,443 539,108
OTHER INCOME (EXPENSE)
Investment and other income 136,351 90,108 55,934
Interest expense (10,556) (13,960) (20,958)
- -------------------------------------------------------------------------------------------------
Other income, net 125,795 76,148 34,976
Income before taxes on income 637,790 739,591 574,084
Taxes on income 153,069 177,502 147,373
- -------------------------------------------------------------------------------------------------
NET INCOME $484,721 $562,089 $426,711
- -------------------------------------------------------------------------------------------------
Earnings per Share
Basic $1.92 $2.28 $1.69
Diluted $1.91 $2.28 $1.69
The accompanying notes are an integral part of these consolidated financial
statements.
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CONSOLIDATED BALANCE SHEETS
(in thousands)
AS OF SEPTEMBER 30, 2001 2000
- -------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $497,241 $734,071
Receivables
Sponsored investment products 233,086 241,282
Other 63,079 27,105
Investment securities, available-for-sale 1,027,975 635,819
Prepaid expenses and other 108,895 18,017
- -------------------------------------------------------------------------------------------------
Total current assets 1,930,276 1,656,294
BANKING/FINANCE ASSETS
Cash and cash equivalents 71,736 11,934
Loans receivable, net 555,314 256,416
Investment securities, available-for-sale 484,280 26,851
Other 117,914 4,361
- -------------------------------------------------------------------------------------------------
Total banking/finance assets 1,229,244 299,562
OTHER ASSETS
Deferred sales commissions 104,082 86,754
Property and equipment, net 449,626 444,694
Intangible assets, net 1,988,820 1,169,485
Receivable from banking/finance group 307,214 168,496
Other 256,388 217,158
- -------------------------------------------------------------------------------------------------
Total other assets 3,106,130 2,086,587
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS $6,265,650 $4,042,443
- -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
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CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
AS OF SEPTEMBER 30, 2001 2000
- -------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Compensation and benefits $221,672 $180,743
Current maturities of long-term debt 8,361 68,776
Accounts payable and accrued expenses 127,918 72,646
Commissions 83,518 76,965
Income taxes 11,925 61,661
Other 4,039 28,768
- -------------------------------------------------------------------------------------------------
Total current liabilities 457,433 489,559
BANKING/FINANCE LIABILITIES
Payable to Parent 307,214 168,496
Deposits 723,608 54,846
Other 39,839 15,612
- -------------------------------------------------------------------------------------------------
Total banking/finance liabilities 1,070,661 238,954
OTHER LIABILITIES
Long-term debt 566,013 294,090
Other 193,647 54,347
- -------------------------------------------------------------------------------------------------
Total other liabilities 759,660 348,437
- -------------------------------------------------------------------------------------------------
Total liabilities 2,287,754 1,076,950
- -------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value, 1,000,000 shares
authorized; none issued - -
Common stock, $0.10 par value, 500,000,000 shares
authorized; 260,797,545 and 243,730,140 shares
issued and outstanding for 2001 and 2000, respectively 26,080 24,373
Capital in excess of par value 657,878 -
Retained earnings 3,342,979 2,932,166
Other - (3,422)
Accumulated other comprehensive (loss) income (49,041) 12,376
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 3,977,896 2,965,493
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,265,650 $4,042,443
- -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
39
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME
(in thousands)
SHARES CAPITAL IN
AS OF AND FOR THE YEARS ENDED COMMON COMMON EXCESS OF
SEPTEMBER 30, 2001, 2000 and 1999 STOCK STOCK PAR VALUE
- -----------------------------------------------------------------------------------------------------
BALANCE OCTOBER 1, 1998 251,742 $25,174 $93,033
Net Income
Other Comprehensive Income:
Net unrealized gains on investments
Currency translation adjustments
Total comprehensive income
Purchase of stock (2,064) (206) (64,128)
Cash dividends on common stock
Issuance of restricted shares, net 1,036 104 30,560
Employee stock plan (ESIP) shares 299 30 9,002
Other (6) (1) 1,164
BALANCE SEPTEMBER 30, 1999 251,007 25,101 69,631
- -----------------------------------------------------------------------------------------------------
Net Income
Other Comprehensive Income:
Net unrealized gains on investments
Currency translation adjustments
Total comprehensive income
Purchase of stock (8,442) (844) (112,046)
Cash dividends on common stock
Issuance of restricted shares, net 989 99 30,081
Employee stock plan (ESIP) shares 349 34 11,030
Other (173) (17) 1,304
BALANCE SEPTEMBER 30, 2000 243,730 24,373 -
- -----------------------------------------------------------------------------------------------------
Net Income
Other Comprehensive Income:
Net unrealized loss on investments
Currency translation adjustments
Total comprehensive income
Purchase of stock (4,200) (420) (163,438)
Cash dividends on common stock
Issuance of restricted shares, net 716 71 32,313
Employee stock plan (ESIP) shares 359 36 13,077
Stock issued to acquire Fiduciary 20,187 2,019 773,768
Exercise of options and other 6 1 2,158
BALANCE SEPTEMBER 30, 2001 260,798 $26,080 $657,878
- -----------------------------------------------------------------------------------------------------
[Table continued on next page]
The accompanying notes are an integral part of these consolidated financial
statements.
40
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME
[Table continued from previous page]
(in thousands)
ACCUMULATED
OTHER TOTAL TOTAL
AS OF AND FOR THE YEARS ENDED RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
SEPTEMBER 30, 2001, 2000 and 1999 EARNINGS OTHER INCOME EQUITY INCOME
- -------------------------------------------------------------------------------------------------------------
BALANCE OCTOBER 1, 1998 $2,194,835 $(4,230) $(28,045) $2,280,767
Net Income 426,711 426,711 $426,711
Other Comprehensive Income:
Net unrealized gains on investments 24,061 24,061 24,061
Currency translation adjustments 3,730 3,730 3,730
---------
Total comprehensive income $454,502
Purchase of stock (64,334)
Cash dividends on common stock (55,498) (55,498)
Issuance of restricted shares, net 698 31,362
Employee stock plan (ESIP) shares 9,032
Other 1,163
BALANCE SEPTEMBER 30, 1999 2,566,048 (3,532) (254) 2,656,994
- ---------------------------------------------------------------------------------------------
Net Income 562,089 562,089 $562,089
Other Comprehensive Income:
Net unrealized gains on investments 22,511 22,511 22,511
Currency translation adjustments (9,881) (9,881) (9,881)
----------
Total comprehensive income $574,719
Purchase of stock (137,152) (250,042)
Cash dividends on common stock (58,819) (58,819)
Issuance of restricted shares, net 110 30,290
Employee stock plan (ESIP) shares 11,064
Other 1,287
BALANCE SEPTEMBER 30, 2000 2,932,166 (3,422) 12,376 2,965,493
- ---------------------------------------------------------------------------------------------
Net Income 484,721 484,721 $484,721
Other Comprehensive Income:
Net unrealized loss on investments (58,170) (58,170) (58,170)
Currency translation adjustments (3,247) (3,247) (3,247)
----------
Total comprehensive income $423,304
Purchase of stock (8,255) (172,113)
Cash dividends on common stock (65,653) (65,653)
Issuance of restricted shares, net 3,422 35,806
Employee stock plan (ESIP) shares 13,113
Stock issued to acquire Fiduciary 775,787
Exercise of options and other 2,159
BALANCE SEPTEMBER 30, 2001 $3,342,979 $ - $(49,041) $3,977,896
- ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
41
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
FOR THE YEARS ENDED SEPTEMBER 30, 2001 2000 1999
- -------------------------------------------------------------------------------------------------
NET INCOME $484,721 $562,089 $426,711
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Increase in receivables, prepaid expenses and other (88,360) (63,098) (55,039)
Advances of deferred sales commissions (86,305) (67,091) (75,729)
Increase in other current liabilities 14,218 33,229 25,676
Decrease in income taxes payable (29,739) (2,079) (9,351)
Increase in commissions payable 6,552 14,996 8,797
Increase in accrued compensation and benefits 54,056 44,999 34,822
Depreciation and amortization 223,846 199,639 200,014
(Decrease) increase in restructuring liabilities - (2,564) 28,965
Gains on disposition of assets (45,687) (18,407) (399)
September 11, 2001 asset write-offs 19,885 - -
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 553,187 701,713 584,467
Purchase of investments (947,615) (628,206) (731,798)
Liquidation of investments 463,276 374,102 909,110
Purchase of banking/finance investments (131,102) (32,788) (24,891)
Liquidation of banking/finance investments 187,082 26,449 31,557
Proceeds from securitization of loans receivable 139,295 123,048 106,375
Net originations of loans receivable (294,557) (194,100) (131,979)
Addition of property and equipment (107,326) (108,432) (135,168)
Proceeds from sale of property 10,392 4,088 4,083
Acquisitions of subsidiaries, net of cash acquired (99,058) - -
- -------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (779,613) (435,839) 27,289
Increase (decrease) in bank deposits 67,297 (3,372) (29,566)
Exercise of common stock options 2,158 1,142 1,456
Dividends paid on common stock (63,471) (57,953) (54,279)
Purchase of stock (172,113) (250,042) (64,334)
Issuance of debt 711,847 497,118 64,140
Payments on debt (496,320) (526,006) (265,972)
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 49,398 (339,113) (348,555)
(Decrease) increase in cash and cash equivalents (177,028) (73,239) 263,201
Cash and cash equivalents, beginning of year 746,005 819,244 556,043
- -------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $568,977 $746,005 $819,244
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest, including banking/finance group interest $17,746 $26,370 $30,361
Income taxes $148,268 $180,098 $163,425
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Value of common stock issued in other transactions,
principally restricted stock $28,640 $30,181 $30,664
Value of common stock issued to acquire Fiduciary $775,786 - -
Fair value of Fiduciary assets acquired $1,538,084 - -
Fair value of Fiduciary liabilities acquired $757,722 - -
The accompanying notes are an integral part of these consolidated financial
statements.
42
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
We derive the majority of our revenues and net income from providing investment
management, administration, distribution and related services to the Franklin,
Templeton, Mutual Series, Bissett and Fiduciary funds, institutional and private
accounts and other investment products (our "Sponsored Investment Products").
Services to our Sponsored Investment Products are provided under contracts that
set forth the fees to be charged for these services. The majority of these
contracts are subject to periodic review and approval by each Mutual Fund's
Board of Directors/Trustees and/or its shareholders. Currently, no single
Sponsored Investment Product's revenues represent more than 10% of total
revenues.
BASIS OF PRESENTATION. The consolidated financial statements are prepared in
accordance with generally accepted accounting principles that require us to
estimate certain amounts. Actual amounts may differ from these estimates.
The consolidated financial statements include the accounts of Franklin
Resources, Inc. and its majority-owned subsidiaries ("Franklin Templeton
Investments"). All material intercompany accounts and transactions have been
eliminated except the intercompany payable from the banking/finance group to the
parent to fund auto and credit card loans and the related interest expense.
Operating revenues of the banking/finance group are included in Other, net and
are presented net of related interest expense and the provision for loan losses.
Accordingly, reported consolidated interest expense excludes interest expense
attributable to the banking/finance group.
CASH AND CASH EQUIVALENTS include cash on hand, demand deposits with banks, debt
instruments with original maturities of three months or less and other highly
liquid investments, including money market funds, which are readily convertible
into cash.
INVESTMENT SECURITIES, AVAILABLE-FOR-SALE are carried at fair value. Fair values
for investments in our sponsored investment products are based on the last
reported net asset value. Fair values for other investments are based on the
last reported price on the exchange on which they are traded. Realized gains and
losses are included in investment income currently based on specific
identification. Unrealized gains and losses are recorded net of tax as part of
Accumulated other comprehensive income until realized.
DERIVATIVES. We do not hold or issue derivative financial instruments for
trading purposes. Periodically, we enter into interest-rate swap agreements to
reduce variable interest-rate exposure with respect to our commercial paper,
designated as cash flow hedges, and to hedge exposures or modify the interest
rate characteristics of fixed rate loans with maturities in excess of one year,
designated as fair value hedges. As of September 30, 2001, we held interest rate
swaps with a total notional amount of $4 million and these were carried at fair
value.
We periodically enter into spot and forward currency contracts as principal to
facilitate client transactions and, on limited occasions, hold currency options
for our own account. It is our policy that substantially all forward contracts
be covered no later than the close of business each day. Gains or losses on
these contracts are reflected in the consolidated statement of income. The gross
fair market value of all contracts outstanding that had a positive fair market
value totaled $1.3 million at September 30, 2001. This represents a credit
exposure to the extent that counterparties fail to settle their contractual
obligations. This risk is mitigated by the use of master netting agreements,
careful valuation of counterparty credit standings, diversification and limits.
LOANS RECEIVABLE. Our banking/finance group offers retail-banking and consumer
lending services. We accrue interest on loans using the simple interest method.
The majority of retail-banking loans are at variable rates which are adjusted
periodically. An allowance for loan losses on our consumer loan portfolio is
established monthly based on historical experience, including delinquency and
loss trends. A loan is charged to the allowance for loan losses when it is
deemed to be uncollectible, taking into consideration the value of the
collateral, the financial condition of the borrower and other factors.
Recoveries on loans previously charged off as uncollectible are credited to the
allowance for loan losses. We have not recorded allowance for possible loan
losses on our retail-banking loans and advances as these loans are generally
payable on demand and are fully secured by assets
43
- --------------------------------------------------------------------------------
under our custody. Advances on customers' accounts are generally secured or
subject to rights of offset and, consistent with past experience, no loan losses
are anticipated.
DEFERRED SALES COMMISSIONS. Sales commissions paid to brokers and other
investment advisors in connection with the sale of shares of our mutual funds
sold without a front-end sales charge are capitalized and amortized over periods
not exceeding six years - the periods in which we estimate that they will be
recovered from distribution plan payments and from contingent deferred sales
charges.
PROPERTY AND EQUIPMENT are recorded at cost and are depreciated on the
straight-line basis over their estimated useful lives. Expenditures for repairs
and maintenance are charged to expense when incurred. Leasehold improvements are
amortized on the straight-line basis over their estimated useful lives or the
lease term, whichever is shorter.
SOFTWARE DEVELOPED FOR INTERNAL USE. Certain internal and external costs
incurred in connection with developing or obtaining software for internal use
are capitalized in accordance with the American Institute of Certified Public
Accountants' Statement of Position No. 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." These capitalized
costs are included in Property and Equipment, net on the Consolidated Balance
Sheets and are amortized when the software project is complete and the
application is put into production, over the estimated useful life of the
software.
INTANGIBLE ASSETS, consisting principally of the estimated value of mutual fund
management contracts, customer base and goodwill resulting from our acquisition
of the assets of Templeton, Galbraith & Hansberger Ltd., Heine Securities
Corporation, Bissett and Associates Investment Management Ltd. ("Bissett") and
Fiduciary Trust Company International ("Fiduciary"), are being amortized on a
straight-line basis over various lives ranging from 5 to 40 years. We have
reviewed intangible assets for other-than-temporary impairment. Where
applicable, we assessed the value of intangibles on the basis of the expected
future undiscounted operating cash flows without interest charges to be derived
from these assets in relation to the carrying values and determined that there
is no impairment. Effective October 1, 2001, we will adopt an impairment-based
approach to intangible assets as further described in Note 19. If, in some
future period, our evaluation indicates that these assets have been impaired,
the assets will be adjusted to their fair values.
DEMAND AND INTEREST BEARING DEPOSITS. The fair value of demand deposits are, by
definition, equal to their carrying amounts. The interest-bearing deposits are
variable rate and short-term and, therefore, the carrying amounts approximate
their fair values. As of September 30, 2001 and 2000, we carried $109.0 million
and $10.0 million of demand deposits and $614.6 million and $44.8 million of
interest-bearing deposits, respectively. As of fiscal year end 2001, these
included $24.4 million in non-U.S. locations.
RECOGNITION OF REVENUES. We recognize investment management fees, shareholder
servicing fees, investment income and distribution fees as earned. We record
underwriting commissions related to the sale of shares of our Sponsored
Investment Products on the trade date.
ADVERTISING AND PROMOTION. We expense costs of advertising and promotion as
incurred.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of foreign subsidiaries are
translated at current exchange rates as of the end of the accounting period, and
related revenues and expenses are translated at average exchange rates in effect
during the period. Net exchange gains and losses resulting from translation are
excluded from income and are recorded as part of Accumulated other comprehensive
income. Foreign currency transaction gains and losses are reflected in income
currently.
DIVIDENDS. For the years ended September 30, 2001, 2000 and 1999, we declared
dividends to common stockholders of $0.26, $0.24 and $0.22 per share,
respectively.
STOCK-BASED COMPENSATION. As allowed under the provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), we have elected to apply Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting
44
- --------------------------------------------------------------------------------
for our stock-based plans. Accordingly, no compensation costs are recognized
with respect to stock options granted, or with respect to shares issued under
the Employee Stock Investment Plan. Compensation expense is recognized for the
matching contribution that we may elect to make in connection with the Employee
Stock Investment Plan over the 18-month holding period and for the full cost of
restricted stock grants in the year that they are earned.
COMPREHENSIVE INCOME. Total comprehensive income is reported in the consolidated
statements of stockholders' equity and includes net income, unrealized gains on
investment securities available-for-sale, net of income taxes and currency
translation adjustments.
The changes in net unrealized gains (losses) on investments include
reclassification adjustments relating to the net realized gains on investment
sales of $34.2 million, $9.9 million and $0.1 million during fiscal 2001, 2000
and 1999. The tax effect of the change in unrealized gains (losses) on
investments was $(18.4) million, $7.1 million and $4.8 million during fiscal
2001, 2000 and 1999.
EARNINGS PER SHARE. Earnings per share were computed as follows:
(in thousands except per share amounts)
2001 2000 1999
- -----------------------------------------------------------------------------------------
NET INCOME $484,721 $562,089 $426,711
- -----------------------------------------------------------------------------------------
Weighted-average shares outstanding - basic 252,628 246,116 252,122
Incremental shares from assumed conversions 1,035 508 635
- -----------------------------------------------------------------------------------------
Weighted-average shares outstanding - diluted 253,663 246,624 252,757
- -----------------------------------------------------------------------------------------
Earnings per share:
Basic $1.92 $2.28 $1.69
Diluted $1.91 $2.28 $1.69
NOTE 2 - ACQUISITIONS
On October 2, 2000, we acquired all of the issued and outstanding shares of
Bissett, a Canadian asset management company. The all-cash transaction was
valued at approximately $95 million. Intangible assets of approximately $89
million with lives ranging from 15 to 40 years were recorded as a result of the
acquisition. We accounted for this transaction using the purchase method. These
financial statements include the operating results of Bissett from October 2,
2000.
On April 10, 2001, we acquired Fiduciary. These financial statements include the
results of Fiduciary from April 10, 2001. Each share of Fiduciary's common stock
was exchanged for 2.7744 shares of our common stock, resulting in the issuance
in the aggregate of approximately 20,187,000 shares of our common stock. The
value of the shares issued in exchange for Fiduciary was approximately $775.8
million. We accounted for this transaction using the purchase method of
accounting. The excess of the purchase price, including our acquisition costs,
over the fair value of the net assets acquired resulted in goodwill of $559.5
million. Net assets acquired included $235.5 million of other intangible assets.
As of September 30, 2001, we wrote off the net intangible asset related to
Fiduciary's headquarters lease of $8.2 million as a result of the September 11,
2001 terrorist attack. See Note 18. The estimated life of the remaining goodwill
and other intangible assets is 40 and 15 years, respectively.
We have not presented proforma combined results of operations for these
acquisitions because the results of operations as reported in the accompanying
consolidated statements of income would not have been materially different.
45
- --------------------------------------------------------------------------------
NOTE 3 - INVESTMENT SECURITIES
Investment securities, available-for-sale at September 30, 2001 and 2000,
consisted of the following:
(in thousands)
Gross unrealized
Amortized ---------------- Fair
cost Gains Losses value
- -----------------------------------------------------------------------------------------
2001
Sponsored investment products $325,150 $6,472 $(48,388) $283,234
Debt (primarily U.S. Government) 1,192,205 12,242 - 1,204,447
Equities 18,560 6,024 (10) 24,574
- ----------------------------------------------------------------------------------------
TOTAL $1,535,915 $24,738 $(48,398) $1,512,255
- ----------------------------------------------------------------------------------------
2000
Sponsored investment products $208,125 $55,685 $(2,763) $261,047
Debt (primarily U.S. Government) 397,611 71 (256) 397,426
Equities 1,552 2,658 (13) 4,197
- ----------------------------------------------------------------------------------------
TOTAL $607,288 $58,414 $(3,032) $662,670
- ----------------------------------------------------------------------------------------
At September 30, 2001, maturities of debt securities were as follows:
(in thousands) Amortized cost Fair value
- ------------------------------------------------------------------------------
Due in one year or less $853,994 $854,271
Due after one year through three years 36,196 37,465
Due after three years 302,015 312,711
- ------------------------------------------------------------------------------
$1,192,205 $1,204,447
NOTE 4 - BANKING/FINANCE GROUP LOANS AND ALLOWANCE FOR LOAN LOSSES
The banking/finance segment's loans receivable include auto loan and credit card
receivables from individuals that are collectively described below as
installment loans. Following the Fiduciary acquisition of April 2001, loans
receivable also include secured loans and other advances made to Fiduciary
clients. No loan loss allowance is recognized on Fiduciary's retail-banking
loans and advances as described in Note 1.
46
- --------------------------------------------------------------------------------
Change in loans and in the associated allowance for loan losses during 2001 and
2000 were as follows:
(in thousands) Installment Secured Loan Loss Loans
loans Loans Allowance receivable,
net
- ---------------------------------------------------------------------------------------------
Balance, October 1, 2000 $261,387 $ - $(4,971) $256,416
Fiduciary acquisition - 148,209 - 148,209
Additions 405,528 128,853 (12,820) 521,561
Paydowns (154,367) (73,964) - (228,331)
Charge-offs (6,710) - 6,710 -
Recoveries 1,367 - (1,367) -
Loans securitized (145,421) - 2,880 (142,541)
- ----------------------------------------------------------------------------------------------
Balance, September 30, 2001 $361,784 $203,098 $(9,568) $555,314
- ----------------------------------------------------------------------------------------------
Balance, October 1, 1999 $189,771 $ - $(3,586) $186,185
Additions 311,725 - (6,925) 304,800
Paydowns (109,685) - - (109,685)
Charge-offs (5,622) - 5,622 -
Recoveries 1,830 - (1,830) -
Loans securitized (126,632) - 1,748 (124,884)
- ----------------------------------------------------------------------------------------------
Balance, September 30, 2000 $261,387 $ - $(4,971) $256,416
- ----------------------------------------------------------------------------------------------
The following is a summary of delinquency and loss information for fiscal 2001,
2000 and 1999:
(in thousands)
2001 2000 1999
- --------------------------------------------------------------------------------
Charge-offs as a percentage of average loans 2.2% 1.7% 2.1%
Secured loans, 90 days or more delinquent $300 $ - $ -
Installment loans, 90 days or more delinquent $292 $683 $785
In January 2001, March 2000 and May 1999, the banking/finance segment sold
portions of its auto loans receivable to securitization trusts. The table below
shows the assumptions that were used to calculate the gain on sale and the
details of the transactions.
(in millions)
January 2001 March 2000 May 1999
- --------------------------------------------------------------------------------
Proceeds $139.3 $123.0 $106.4
Book value of loans sold $142.5 $124.9 $109.4
Gain (loss) on sale $ 2.9 $ (0.9) $ 1.2
Discount rate 12% 12% 12%
Cumulative credit loss rate 3.06% 3.66% 3.44%
Loan servicing rights retained on auto loans sold are not material to our
reported operating results and financial condition.
47
- --------------------------------------------------------------------------------
Net interest income included in Other operating revenues in the statement of
income was as follows:
(in thousands) 2001 2000 1999
- ------------------------------------------------------------------------------
Interest income earned on loans $38,975 $23,299 $18,420
Interest expense on deposits (9,868) (2,745) (3,622)
Interest expense payable to parent (9,778) (8,617) (6,031)
- ------------------------------------------------------------------------------
Net interest income $19,329 $11,937 $8,767
NOTE 5 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at September 30, 2001 and
2000:
(in thousands)
Useful lives
in years 2001 2000
- --------------------------------------------------------------------------------
Furniture, software and equipment 3-5 $505,246 $428,501
Premises and leasehold improvements 5-35 207,484 202,978
Land - 68,446 69,625
- --------------------------------------------------------------------------------
781,176 701,104
Less: Accumulated depreciation and amortization (331,550) (256,410)
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET $449,626 $444,694
- --------------------------------------------------------------------------------
NOTE 6 - INTANGIBLE ASSETS
The following is a summary of intangible assets at September 30, 2001 and 2000:
(in thousands)
AMORTIZATION
PERIOD IN YEARS 2001 2000
- --------------------------------------------------------------------------------
Goodwill 20-40 $1,473,818 $846,017
Management contracts 40 510,490 510,490
Customer base 15 232,190 -
Other intangibles 5-15 47,120 31,546
- --------------------------------------------------------------------------------
2,263,618 1,388,053
Less: Accumulated amortization (274,798) (218,568)
- --------------------------------------------------------------------------------
INTANGIBLE ASSETS, NET $1,988,820 $1,169,485
- --------------------------------------------------------------------------------
48
- --------------------------------------------------------------------------------
NOTE 7 - SEGMENT INFORMATION
We have 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 years ended
September 30, 2001, 2000 and 1999 is presented in the table below. Operating
revenues of the banking/finance segment are reported net of interest expense and
provision for loan losses. See Note 4.
(in thousands) Investment Banking/finance Company
management Totals
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 2001
- -------------------------------------------------------------------------------------------
Assets $5,036,406 $1,229,244 $6,265,650
Operating revenues 2,323,085 31,758 2,354,843
Interest expense 10,556 N/A 10,556
Income before taxes 629,908 7,882 637,790
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 2000
- -------------------------------------------------------------------------------------------
Assets $3,742,881 $299,562 $4,042,443
Operating revenues 2,320,755 19,385 2,340,140
Interest expense 13,960 N/A 13,960
Income before taxes 739,030 561 739,591
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 1999
- -------------------------------------------------------------------------------------------
Assets $3,449,012 $217,778 $3,666,790
Operating revenues 2,246,767 15,730 2,262,497
Interest expense 20,958 N/A 20,958
Income before taxes 570,120 3,964 574,084
The investment management segment incurs substantially all of our depreciation
and amortization costs and expenditures on long-lived assets.
We conduct operations in the following principal geographic areas of the world:
the United States, Canada, the Bahamas, Europe, Asia, South America, Africa and
Australia. For segment reporting purposes, we have combined Asia, South America,
Africa and Australia into one category - Other. Revenues by geographic area
include fees and commissions charged to customers and fees charged to
affiliates.
49
- --------------------------------------------------------------------------------
Information is summarized below:
(in thousands)
2001 2000 1999
- --------------------------------------------------------------------------------
OPERATING REVENUES:
United States $1,685,108 $1,596,712 $1,591,093
Canada 267,007 250,778 233,013
Bahamas 294,922 284,518 281,437
Europe 129,090 126,111 122,744
Other 144,200 191,095 144,657
Eliminations (165,484) (109,074) (110,447)
- --------------------------------------------------------------------------------
TOTAL $2,354,843 $2,340,140 $2,262,497
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET:
United States $394,082 $387,197 $356,050
Canada 7,246 7,096 5,890
Bahamas 7,916 8,126 8,723
Europe 7,159 6,692 7,478
Other 33,223 35,583 38,254
- --------------------------------------------------------------------------------
TOTAL $449,626 $444,694 $416,395
- --------------------------------------------------------------------------------
NOTE 8 - DEBT
Debt at September 30, 2001 and 2000 was as follows:
(in thousands)
2001 WEIGHTED
AVERAGE INTEREST RATE 2001 2000
- --------------------------------------------------------------------------------
Convertible Notes 1.875% $504,683 $ -
Commercial paper - $254,381
Medium-term notes - 60,000
Other 69,691 48,485
- --------------------------------------------------------------------------------
574,374 362,866
Less current maturities 8,361 68,776
LONG-TERM DEBT $566,013 $294,090
- --------------------------------------------------------------------------------
As of September 30, 2001, maturities of long-term debt are as follows:
2002 $ -
2003 20,915
2004 6,389
2005 6,793
2006 7,223
Thereafter 524,693
- ----------------------------------------------------
LONG-TERM DEBT $566,013
- ----------------------------------------------------
50
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In May 2001, we received approximately $490 million in net proceeds upon the
closing of the sale of $877 million principal amount at maturity of zero-coupon
convertible senior notes due 2031 (the "Convertible Notes").
The Convertible Notes, which were offered to qualified institutional buyers
only, carry a yield to maturity of 1.875% per annum, with an initial conversion
premium of 43%. Each of the $1,000 (principal amount at maturity) Convertible
Notes is convertible into 9.3604 shares of our common stock. We may redeem the
Convertible Notes for cash on or after May 11, 2006 at their accreted value. We
may be required to repurchase the Convertible Notes at their accreted value, at
the option of the holders, on May 11 of 2003, 2004, 2006, 2011, 2016, 2021 and
2026. In such event, we may choose to pay the purchase price for such
repurchases in cash or shares of our common stock.
At September 30, 2001, the amount included in long-term debt in respect of the
Convertible Notes was $504.7 million including principal outstanding and accrued
interest. In the maturity schedule above, we have classified this amount as
maturing after September 2006, as the final maturity date is May 2031. The
holders' ability to redeem will depend on the performance of our common stock.
If our stock price at May 2003, 2004, and 2006 is the same as it was at
September 30, 2001, holders will not redeem the Convertible Notes before
September 2006.
At September 30, 2001, approximately $850 million was available to us under
unused commercial paper and medium-term note programs and an additional $300
million was available under a shelf registration statement with the Securities
and Exchange Commission permitting the issuance of debt and equity securities.
We did not have any commercial paper outstanding or medium term notes issued at
September 30, 2001.
Our revolving credit facilities at September 30, 2001 totaled $500 million, of
which $200 million was under a 364-day facility. The remaining $300 million
facility will expire in May 2003. The agreements related to the revolving credit
facilities include various restrictive covenants, including: a capitalization
ratio, interest coverage ratio, minimum working capital and limitation on
additional debt. We also have $350 million available in uncommitted bank lines
under the Federal Reserve Funds system.
NOTE 9 - INVESTMENT INCOME
(in thousands)
2001 2000 1999
- --------------------------------------------------------------------------------
Dividends $ 24,369 $12,294 $12,473
Interest 63,455 57,025 40,845
Realized gains, net 54,869 19,718 2,323
Foreign exchange losses, net (3,629) (1,311) (1,924)
Other (2,713) 2,382 2,217
- --------------------------------------------------------------------------------
INVESTMENT INCOME $136,351 $90,108 $55,934
- --------------------------------------------------------------------------------
Substantially all of our dividend income was generated by investments in our
sponsored investment products. We realized a gain of $32.9 million on the sale
of our headquarters building in San Mateo in July 2000. That gain was amortized
over 12 months, the period of our leaseback on the building.
51
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NOTE 10 - TAXES ON INCOME
Taxes on income for the years ended September 30, 2001, 2000 and 1999 were as
follows:
(in thousands)
2001 2000 1999
- --------------------------------------------------------------------------------
Current
Federal $ 84,220 $ 96,074 $ 91,141
State 16,694 18,558 24,797
Foreign 41,532 59,590 45,193
Deferred expense (benefit) 10,623 3,280 (13,758)
- --------------------------------------------------------------------------------
TOTAL PROVISION $153,069 $177,502 $147,373
- --------------------------------------------------------------------------------
Included in income before taxes was $357.0 million, $446.0 million and $356.9
million of foreign income for the years ended September 30, 2001, 2000 and 1999,
respectively.
The major components of the net deferred tax liability/asset as of September 30,
2001 and 2000 were as follows:
(in thousands)
2001 2000
- -------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS
State taxes $ 5,186 $ 6,511
Loan loss reserves 5,021 3,165
Deferred compensation and employee benefits 24,330 6,006
Restricted stock compensation plan 34,328 37,094
Severance and retention compensation 18,232 -
Net operating loss and foreign tax credit carry-forwards 65,161 53,627
Deferred gain on sale of headquarters - 10,511
Investments 2,399 -
Other 6,796 10,874
- -------------------------------------------------------------------------------------------------
Total deferred tax assets 161,453 127,788
Valuation allowance for tax carry-forwards (52,268) (53,627)
- -------------------------------------------------------------------------------------------------
Deferred tax assets, net of valuation allowance 109,185 74,161
DEFERRED TAX LIABILITIES
Investments - 12,750
Depreciation on fixed assets 10,842 18,148
Goodwill and other purchased intangibles 135,508 38,085
Deferred commissions 12,368 8,473
Other 19,356 3,730
- -------------------------------------------------------------------------------------------------
Total deferred tax liabilities 178,074 81,186
- -------------------------------------------------------------------------------------------------
Net deferred tax (liability) asset $(68,889) $ (7,025)
- -------------------------------------------------------------------------------------------------
At September 30, 2001, there were approximately $49 million of foreign net
operating loss carry-forwards, approximately $41 million of which expire between
2002 and 2009 with the remaining carry-forwards having an indefinite life. In
addition, there are approximately $23 million in Federal operating loss
carry-forwards that expire in 2020 and $586 million in state net operating loss
carry-forwards that expire between 2008 and 2021. A
52
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valuation allowance has been recognized on certain deferred tax assets due to
the uncertainty of realizing the benefit of the loss and credit carry-forwards.
We have made no provision for U.S. taxes on $1,687 million of cumulative
undistributed earnings of foreign subsidiaries as those earnings are intended to
be reinvested for an indefinite period of time. Determination of the potential
amount of unrecognized deferred U.S. income tax liability related to such
reinvested income is not practicable because of the numerous assumptions
associated with this hypothetical calculation; however, foreign tax credits
would be available to reduce some portion of this amount.
The following is a reconciliation between the amount of tax expense at the
Federal statutory rate and taxes on income as reflected in operations for the
years ended September 30, 2001, 2000 and 1999:
(in thousands)
2001 2000 1999
- -------------------------------------------------------------------------------------------------
Federal statutory rate 35% 35% 35%
Federal taxes at statutory rate $223,226 $258,857 $200,929
State taxes, net of federal tax effect 11,716 17,586 15,819
Foreign earnings subject to reduced tax rates for
which no U.S. tax is provided (75,963) (96,260) (83,954)
Other (5,910) (2,681) 14,579
- -------------------------------------------------------------------------------------------------
Actual tax provision $153,069 $177,502 $147,373
Effective tax rate 24% 24% 26%
NOTE 11 - COMMITMENTS AND CONTINGENCIES
We lease office space and equipment under long-term operating leases expiring at
various dates through fiscal year 2017. Lease expense aggregated $30.9 million,
$43.1 million and $38.7 million for the fiscal years ended September 30, 2001,
2000 and 1999, respectively. Future minimum lease payments under non-cancelable
operating leases are not material.
We entered into an operating lease for our new corporate headquarters in San
Mateo, California that expires in fiscal 2005, with additional renewal options
for a further period of up to 10 years. In connection with this lease, we are
contingently liable under residual guarantees, for approximately $145 million,
representing approximately 85% of the total construction costs of $170 million.
The lease agreement is not expected to impact our cash flows or financial
condition materially during the initial five-year lease period. As the net
present value of the
minimum lease payments, including the residual guarantee, was less than 90% of
the fair value of the leased property at the inception of the lease, this has
been classified as an operating lease.
At September 30, 2001, the banking/finance segment had commitments to extend
credit aggregating $235.0 million, principally under its credit card lines.
Standby letters of credit existed totaling $10.2 million for Fiduciary clients
which expire through March 2002. These credits are secured by marketable
securities.
We are involved in various claims and legal proceedings that are considered
normal in our business. While it is not feasible to predict or determine the
final outcome of these proceedings, we do not believe that they should have a
material adverse effect on our financial position, results of operations or
liquidity.
In February 2001, we signed an agreement with IBM under which IBM assumed
management of our data center and distributed server operations. Under the terms
of the agreement, we may terminate the agreement any time after March 2004. If
we were to terminate the agreement, we would incur a termination charge. The
maximum termination charge payable depends on service levels prior to our
termination of the agreement, and the amount of costs IBM would incur in winding
down the services. Based on September 30, 2001 service levels, this termi-
53
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nation fee would approximate $33 million. We do not consider it likely that we
will incur this cost. Under the terms of the agreement, we also must pay IBM a
transition charge of approximately $2.7 million in March 2003.
NOTE 12 - EMPLOYEE STOCK AWARD AND OPTION PLANS
We sponsor a universal stock plan and an Annual Incentive Compensation Plan
("AICP"). Under the terms of these plans, eligible employees may receive cash
and stock awards. Under the terms of the AICP, restricted stock awards are based
on our pretax operating income. The universal stock plan provides for the
issuance of up to 26 million shares of the common stock for various
stock-related awards, including those related to the AICP. As of September 30,
2001, we had approximately 10 million shares available for grant under the
universal stock plan, including those related to the AICP. In addition to the
annual award of stock under the plan, we may award options and other forms of
stock-based compensation to certain employees. Currently, only restricted stock
and stock options have been granted. The Compensation Committee of the Board of
Directors determines the terms and conditions of awards under the plans. Total
compensation cost recognized for stock-based compensation during fiscal 2001,
2000 and 1999 was $28.5 million, $28.9 million and $37.9 million, respectively.
Information regarding stock options is as follows:
(shares in thousands)
2001 2000 1999
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
- -------------------------------------------------------------------------------------------------
Outstanding, beginning of year 2,222 $32.52 1,315 $32.02 193 $29.32
Granted 6,640 $38.41 1,108 $32.60 1,243 $31.39
Exercised/cancelled (465) $36.70 (201) $29.73 (121) $21.24
- -------------------------------------------------------------------------------------------------
Outstanding, end of year 8,397 $36.94 2,222 $32.52 1,315 $32.02
Exercisable, end of year 2,602 $35.65 437 $34.44 117 $34.44
The range of exercise prices for these options at September 30, 2001 was from
$28.19 to $43.36. Of these, 83% were exercisable at prices ranging from $32.63
to $38.38. The weighted-average remaining contractual life for the options was 7
years.
If we had determined compensation costs for our stock option plans and our
Employee Stock Investment Plan (See Note 13) based upon fair values at the grant
dates in accordance with the provisions of FAS 123, our net income and earnings
per share would have been reduced to the pro forma amounts indicated below. For
pro forma purposes, the estimated fair value of options is amortized to expense
over the options' vesting period.
FOR THE YEARS ENDED SEPTEMBER 30, 2001 2000 1999
- --------------------------------------------------------------------------------
Net income (in millions)
As reported $484.7 $562.1 $426.7
Pro forma $445.3 $553.4 $422.5
- --------------------------------------------------------------------------------
Basic earnings per share
As reported $1.92 $2.28 $1.69
Pro forma $1.76 $2.25 $1.67
- --------------------------------------------------------------------------------
Diluted earnings per share
As reported $1.91 $2.28 $1.69
Pro forma $1.76 $2.24 $1.67
- --------------------------------------------------------------------------------
54
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The weighted-average estimated fair value of options granted on the date of
grant using Black-Scholes option-pricing model was as follows:
FOR THE YEARS ENDED SEPTEMBER 30, 2001 2000 1999
- --------------------------------------------------------------------------------
Weighted-average fair value of
options granted $19.58 $15.31 $11.33
Assumptions made:
Dividend yield 1% 1% 1%
Expected volatility 38% 38% 36%
Risk-free interest rate 5% 6% 5%
Expected life 6 months- 6 months- 6 months-
10 years 8 years 8 years
NOTE 13 - EMPLOYEE STOCK INVESTMENT PLAN
We have a qualified, non-compensatory Employee Stock Investment Plan ("ESIP")
which allows participants who meet certain eligibility criteria to purchase
shares of our common stock at 90% of their market value on certain defined
dates. Our stockholders approved 4 million shares of common stock for issuance
under the ESIP. The ESIP is open to substantially all employees of U.S.
subsidiaries and certain employees of non-U.S. subsidiaries. At September 30,
2001, approximately 913,000 shares had been purchased on a cumulated basis under
the ESIP at a weighted average price of $32.13.
In connection with the ESIP, we may provide matching grants to participants in
the ESIP of whole or partial shares of common stock. While reserving the right
to change such determination, we have indicated that we will provide one
half-share for each share held by a participant for a minimum period of 18
months. Our first matching grant was made in fiscal 2000. During fiscal 2001 and
2000, we issued approximately 81,000 and 84,000 shares at an average market
price of $45.04 and $35.52, respectively.
NOTE 14 - OTHER COMPENSATION AND BENEFIT PLANS
Following the acquisition of Fiduciary on April 10, 2001, we assumed
responsibility for a number of compensation and benefit plans that Fiduciary had
with its employees.
Fiduciary has a noncontributory retirement plan (the "retirement plan") covering
substantially all Fiduciary employees who had attained age 21 and completed one
year of service. Fiduciary also maintains a nonqualified supplementary executive
retirement plan ("SERP") to pay defined benefits to participants in the
retirement plan that are in excess of certain limits imposed by Federal tax law.
In addition to these pension retirement plans, Fiduciary sponsors a defined
benefit healthcare plan that provides post-retirement medical benefits to
full-time employees who have worked 10 years and attained age 55 while in
service of Fiduciary. As of the date of acquisition, these plans were closed to
new entrants.
The benefit obligation at September 30, 2001 in respect of these plans was $34.5
million which exceeded the fair value of plan assets by $15.3 million. As of
September 30, 2001, we were fully accrued under these plans. The net periodic
benefit cost reflected on our statement of operations was $1.4 million in fiscal
2001.
We used the following assumptions in calculating financial information for these
plans:
PENSION BENEFITS NON-PENSION BENEFITS
- --------------------------------------------------------------------------------
Discount rate 7.25% 7.25%
Expected return on plan assets 9.00% N/A
Increase in rate of compensation 5.50% 5.50%
55
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Following the acquisition of Fiduciary, we established a $85 million retention
pool aimed at retaining key Fiduciary employees, under which employees will
receive both cash payments and options. Salaried employees who remain
continuously employed through the applicable dates are eligible for compensation
under the program. Excluding the value of options granted, the value of the
retention plan is $68 million, and is being expensed over a period ranging from
one to five years. During fiscal 2001, we expensed $24 million, including the
acceleration of retention payments related to the September 11, 2001 events as
described in Note 18.
NOTE 15 - 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. All of the total estimated charges
were utilized at September 30, 2000.
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. The methods and assumptions used to
estimate fair values of our financial instruments are described below.
Due to the short-term nature and liquidity of Cash and cash equivalents and
Receivables, the carrying amounts of these assets in the consolidated balance
sheets approximated fair value.
Investment securities, available-for-sale are carried at fair market value as
required by generally accepted accounting principles. See Note 1.
Loans receivable, net are valued using interest rates that consider the current
credit and interest rate risk inherent in the loans and the current economic and
lending conditions. The amounts in the consolidated balance sheets approximated
fair value.
Deposits of the banking/finance segment are valued using interest rates offered
by comparable institutions on deposits with similar remaining maturities. The
amounts in the consolidated balance sheets approximated fair value.
As of September 30, 2001, interest-rate swap agreements that expire in February
2003 and August 2004 are accounted for at their fair value of approximately $0.2
million and foreign exchange contracts are carried at fair value of
approximately zero.
Debt is valued using publicly-traded debt with similar maturities, credit risk
and interest rates. The amounts in the consolidated balance sheet approximate
fair values.
NOTE 17 - BANKING REGULATORY RATIOS
Following the Fiduciary acquisition in April 2001, we became a bank holding
company and a financial holding company subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on our financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, we must
meet specific capital guidelines that involve quantitative measures of our
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. Our capital amounts and classification are also
subject to qualitative judgements by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require us to maintain minimum amounts and ratios of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined) and of Tier
1 capital to average assets (as defined).
56
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We believe that, as of September 30, 2001, we exceed the capital adequacy
requirements listed below.
(in thousands) 2001 Minimum To be well
for capitalized
capital under prompt
adequacy corrective
purposes action
- -------------------------------------------------------------------------------------------
Total Capital $1,966,075 N/A N/A
Tier 1 Capital $1,957,612 N/A N/A
Tier 1 Capital (to average assets) 49% 3% 5%
Tier 1 Capital (to risk-weighted assets) 72% 4% 6%
Total Capital (to risk-weighted assets) 72% 8% 10%
NOTE 18 - SEPTEMBER 11, 2001 EVENT
On September 11, 2001, the headquarters of our subsidiary company, Fiduciary, at
Two World Trade Center was destroyed in the terrorist attacks on New York City
(the "September 11, 2001 event"). Franklin Templeton Investments has since
leased office space for Fiduciary in midtown Manhattan, to resume permanent
operations.
The following table shows the financial impact of the event recognized at
September 30, 2001:
(in thousands) September 11, 2001 Estimated September 11,
event costs insurance 2001 event
recognized proceeds expense, net
Asset write-offs $19,885 $(27,185) $(7,300)
Employee benefit payments 16,464 (35) 16,429
Other 13,836 (15,316) (1,480)
- --------------------------------------------------------------------------------
Net amount $50,185 $(42,536) $7,649
Approximately $19.9 million of the estimated costs were for the write-off of an
intangible asset related to the lease and the write-off of property and
equipment lost in the September 11, 2001 event. The other significant component,
$16.5 million related to employee benefit payments, including the acceleration
of payments under the employee retention bonus plan related to the acquisition
of Fiduciary, and other payments made in respect to victims of the September 11,
2001 event that were employees of Franklin Templeton Investments.
NOTE 19 - NEW ACCOUNTING STANDARDS
In June 2001, Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141") and Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142") were issued. SFAS 141
requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method of accounting and also requires
identified intangible assets acquired in a business combination be recognized as
an asset apart from goodwill if they meet certain criteria. The impact of the
adoption of SFAS 141 on our reported operating results, financial position and
existing financial statement disclosure is not expected to be material.
SFAS 142 applies to all goodwill and identified intangible assets acquired in a
business combination. Under the new standard, all goodwill and indefinite-lived
intangible assets, including that acquired before initial application of the
standard, will not be amortized but will be tested for impairment at least
annually. The new standard is effective for fiscal years beginning after
December 15, 2001. Subject to a detailed review, we expect a $50 million
reduction of expense related to amortization of goodwill and indefinite-life
intangible assets.
57
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In August 2001, Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), was issued.
This statement addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and broadens the definition of what constitutes
a discontinued operation and how the results of a discontinued operation are to
be measured and presented. The provisions of SFAS 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and we expect to early adopt this statement on October 1, 2001. The impact of
the adoption of SFAS 144 on our reported operating results, financial position
and existing financial statement disclosure is not expected to be material.
58
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NOTE 20 - QUARTERLY INFORMATION (UNAUDITED)
(in thousands)
QUARTER FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------------------------------------
2001
Revenues $564,074 $577,413 $609,473 $603,883
Operating income $148,978 $144,473 $124,696 $93,848
Net income $149,465 $131,684 $119,703 $83,869
Earnings per share:
Basic $0.61 $0.54 $0.46 $0.32
Diluted $0.61 $0.54 $0.46 $0.32
Dividend per share $0.065 $0.065 $0.065 $0.065
Common stock price per share:
High $45.50 $48.30 $47.40 $46.07
Low $34.00 $34.20 $36.05 $31.65
- -------------------------------------------------------------------------------------------------
2000
Revenues $565,667 $612,526 $568,897 $593,050
Operating income $167,635 $172,077 $168,832 $154,899
Net income $137,522 $143,374 $140,370 $140,823
Earnings per share:
Basic $0.55 $0.58 $0.58 $0.58
Diluted $0.55 $0.58 $0.58 $0.58
Dividend per share $0.06 $0.06 $0.06 $0.06
Common stock price per share:
High $35.00 $39.19 $36.25 $45.63
Low $27.44 $24.63 $28.19 $30.00
- -------------------------------------------------------------------------------------------------
1999
Revenues $567,679 $554,071 $566,775 $573,972
Operating income $90,765 $131,120 $156,506 $160,717
Net income $68,492 $102,471 $123,307 $132,441
Earnings per share:
Basic $0.27 $0.41 $0.49 $0.53
Diluted $0.27 $0.41 $0.49 $0.52
Dividend per share $0.055 $0.055 $0.055 $0.055
Common stock price per share:
High $45.62 $38.38 $45.00 $43.44
Low $26.50 $27.00 $27.12 $29.75
- -------------------------------------------------------------------------------------------------
Our common stock is traded on the New York Stock Exchange ("NYSE") and the
Pacific Exchange, Inc. under the ticker symbol BEN and the London Stock Exchange
under the ticker symbol FKR. On September 30, 2001, the closing price of our
common stock on the NYSE was $34.67 per share. At November 1, 2001, there were
approximately 5,100 shareholders of record.
59
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Franklin Resources, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and comprehensive income
and cash flows present fairly, in all material respects, the consolidated
financial position of Franklin Resources, Inc. and its subsidiaries at September
30, 2001 and 2000, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended September 30, 2001,
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
November 15, 2001
60
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF REGISTRANT
- --------------------------------
The following information on the executive officers of Franklin Templeton
Investments, including their principal occupations for the past five (5) years,
is given as of November 28, 2001.
JENNIFER J. BOLT
AGE 37
Vice President of FRI since June 1994; officer and/or director of other Company
subsidiaries; employed by FRI or subsidiaries in various other capacities for
more than the past seven (7) years.
HARMON E. BURNS
AGE 56
DIRECTOR SINCE 1991
Vice Chairman and Director of FRI, formerly Executive Vice President and
director of the Company for more than the past seven (7) years; officer and/or
director of many other Company subsidiaries; officer and/or director or trustee
in 51 investment companies of Franklin Templeton Investments.
MARTIN L. FLANAGAN
AGE 41
President, Member - Office of the President, Chief Financial Officer and Chief
Operating Officer of FRI; formerly Senior Vice President; Chief Financial
Officer of FRI since December 1995; officer and/or director of many other
Company subsidiaries; officer, director and/or trustee in 51 investment
companies of Franklin Templeton Investments.
BARBARA GREEN
AGE 54
Vice President and Deputy General Counsel of FRI since January 2000; Vice
President, Franklin Templeton Companies, Inc. since March 2000; Senior Vice
President, Templeton Worldwide, Inc.; officer in 52 investment companies of
Franklin Templeton Investments.
ALLEN J. GULA, JR.
AGE 47
President, Member - Office of the President, formerly Senior Vice President and
Chief Information Officer of FRI since September 1999; officer of two other
Company subsidiaries since August 1999. Previously, Executive Vice President and
Chief Technology Officer of KeyCorp, a bank holding company, from October 1998
to August 1999. Chairman and Chief Executive Officer of Key Services, a
subsidiary of KeyCorp, and Executive Vice President of KeyCorp from February
1994 to October 1998.
DONNA S. IKEDA
AGE 45
Vice President of FRI since October 1993. Previously employed by FRI from 1982
to 1990 as Director of Human Resources.
61
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CHARLES B. JOHNSON
AGE 68
DIRECTOR SINCE 1969
Chairman of the Board, Chief Executive Officer and director of the Company;
officer and/or director of many other Company subsidiaries; officer and/or
director or trustee in 48 investment companies of Franklin Templeton
Investments.
CHARLES E. JOHNSON
AGE 45
DIRECTOR SINCE 1993
President, Member - Office of the President, and director of the Company;
formerly Senior Vice President and director of the Company for more than the
past five (5) years; officer and/or director of many other Company subsidiaries;
officer and/or director or trustee in 33 investment companies of Franklin
Templeton Investments.
GREGORY E. JOHNSON
AGE 40
President, Member - Office of the President; formerly Vice President of FRI for
more than the past five (5) years; officer of many other Company subsidiaries
and in one investment company of Franklin Templeton Investments.
RUPERT H. JOHNSON, JR.
AGE 61
DIRECTOR SINCE 1969
Vice Chairman, formerly Executive Vice President and director of the Company for
more than the past five (5) years; officer and/or director of many other Company
subsidiaries; officer and/or director or trustee in 51 investment companies of
Franklin Templeton Investments.
LESLIE M. KRATTER
AGE 56
Senior Vice President of FRI since January 2000 and Secretary since March 1998;
formerly Vice President of FRI since March 1993; officer of many other Company
subsidiaries.
KENNETH A. LEWIS
AGE 40
Vice President of FRI since September 1996; formerly Corporate Controller of
FRI; officer of many other Company subsidiaries. Prior to the Templeton
acquisition, employed by various Templeton entities since 1989.
WILLIAM J. LIPPMAN
AGE 76
Senior Vice President of FRI since March 1990; officer and/or director or
trustee of other Company subsidiaries and in six investment companies of
Franklin Templeton Investments. Until June 1988, President, Chief Executive
Officer and director of L.F. Rothschild Fund Management, Inc., Director of L.F.
Rothschild Asset Management, Inc., Administrative Managing Director and director
of L.F. Rothschild & Co., Incorporated.
MURRAY L. SIMPSON
AGE 64
Executive Vice President and General Counsel of FRI since January 2000; officer
in 52 investment companies of Franklin Templeton Investments. Previously
Managing Director and Chief Executive Officer of Templeton Franklin Investment
Services (Asia), Limited from 1994-2000.
62
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CHARLES R. SIMS
AGE 40
Vice President of Finance, Chief Accounting Officer and Treasurer of FRI since
June 2000; and Treasurer of FRI and various subsidiaries since September 1997;
and assistant treasurer in 53 investment companies of Franklin Templeton
Investments. Prior to September 1997, employed as Vice President and Chief
Financial Officer of Franklin Templeton Investments Corp. formerly known as
Templeton Management Limited. Employed by Franklin Templeton Investments since
1989.
ANNE M. TATLOCK
AGE 62
Vice Chairman, Member - Office of the Chairman and Director of the Company;
Chairman of the Board, Chief Executive Officer and Director of Fiduciary Trust
Company International, a subsidiary of Company; officer and/or Director of
certain other subsidiaries of Company. Director, American General Corp., Fortune
Brands, Inc., and Merck & Co., Inc.
Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Peter M. Sacerdote,
a director of FRI, is a brother-in-law of Charles B. Johnson and Rupert H.
Johnson, Jr. Charles E. Johnson is the son of Charles B. Johnson, the nephew of
Rupert H. Johnson, Jr. and Peter Sacerdote and the brother of Gregory E. Johnson
and Jennifer Bolt. Gregory E. Johnson is the son of Charles B. Johnson, the
nephew of Rupert H. Johnson, Jr. and Peter Sacerdote and the brother of Jennifer
Bolt and Charles E. Johnson. Jennifer Bolt is the daughter of Charles B.
Johnson, the niece of Rupert H. Johnson, Jr. and Peter Sacerdote and the sister
of Charles E. Johnson and Gregory E. Johnson.
Information regarding the biographies of the directors of FRI and compliance
with Section 16(a) of the Exchange Act is incorporated by reference to the Proxy
Statement section entitled "Proposal 1: Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Proxy Statement section entitled "Proposal 1:
Election of Directors."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Proxy Statement section entitled "Principal
Holders of Voting Securities" and "Security Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Proxy Statement section entitled "Proposal 1:
Election of Directors - Certain Relationships and Related Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Please see the index in Item 8 on page 36 of this Annual Report for
a list of the financial statements filed as part of this report.
(2) Please see the index in Item 8 on page 36 of this Annual Report for
a list of the financial statement schedules filed as part of this
report.
(3) Exhibits: See Index to Exhibits on Pages 66 to 70.
63
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(b)(1) Form 8-K filed on July 27, 2001 reporting under Item 5 "Other
Events" an earnings press release, dated July 26, 2001, and including
said press release as an Exhibit under Item 7 "Financial Statements
and Exhibits."
(c) See Item 14(a)(3) above.
(d) No separate financial statements are required; schedules are included
in Item 8.
64
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FRANKLIN RESOURCES, INC.
Date: December 26, 2001 By: /s/ Charles B. Johnson
--------------------------------------------
Charles B. Johnson, Chairman, Chief Executive
Officer, and Member - Office of the Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Date: December 26, 2001 By: /s/ Charles B. Johnson
--------------------------------------------
Charles B. Johnson, Chairman, Chief
Executive Officer, Member - Office of the
Chairman, and Director
Date: December 26, 2001 By: /s/ Harmon E. Burns
--------------------------------------------
Harmon E. Burns, Vice Chairman, Member
- Office of the Chairman, and Director
Date: December 26, 2001 By: /s/ Anne M. Tatlock
--------------------------------------------
Anne M. Tatlock, Vice Chairman, Member
- Office of the Chairman, and Director
Date: December 26, 2001 By: /s/ Martin L. Flanagan
--------------------------------------------
Martin L. Flanagan, President, Member -
Member - Office of the President, and Chief
Financial Officer
Date: December 26, 2001 By: /s/ Allen J. Gula, Jr.
--------------------------------------------
Allen J. Gula, Jr., President, and Member -
Office of the President
Date: December 26, 2001 By: /s/ Charles E. Johnson
--------------------------------------------
Charles E. Johnson, President, Member -
Office of the President, and Director
Date: December 26, 2001 By: /s/ Gregory E. Johnson
--------------------------------------------
Gregory E. Johnson, President, and Member -
Office of the President
Date: December 26, 2001 By: /s/ Rupert H. Johnson, Jr.
--------------------------------------------
Rupert H. Johnson, Jr., Vice Chairman,
Member - Office of the Chairman, and
Director
Date: December 26, 2001 By: /s/ Harry O. Kline
--------------------------------------------
Harry O. Kline, Director
Date: December 26, 2001 By: /s/ James A. McCarthy
--------------------------------------------
James A. McCarthy, Director
Date: December 26, 2001 By: /s/ Peter M. Sacerdote
--------------------------------------------
Peter M. Sacerdote, Director
Date: December 26, 2001 By: /s/ Charles R. Sims
--------------------------------------------
Charles R. Sims, Vice President - Finance,
Chief Accounting Officer, and Treasurer
Date: December 26, 2001 By: /s/ Louis E. Woodworth
--------------------------------------------
Louis E. Woodworth, Director
65
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Exhibits (other than 12, 21 and 23) deleted, but filed with the Securities and
Exchange Commission.
INDEX TO EXHIBITS
Exhibit No.
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3(i)(a) Registrant's Certificate of Incorporation, as filed November
28, 1969, incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1994
(the "1994 Annual Report")
3(i)(b) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1, 1985, incorporated by reference
to the 1994 Annual Report
3(i)(c) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1, 1987, incorporated by reference
to the 1994 Annual Report
3(i)(d) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated by
reference to the 1994 Annual Report
3(ii) Registrant's Amended and Restated By-laws adopted December 10,
1999, incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1999
4.1 Indenture between the Registrant and The Chase Manhattan Bank
(formerly Chemical Bank), as trustee, dated as of May 19, 1994,
incorporated by reference to the Company's Registration Statement
on Form S-3, filed on April 14, 1994
4.2 Indenture between Franklin Resources, Inc. and The Bank of New
York dated May 11, 2001, incorporated by reference to the
Registrant's Registration Statement on Form S-3, filed on August
6, 2001
4.3 Form of Liquid Yield Option Note due 2031 (Zero Coupon-Senior)
(included in Exhibit 4.2 hereto)
4.4 Registration Rights Agreement between Franklin Resources, Inc.
and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") dated May 11, 2001, incorporated by reference to the
Registrant's Registration Statement on Form S-3, filed on August
6, 2001
10.1 Representative Distribution Plan between Templeton Growth Fund,
Inc. and Franklin/Templeton Investor Services, Inc., incorporated
by reference to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1993 (the "1993 Annual Report")
10.2 Representative Transfer Agent Agreement between Templeton Growth
Fund, Inc. and Franklin/Templeton Investor Services, Inc.,
incorporated by reference to the 1993 Annual Report
10.3 Representative Investment Management Agreement between Templeton
Growth Fund, Inc. and Templeton, Galbraith & Hansberger Ltd.,
incorporated by reference to the 1993 Annual Report
10.4 Representative Management Agreement between Advisers and the
Franklin Group of Funds, incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1992 (the "1992 Annual Report")
10.5 Representative Distribution 12b-1 Plan between Distributors and
the Franklin Group of Funds, incorporated by reference to the
1992 Annual Report
10.6 Amended Annual Incentive Compensation Plan approved January 24,
1995, incorporated by reference to the Company's Proxy Statement
filed under cover of Schedule 14A on December 28, 1994 in
connection with its Annual Meeting of Stockholders held on
January 24, 1995 *
10.7 Universal Stock Plan approved January 19, 1994, incorporated by
reference to the Company's 1995 Proxy Statement filed under cover
of Schedule 14A on December 29, 1993 in connection with its
Annual Meeting of Stockholders held on January 19, 1994 *
66
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10.8 Representative Amended and Restated Distribution Agreement
between Franklin/Templeton Distributors, Inc. and Franklin
Federal Tax-Free Income Fund, incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1995 (the "June 1995 Quarterly Report")
10.9 Distribution 12b-1 Plan for Class II shares between
Franklin/Templeton Distributors, Inc. and Franklin Federal
Tax-Free Income Fund, incorporated by reference to the June 1995
Quarterly Report
10.10 Representative Investment Management Agreement between Templeton
Global Strategy SICAV and Templeton Investment Management
Limited, incorporated by reference to the June 1995 Quarterly
Report
10.11 Representative Sub-Distribution Agreement between Templeton,
Galbraith & Hansberger Ltd. and BAC Corp. Securities,
incorporated by reference to the June 1995 Quarterly Report
10.12 Representative Dealer Agreement between Franklin/Templeton
Distributors, Inc. and Dealer, incorporated by reference to the
June 1995 Quarterly Report
10.13 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (ERISA), incorporated by
reference to the June 1995 Quarterly Report
10.14 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (NON-ERISA), incorporated by
reference to the June 1995 Quarterly Report
10.15 Representative Amended and Restated Transfer Agent and
Shareholder Services Agreement between Franklin/Templeton
Investor Services, Inc. and Franklin Custodian Funds, Inc., dated
July 1, 1995, incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1995
(the "1995 Annual Report")
10.16 Representative Amended and Restated Distribution Agreement
between Franklin/Templeton Distributors, Inc. and Franklin
Custodian Funds, Inc., incorporated by reference to the 1995
Annual Report
10.17 Representative Class II Distribution Plan between
Franklin/Templeton Distributors, Inc. and Franklin Custodian
Funds, Inc., on behalf of its Growth Series, incorporated by
reference to the 1995 Annual Report
10.18 Representative Dealer Agreement between Franklin/Templeton
Distributors, Inc. and Dealer, incorporated by reference to the
1995 Annual Report
10.19 Representative Mutual Fund Purchase and Sales Agreement for
Accounts of Bank and Trust Company Customers, effective July 1,
1995, incorporated by reference to the 1995 Annual Report
10.20 Representative Management Agreement between Franklin Value
Investors Trust, on behalf of Franklin MicroCap Value Fund, and
Franklin Advisers, Inc., incorporated by reference to the 1995
Annual Report
10.21 Representative Sub-Distribution Agreement between Templeton,
Galbraith & Hansberger Ltd. and Sub-Distributor, incorporated by
reference to the 1995 Annual Report
10.22 Representative Non-Exclusive Underwriting Agreement between
Templeton Growth Fund, Inc. and Templeton Franklin Investment
Services (Asia) Limited, dated September 18, 1995, incorporated
by reference to the 1995 Annual Report
10.23 Representative Shareholder Services Agreement between
Franklin/Templeton Investor Services, Inc. and Templeton Franklin
Investment Services (Asia) Limited, dated September 18, 1995,
incorporated by reference to the 1995 Annual Report
10.24 Agreement to Merge the Businesses of Heine Securities
Corporation, Elmore Securities Corporation and Franklin
Resources, Inc., dated June 25, 1996, incorporated by reference
to the Company's Report on Form 8-K dated June 25, 1996
67
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10.25 Subcontract for Transfer Agency and Shareholder Services dated
November 1, 1996 by and between Franklin Investor Services, Inc.
and PFPC Inc., incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1996
(the "1996 Annual Report")
10.26 Representative Sample of Franklin/Templeton Investor Services,
Inc. Transfer Agent and Shareholder Services Agreement,
incorporated by reference to the 1996 Annual Report
10.27 Representative Administration Agreement between Templeton Growth
Fund, Inc. and Franklin Templeton Services, Inc., incorporated by
reference to the 1996 Annual Report
10.28 Representative Sample of Fund Administration Agreement with
Franklin Templeton Services, Inc., incorporated by reference to
the 1996 Annual Report
10.29 Representative Subcontract for Fund Administrative Services
between Franklin Advisers, Inc. and Franklin Templeton Services,
Inc., incorporated by reference to the 1996 Annual Report
10.30 Representative Investment Advisory Agreement between Franklin
Mutual Series Fund Inc. and Franklin Mutual Advisers, Inc.,
incorporated by reference to the 1996 Annual Report
10.31 Representative Management Agreement between Franklin Valuemark
Funds and Franklin Mutual Advisers, Inc., incorporated by
reference to the 1996 Annual Report
10.32 Representative Investment Advisory and Asset Allocation
Agreement between Franklin Templeton Fund Allocator Series and
Franklin Advisers, Inc., incorporated by reference to the 1996
Annual Report
10.33 Representative Management Agreement between Franklin New York
Tax-Free Income Fund, Inc. and Franklin Investment Advisory
Services, Inc., incorporated by reference to the 1996 Annual
Report
10.34 1998 Employee Stock Investment Plan approved January 20, 1998,
incorporated by reference to the Company's Proxy Statement filed
under cover of Schedule 14A on December 17, 1997 in connection
with its Annual Meeting of Stockholders held on January 20, 1998
10.35 System Development and Services Agreement dated as of August 29,
1997 by and between Franklin/Templeton Investor Services, Inc.
and Sungard Shareholder Systems, Inc., incorporated by reference
to the 1997 Annual Report
10.36 1998 Universal Stock Incentive Plan approved October 16, 1998 by
the Board of Directors, incorporated by reference to the
Company's Proxy Statement filed under cover of Schedule 14A on
December 23, 1998 in connection with its Annual Meeting of
Stockholders held on January 28, 1999*
10.37 Amendment No. 3 to the Agreement to Merge the Businesses of
Heine Securities Corporation, Elmore Securities Corporation and
Franklin Resources, Inc., dated December 17, 1997, incorporated
by reference to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended December 31, 1997
10.38 Representative Agreement for the Supply of Investment Management
and Administration Services, dated February 16, 1998, by and
between Templeton Funds and Templeton Investment Management
Limited, incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1998
10.39 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (ERISA), as amended,
incorporated by reference to the Company's Annual Report on Form
10-K/A for the fiscal year ended September 30, 1998 (the "1998
Annual Report")
10.40 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (NON-ERISA), as amended,
incorporated by reference to the 1998 Annual Report
68
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10.41 Representative Variable Insurance Fund Participation Agreement
among Templeton Variable Products Series Fund or Franklin
Valuemark Fund, Franklin/Templeton Distributors, Inc. and an
insurance company, incorporated by reference from the form 10-Q
for the quarter ended December 31, 1998
10.42 Purchase Agreement between Mariners Island Co-Tenancy and
Keynote Systems, Inc. dated April 25, 2000, incorporated by
reference to the Company's Report on Form 10-Q for the quarterly
period ended June 30, 2000
10.43 Acquisition Agreement dated July 26, 2000 among Franklin
Resources, Inc., FTI Acquisition and Bissett & Associates
Investment Management, Ltd., incorporated by reference to the
Company's Report on Form 8-K dated August 1, 2000
10.44 Agreement and Plan of Share Acquisition between Franklin
Resources, Inc. and Fiduciary Trust Company International dated
October 25, 2000, incorporated by reference to the Company's
Report on Form 8-K/A (Amendment No. 1) dated October 25, 2000 and
filed on October 26, 2000
10.45 Representative Amended and Restated Distribution Agreement among
Templeton Emerging Markets Fund, Templeton Canadian Bond Fund,
Templeton International Stock Fund, Templeton Canadian Stock
Fund, Templeton Global Smaller Companies Fund, Templeton Global
Bond Fund, Templeton Treasury Bill Fund, Templeton Global
Balanced Fund, Templeton International Balanced Fund, Templeton
Canadian Asset Allocation Fund, Mutual Beacon Fund, Franklin U.S.
Small Cap Growth Fund, Templeton Balanced Fund, Templeton Growth
Fund, Ltd., Templeton Management Limited and FEP Capital, L.P.
dated December 31, 1998, incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2000 (the "2000 Annual Report")
10.46 Representative Purchase and Sales Agreement by and among
Franklin/Templeton Distributors, Inc., Franklin Resources, Inc.
and Lightning Finance Company Limited dated August 1, 1999,
incorporated by reference to the 2000 Annual Report
10.47 Representative Advisory Agreement between Templeton Global
Advisers Limited and Templeton Asset Management Limited dated
December 21, 1999, incorporated by reference to the 2000 Annual
Report
10.48 Representative Amended and Restated Commission Paying Agreement
between Templeton Global Strategy Funds, Templeton Global
Advisors Limited, Templeton Global Strategic Services S.A., and
Lightning Finance Company Limited dated January 31, 2000,
incorporated by reference to the 2000 Annual Report
10.49 Representative Variable Insurance Fund Participation Agreement
among Franklin Templeton Variable Insurance Products Trust
(formerly Franklin Valuemark Funds), Franklin/Templeton
Distributors, Inc. and CUNA Mutual Life Insurance Company dated
May 1, 2000, incorporated by reference to the 2000 Annual Report
10.50 Stock Purchase Agreement between Good Morning Securities Co.,
Ltd. and Templeton Investment Counsel, Inc. dated June 29, 2000,
incorporated by reference to the 2000 Annual Report
10.51 Agreement entered into between NEDCOR Investment Bank Holdings
Limited, NEDCOR Investment Bank Limited, Templeton International,
Inc., Franklin Templeton Asset Management (Proprietary) Limited
and Templeton Global Advisors Limited dated August 1, 2000,
incorporated by reference to the 2000 Annual Report
10.52 Representative Amended and Restated Distribution Agreement
between Franklin/Templeton Distributors, Inc. and Franklin Growth
and Income Fund dated August 10, 2000, incorporated by reference
to the 2000 Annual Report
10.53 Employment Agreement entered into on December 22, 2000 by and
among Anne M. Tatlock, Fiduciary Trust Company International and
Franklin Resources, Inc., incorporated by reference to the
Company's Report on Form 10-Q for the quarterly period ended
December 31, 2000
69
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10.54 Amended and Restated 1998 Universal Stock Incentive Plan as
approved by the Board of Directors on October 28, 2000 and the
Stockholders at the Annual Meeting held on January 25, 2001,
incorporated by reference to the Company's Report on Form 10-Q
for the quarterly period ended December 31, 2000*
10.55 Representative Sub-Advisory Agreement between FTTrust Company,
on behalf of Templeton International Smaller Companies Fund,
Templeton Investment Counsel, LLC and Templeton Asset Management
Limited, dated January 23, 2001, incorporated by reference to the
Company's Report on Form 10-Q for the quarterly period ended
March 31, 2001
10.56 Managed Operations Services Agreement between Franklin Templeton
Companies, LLC, and International Business Machines Corporation
dated February 6, 2001, incorporated by reference to the
Company's Report on Form 10-Q for the quarterly period ended
March 31, 2001
10.57 Representative Agency Agreement between FTTrust Company and
Franklin/Templeton Investor Services, LLC, dated April 1, 2001,
incorporated by reference to the Company's Report on Form 10-Q
for the quarterly period ended March 31, 2001
10.58 Lease between RCPI Landmark Properties, L.L.C. and Franklin
Templeton Companies, LLC dated September 30, 2001
10.59 Synthetic Lease Financing Facility Agreements dated September
27, 1999
10.60 Representative Amended and Restated Master Management Agreement
between Franklin Templeton Investment Corp., as Trustee of Mutual
funds and Franklin Templeton Investment Corp., as Manager, dated
May 31, 2001
10.61 Representative Master Management Agreement dated May 31, 2001
between Franklin Templeton Tax Class Corp. and Franklin Templeton
Investments Corp.
12 Computation of Ratios of Earnings to Fixed Charges
21 List of Subsidiaries
23 Consent of Independent Auditors
* Compensatory Plan
70
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