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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 1-9318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2670991
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
One Franklin Parkway, San Mateo, CA 94403
(Address of Principal Executive Offices)
(Zip Code)
(650) 312-2000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
described in Rule 12b-2 of the Exchange Act).
YES X NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding: 250,985,035 shares, common stock, par value $.10 per share at July
31, 2003.
- --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
(in thousands, except per share data) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------
OPERATING REVENUES:
Investment management fees $376,553 $384,840 $1,075,862 $1,107,416
Underwriting and distribution fees 225,632 213,300 605,727 602,844
Shareholder servicing fees 57,430 48,832 160,796 144,197
Other, net 24,292 19,078 60,108 55,768
- ---------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUES 683,907 666,050 1,902,493 1,910,225
- ---------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Underwriting and distribution 207,071 191,586 548,986 541,180
Compensation and benefits 163,230 167,570 483,157 487,477
Information systems, technology and
occupancy 70,459 75,573 214,458 223,364
Advertising and promotion 22,281 29,268 69,151 81,174
Amortization of deferred sales commissions 19,159 17,677 52,244 51,467
Amortization of intangible assets 4,244 4,238 12,716 12,871
Other 28,088 26,286 73,245 67,956
- ---------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 514,532 512,198 1,453,957 1,465,489
- ---------------------------------------------------------------------------------------------
Operating income 169,375 153,852 448,536 444,736
OTHER INCOME (EXPENSES):
Investment and other income 22,415 18,017 50,276 51,128
Interest expense (6,736) (3,158) (12,805) (9,134)
- ---------------------------------------------------------------------------------------------
Other income, net 15,679 14,859 37,471 41,994
- ---------------------------------------------------------------------------------------------
Income before taxes on income 185,054 168,711 486,007 486,730
Taxes on income 53,666 43,021 135,256 122,525
- ---------------------------------------------------------------------------------------------
NET INCOME $131,388 $125,690 $350,751 $364,205
- ---------------------------------------------------------------------------------------------
Earnings per share:
Basic $0.52 $0.48 $1.37 $1.39
Diluted $0.52 $0.48 $1.37 $1.39
Dividends per share $0.075 $0.070 $0.225 $0.210
See accompanying notes to the consolidated financial statements.
2
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FRANKLIN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
JUNE 30 SEPTEMBER 30
(in thousands) 2003 2002
- ------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $1,204,297 $850,940
Receivables 326,436 292,325
Investment securities, available-for-sale 1,406,508 1,121,011
Prepaid expenses and other 91,785 97,783
- ------------------------------------------------------------------------------------------------
Total current assets 3,029,026 2,362,059
- ------------------------------------------------------------------------------------------------
Banking/finance assets:
Cash and cash equivalents 209,118 129,664
Loans receivable, net 355,020 444,338
Investment securities, available-for-sale 341,457 432,081
Other 38,253 45,889
- ------------------------------------------------------------------------------------------------
Total banking/finance assets 943,848 1,051,972
- ------------------------------------------------------------------------------------------------
Non-current assets:
Investments, other 268,547 263,927
Deferred sales commissions 190,196 130,617
Property and equipment, net 369,905 394,172
Intangible assets, net 688,168 697,246
Goodwill 1,334,251 1,321,939
Receivable from banking/finance group 40,176 100,705
Other 112,993 100,101
- ------------------------------------------------------------------------------------------------
Total non-current assets 3,004,236 3,008,707
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $6,977,110 $6,422,738
- ------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
3
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FRANKLIN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
JUNE 30 SEPTEMBER 30
(in thousands except share data) 2003 2002
- ------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Compensation and benefits $185,647 $228,093
Current maturities of long-term debt 2,134 7,830
Accounts payable and accrued expenses 152,744 117,246
Commissions 93,097 81,033
Income taxes 6,026 12,510
Other 10,266 8,307
- ------------------------------------------------------------------------------------------------
Total current liabilities 449,914 455,019
- ------------------------------------------------------------------------------------------------
Banking/finance liabilities:
Deposits 688,604 733,571
Payable to Parent 40,176 100,705
Other 100,989 49,660
- ------------------------------------------------------------------------------------------------
Total banking/finance liabilities 829,769 883,936
- ------------------------------------------------------------------------------------------------
Non-current liabilities:
Long-term debt 1,081,696 595,148
Deferred taxes 204,979 175,176
Other 49,461 46,513
- ------------------------------------------------------------------------------------------------
Total non-current liabilities 1,336,136 816,837
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Total liabilities 2,615,819 2,155,792
- ------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 10)
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;
250,678,021 and 258,555,285 shares issued and outstanding, for June
and September 25,068 25,856
Capital in excess of par value 333,474 598,196
Retained earnings 3,996,009 3,702,636
Accumulated other comprehensive gain (loss) 6,740 (59,742)
- ------------------------------------------------------------------------------------------------
Total stockholders' equity 4,361,291 4,266,946
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,977,110 $6,422,738
- ------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
4
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FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED NINE MONTHS ENDED
JUNE 30
(in thousands) 2003 2002
- ------------------------------------------------------------------------------------------------
NET INCOME $350,751 $364,205
Adjustments to reconcile net income to net cash
provided by operating activities:
(Increase) decrease in receivables, prepaid expenses and other (30,084) 27,497
Net advances of deferred sales commissions (112,065) (67,200)
Increase in other current liabilities 106,954 27,301
(Decrease) increase in deferred income taxes and taxes payable (45,915) 42,507
Increase in commissions payable 12,064 3,668
(Decrease) increase in accrued compensation and benefits (14,071) 1,897
Depreciation and amortization 132,612 138,505
Net gains on disposal of assets (5,678) (4,342)
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 394,568 534,038
- ------------------------------------------------------------------------------------------------
Purchase of investments (1,644,307) (1,002,040)
Liquidation of investments 1,370,323 749,993
Purchase of banking/finance investments (235,522) (188,419)
Liquidation of banking/finance investments 419,114 193,642
Net proceeds from securitization of loans receivable 372,961 499,332
Net origination of loans receivable (285,267) (342,124)
Additions of property and equipment (44,030) (34,626)
Proceeds from sale of property and equipment 481 9,552
Insurance proceeds related to September 11, 2001 event 10,643 28,562
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (35,604) (86,128)
- ------------------------------------------------------------------------------------------------
(Decrease) increase in bank deposits (44,965) 34,408
Exercise of common stock options 4,726 16,934
Net put option premiums and settlements 1,335 895
Dividends paid on common stock (57,379) (53,250)
Purchase of stock (307,373) (8,146)
Increase in debt 493,616 82,583
Payments on debt (16,113) (68,667)
- ------------------------------------------------------------------------------------------------
Net cash provided by financing activities 73,847 4,757
- ------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 432,811 452,667
Cash and cash equivalents, beginning of period 980,604 622,775
- ------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,413,415 $1,075,442
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION:
Value of common stock issued, principally restricted stock $28,373 $28,009
See accompanying notes to the consolidated financial statements.
5
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FRANKLIN RESOURCES, INC.
Notes to Consolidated Financial Statements
June 30, 2003
(Unaudited)
1. BASIS OF PRESENTATION
---------------------
We have prepared these unaudited interim financial statements of
Franklin Resources, Inc. and its consolidated subsidiaries in
accordance with the instructions to Form 10-Q and the rules and
regulations of the U.S. Securities and Exchange Commission. Under
these rules and regulations, we have shortened or omitted some
information and footnote disclosures normally included in financial
statements prepared under generally accepted accounting principles. We
believe that we have made all adjustments necessary for a fair
statement of the results of operations for the periods shown. All
adjustments are normal and recurring. You should read these financial
statements together with our audited financial statements included in
our Annual Report on Form 10-K for the year ended September 30, 2002.
Certain amounts for the comparative prior year periods have been
reclassified to conform to the financial presentation for and at the
periods ended June 30, 2003.
2. NEW ACCOUNTING STANDARDS
------------------------
In April 2003, Statement of Financial Accounting Standards No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"), was issued. SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
and for hedging activities under FASB Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS 149 is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. We believe that the adoption of SFAS
149 will not have a significant impact on our consolidated operating
results or financial position.
In May 2003, Statement of Financial Accounting Standards No. 150,
"Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" ("SFAS 150"), was issued. SFAS 150
clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that these
instruments be classified as liabilities in statements of financial
position. SFAS 150 was effective immediately for financial instruments
entered into or modified after May 31, 2003, and for interim or annual
periods beginning after June 15, 2003 for transactions entered into
before June 1, 2003. The adoption of SFAS 150, which affected our
treatment of put options (see Note 10), did not have a significant
impact on our consolidated operating results or financial position.
6
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3. COMPREHENSIVE INCOME
--------------------
The following table shows comprehensive income for the three and nine
months ended June 30, 2003 and 2002.
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
(in thousands) 2003 2002 2003 2002
-----------------------------------------------------------------------------------------
Net income $131,388 $125,690 $350,751 $364,205
Net unrealized gain (loss) on available-for-sale
securities, net of tax 38,141 (22,059) 41,296 (15,878)
Foreign currency translation adjustments 13,965 11,572 25,186 2,720
-----------------------------------------------------------------------------------------
Comprehensive income $183,494 $115,203 $417,233 $351,047
-----------------------------------------------------------------------------------------
4. EARNINGS PER SHARE
------------------
We computed earnings per share as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
(in thousands except per share data) 2003 2002 2003 2002
----------------------------------------------------------------------------------------
Net income $131,388 $125,690 $350,751 $364,205
----------------------------------------------------------------------------------------
Weighted-average shares outstanding - basic 252,633 261,952 255,721 261,507
Incremental shares from assumed conversions 621 1,135 622 894
----------------------------------------------------------------------------------------
Weighted-average shares outstanding - diluted 253,254 263,087 256,343 262,401
----------------------------------------------------------------------------------------
Earnings per share:
Basic and diluted $0.52 $0.48 $1.37 $1.39
----------------------------------------------------------------------------------------
5. CASH AND CASH EQUIVALENTS
-------------------------
Cash and cash equivalents at June 30, 2003 and September 30, 2002
consisted of the following:
JUNE 30, SEPTEMBER 30,
(in thousands) 2003 2002
----------------------------------------------- -------------------- -------------------
Cash and due from banks $297,321 $224,214
Federal funds sold and securities purchased under
agreements to resell 111,780 82,150
Other 1,004,314 674,240
----------------------------------------------- -------------------- -------------------
Total $1,413,415 $980,604
----------------------------------------------- -------------------- -------------------
7
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Cash and cash equivalents - other includes money market mutual fund
investments and U.S. Treasury bills. Federal Reserve Board regulations
require reserve balances on deposits to be maintained with the Federal
Reserve Banks by banking subsidiaries. The required reserve balance
was $1.6 million at June 30, 2003 and $5.3 million at September 30,
2002.
6. SECURITIZATION OF LOANS RECEIVABLE
----------------------------------
From time to time, we enter into auto loan securitization transactions
with qualified special purpose entities and record these transactions
as sales. The following table shows details of auto loan
securitization transactions for the three and nine months ended June
30, 2003 and 2002.
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
(in thousands) 2003 2002 2003 2002
---------------------------------------------------------------------------------------
Gross sale proceeds $259,305 $183,832 $390,925 $503,448
Net carrying amount of loans sold 249,781 178,937 375,885 485,197
---------------------------------------------------------------------------------------
Pre-tax gain $9,524 $4,895 $15,040 $18,251
---------------------------------------------------------------------------------------
When we sell auto loans in a securitization transaction, we record an
interest-only strip receivable. The interest-only strip receivable
represents our contractual right to receive interest from the pool of
securitized loans after the payment of required amounts to holders of
the securities and certain other costs associated with the
securitization. Gross sales proceeds include the fair value of the
interest-only strips.
We generally estimate fair value based on the present value of future
expected cash flows. The key assumptions used in the present value
calculations of our securitization transactions at the date of
securitization were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
2003 2002 2003 2002
------------------------------------------------------------------------------------------
Excess cash flow discount rate (annual rate) 12.0% 12.0% 12.0% 12.0%
Cumulative life loss rate 3.7% 3.3% 3.7%-4.3% 3.3%-3.8%
Pre-payment speed assumption (average
monthly rate) 1.8% 1.5% 1.8% 1.5%
-------------------------------------------------------------------------------------------
We determined these assumptions using data from comparable
transactions, historical information and management's estimate.
Interest-only strip receivables are generally restricted assets and
subject to limited recourse provisions.
We generally estimate the fair value of the interest-only strips at
each period-end based on the present value of future expected cash
flows, consistent with the methodology used at the date of
securitization. The following shows, as of June 30, 2003 and September
30, 2002, the carrying value and the sensitivity of the interest-only
strip receivable to hypothetical adverse changes in the key economic
assumptions used to measure fair value:
8
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JUNE 30, SEPTEMBER 30,
(in thousands) 2003 2002
---------------------------------------------------------------------------------------
Carrying amount/fair value of interest-only strips $35,718 $29,088
---------------------------------------------------
Excess cash flow discount rate (annual rate) 12.0% 12.0%
--------------------------------------------
Impact on fair value of 10% adverse change $(526) $(400)
Impact on fair value of 20% adverse change $(1,037) $(789)
Cumulative life loss rate 4.0% 3.6%
-------------------------
Impact on fair value of 10% adverse change $(2,400) $(1,787)
Impact on fair value of 20% adverse change $(4,800) $(3,579)
Pre-payment speed assumption (average monthly rate) 1.7% 1.7%
----------------------------------------------
Impact on fair value of 10% adverse change $(3,546) $(2,632)
Impact on fair value of 20% adverse change $(6,942) $(5,155)
---------------------------------------------------------------------------------------
Actual future market conditions may differ materially. Accordingly,
this sensitivity analysis should not be considered our projections of
future events or losses.
We receive annual servicing fees ranging from 1% to 2% of the loans
securitized for services we provide to the securitization trusts. We
also receive the rights to future cash flows, if any, arising after
the investors in the securitization trust have received their
contracted return.
The following is a summary of cash flows received from and paid to
securitization trusts.
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
(in thousands) 2003 2002 2003 2002
---------------------------------------------------------------------------------------
Servicing fees received $2,375 $1,952 $7,444 $5,349
Other cash flows received 4,973 6,064 14,105 11,985
Purchase of loans from trusts 441 241 10,804 8,622
---------------------------------------------------------------------------------------
Amounts payable to the trustee for interest and principal on loans
collected on behalf of the trusts of $34.1 million at June 30, 2003
and $24.9 million at September 30, 2002 are included in other
banking/finance liabilities.
9
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The securitized loan portfolio that we manage and the related
delinquencies as of June 30, 2003 and September 30, 2002 were as
follows:
JUNE 30, SEPTEMBER 30,
(in thousands) 2003 2002
---------------------------------------------------------------------------------------
Securitized loans held by securitization trusts $698,554 $530,896
Delinquencies 11,493 9,317
---------------------------------------------------------------------------------------
Net charge-offs on the securitized loan portfolio were $3.1 million
and $1.9 million during the three months ended June 30, 2003 and 2002
and $9.1 million and $4.6 million during the nine months ended June
30, 2003 and 2002.
7. INTANGIBLE ASSETS AND GOODWILL
------------------------------
Intangible assets at June 30, 2003 and September 30, 2002 were as
follows:
GROSS CARRYING ACCUMULATED NET CARRYING
(in thousands) AMOUNT AMORTIZATION AMOUNT
---------------------------------------------------------------------------------------
JUNE 30, 2003
Amortized intangible assets:
Customer base $232,761 $(35,168) $197,593
Other 31,546 (19,285) 12,261
---------------------------------------------------------------------------------------
264,307 (54,453) 209,854
Non-amortized intangible assets:
Management contracts 478,314 - 478,314
---------------------------------------------------------------------------------------
Total $742,621 $(54,453) $688,168
---------------------------------------------------------------------------------------
SEPTEMBER 30, 2002
Amortized intangible assets:
Customer base $231,935 $(23,358) $208,577
Other 31,546 (18,181) 13,365
---------------------------------------------------------------------------------------
263,481 (41,539) 221,942
Non-amortized intangible assets:
Management contracts 475,304 - 475,304
---------------------------------------------------------------------------------------
Total $738,785 $(41,539) $697,246
---------------------------------------------------------------------------------------
10
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Estimated amortization expense for each of the next 5 fiscal years is
as follows:
FOR THE FISCAL YEARS ENDING
(in thousands) SEPTEMBER 30,
---------------------------------------- -----------------------------
2003 $16,989
2004 16,989
2005 16,989
2006 16,989
2007 16,989
---------------------------------------- -----------------------------
The change in the carrying value of goodwill was as follows:
(in thousands)
----------------------------------------------------------------------
Goodwill as of September 30, 2002 $1,321,939
Foreign currency movements 12,312
----------------------------------------------------------------------
Goodwill as of June 30, 2003 $1,334,251
----------------------------------------------------------------------
All of our goodwill and intangible assets relate to our investment
management operating segment. Indefinite-lived intangible assets
represent the value of management contracts related to our mutual
funds and other investment products. As of March 31, 2003, we
completed the annual impairment testing of goodwill and
indefinite-lived intangible assets under the guidance set out in
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets", and we determined that there was no impairment in the value
of goodwill and indefinite-lived assets as of October 1, 2002.
8. SEGMENT INFORMATION
-------------------
We have two operating segments: investment management and
banking/finance. We based our operating segment selection process
primarily on services offered. The investment management segment
derives substantially all its revenues and net income from providing
investment advisory, administration, distribution and related services
to the Franklin, Templeton, Mutual Series, Fiduciary Trust and Bissett
funds, and institutional, high net-worth and private accounts and
other investment products. The banking/finance segment offers consumer
lending and selected retail-banking services to individuals.
Financial information for our two operating segments for the three and
nine months ended June 30, 2003 and 2002 is presented in the table
below. Operating revenues of the banking/finance segment are reported
net of interest expense and provision for loan losses.
11
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THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
(in thousands) 2003 2002 2003 2002
---------------------------------------------------------------------------------------
OPERATING REVENUES
Investment management $663,504 $650,465 $1,853,586 $1,867,218
Banking/finance 20,403 15,585 48,907 43,007
---------------------------------------------------------------------------------------
Total $683,907 $666,050 $1,902,493 $1,910,225
---------------------------------------------------------------------------------------
INCOME BEFORE TAXES
Investment management $162,329 $160,111 $448,041 $459,492
Banking/finance 22,725 8,600 37,966 27,238
---------------------------------------------------------------------------------------
Total $185,054 $168,711 $486,007 $486,730
---------------------------------------------------------------------------------------
Operating segment assets were as follows:
JUNE 30, SEPTEMBER 30,
(in thousands) 2003 2002
----------------------------------------------------------------------------------------
Investment management $6,033,262 $5,370,766
Banking/finance 943,848 1,051,972
----------------------------------------------------------------------------------------
Total $6,977,110 $6,422,738
----------------------------------------------------------------------------------------
Operating revenues of the banking/finance segment included above were
as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
(in thousands) 2003 2002 2003 2002
--------------------------------------------------------------------------------------------
Interest and loan fees $8,944 $8,669 $24,908 $26,592
Interest and dividends on investment securities 4,241 5,129 15,103 14,636
---------------------------------------------------------------------------------------------
Total interest income 13,185 13,798 40,011 41,228
Interest on deposits (1,461) (2,400) (4,841) (7,477)
Interest on short-term debt (141) (79) (339) (354)
Interest expense - inter-segment (826) (1,394) (2,235) (4,880)
---------------------------------------------------------------------------------------------
Total interest expense (2,428) (3,873) (7,415) (12,711)
Net interest income 10,757 9,925 32,596 28,517
Other income 12,595 7,224 25,810 26,386
Provision for loan losses (2,949) (1,564) (9,499) (11,896)
---------------------------------------------------------------------------------------------
Total operating revenues $20,403 $15,585 $48,907 $43,007
---------------------------------------------------------------------------------------------
Inter-segment interest payments from the banking/finance segment to
the investment management segment are based on market rates prevailing
at the inception of each loan. Inter-segment interest income and
expense are not eliminated in our Consolidated Statements of Income.
12
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9. DEBT
----
Outstanding debt at June 30, 2003 and September 30, 2002 consisted of
the following:
JUNE 30, SEPTEMBER 30,
(in thousands) 2003 2002
----------------------------------------------- -------------------- -------------------
SHORT-TERM:
Federal funds purchased $39,000 $-
Federal Home Loan Board advances 15,000 8,500
Current maturities of long-term debt 2,134 7,830
----------------------------------------------- -------------------- -------------------
56,134 16,330
LONG-TERM:
Convertible Notes (including accrued interest) 517,892 514,190
Medium Term Notes 420,000 -
Other 143,804 80,958
----------------------------------------------- -------------------- -------------------
1,081,696 595,148
----------------------------------------------- -------------------- -------------------
Total debt $1,137,830 $611,478
----------------------------------------------- -------------------- -------------------
Federal funds purchased and Federal Home Loan Board advances are
included in other liabilities of the banking/finance operating
segment. Other long-term debt consists primarily of deferred
commission liability recognized in relation to U.S. deferred
commission assets financed by Lightning Finance Company Limited
("LFL") that were not sold by LFL in a securitization transaction as
of June 30, 2003 and September 30, 2002.
In May 2001, we received approximately $490 million in net proceeds
from the sale of $877.0 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 an interest rate 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 have
to repurchase the Convertible Notes at their accreted value, at the
option of the holders, on May 11 of 2004, 2006, 2011, 2016, 2021 and
2026. In this event, we may choose to pay the purchase price in cash
or shares of our common stock. The amount of Convertible Notes that
will be redeemed depends on, among other factors, the performance of
our common stock. On May 12, 2003, at the option of the holders, we
repurchased Convertible Notes with a face value of $5.9 million
principal amount at maturity, for $3.5 million in cash, the accreted
value of the notes as of May 11, 2003.
In April 2003, we completed the sale of five-year senior notes due
April 15, 2008 totaling $420.0 million ("Medium Term Notes"). The
senior notes, which were offered to qualified institutional buyers
only, carry an interest rate of 3.7% and are not redeemable prior to
maturity by either us or the note holders. Interest payments are due
semi-annually.
13
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10. COMMITMENTS AND CONTINGENCIES
-----------------------------
GUARANTEES
Under Financial Accounting Standards Board Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others", we are
required, on a prospective basis, to recognize in our financial
statements a liability for the fair value of any guarantees issued or
modified after December 31, 2002 as well as make additional
disclosures about existing guarantees.
In October 1999, we entered into an agreement for the lease of our
corporate headquarters in San Mateo, California from a lessor trust
under an operating lease 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 for approximately $145
million in residual guarantees, representing approximately 85% of the
total construction costs of $170 million. We would become liable under
this residual guarantee if we were unable or unwilling to exercise our
renewal option to extend the lease term or buy the corporate
headquarter buildings, or if we were unable to arrange for the sale of
the building for more than $145 million.
We are also contingently liable to purchase the corporate headquarter
buildings for an amount equal to the final construction costs of $170
million if an event of default occurs under the agreement. An event of
default includes, but is not limited to, failure to make lease
payments when due and failure to maintain required insurance.
Management considers the possibility of default under the provisions
of the agreement to be remote. The lease is treated as an operating
lease as none of the capitalization criteria under Statement of
Financial Accounting Standards No. 13, "Accounting for Leases", was
met at the inception of the lease.
We provide investment management services to, and have made
investments in, a number of collateralized debt obligation entities
("CDOs") that, using debt financing, invest in debt instruments. These
entities subsequently issue notes and preferred shares to investors.
In September 2002, we entered into an agreement in relation to one of
these entities. Under the agreement, in the event that the CDO is
terminated prior to the issuance of securities to investors, we have a
contingent obligation in the maximum amount of approximately $182.5
million.
In relation to the auto loan securitization transactions that we have
entered into with a number of qualified special purpose entities, we
are obligated to cover shortfalls in amounts due to the holders of the
notes up to certain levels as specified under the related agreements.
As of June 30, 2003, the maximum potential amount of future payments
was $17.5 million. We also recognized a $0.3 million liability to
reflect obligations arising from an auto securitization transaction in
June 2003.
At June 30, 2003, our banking/finance operating segment had issued
financial standby letters of credit totaling $10.4 million on which
beneficiaries would be able to draw upon in the event of
non-performance by our customers, primarily in relation to lease and
lien obligations of these banking customers. These standby letters of
credit, issued prior to January 1, 2003, are secured by marketable
securities with a fair value of $31.6 million as of June 30, 2003 and
commercial real estate.
14
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OTHER COMMITMENTS AND CONTINGENCIES
In February 2001, we signed an agreement to outsource management of
our data center and distributed server operations. We may terminate
the agreement any time beginning on March 1, 2004 by incurring a
termination charge. The maximum termination charge payable depends on
the termination date, the service levels before our termination of the
agreement, and costs incurred to wind down the services. Based on June
30, 2003 service levels, the termination fee payable on March 1, 2004
would approximate $37.8 million and would decrease on each one-year
anniversary for the following three years (see Note 15 for subsequent
events).
From time to time, we sell put options giving the purchaser the right
to sell shares of our common stock to us at a specified price upon
exercise of the options on the designated expiration dates if certain
conditions are met. The likelihood that we will have to purchase our
stock and the purchase price is contingent on the market value of our
stock when the put option contract becomes exercisable. At June 30,
2003, there were 2.9 million put options outstanding. All of these
options were issued prior to June 1, 2003, and through June 30, 2003
are treated as equity instruments. The related premium received is
recorded in Stockholders' Equity as Capital in excess of par value.
Beginning in July 2003, these put options will be recognized as
liabilities and carried at fair value in our books and records in
accordance with SFAS 150 (see Note 2). One million of the 2.9 million
put options outstanding on June 30, 2003 expired in July 2003
resulting in a recognized gain of $1.9 million classified as Other
Income. The remaining 1.9 million put options expire in December 2003
and January 2004 and have an average exercise price of $34.
At June 30, 2003, our banking/finance operating segment had
commitments to extend credit aggregating $285.3 million, mainly under
credit card lines.
We lease office space and equipment under long-term operating leases.
Future minimum lease payments under non-cancelable leases are not
material.
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.
11. TRANSACTIONS WITH VARIABLE INTEREST ENTITIES
--------------------------------------------
Under Financial Accounting Standards Board Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), a variable
interest entity ("VIE") is defined as a corporation, trust,
partnership or other entity where the equity investment holders have
not contributed sufficient capital to finance the activities of the
VIE or the equity investment holders do not have defined rights and
obligations normally associated with an equity investment. FIN 46
requires consolidation of a VIE by the enterprise that has the
majority of the risks and rewards of ownership, referred to as the
primary beneficiary. The consolidation and disclosure provisions of
FIN 46 are effective immediately for VIEs created after January 31,
2003, and for interim or annual reporting periods beginning after June
15, 2003 for VIEs created before February 1, 2003. We are currently
evaluating the impact that the adoption of FIN 46 will have on our
results of operations and financial condition in relation to VIEs in
existence as of January 31, 2003, as described below.
15
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LESSOR TRUST. We lease our corporate headquarters in San Mateo,
California from a lessor trust under an operating lease as described
in Note 10. Our maximum exposure arising from this arrangement is
approximately $170 million at June 30, 2003. We believe the lessor
trust will be consolidated in our financial statements as of July 1,
2003. We estimate the impact on our Consolidated Balance Sheet at July
1, 2003 will be to increase Property and equipment, net by
approximately $160.3 million and Long-term debt by approximately
$164.9 million. We do not expect the impact on net income to be
material.
COLLATERALIZED DEBT OBLIGATION ENTITIES. We provide investment
management services to, and have made investments in, a number of CDOs
as described in Note 10. Our equity ownership interest in the CDOs is
currently not sufficient to meet consolidation requirements. We earn
investment management fees, including subordinated management fees in
some cases, for managing the CDOs, as well as incentive fees that are
contingent on certain performance conditions. At June 30, 2003, the
combined market value of assets in these CDOs was approximately $1.5
billion, and our maximum exposure to loss as a result of these
investments was approximately $15.4 million. At this time, it is
reasonably possible that we will either make additional disclosures
about, or consolidate, one or more of these entities in our annual
financial statements as of September 30, 2003.
12. COMMON STOCK REPURCHASES
------------------------
During the nine months ended June 2003, we increased the number of
shares of our common stock authorized for purchase by 20 million
shares and we purchased and retired 9.2 million shares at a cost of
$312.3 million, including 2 million shares repurchased under put
option contracts (see Note 15 for subsequent events). At June 30,
2003, approximately 20.7 million shares remained under board share
repurchase authorizations.
13. EMPLOYEE STOCK OPTION AND INVESTMENT PLANS
------------------------------------------
Under our stock option plan, we may award options to some employees.
In addition, we have a qualified, non-compensatory Employee Stock
Investment Plan ("ESIP"), which allows participants who meet certain
eligibility criteria to buy shares of common stock at 90% of their
market value on defined dates. We account for these plans using the
intrinsic value method under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related
interpretations. Accordingly, no compensation costs are recognized
with respect to stock options granted that have an exercise price
equal to the market value of the underlying stock at the date of
grant, or with respect to shares issued under the ESIP.
If we had determined compensation costs for our stock option plans and
our ESIP based upon fair values at the grant dates in accordance with
the provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", 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 was
calculated using the Black-Scholes option-pricing model and is
amortized over the options' vesting periods.
16
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THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
(in thousands) 2003 2002 2003 2002
---------------------------------------------------------------------------------------
Net Income, as reported $131,388 $125,690 $350,751 $364,205
Less: stock-based compensation expense
determined under the fair value method,
net of tax (17,325) (15,568) (51,274) (43,624)
---------------------------------------------------------------------------------------
PRO FORMA NET INCOME $114,063 $110,122 $299,477 $320,581
---------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
As reported $0.52 $0.48 $1.37 $1.39
Pro forma $0.45 $0.42 $1.17 $1.23
DILUTED EARNINGS PER SHARE
As reported $0.52 $0.48 $1.37 $1.39
Pro forma $0.45 $0.42 $1.17 $1.22
---------------------------------------------------------------------------------------
14. BANKING REGULATORY RATIOS
-------------------------
Following the acquisition of Fiduciary Trust Company International 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 result in certain mandatory, and possibly
additional, discretionary actions by regulators that, if undertaken,
could have a direct material effect on our financial statements. We
must meet specific capital adequacy 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 judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require us to maintain a minimum Tier 1 capital and Tier 1
leverage ratio (as defined in the regulations), as well as minimum
Tier 1 and Total risk-based capital ratios (as defined in the
regulations). Based on our calculations as of June 30, 2003, we
exceeded the capital adequacy requirements applicable to us as listed
below.
THREE MONTHS ENDED MINIMUM FOR OUR CAPITAL
(in thousands) JUNE 30, 2003 ADEQUACY PURPOSES
----------------------------------- --------------------- ---------------------------
Tier 1 capital $2,199,885 N/A
Total risk-based capital $2,206,654 N/A
Tier 1 leverage ratio 42% 4%
Tier 1 risk-based capital ratio 67% 4%
Total risk-based capital ratio 67% 8%
------------------------------------- --------------------- ---------------------------
17
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15. SUBSEQUENT EVENTS
-----------------
In July 2003, we renegotiated our outsourcing agreement discussed in
Note 10. We may terminate the amended agreement any time after July 1,
2006 by incurring a termination charge. The maximum termination charge
payable will depend on the termination date of the amended agreement,
the service levels before our termination of the agreement, costs
incurred by our service provider to wind-down the services and costs
associated with assuming equipment leases. As of July 31, 2003, we
estimate that the termination fee payable in July 2006, not including
costs associated with assuming equipment leases would approximate
$14.3 million and would decrease each month for the subsequent two
years.
On August 1, 2003, we entered into an agreement to acquire the
remaining interest in Darby Overseas Investments, Ltd. and Darby's
Overseas Partners, L.P. (collectively "Darby"), in which we formerly
held a 12.7% interest, for approximately $75.9 million in cash. As of
June 30, 2003, Darby managed approximately $700 million in private
equity and mezzanine funds and sub-advised approximately $300 million
in emerging markets fixed-income products.
On August 5, 2003, we purchased and retired 6.1 million shares of our
common stock at a cost of $267.5 million from the estate of a former
employee.
18
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, we also make some statements relating to
the future, which are called "forward-looking" statements. These forward-looking
statements involve a number of risks, uncertainties and other important factors
that could cause our actual results and outcomes to differ materially from any
future results or outcomes expressed or implied by such forward-looking
statements. Forward-looking statements are our best prediction at the time they
are made, and for this reason, you should not rely too heavily on them and
review the "Risk Factors" section set forth below and in our recent filings with
the U.S. Securities and Exchange Commission, which describes these risks,
uncertainties and other important factors in more detail.
GENERAL
We derive the majority of our operating revenues, operating expenses and net
income from providing investment advisory and related services to retail mutual
funds, institutional, high net-worth, private accounts and other investment
products. This is our main 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 under five distinct
names:
* Franklin * Templeton * Mutual Series * Fiduciary Trust * Bissett
Our sponsored investment products include a broad range of global/international
equity, U.S. domestic, hybrid/balanced, fixed-income and money market mutual
funds, as well as other investment products that meet a wide variety of specific
investment needs of individuals and institutions.
The level of our revenues depends largely on the level and relative mix of
assets under management. To a lesser degree, our revenues also depend 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 with our sponsored
investment products or our clients. These arrangements could change in the
future.
Our secondary business and operating segment is banking/finance. Our
banking/finance group offers consumer lending and selected retail-banking
services to high net-worth individuals, foundations and institutions.
19
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RESULTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
(in millions except per share JUNE 30 PERCENT JUNE 30 PERCENT
Data) 2003 2002 CHANGE 2003 2002 CHANGE
- -----------------------------------------------------------------------------------------------
NET INCOME $131.4 $125.7 5% $350.8 $364.2 (4%)
EARNINGS PER COMMON SHARE
Basic and diluted $0.52 $0.48 8% $1.37 $1.39 (1%)
OPERATING MARGIN 25% 23% - 24% 23% -
- -----------------------------------------------------------------------------------------------
Net income increased 5% during the three months ended June 30, 2003 compared to
the same period last year. The increase was mainly due to higher shareholder
servicing fees and lower advertising and promotion and information system,
technology and occupancy expenses, partly offset by lower investment management
fees and a higher effective tax rate. Net income decreased 4% during the nine
months ended June 30, 2003 compared to the same period last year, primarily due
to a decline in investment management fees and a higher effective tax rate
offsetting an increase in shareholder servicing fees and lower advertising and
promotion and information system, technology and occupancy expenses.
ASSETS UNDER MANAGEMENT
JUNE 30 JUNE 30
(in billions) 2003 2002
- -----------------------------------------------------------------------------------------------
Equity:
Global/international $91.6 $93.6
Domestic (U.S.) 50.7 48.5
- -----------------------------------------------------------------------------------------------
Total equity 142.3 142.1
- -----------------------------------------------------------------------------------------------
Hybrid/balanced 42.8 39.6
Fixed-income:
Tax-free 53.6 50.2
Taxable
Domestic (U.S.) 31.4 24.7
Global/international 10.9 8.4
- -----------------------------------------------------------------------------------------------
Total fixed-income 95.9 83.3
- -----------------------------------------------------------------------------------------------
Money market 6.0 5.4
- -----------------------------------------------------------------------------------------------
Total $287.0 $270.4
- -----------------------------------------------------------------------------------------------
Simple monthly average for the three-month period (1) $272.2 $274.8
Simple monthly average for the nine-month period (1) $261.8 $265.6
- -----------------------------------------------------------------------------------------------
(1) Investment management fees from approximately 50% of our assets under
management at June 30, 2003 are calculated using a daily average.
Our assets under management at June 30, 2003 were $287.0 billion, 6% higher than
they were a year ago, mainly due to excess sales over redemptions ("net
inflows") of $9.5 billion and market appreciation of
20
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$31.4 billion, mainly in the quarter ended June 30, 2003. Simple monthly average
assets decreased 1% during both the three and nine months ended June 30, 2003
over the same periods a year ago.
The simple monthly average mix of assets under management is shown below.
NINE MONTHS ENDED
JUNE 30
2003 2002
- -----------------------------------------------------------------------------------------------
PERCENTAGE OF SIMPLE MONTHLY AVERAGE ASSETS UNDER MANAGEMENT
Equity 48% 52%
Fixed-income 35% 31%
Hybrid/balanced 15% 15%
Money market 2% 2%
- -----------------------------------------------------------------------------------------------
Total 100% 100%
- -----------------------------------------------------------------------------------------------
The change in the composition of assets under management, resulting from higher
relative inflows and appreciation for fixed-income as compared to equity
products, led to a slight decrease in our effective investment management fee
rate (investment management fees divided by simple monthly average assets under
management). For the nine months ended June 30, 2003, the effective investment
management fee rate declined slightly to 0.548% from 0.556% in the same period
last year.
Assets under management by shareholder location were as follows:
AS OF JUNE 30,
(in billions) 2003 2002
- --------------------------------------------------------- ----------- ----------
United States $237.0 $227.1
Canada 20.3 21.5
Europe 13.4 11.2
Asia/Pacific and other 16.3 10.6
- --------------------------------------------------------- ----------- ----------
Total $287.0 $270.4
- --------------------------------------------------------- ----------- ----------
Components of the change in our assets under management were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 PERCENT JUNE 30 PERCENT
(in billions) 2003 2002 CHANGE 2003 2002 CHANGE
- ----------------------------------------------------------------------------------------------
Beginning assets under management $252.4 $274.5 (8%) $247.8 $246.4 1%
Sales 21.9 18.6 18% 56.7 56.3 1%
Reinvested distributions 1.0 1.1 (9%) 3.0 4.2 (29%)
Redemptions (16.0) (14.1) 13% (47.2) (43.9) 8%
Distributions (1.5) (1.7) (12%) (4.7) (6.5) (28%)
Appreciation (depreciation) 29.2 (8.0) N/A 31.4 13.9 126%
- ----------------------------------------------------------------------------------------------
Ending assets under management $287.0 $270.4 6% $287.0 $270.4 6%
- ----------------------------------------------------------------------------------------------
For the three and nine months ended June 30, 2003, net inflows were $5.9 billion
and $9.5 billion, as compared to $4.5 billion and $12.4 billion in the same
periods last year. Market appreciation of $29.2
21
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billion and $31.4 billion in the three and nine months ended June 30, 2003
related mainly to our equity and hybrid/balanced products.
OPERATING REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 PERCENT JUNE 30 PERCENT
(in millions) 2003 2002 CHANGE 2003 2002 CHANGE
- ---------------------------------------------------------------------------------------------
Investment management fees $376.6 $384.9 (2%) $1,075.9 $1,107.4 (3%)
Underwriting and distribution fees 225.6 213.3 6% 605.7 602.8 -
Shareholder servicing fees 57.4 48.8 18% 160.8 144.2 12%
Other, net 24.3 19.1 27% 60.1 55.8 8%
- ---------------------------------------------------------------------------------------------
Total operating revenues $683.9 $666.1 3% $1,902.5 $1,910.2 -
- ---------------------------------------------------------------------------------------------
SUMMARY
Total operating revenues increased 3% during the three months ended June 30,
2003 compared to the same period last year primarily due to increased
underwriting and distribution and shareholder servicing fees, partly offset by a
decline in investment management fees. Total operating revenues remained
constant during the nine months ended June 30, 2003 compared to the same period
last year as lower investment management fees were mostly offset by higher
shareholder servicing fees.
INVESTMENT MANAGEMENT FEES
Investment management fees account for 55% of our operating revenues in the
quarter ended June 30, 2003. 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 investment
objective and type of services provided. In return for these fees, we provide a
combination of investment advisory, administrative and other management
services.
Investment management fees decreased 2% and 3% during the three and nine months
ended June 30, 2003 compared to the same periods last year consistent with a 1%
decrease in simple monthly average assets under management over the same
periods, and the decline in our effective fee rate resulting from a change in
asset mix.
UNDERWRITING AND DISTRIBUTION FEES
We earn underwriting fees from the sale of some classes of sponsored investment
products on which investors pay a sales commission at the time of purchase.
Sales commissions are reduced or eliminated on some classes of shares and for
sales to shareholders or intermediaries that exceed specified minimum amounts.
Therefore, underwriting fees will change with the overall level of gross sales
and the relative mix of sales between different share classes.
Our sponsored investment products pay distribution fees in return for sales,
marketing and distribution efforts on their behalf. While other contractual
arrangements exist in international jurisdictions, in the United States,
distribution fees include "12b-1 fees". These fees are subject to maximum payout
levels based on a percentage of the assets in each fund. We pay a significant
portion of underwriting and distribution fees to the financial advisors and
other intermediaries who sell our sponsored investment
22
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products to the public on our behalf. See the description of underwriting and
distribution expenses below.
Underwriting and distribution fees increased 6% and remained constant during the
three and nine months ended June 30, 2003 compared to the same periods last
year. During the three and nine months ended June 30, 2003, commission revenues
increased 14% and 2% from the same periods last year consistent with an 18% and
1% increase in gross sales. Distribution fees remained constant during both the
three and nine months ended June 30, 2003 over the same periods last year
consistent with relatively stable simple monthly average assets under
management.
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. In
some instances, sponsored investment products are charged these fees based on
the level of assets under management. We receive fees as compensation for
providing transfer agency services, including providing customer statements,
transaction processing, customer service and tax reporting. In the United
States, transfer agency service agreements provide that accounts closed in a
calendar year remain billable through the second quarter of the following
calendar year at a reduced rate. In Canada, such agreements provide that
accounts closed in the calendar year remain billable for four months after the
end of the calendar year. Accordingly, the level of fees will vary with the
growth in new accounts and the level of closed accounts that remain billable.
Shareholder servicing fees increased 18% and 12% during the three and nine
months ended June 30, 2003 from the same periods last year. The increase
reflects an increase in billable shareholder accounts due to revised shareholder
service fee agreements in the United States effective on January 1, 2003 and 0.7
million shareholder accounts added in the acquisition of Pioneer ITI AMC Limited
("Pioneer"), in July 2002. In the coming quarter, approximately 1.6 million
accounts closed in the United States during calendar year 2002 will no longer be
billable effective July 1, 2003.
OTHER, NET
Other, net consists mainly of revenues from the banking/finance operating
segment as well as income from custody services. Revenues from the
banking/finance operating segment include 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 27% during the three months ended June 30, 2003 over the
same period last year consistent with higher realized gains from auto loan
securitizations. Other, net increased 8% during the nine months ended June 30,
2003 from the same period last year mainly due to a decrease in interest expense
on deposits and lower inter-segment interest expense, partly offset by lower
realized gains from auto loan securitizations.
23
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OPERATING EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 PERCENT JUNE 30 PERCENT
(in millions) 2003 2002 CHANGE 2003 2002 CHANGE
- ----------------------------------------------------------------------------------------------
Underwriting and distribution $207.0 $191.6 8% $549.0 $541.2 1%
Compensation and benefits 163.2 167.5 (3%) 483.2 487.5 (1%)
Information systems, technology and
occupancy 70.5 75.6 (7%) 214.5 223.4 (4%)
Advertising and promotion 22.3 29.3 (24%) 69.2 81.2 (15%)
Amortization of deferred sales
commissions 19.2 17.7 8% 52.2 51.5 1%
Amortization of intangible assets 4.2 4.2 - 12.7 12.8 (1%)
Other 28.1 26.3 7% 73.2 67.9 8%
- ----------------------------------------------------------------------------------------------
Total operating expenses $514.5 $512.2 - $1,454.0 $1,465.5 (1%)
- ----------------------------------------------------------------------------------------------
SUMMARY
Operating expenses remained constant and decreased 1% during the three and nine
months ended June 30, 2003 compared to the same periods last year as higher
underwriting and distribution expenses were offset by lower advertising and
promotion, and information systems, technology and occupancy costs.
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. Underwriting
and distribution expense increased 8% and 1% during the three and nine months
ended June 30, 2003 over the same periods last year consistent with underwriting
and distribution revenue trends.
COMPENSATION AND BENEFITS
Compensation and benefits expense decreased 3% and 1% during the three and nine
months ended June 30, 2003 compared to the same periods last year. Although we
experienced a decrease in retention bonus commitments related to the acquisition
of Fiduciary Trust Company International in April 2001, we have also experienced
increases in employee insurance and other benefits costs in the current fiscal
year. We employed approximately 6,500 people at both June 30, 2003 and June 30,
2002. Our acquisition of Pioneer, in July 2002, added approximately 180
employees. In order to hire and retain 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.
INFORMATION SYSTEMS, TECHNOLOGY AND OCCUPANCY
Information systems, technology and occupancy costs decreased 7% and 4% during
the three and nine months ended June 30, 2003 from the same periods last year
primarily due to decreased purchases of information system and technology
equipment leading to decreased depreciation (certain of our technology equipment
is periodically replaced with new equipment under our technology outsourcing
agreement) and lower expenditures on technology projects. While continuing to
work on new technology
24
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initiatives and investment in our technology infrastructure, we have slowed down
a number of initiatives and delayed the start of other technology projects given
the current economic slowdown and our focus on cost control and management.
Details of capitalized information systems and technology costs were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
(in thousands) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------
Net book value at beginning of period $100,094 $146,866 $121,486 $162,857
Additions during period, net of disposals and other
adjustments 7,486 7,085 22,817 29,517
Amortization during period (16,645) (19,610) (53,368) (58,033)
- -----------------------------------------------------------------------------------------------
Net book value at end of period $90,935 $134,341 $90,935 $134,341
- -----------------------------------------------------------------------------------------------
ADVERTISING AND PROMOTION
Advertising and promotion expense decreased 24% and 15% during the three and
nine months ended June 30, 2003 over the same periods last year. During the
three and nine months ended June 2002, we incurred increased promotion expense
to assist in educating the sales channels and the investing public about the
strong relative investment performance of our sponsored investment products. We
are committed to invest in advertising and promotion in response to changing
business conditions, which means that the level of advertising and promotion
expenditures may increase more rapidly or decrease more slowly than our
revenues.
AMORTIZATION OF DEFERRED SALES COMMISSIONS
Certain fund share classes, including class B, are sold without a front-end
sales charge to shareholders, although our distribution subsidiaries pay a
commission on the sale. In the United States, class A shares are sold without a
front-end sales charge to shareholders when minimum investment criteria are met
although our U.S. distribution subsidiary pays a commission on these sales.
Class C shares are sold with a front-end sales charge that is lower than the
commission paid by the U.S. distributor. We defer and amortize all up-front
commissions paid by our distribution subsidiaries over 18 months to 8 years
depending on share class or financing arrangements.
We have arranged to finance our class B and C 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 a 49% ownership
interest. In the United States, LFL has entered into a financing agreement with
our U.S. distribution subsidiary and we maintain a continuing interest in the
assets until resold by LFL. As a result, we retain DCA sold to LFL under the
U.S. agreement in our financial statements and amortize them over an 8-year
period, or until resold by LFL in a securitization, which generally occurs
annually. In contrast to the U.S. arrangement, LFL has entered into direct
agreements with the Canadian and European sponsored investment products, and, as
a result, we do not record DCA from these sources in our financial statements.
Amortization of deferred sales increased 8% and 1% during the three and nine
months ended June 30, 2003 over the same periods last year. While LFL did not
sell any U.S. DCA in a securitization transaction in fiscal 2003, approximately
$61.5 million U.S. DCA were sold in June 2002.
25
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OTHER INCOME (EXPENSE)
Other income (expense) includes investment and other income and interest
expense. Investment and other income is comprised mainly of the following:
* dividends from investments
* interest income from investments in government securities and other
fixed-income investments
* realized gains and losses on investments
* foreign currency exchange gains and losses
* miscellaneous income, including gain or loss on disposal of property.
Other income (expense) increased 6% during the three months ended June 30, 2003
from the same period last year. This was mainly due to higher realized gains on
sale of investments offset by lower interest income and higher interest expense.
Other income (expense) decreased 11% during the nine months ended June 30, 2003
from the same period last year due to lower interest income and additional
interest expense due to the sale of medium term notes in April 2003, partly
offset by higher foreign exchange gains from our non-U.S. operations and
realized gains on sale of investments.
TAXES ON INCOME
As a multi-national corporation, we provide investment management services to a
wide range of international investment products, often managed from locations
outside the United States. Some of these jurisdictions have lower tax rates than
the United States. The mix of income (mainly investment management fees) subject
to these lower rates, when aggregated with income originating in the United
States, produces a lower overall effective tax rate than existing U.S. Federal
and state tax rates. Our effective income tax rate in the quarter ended June 30,
2003 increased to 29% compared to 26% in the same period last year. The
effective tax rate will continue to reflect the relative contributions of
foreign earnings that are subject to reduced tax rates and that are not
currently included in U.S. taxable income, as well as other factors.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, we had $1,413.4 million in cash and cash equivalents, as
compared to $980.6 million at September 30, 2002. Cash and cash equivalents
include cash, U.S. Treasury bills and other debt instruments with original
maturities of three months or less and other highly liquid investments that are
readily convertible into cash, including money market funds. Liquid assets,
which consist of cash and cash equivalents, investments available-for-sale and
current receivables increased to $3,487.8 million at June 30, 2003 from $2,826.0
million at September 30, 2002. Liquid assets have increased in the current year
mainly due to cash provided by operating activities, proceeds received from auto
loan securitizations and the issuance of medium term notes, offset in part by
common stock repurchases and loan origination activity.
Outstanding debt increased to $1,083.8 million at June 30, 2003 compared to
$603.0 million at September 30, 2002. The balance at June 30, 2003 consists of
$517.9 million in principal and accrued interest related to outstanding
convertible notes, $420.0 million in five-year senior notes and $145.9 million
of other long-term debt, consisting mainly of deferred commission liabilities
recognized in relation to U.S. DCA financed by LFL that has not yet been sold by
LFL in a securitization transaction (see Note 9 to the financial statements for
a further description of debt outstanding). As of September
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30, 2002, outstanding debt included $514.2 million related to the convertible
notes and $88.8 million of other long-term debt. The increase in outstanding
debt from September 30, 2002 is due to the issuance of the five- year senior
notes in April 2003, the increase in U.S. DCA financed by LFL, and the accretion
of interest on the convertible notes.
As of June 30, 2003, we had $500 million of commercial paper and $300 million of
debt and equity securities available to be issued under shelf registration
statements filed with the Securities and Exchange Commission. Our committed
revolving credit facilities at June 30, 2003 totaled $420 million, of which,
$210 million was under a 364-day facility. The remaining $210 million facility
is under a five-year facility that will expire in June 2007. In addition, at
June 30, 2003, our banking/finance operating segment had $658.8 million in
available uncommitted short-term bank lines under the Federal Reserve Funds
system, the Federal Reserve Bank discount window, and Federal Home Loan Bank
short-term borrowing capacity. Our ability to access the capital markets in a
timely manner depends on a number of factors including our credit rating, the
condition of the global economy, investors' willingness to purchase our
securities, interest rates, credit spreads and the valuation levels of equity
markets. In extreme circumstances, we might not be able to access this liquidity
readily.
Our banking/finance operating segment periodically enters into auto loan
securitization transactions with qualified special purpose entities, which then
issue asset-backed securities to private investors. We received cash proceeds
from these transactions of $390.9 million and $503.4 million during the nine
months ended June 30, 2003 and 2002. The outstanding loan balances held by these
special purpose entities were $698.6 million as of June 30, 2003 and $530.9
million as of September 30, 2002. Our ability to access the securitization
market will directly affect our plans to finance the auto loan portfolio in the
future.
The sales commissions that we have financed globally through LFL during the nine
months ended June 30, 2003 were approximately $121.0 million compared to $103.9
million over the same period last year. LFL's ability to access credit
facilities and the securitization market will directly affect our existing
financing arrangements.
At June 30, 2003, the banking/finance operating segment had commitments to
extend credit aggregating $285.3 million, mainly under its credit card lines,
and had issued financial standby letters of credit totaling $10.4 million. The
standby letters of credit are secured by marketable securities and commercial
real estate.
During the nine months ended June 2003 we increased the number of shares of our
common stock authorized for purchase by 20 million shares and we purchased and
retired 9.2 million shares at a cost of $312.3 million, including 2 million
shares repurchased under put option contracts. At June 30, 2003, approximately
20.7 million shares remained under board share purchase authorizations. On
August 5, 2003, we purchased and retired 6.1 million shares at a cost of $267.5
million from the estate of a former employee.
During the nine months ended June 2003, we sold put options giving the purchaser
the right to sell 2.4 million shares of our common stock to us at a specified
price upon exercise of the options on the designated expiration dates if certain
conditions are met. At June 30, 2003, there were 2.9 million put options
outstanding. One million of the 2.9 million put options outstanding on June 30,
2003 expired in July 2003 resulting in a recognized gain of $1.9 million
classified as Other Income. The remaining 1.9 million put options expire in
December 2003 and January 2004 and have an average exercise price of $34.
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We expect that the main uses of cash will be to:
* expand our core business
* make strategic acquisitions
* acquire shares of our common stock
* fund property and equipment purchases
* pay operating expenses of the business
* enhance our technology infrastructure
* improve our business processes
* pay shareholder dividends
* repay and service debt.
We believe that we can meet our present and reasonably foreseeable operating
cash needs and future commitments through the following:
* existing liquid assets
* continuing cash flow from operations
* borrowing capacity under current credit facilities
* ability to issue debt or equity securities
* mutual fund sales commission financing arrangement.
In particular, we expect to finance future investment in our banking/finance
activities through operating cash flows, debt, increased deposit base, or
through the securitization of a portion of the receivables from consumer lending
activities.
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with
generally accepted accounting principles in the United States. The preparation
of these financial statements requires us to make estimates and assumptions that
impact our financial position and results of operations. These estimates and
assumptions are affected by our application of accounting policies. Below we
describe certain critical accounting policies that we believe are important to
understanding our results of operations and financial position. For additional
information about our accounting policies, please refer to Note 1 to the
financial statements contained in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2002.
Intangible Assets and Goodwill
- ------------------------------
Intangible assets and goodwill as of June 30, 2003 were as follows:
(in thousands) NET CARRYING AMOUNT
- ------------------------------------------------------- ------------------------
Goodwill $1,334,251
Intangible assets - definite-lived 209,854
Intangible assets - indefinite-lived 478,314
- ------------------------------------------------------- ------------------------
Total $2,022,419
- ------------------------------------------------------- ------------------------
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As of March 31, 2003, we completed our annual impairment test of goodwill and
indefinite-lived and definite-lived intangible assets and we determined that
there was no impairment to these assets as of October 1, 2002. While we believe
that our testing was appropriate, it involved the use of estimates and
assumptions. If these estimates and assumptions change in the future, we may be
required to record impairment charges or otherwise increase amortization
expense.
Income Taxes
- ------------
As a multinational corporation, we operate in various locations outside the
United States. We have not made a provision for U.S. taxes on the cumulative
undistributed earnings of foreign subsidiaries as those earnings are intended to
be reinvested for an indefinite period of time. These earnings approximated $2.1
billion at June 30, 2003. Changes to our policy of reinvesting foreign earnings
may have a significant effect on our financial condition and results of
operation.
Valuation of Investments
- ------------------------
We record substantially all investments in our financial statements at fair
value or amounts that approximate fair value. Where available, we use prices
from independent sources such as listed market prices or broker or dealer price
quotations. For investments in illiquid and privately held securities that do
not have readily determinable fair values, we estimate the value of the
securities based upon available information. However, even where the value of a
security is derived from an independent market price or broker or dealer quote,
some assumptions may be required to determine the fair value. For example, we
generally assume that the size of positions in securities that we hold would not
be large enough to affect the quoted price of the securities when sold, and that
any such sale would happen in an orderly manner. However, these assumptions may
be incorrect and the actual value realized on sale could differ from the current
carrying value.
We evaluate our investments for other-than-temporary decline in value on a
periodic basis. This may exist when the fair value of an investment security has
been below the current value for an extended period of time. As most of our
investments are carried at fair value, if an other-than-temporary decline in
value is determined to exist, the unrealized investment loss recorded net of tax
in accumulated other comprehensive income is realized as a charge to net income,
in the period in which the other-than-temporary decline in value is determined.
In September 2002, we recognized $60.1 million for an other-than-temporary
decline in the value of certain investments. While we believe that we have
accurately estimated the amount of other-than-temporary decline in value in our
portfolio, different assumptions could result in changes to the recorded amounts
in our financial statements.
Loss Contingencies
- ------------------
We are involved in various lawsuits and claims encountered in the normal course
of business. When such a matter arises and periodically thereafter, we consult
with our legal counsel and evaluate the merits of the claim based on the facts
available at that time. In management's opinion, an adequate accrual has been
made as of June 30, 2003 to provide for any losses that may arise from these
matters.
Variable Interest Entities
- --------------------------
Financial Accounting Standards Board Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("FIN 46") requires consolidation of a variable
interest entity ("VIE") by the enterprise that has the majority of the risks and
rewards of ownership, referred to as the primary beneficiary. We are currently
evaluating the impact of this interpretation on our investments in existence as
of January 31, 2003. This
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evaluation requires us to make certain assumptions and estimates in calculating
the extent of our interest in such entities, which may impact our treatment of a
lessor trust and certain collateralized debt obligation entities as further
described in Note 11 to the financial statements. Based on our evaluation, the
lessor trust will be consolidated in our financial statements as of July 1,
2003. We expect the impact on our consolidated financial position at July 1,
2003 will be to increase Property and equipment, net by approximately $160.3
million and Long-term debt by approximately $164.9 million. We do not expect the
impact on net income to be material. In relation to our collateralized debt
obligation entities, it is reasonably possible that we will either make
additional disclosures about, or consolidate, one or more of these entities
effective July 1, 2003.
RISK FACTORS
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 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 financial and equity markets
due to the continuing threat of terrorism and the recent reports of accounting
irregularities at certain public companies. 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 generally 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
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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 ABILITY TO SUCCESSFULLY INTEGRATE THE WIDELY VARIED SEGMENTS OF OUR BUSINESS
CAN BE IMPEDED BY SYSTEMS AND OTHER TECHNOLOGICAL LIMITATIONS. Our continued
success in effectively managing and growing our business globally depends on our
ability to integrate the varied accounting, financial and operational systems of
our international business with that of our domestic business.
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 and C 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
plans.
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 or in some cases zero interest rates. Our
inability to compete effectively against these companies or to maintain 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.
WE ARE SUBJECT TO FEDERAL RESERVE BOARD REGULATION. Upon completion of our
acquisition of Fiduciary in April 2001, we became a bank holding company and a
financial holding company subject to the supervision and regulation of the
Federal Reserve Board. We are subject to the restrictions, limitations, or
prohibitions of the Bank Holding Company Act of 1956 and the Gramm-Leach Bliley
Act. The Federal Reserve Board may impose additional limitations or restrictions
on our activities, including 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. The Federal Reserve Board may also
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.
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ITEM 3. 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 adverse changes in interest rates, foreign exchange and/or equity prices.
Management is responsible for managing this risk. Our Enterprise Risk Management
Committee is responsible for providing a framework to assist management to
identify, assess and manage market and other risks.
We are exposed to changes in interest rates mainly through financing
transactions and portfolio debt holdings available-for-sale, which are carried
at fair value in our financial statements. As of June 30, 2003, a significant
percentage of our outstanding debt is at fixed interest rates. In our
banking/finance operating segment, we monitor the net interest rate margin and
the average maturity of interest earning assets, as well as funding sources. In
addition, as of June 30, 2003, we have considered the potential impact of the
effect on the banking/finance operating 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 mainly in the United States, but also provide services and earn
revenues in Canada, the Bahamas, Europe, Asia, South America, Africa and
Australia. A significant portion 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 through securities we hold that are
carried at fair value. To mitigate this risk, we maintain a diversified
investment portfolio.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's
principal executive and principal financial officers, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of June 30, 2003. Based on their evaluation, the Company's principal
executive and principal financial officers concluded that the Company's
disclosure controls and procedures were effective as of June 30, 2003.
There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during the Company's fiscal quarter ended June 30, 2003, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the litigation previously reported
in our Quarterly Report on Form 10-Q for the period ended March 31, 2003 as
filed with the Securities and Exchange Commission on May 12, 2003. 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: see Exhibit Index on page 35 to page 36.
(b) Reports on Form 8-K:
(i) Form 8-K filed on April 8, 2003 reporting under Item 5 "Other
Events" the completed sale of $420 million of 3.700% Senior Notes
due 2008 and under Item 7 "Financial Statements and Exhibits"
(ii) Form 8-K filed on April 24, 2003 reporting under Item 7
"Financial Statements and Exhibits" an earnings press release,
dated April 24, 2003, and including said press release as an
Exhibit under Item 9 "Regulation FD Disclosure"
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN RESOURCES, INC.
(Registrant)
Date: August 14, 2003 By /s/ James R. Baio
-----------------
James R. Baio
Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit 3(i)(a) Registrant's Certificate of Incorporation, as filed November
28, 1969, incorporated by reference to Exhibit (3)(i) to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994 (the "1994 Annual Report")
Exhibit 3(i)(b) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1, 1985, incorporated by
reference to Exhibit (3)(ii) to the 1994 Annual Report
Exhibit 3(i)(c) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1, 1987, incorporated by
reference to Exhibit (3)(iii) to the 1994 Annual Report
Exhibit 3(i)(d) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated by
reference to Exhibit (3)(iv) to the 1994 Annual Report
Exhibit 3(ii) Registrant's Amended and Restated By-Laws incorporated by
reference to Exhibit 3(ii) to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 2002
Exhibit 4.1 Indenture between Franklin Resources, Inc. 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
Exhibit 4.2 Indenture between Franklin Resources, Inc. and The Bank of
New York dated May 11, 2001 incorporated by reference to
Exhibit 4.2 to the Registrant's Registration Statement on
Form S-3, filed on August 6, 2001
Exhibit 4.3 Form of Liquid Yield Option Note due 2031 (Zero Coupon-
Senior) (included in Exhibit 4.2 hereto)
Exhibit 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
Exhibit 4.5 Form of 3.7% Senior Notes due 2008 incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the
period for the period ended March 31, 2003 filed on May 12,
2003
Exhibit 12 Computations of ratios of earnings to fixed charges
Exhibit 31.1 Certification of Chief Executive Officer
Exhibit 31.2 Certification of Chief Financial Officer
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Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
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