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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-2670991
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code: (650) 312-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, par value New York Stock Exchange
$.10 per share Pacific Exchange
London Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by "X" 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 at least the past 90 days. YES [X] NO
Indicate by "X" mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by "X" mark whether the registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2). YES [X] NO
The aggregate market value of the voting stock ("Common Stock") held by
non-affiliates of the registrant, as of March 31, 2004 (the last business day of
registrant's second quarter of fiscal 2004), was approximately $7.66 billion
based upon the last sale price reported for such date on the New York Stock
Exchange. For purposes of this disclosure, shares of Common Stock held by
persons who hold more than 5% of the outstanding shares of Common Stock and
shares held by officers and directors of the registrant have been excluded
because such persons may be deemed to be affiliates. This determination is not
necessarily conclusive.
Number of shares of the registrant's common stock outstanding at November 30,
2004: 251,352,866
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant's proxy statement for its annual meeting of
stockholders (the "Proxy Statement") to be held on January 25, 2005, which will
be filed with the Securities and Exchange Commission (the "SEC"), are
incorporated by reference into Part III of this report.
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INDEX TO ANNUAL REPORT ON FORM 10-K
-----------------------------------
PAGE
NUMBER
REFERENCE TO THIS
FORM 10-K 2004 ANNUAL REPORT
REQUIRED INFORMATION ON FORM 10-K
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PART I
ITEM 1. BUSINESS............................................................... 4
General.............................................................. 4
Company History and Acquisitions..................................... 4
Lines of Business.................................................... 5
Investment Management and Related Services.......................... 5
Banking/Finance Operations.......................................... 21
Regulatory Considerations............................................ 22
Competition.......................................................... 23
Financial Information About Industry Segments........................ 24
Intellectual Property................................................ 24
Employees............................................................ 25
Available Information................................................ 25
Executive Officers of the Registrant................................. 25
ITEM 2. PROPERTIES............................................................. 27
ITEM 3. LEGAL PROCEEDINGS...................................................... 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS..................................................... 30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES............................ 31
ITEM 6. SELECTED FINANCIAL DATA................................................ 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................ 32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.................................................... 51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................ 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............................... 94
ITEM 9A. CONTROLS AND PROCEDURES................................................ 94
ITEM 9B. OTHER INFORMATION...................................................... 94
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PAGE
NUMBER
REFERENCE TO THIS
FORM 10-K 2004 ANNUAL REPORT
REQUIRED INFORMATION ON FORM 10-K
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................... 94
Proxy: "Proposal 1: Election of Directors"*
ITEM 11. EXECUTIVE COMPENSATION................................................ 94
Proxy: "Proposal 1: Election of Directors"*
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS................................................. 95
Equity Compensation Plan Information
Proxy: "Security Ownership of Principal Shareholders"
and "Security Ownership of Management"*
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS........................................................ 95
Proxy: "Proposal 1: Election of Directors -
Certain Relationships and Related Transactions"*
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES................................ 95
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES............................ 96
SIGNATURES............................................................ 103
* Incorporated by reference to the Proxy Statement.
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PART I
FORWARD-LOOKING STATEMENTS. In addition to historical information, this Annual
Report on Form 10-K contains forward-looking statements that involve risks and
uncertainties, including the risk factors explained in the section entitled
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), that could cause our actual results to differ materially
from those reflected in the forward-looking statements. When used in this
report, words or phrases about the future such as "expected to", "could have",
"will continue", "anticipates", "estimates" or similar expressions are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Statements in MD&A and elsewhere in this report that
speculate about future events are "forward-looking statements". Forward-looking
statements are our best prediction at the time that they are made, and you
should not rely on them. If a circumstance occurs that causes any of our
forward-looking statements to be inaccurate, we do not have an obligation to
announce publicly the change to our expectations, or to make any revision to the
forward-looking statements.
ITEM 1. BUSINESS.
GENERAL
Franklin Resources, Inc. ("FRI" or the "Company"), is an investment management
company, which is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"), and as a financial holding
company under the Gramm-Leach-Bliley Act (the "GLB Act"). Through our
wholly-owned direct and indirect subsidiary companies, we provide a broad range
of investment advisory, investment management and related services to open-end
and closed-end investment companies (including our own family of retail mutual
funds), institutional accounts, high net-worth families, individuals and
separate accounts in the United States (the "U.S.") and internationally. Our
"sponsored investment products" include a broad range of domestic and
global/international equity, hybrid, fixed-income, and money market mutual funds
as well as other investment products, which are sold to the public under the
Franklin, Templeton, Mutual Series, Bissett, Fiduciary Trust and Darby Overseas
brand names. As of September 30, 2004, we had $361.9 billion in assets under our
management with approximately 15.3 million billable shareholder accounts
worldwide. In support of our primary business and operating segment, investment
management, we also provide certain related services, including transfer agency,
fund administration, distribution, shareholder processing, custodial, trustee
and other fiduciary services. In our secondary business and operating segment,
banking/finance, we provide clients with select retail-banking and consumer loan
services through our bank subsidiaries. The common stock of FRI is traded in the
U.S. primarily on the New York Stock Exchange (the "NYSE") and the Pacific
Exchange under the ticker symbol "BEN" and under the ticker symbol "FRK" on the
London Stock Exchange, and is included in the Standard & Poor's 500 Index. The
term "Franklin(R) Templeton(R) Investments" as used in this document, refers to
Franklin Resources, Inc. and its consolidated subsidiaries.
COMPANY HISTORY AND ACQUISITIONS
Franklin Templeton Investments and its predecessors have been engaged in the
investment management business since 1947. Franklin Resources, Inc. was
incorporated in Delaware in November 1969. We originated our mutual fund
business with the Franklin family of funds, which is now known as the Franklin
Funds(R). We expanded our business, in part, by acquiring companies engaged in
the investment advisory and investment management business.
In October 1992, we acquired substantially all of the assets and liabilities of
the investment adviser, investment management and other financial service
businesses of Templeton, Galbraith & Hansberger Ltd. This acquisition added the
Templeton family of funds to our Company. The Templeton funds are known for
their international and global investment objectives and value style of
investing.
In November 1996, we acquired certain assets and liabilities of Heine Securities
Corporation, which provided investment management services to various accounts
and investment companies, including Mutual Series Fund Inc., now known as
Franklin Mutual Series Fund Inc. ("Mutual Series"). The Mutual Series funds are
primarily value oriented equity funds.
We expanded our business in Korea in July 2000 when we purchased all of the
remaining outstanding shares of a Korean asset management company, Ssangyong
Templeton Investment Trust Management Co., Ltd.
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(currently known as Franklin Templeton Investment Trust Management Co., Ltd.) in
which we previously held a partial interest. With assets under management
exceeding $3 billion in Korea, we are now one of the larger foreign money
managers in that country.
We acquired all of the outstanding shares of Bissett & Associates Investment
Management, Ltd. ("Bissett") in October 2000 for approximately $95 million.
Bissett now operates as part of our Canadian subsidiary, Franklin Templeton
Investments Corp. ("FTIC"). With the addition of Bissett, we added Bissett's
family of mutual funds to our existing Canadian based funds and expanded our
investment advisory services throughout Canada to a broad range of clients,
including institutional clients such as pension plans, municipalities,
universities, charitable foundations and private clients.
In April 2001, we acquired Fiduciary Trust Company International, a bank
organized under the New York State Banking Law ("Fiduciary Trust"). Following
the acquisition, Fiduciary Trust became a wholly-owned subsidiary of Franklin
Resources, Inc. The stock transaction was valued at approximately $776 million
at closing. Fiduciary Trust has a reputation as one of the leading providers of
investment management and related trust and custody services to institutional
clients and high net-worth families and individuals. With the acquisition of
Fiduciary Trust, we also added Fiduciary Trust's U.S. and non-U.S. mutual funds
to our product line.
In July 2002, our 75% owned subsidiary, Franklin Templeton Asset Management
(India) Private Limited, acquired all of the outstanding shares of Pioneer ITI
AMC Limited ("Pioneer") for approximately $55.4 million. Pioneer was an Indian
investment management company which had approximately $800 million in assets
under management as of the purchase date. The acquisition has made us one of the
largest private sector fund companies in India, with assets under management of
over $4 billion, and approximately 850,000 shareholder accounts at September 30,
2004.
In October 2003, we acquired Darby Overseas Investments, Ltd. and Darby Overseas
Partners, L.P. (collectively, "Darby") for $75.9 million. We had previously
owned 12.66% of Darby, and with the completion of the acquisition, we now have a
100% ownership interest. Darby, based in Washington, D.C., sponsors and manages
funds for institutional investors and high net-worth clients that invest
primarily in emerging markets, private equity and mezzanine finance
transactions, including specialized sector funds.
LINES OF BUSINESS
I. INVESTMENT MANAGEMENT AND RELATED SERVICES
------------------------------------------
We derive substantially all of our revenues from providing investment advisory,
investment management, distribution and administrative services to our various
family of funds, high net-worth clients, institutional accounts and separate
accounts. Our revenues depend to a large extent on the amount of assets under
management. Underwriting and distribution revenues, also a large source of
revenue, consist of sales charges and commissions derived from sales of our
sponsored investment products and distribution and service fees. When used in
this report "Franklin Templeton mutual funds" or "funds" means all of the
Franklin, Templeton, Mutual Series, Bissett and Fiduciary Trust mutual funds;
"sponsored investment products" means all of the Franklin Templeton mutual funds
together with closed-end investment companies, foreign-based investment
products, and other U.S. and international private, institutional, high
net-worth and separate accounts.
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A. ASSETS UNDER MANAGEMENT ("AUM")
-------------------------------
Investment management fees, a large source of our revenue, are based upon the
dollar value of assets in the accounts that we advise. As of September 30, 2004,
the type of assets under management by investment objective held by investors on
a worldwide basis was:
TYPE OF ASSETS VALUE IN BILLIONS % TOTAL OF AUM
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EQUITY
- ------
Growth potential, income potential or various combinations thereof. $199.3 55%
FIXED-INCOME
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Both long and short-term. $96.8 27%
HYBRID
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Asset allocation, balanced, flexible and income-mixed funds. $59.0 16%
MONEY MARKET
- ------------
Short-term liquid assets. $6.8 2%
Broadly speaking, the change in the net assets of the sponsored investment
products depends primarily upon two factors: (1) the level of sales (inflows) as
compared to the level of redemptions (outflows); and (2) the increase or
decrease in the market value of the securities held in the portfolio of
investments. We are subject to the risk of asset volatility, resulting from
changes in the domestic and global financial and equity markets. In addition,
because we generally derive higher revenues and income from our equity assets, a
shift in assets from equity to fixed-income and hybrid funds reduces total
revenue and thus, net income. Despite such risk of asset volatility, we believe
that we are more competitive as a result of the greater diversity of sponsored
investment products available to our customer base.
B. TYPES OF INVESTMENT MANAGEMENT AND RELATED SERVICES
---------------------------------------------------
A majority of our revenues are derived from providing investment management,
advisory, distribution, transfer agency and related services for the Franklin
Templeton open-end and/or closed-end funds. We advise, manage and implement the
investment activities of, and provide other administrative services necessary to
operate, our U.S.-registered open-end and closed-end funds or series and our
many non-U.S. based sponsored investment products.
1. Fund Advisory Services
We earn investment management fee revenues by providing investment advisory and
management services pursuant to investment management agreements with each fund.
This business is primarily conducted through our wholly-owned direct and
indirect subsidiary companies, including, among others, the following:
Fiduciary International, Inc. ("FII"), a registered investment adviser under the
Investment Advisers Act of 1940 (the "Advisers Act"), provides investment
advisory and portfolio management services to certain mutual funds and separate
accounts;
Fiduciary Investment Management International, Inc. ("FIMI"), a registered
investment adviser under the Advisers Act, provides investment management
and portfolio management services to institutional clients and private accounts;
Fiduciary Trust Company of Canada ("FTCC"), a registered foreign equivalent
investment adviser with certain of the Canadian provincial securities
commissions, provides investment advisory and portfolio management services to
certain mutual funds and separate accounts;
Fiduciary Trust International Limited ("FTIL"), a registered investment adviser
under the Advisers Act, provides investment advisory and portfolio management
services for institutional clients, investment companies and private accounts;
Franklin Advisers, Inc. ("FAV"), a registered investment adviser under the
Advisers Act, provides investment advisory, portfolio management and
administrative services to various Franklin Templeton mutual funds, sub-advisory
services to non-affiliated entities and advisory services to institutional
accounts;
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Franklin Advisory Services, LLC ("FAS"), a registered investment adviser under
the Advisers Act, provides investment advisory and portfolio management services
to certain of the Franklin Templeton mutual funds and also provides sub-advisory
services to non-affiliated entities;
Franklin Investment Advisory Services, LLC ("FIAS"), a registered investment
adviser under the Advisers Act, provides investment and portfolio management
services to mutual fund clients;
Franklin Mutual Advisers, LLC ("FMA"), a registered investment adviser under the
Advisers Act, provides investment and portfolio management services to the
Mutual Series funds and also to certain Franklin Templeton mutual funds;
Franklin Templeton Alternative Strategies, Inc. ("FTAS"), a registered
investment adviser under the Advisers Act and a registered Commodity Pool
Operator under the Commodity Exchange Act, provides investment advisory,
portfolio management and administrative services to certain of our sponsored
investment products with mandates in alternative investments and subadvisory
services to certain Franklin Templeton mutual funds;
Franklin Templeton Asset Management (India) Private Limited ("FTAMPL"), an
"Asset Management Company" approved by the Securities and Exchange Board of
India, provides investment advisory, portfolio management and administrative
services to certain mutual funds in India;
Franklin Templeton Institutional, LLC ("FTI"), a registered investment adviser
under the Advisers Act, provides investment advisory, portfolio management and
administrative services to institutional clients;
Franklin Templeton Investment Management Limited ("FTIML"), a registered foreign
equivalent investment adviser in the United Kingdom and a registered investment
adviser under the Advisers Act, serves as an investment adviser to various of
our investment companies registered in foreign jurisdictions, including Europe,
and to various separate accounts, as well;
Franklin Templeton Investment Trust Management Co., Ltd. ("FTITMC"), a
registered foreign equivalent investment adviser in Korea, provides investment
trust management services and also manages equity and fixed income products in
Korea;
Franklin Templeton Investments (Asia) Limited ("FTIA"), a registered investment
adviser under the Advisers Act and a foreign equivalent of an investment adviser
in Hong Kong, provides certain advisory and subadvisory services to certain
Franklin and Templeton funds and distributes investment products in Hong Kong;
Franklin Templeton Investments Australia Limited ("FTIAUST"), a registered
foreign equivalent investment adviser in Australia, provides investment advisory
and portfolio management services to institutional clients in Australia;
Franklin Templeton Investments Corp. ("FTIC"), a registered foreign equivalent
investment adviser with many of the Canadian securities commissions, a mutual
fund broker/dealer with the Ontario Securities Commission and Alberta Securities
Commission and an investment adviser under the Advisers Act, provides investment
advisory, portfolio management, distribution and administrative services for
Canadian registered retail funds and sub-advisory services to certain
institutional and private accounts;
Franklin Templeton Investments Japan Limited ("FTIJL"), a registered foreign
equivalent investment adviser in Japan, provides investment advisory, portfolio
management and administrative services to certain of our funds in Japan and
manages Japan equity funds that are sold in other regions;
Franklin Templeton Portfolio Advisors, Inc. ("FTPA"), a registered investment
adviser under the Advisers Act, provides advisory services to private accounts
and in connection with third party broker/dealer separately managed account or
"wrap fee" programs;
Templeton Asset Management Ltd. ("TAML"), a registered investment adviser under
the Advisers Act and a registered foreign equivalent investment adviser in
Singapore and Hong Kong, provides investment advisory and related services to
certain Templeton developing markets funds and portfolios;
Templeton Global Advisors Limited ("TGAL"), a registered investment adviser
under the Advisers Act, provides investment advisory, portfolio management, and
administrative services to certain of the institutional and private accounts;
and
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Templeton Investment Counsel, LLC ("TIC"), a registered investment adviser under
the Advisers Act, provides investment advisory, portfolio management and
administrative services to certain of the Templeton funds, sub-advisory services
to certain of the Franklin funds and advisory services to institutional and
private accounts.
Our investment adviser subsidiaries conduct investment research and determine
which securities the U.S.-registered open-end and closed-end funds will
purchase, hold or sell under the supervision and oversight of the fund's board
of trustees, directors or administrative managers. In addition, the investment
advisers subsidiaries take all steps necessary to implement such decisions,
including selecting brokers and dealers, executing and settling trades in
accordance with detailed criteria set forth in the management agreement for each
fund, internal policies, and applicable law and practice. In addition, certain
of our subsidiary companies provide similar investment management and
administrative services to a number of non-U.S. open-end and closed-end
investment companies, as well as other U.S. and international private and
institutional accounts, including certain of our sponsored investment companies
organized in Luxembourg and Ireland.
Our investment advisory services include fundamental investment research and
valuation analyses, including original economic, political, industry and company
research, company visits and inspections, and the utilization of such sources as
company public records and activities, management interviews, company prepared
information, and other publicly available information, as well as analyses of
suppliers, customers and competitors. In addition, research services provided by
brokerage firms are used to support our findings.
Investment management and related services are provided pursuant to agreements
in effect with each of our U.S.-registered open-end and closed-end funds.
Comparable agreements are in effect with foreign-registered funds and private
and institutional accounts. In general, the management agreements for our
U.S.-registered open-end and closed-end funds must be renewed each year (after
an initial two year term), and must be specifically approved at least annually
by a vote of such funds' board of trustees or directors as a whole and
separately by the trustees/directors that are not interested persons of such
funds' under the Investment Company Act of 1940 (the " '40 Act") or by a vote of
the holders of a majority of such funds' outstanding voting securities.
Foreign-registered funds and private and institutional accounts have various
termination rights, and review and renewal provisions that are not discussed in
this report.
Under the majority of investment management agreements, the U.S.-registered
open-end and closed-end funds pay us a fee payable monthly in arrears based upon
a fund's average daily net assets. Annual fee rates under the various global
investment management agreements generally range from 0.15% to a maximum of
2.50% and are often reduced as net assets exceed various threshold levels. The
funds generally pay their own expenses such as legal, custody and audit fees,
reporting costs, board and shareholder meeting costs, United States Securities
and Exchange Commission ("SEC") and state registration fees and similar
expenses.
We use a "master/feeder" fund structure in certain situations. This structure
allows an investment adviser to manage a single portfolio of securities at the
"master fund" level and have multiple "feeder funds" that invest all of their
respective assets into the master fund. Individual and institutional
shareholders invest in the "feeder funds" which can offer a variety of service
and distribution options. An advisory fee is charged at the master fund level,
and administrative and shareholder servicing fees are charged at the feeder fund
level.
Our investment management agreements permit us to serve as an adviser to more
than one fund so long as our ability to render services to each of the funds is
not impaired, and so long as purchases and sales of portfolio securities for
various advised funds are made on an equitable basis. Our management personnel
and the fund directors or trustees regularly review the fund advisory and other
administrative fee structures in light of fund performance, the level and range
of services provided, industry conditions and other relevant factors. Advisory
and other administrative fees are generally waived or voluntarily reduced when a
new fund is established and then increased to contractual levels within an
established timeline or as net asset values reach certain levels.
Each U.S. investment management or advisory agreement between certain of our
subsidiary companies and each fund automatically terminates in the event of its
"assignment", as defined in the '40 Act. In addition, either party may terminate
the agreement without penalty after written notice ranging from 30 to 60 days.
If management agreements representing a significant portion of our assets under
management were terminated, it would have a material adverse impact on our
Company. To date, none of our management agreements with any of our retail
Franklin Templeton mutual funds have been involuntarily terminated.
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2. Underwriting and Distribution
A significant portion of our revenues under the investment management operating
segment are generated from providing underwriting and distribution services.
Franklin/Templeton Distributors, Inc. ("FTDI"), a wholly-owned subsidiary of the
Company, acts as the principal underwriter and distributor of shares of most of
our U.S.-registered open-end mutual funds. We earn underwriting and distribution
fees primarily by distributing the funds pursuant to distribution agreements
between FTDI and the funds. Under each distribution agreement, we offer and sell
the fund's shares on a continuous basis and pay certain costs associated with
underwriting and distributing the funds, including the costs of developing and
producing sales literature and printing of prospectuses, which may be then
either partially or fully reimbursed by the funds.
Most of our U.S. and non-U.S.-registered retail funds are distributed with a
multi-class share structure. We adopted this share structure to provide
investors with greater sales charge alternatives for their investments. Class A
shares represent a traditional fee structure whereby the investor pays a
commission at the time of purchase unless minimum investment criteria are met.
Class B shares, which are available in many of our funds in the U.S. and
globally, have no front-end sales charges but instead have a declining schedule
of sales charges (called contingent deferred sales charges) if the investor
redeems within a number of years from the original purchase date. The boards of
the funds that offer Class B shares have approved a proposal to cease the
offering of Class B shares to new investors and existing shareholders desiring
to make additional purchases. Existing Class B shareholders would continue to be
permitted to exchange shares into Class B shares of different funds. Existing
Class B shareholders would also be permitted to continue to reinvest dividends
in additional Class B shares. The cessation of purchases of Class B shares by
new investors and existing shareholders will be effective in the first calendar
quarter of 2005 and may have a negative effect on the overall sales of the
funds' shares. Class C shares have no front-end sales charges, but do have a
back-end sales charge for redemptions within 12 months from the date of
purchase. Class R shares with reduced sales charges are available for purchase
by certain retirement plan accounts in the U.S. only.
Globally, we offer Advisor Class shares in many of our Franklin Templeton mutual
funds and in the U.S. we offer Z Class shares in Mutual Series funds on a
limited basis, both of which have no sales charges. Franklin Global Trust offers
seven series of funds, managed by our subsidiary FII, which are sold with no
sales charge to high net-worth or institutional clients of Fiduciary Trust. The
Advisor and Z Class shares are available to our current and former officers,
trustees, directors, and full-time employees, and are also offered to
institutions and investment advisory clients (both affiliated and unaffiliated),
as well as individuals generally investing $5 million or more. In the U.S., we
also sell money market funds to investors without a sales charge. Under the
terms and conditions described in the prospectuses or the statements of
additional information for some funds, certain investors can purchase shares at
net asset value or at reduced sales charges. In addition, investors may
generally exchange their shares of a fund at net asset value for shares within
the same class of another Franklin Templeton mutual fund without having to pay
additional sales charges.
Some of our insurance product funds offered for sale in the U.S. offer a
three-class share structure, Class 1, Class 2, and Class 3 shares, which are
offered at net asset value without a sales load directly to the insurance
company separate accounts (the shareholder). The only difference between the
three classes is that Class 2 and Class 3 shares are assessed a distribution and
service fee ("12b-1 fee") (as described below) payable to those who sell and
distribute Class 2 and Class 3 shares and provide services to shareholders and
contract owners (e.g., FTDI), the insurance company or others. These 12b-1 fees
are generally assessed quarterly at an annual rate of 0.25% of the average daily
net assets of the class. Two of the insurance funds also offer Class 3 shares,
which are the same as Class 2 shares, except that they assess a 1.00% redemption
fee when variable contract owners redeem funds from an insurance company
sub-account held for less than 60 days.
Globally, we offer other types of share classes based on the local needs of the
investors in a particular market. In the majority of cases, investors in any
class of shares within the U.S. or globally may exchange their shares for a like
class of shares in another fund, subject to certain fees that may apply.
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The following table summarizes the sales charges and distribution and service
fee structure for various share classes of our U.S.-registered retail mutual
funds. The fees below generally apply to our U.S.-registered retail mutual
funds, however, there are exceptions to this fee schedule for some funds.
SALES CHARGES AND DISTRIBUTION AND SERVICE FEES FOR MOST U.S.-REGISTERED RETAIL FUNDS
- -------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS R
U.S. RETAIL FUNDS SHARES SHARES (c) SHARES (d) SHARES
- -------------------------------------- ------------- -------------- --------------- -----------------
Sales Charge at Time of Investment
Equity 5.75% (a) None. None. None.
Fixed-income 4.25% (a) None. None. None.
- -------------------------------------- ------------- -------------- --------------- -----------------
Contingent Deferred Sales Charge None. (b) 4% maximum 1% if 1% if
declining shareholder shareholder
to zero sells sells shares
after 6 shares within 18
years of within 12 months of
each months of investment.
investment. investment.
- -------------------------------------- ------------- -------------- --------------- -----------------
Maximum Yearly 12b-1 Plan Fees
Equity 0.35% 1.00% 1.00% 0.50%
Fixed-income
Taxable 0.25% 0.65% 0.65% 0.50%
Tax-free 0.10% 0.65% 0.65% None.
- -------------------------------------- ------------- -------------- --------------- -----------------
Types of Investors That May Purchase Any. Any. Any. See Note (f)
This Share Class below.
- -------------------------------------- ------------- -------------- --------------- -----------------
U.S. RETAIL FUNDS ADVISOR CLASS SHARES Z CLASS SHARES (e)
- ------------------------------------- ----------------------------- ---------------------------------
Sales Charge at Time of Investment None. None.
Equity
Fixed-income
- ------------------------------------- ----------------------------- ---------------------------------
Contingent Deferred Sales Charge None. None.
- ------------------------------------- ----------------------------- ---------------------------------
Maximum Yearly 12b-1 Plan Fees None. None.
- ------------------------------------- ----------------------------- ---------------------------------
Types of Investors That May Current and former Current and former officers,
Generally Purchase This Share Class officers, trustees, trustees, directors and
directors and full-time full-time employees of Franklin
employees of Franklin Templeton Investments;
Templeton Investments; institutions, investment
institutions, investment advisory clients, individuals
advisory clients, investing $5 million or more in
individuals investing $5 Franklin Templeton mutual funds.
million or more in Franklin
Templeton mutual funds.
- ------------------------------------- ----------------------------- ---------------------------------
(a) Reductions in the maximum sales charges may be available depending upon the
amount invested and the type of investor. In some cases noted in each
fund's prospectus or statement of additional information, certain investors
may invest in Class A shares at net asset value (with no load). In
connection with certain of these no-load purchases, FTDI may make a payment
out of its own resources to a broker/dealer involved with that sale.
(b) For Net Asset Value ("NAV") purchases over $1 million, a contingent
deferred sales charge ("CDSC") of 1.00% may apply to shares redeemed within
18 months.
(c) Class B shares convert to Class A shares after eight (8) years of
ownership. Effective in the first calendar quarter of 2005, Class B shares
will no longer be offered to new investors and existing Class B
shareholders desiring to make additional purchases.
(d) FTDI pays a 1.00% broker/dealer commission to broker/dealers of record of
Class C shares. FTDI recovers a portion of the amount it pays to
broker/dealers by retaining certain 12b-1 fees assessed during the first 12
months and from collecting contingent deferred sales charges on any
redemptions made within 12 months of the time of sale.
(e) When the Company entered into management contracts for the Mutual Series
funds, the outstanding shares of Mutual Series funds were reclassified as Z
Class shares on October 31, 1996. Current shareholders who held shares of
any Mutual Series funds on October 31, 1996 may continue to purchase Z
Class shares of any Mutual Series fund. Z Class shareholders may exchange
into Class A shares of other Franklin Templeton mutual funds at net asset
value, which are subject to 12b-1 fees. FTDI may make a payment out of its
own resources to a broker/dealer involved in selling Z Class shares.
10
- --------------------------------------------------------------------------------
(f) The types of investors that may purchase Class R shares include, employer
sponsored retirement plans; any trust or plan established as part of a
qualified tuition program under Section 529 of the Internal Revenue Code;
and investors who open a Franklin Templeton IRA rollover account with less
than $1 million other than a current or former Franklin Templeton employee
or as the result of a spousal rollover or a Qualified Domestic Relations
Order or with direct rollover proceeds of a Defined Contribution Services
Plan. FTDI pays a 1.00% broker/dealer commission to broker/dealers of
record of Class R shares. FTDI recovers a portion of the amount it pays to
broker/dealers by retaining certain 12b-1 fees assessed during the first 12
months.
Our non-U.S.-registered funds, including the Tax Class shares offered in Canada,
have various sales charges and fee structures that are not discussed in this
report.
The distribution agreements with the U.S.-registered Franklin Templeton mutual
funds generally provide for FTDI to pay commission expenses for sales of fund
shares to broker/dealers. These broker/dealers receive various sales commissions
and other fees from FTDI, including fees from the investors in the funds and the
funds themselves, for services in matching investors with funds whose investment
objectives match such investors' goals and risk profiles. Broker/dealers may
also receive fees for their assistance in explaining the operations of the
funds, in servicing the investor's account, reporting and various other
distribution services. Franklin Templeton mutual fund shares are sold primarily
through a large network of independent intermediaries, including broker/dealers,
banks and other similar financial advisers. We are heavily dependent upon these
distribution channels and business relationships. FTDI may make payments to
certain broker/dealers who provide marketing support services, which may include
business planning assistance, advertising, educating broker/dealer personnel
about the Franklin Templeton mutual funds and shareholder financial planning
needs, placement on the broker/dealer's list of offered funds, and access to
sales meetings, sales representatives and management representatives of the
broker/dealer. There is increasing competition for access to these channels,
which has caused our distribution costs to rise and could cause further
increases in the future as competition continues and service expectations
increase. As of September 30, 2004, over 3,700 local, regional, and national
securities brokerage firms offered shares of the U.S.-registered Franklin
Templeton mutual funds for sale to the investing public. In the U.S., we have
approximately 76 general wholesalers and eight Franklin Templeton Portfolio
Advisors, Inc. and retirement plan wholesalers who interface with the
broker/dealer community.
Most of the U.S.-registered Franklin Templeton mutual funds, with the exception
of certain Franklin Templeton money market funds, have adopted distribution
plans (the "Plans") under Rule 12b-1 promulgated under the '40 Act ("Rule
12b-1"). The Plans are established for an initial term of one (1) year and,
thereafter, must be approved annually by the particular fund's board of
directors or trustees and by a majority of its directors or trustees who are not
interested persons of the fund under the '40 Act (the "disinterested fund
directors/trustees"). All such Plans are subject to termination at any time by a
majority vote of the disinterested fund directors/trustees or by the particular
fund shareholders. Fees from the Plans are paid primarily to third-party
broker/dealers who provide service to the shareholder accounts, and engage in
distribution activities. The Plans permit the funds to bear certain expenses
relating to the distribution of their shares, such as expenses for marketing,
advertising, printing and sales promotion. FTDI may also receive reimbursement
from the funds for various expenses that FTDI incurs in distributing the funds,
such as marketing, advertising, printing and sales promotion subject to the
Plans' limitations on amounts. Each fund has a percentage limit for these types
of expenses based on average daily net assets under management.
Similar arrangements exist with the distribution of our global funds and in all
cases the distributor of the funds in the local market arranges for and pays
commissions.
Class B and C shares are generally more costly to us in the year of sale, but
they allow us to be competitive by increasing our presence in various
distribution channels. Historically, we have arranged to finance Class B and
certain Class C share deferred commissions arising from our U.S., Canadian and
European operations through Lightning Finance Company Limited, a company in
which we have a 49% ownership interest. The repayment of the financing advances
is limited to the cash flows generated by the Plans and by any contingent
deferred sales charges collected in connection with early redemptions. Effective
in the first calendar quarter of 2005, Class B shares will no longer be offered
to new investors and existing Class B shareholders desiring to make additional
purchases.
11
- --------------------------------------------------------------------------------
The sales commissions and payments below, payable to qualifying broker/dealers,
generally apply to our U.S.-registered retail funds; however, there are
exceptions to this schedule for some funds.
SALES COMMISSIONS AND OTHER PAYMENTS PAID TO QUALIFYING BROKER/DEALERS AND
OTHER INTERMEDIARIES FOR MOST U.S.-REGISTERED RETAIL FUNDS
- ----------------------------------------------------------
U.S. RETAIL FUNDS CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS R SHARES (g)
- ------------------------------------------------- ------------------ ------------------- ---------------- -----------------
Broker/Dealer Commission at Time of
Investment
Equity 5.00% 4.00% 1.00% 1.00%
Fixed-income 4.00% 3.00% (b) 1.00% 1.00%
Maximum Yearly 12b-1 Plan Fees
Equity 0.25% (a) 0.25% (c) 1.00% (e) 0.35%
Fixed-income 0.35%
Taxable 0.25% (a) 0.15% (d) 0.65% (f)
Tax-free 0.10% 0.15% (d) 0.65% (f)
- ------------------------------------------------- ------------------ ------------------- ---------------- -----------------
(a) The fees referenced above generally apply; however, there are certain
individual funds that may apply a different fee structure, including the
Franklin Rising Dividends Fund whose 12b-1 fee is 0.50%, certain equity
funds whose 12b-1 fees are 0.35% and certain taxable fixed-income funds
whose 12b-1 fees are 0.15%.
(b) Certain fixed-income funds now pay 4.00%.
(c) FTDI receives a fee equal to 1.00%, of which 0.25% is paid to the broker/
dealer on the account and the remaining 0.75% is remitted directly to a
third party for financing initial broker/dealer commissions. After 8 years
from the date of the investment, Class B shares are converted into Class A
shares. Effective in the first calendar quarter of 2005, Class B shares
will no longer be offered to new investors and existing Class B
shareholders desiring to make additional purchases. Payments under the
funds' Rule 12b-1 plans will continue for existing Class B shares subject
to maximum asset-based sales charges under the National Association of
Securities Dealers (the "NASD") rules.
(d) FTDI receives a fee equal to 0.65%, of which 0.15% is paid to the broker/
dealer on the account and the remaining 0.50% is remitted directly to a
third party for financing initial broker/dealer commissions. After 8 years
from the date of the investment, Class B shares are converted into Class A
shares. Effective in the first calendar quarter of 2005, Class B shares
will no longer be offered to new investors and existing Class B
shareholders desiring to make additional purchases. Payments under the
funds' Rule 12b-1 plans will continue for existing Class B shares subject
to maximum asset-based sales charges under NASD rules.
(e) FTDI retains a fee equal to 0.75% and pays 0.25% to the broker/dealer on
the average assets in the account for the first twelve (12) months
following the sale, after which the full 12b-1 fee is paid to the
broker/dealer.
(f) FTDI retains a fee equal to 0.50% and pays 0.15% to the broker/dealer on
the assets in the account for the first twelve (12) months following the
sale, after which it is paid to the broker/dealer.
(g) With respect to Class R shares, broker/dealers may be eligible to receive a
12b-1 fee of 0.35% starting in the 13th month. During the first 12 months,
the full 12b-1 fee will be paid to FTDI to partially offset commission paid
at the time of purchase. Starting in the 13th month, FTDI will receive
0.15%. Broker/dealers may be eligible to receive the full 0.50% 12b-1 fee
starting at the time of purchase if they forego the prepaid commission of
1%.
Our various foreign subsidiaries provide underwriting and distribution services
for our non-U.S.-registered mutual funds, and pay various sales commissions and
other payments to qualifying broker/dealers and other intermediaries who are not
discussed in this report.
FTDI and/or its affiliates may make the following additional payments out of its
own assets to securities broker/dealers that sell shares of Franklin Templeton
mutual funds:
MARKETING SUPPORT PAYMENTS. FTDI may make payments to certain broker/dealers who
are holders or dealers of record for accounts in one or more of the Franklin
Templeton mutual funds. A broker/dealer's marketing support services may include
business planning assistance, advertising, educating broker/dealer personnel
about the Franklin Templeton mutual funds and shareholder financial planning
needs, placement on the broker/dealer's list of offered funds, and access to
sales meetings, sales representatives and management representatives of the
broker/dealer. FTDI compensates broker/dealers differently depending upon, among
other factors, sales and assets levels, redemption rates and the level and/or
type of marketing and educational activities provided by the broker/dealer.
Except as described below, in the case of any one broker/dealer, marketing
support payments will not exceed the sum of 0.10% of that broker/dealer's
current year's total sales of Franklin Templeton mutual funds and 0.05% (or
0.03%) of the total assets, respectively, of equity or fixed income funds
attributable to that broker/dealer, on an annual basis.
12
- --------------------------------------------------------------------------------
TRANSACTION SUPPORT PAYMENTS. FTDI may pay ticket charges of up to $20 per
purchase or exchange order placed by a broker/dealer or one time payments for
ancillary services such as setting up funds on a broker/dealer's mutual fund
trading system.
OTHER PAYMENTS. From time to time, FTDI, at its expense, may provide additional
compensation to broker/dealers which sell or arrange for the sale of shares of
the funds. Such compensation may include financial assistance to broker/dealers
that enable FTDI to participate in and/or present at conferences or seminars,
sales or training programs for invited registered representatives and other
employees, client and investor events and other broker/dealer-sponsored events.
These payments may vary depending upon the nature of the event.
FTDI routinely sponsors due diligence meetings for registered representatives
during which they receive updates on various Franklin Templeton mutual funds and
are afforded the opportunity to speak with portfolio managers. To the extent
permitted by their firm's policies and procedures, registered representatives'
expenses in attending these meetings may be covered by FTDI.
Other compensation may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD. FTDI makes payments for events it
deems appropriate, subject to FTDI guidelines and applicable law.
3. Shareholder Services
Our subsidiary, Franklin Templeton Investor Services, LLC ("FTIS"), provides
shareholder record keeping services and acts as transfer agent and
dividend-paying agent for the U.S.-registered Franklin Templeton open-end funds.
FTIS is registered with the SEC as a transfer agent under the Securities
Exchange Act of 1934. FTIS is compensated under an agreement with each fund on
the basis of an annual per account fee, which varies with the fund and the type
of services being provided, and is reimbursed for out-of-pocket expenses. In
addition, certain funds compensate FTIS based on assets under management. Other
subsidiaries provide the same services to the mutual funds offered for sale in
Canada, Europe, Asia, and other regions internationally, under similar fee
arrangements.
FTIS may also pay servicing fees, that will be reimbursed by the funds, in
varying amounts to certain financial institutions (primarily to help offset
their costs associated with client account maintenance support, statement
preparation and transaction processing) that (i) maintain omnibus accounts with
the fund in the institution's name on behalf of numerous beneficial owners of
fund shares; or (ii) provide support for fund shareholder accounts by sharing
account data with FTIS through the National Securities Clearing Corporation (the
"NSCC") networking system. FTIS will also receive a fee from the funds for
services provided in support of beneficial owners and NSCC networking system
accounts.
4. Administrative Services
Generally, the funds themselves have no paid employees. Through our
subsidiaries, including Franklin Templeton Companies, LLC and Franklin Templeton
Services, LLC ("FTS"), we provide and pay the salaries of personnel who serve as
officers of our U.S.-registered open-end and closed-end funds, including the
administrative personnel as necessary to conduct such funds' day-to-day business
operations. These personnel provide information, ensure compliance with
securities regulations, maintain accounting systems and controls, prepare annual
reports and perform other administrative activities. FTS is compensated under
separate agreements with most of the funds on the basis of a percentage of
assets under management.
C. HIGH NET-WORTH INVESTMENT MANAGEMENT
------------------------------------
Through our subsidiary, Fiduciary Trust, and our Canadian high net-worth
business unit, FTCC, we provide global investment management services to and
market and sell our sponsored investment products to high net-worth individuals
and families. At Fiduciary Trust, these services focus on managing family wealth
from generation to generation through a full service package including wealth
management, estate planning, private funds, private banking, and custody
services. Our high net-worth client business seeks to maintain relationships
that span generations and help families plan the best method of
intergenerational wealth transfer.
13
- --------------------------------------------------------------------------------
Individual client assets are held in accounts separately managed by individual
portfolio managers. These portfolio managers determine asset allocation and
stock selection for client accounts, taking into consideration each client's
specific long-term objectives while utilizing our macroeconomic and individual
stock research.
We offer clients personalized attention and estate planning expertise in an
integrated package of services under the Family Resource Management(R) ("FRM")
brand. Services under FRM provide clients with an integrated strategy to
optimize wealth accumulation and maximize after-tax wealth transfer to the next
generation. These services include advice concerning strategic planning and
asset allocation, investment management, and custody and reporting.
D. INSTITUTIONAL INVESTMENT MANAGEMENT
-----------------------------------
We provide a broad array of investment management services to institutional
clients, focusing on foundations, endowment funds and government and corporate
pension funds. Our subsidiaries offer a wide range of both domestic and
international equity, fixed-income and specialty products through a variety of
investment vehicles, including separate and commingled accounts and open-ended
domestic and offshore mutual funds.
We operate our institutional business under the trade name Franklin Templeton
Institutional. Through a series of legal entities globally, including FTI in the
U.S. we distribute, and market the different investment advisory capabilities of
our various investment advisory subsidiaries under the Franklin, Templeton,
Bissett, Fiduciary Trust and Darby brand names globally. We primarily attract
new institutional business through our strong relationships with pension and
management consultants and through additional mandates from our existing client
relationships.
The Retirement Group, a division of our U.S. subsidiary FTDI, services sponsors
of defined contribution plans, including 401(k)s, bundled defined contribution
plans, variable annuity products and individual retirement accounts. This
business unit allows us to focus on expanding sales of our asset management
capabilities to the U.S. retirement industry by offering a number of investment
options, including sub-advised portfolios, mutual funds, education savings plans
and variable insurance trusts.
E. MANAGED ACCOUNTS
----------------
Through our subsidiary, Franklin Templeton Portfolio Advisors, Inc., a
registered investment adviser, doing business as Franklin Portfolio Advisors and
Templeton Portfolio Advisors, we provide private portfolio management services
and advisory services through third party broker/dealer wrap fee programs. Our
subsidiary, TFIS, also serves as a direct marketing broker/dealer for
institutional investors in the Franklin Templeton mutual funds. Through our
various subsidiaries, we also market and distribute our sponsored investment
products to individually managed and separate accounts.
F. TRUST AND CUSTODY
-----------------
Our subsidiary, Fiduciary Trust, provides trust and custody services including
global master custody and support services to high net-worth and institutional
clients. Through various trust company subsidiaries, including Fiduciary Trust,
we offer a wide range of investment-related services, including, custody and
administration, trust services, estate planning, tax planning, securities
brokerage, trade clearance and private banking to high net-worth individuals,
families and institutional clients in the U.S. and abroad. In addition to
custody services, we also offer our clients a series of other services,
including foreign exchange, performance measurement, securities lending and
brokerage services. We provide planned giving administration and related custody
services for non-profit organizations, including pooled income funds, charitable
remainder trusts, charitable lead trusts and gift annuities, for which we may or
may not act as trustee.
Our other subsidiaries involved in the trust business, either as trust companies
or companies investing in trust companies, include Fiduciary Investment
Corporation, an investment company incorporated under New York State Banking Law
and an indirect holding company for many of our trust company subsidiaries;
FTCC, a trust company incorporated under the Federal Trust and Loan Companies
Act in Canada; Fiduciary Trust International of the South, a Florida
state-chartered limited purpose trust company; Fiduciary Trust International of
California, a California state-chartered limited purpose trust company;
Fiduciary Trust International of Delaware, a Delaware state-chartered limited
purpose trust company; FTCI (Cayman) Ltd., an offshore trust company licensed as
a bank and trust company (with a type "B" license) in the Cayman Islands;
Franklin Templeton Fiduciary Bank & Trust, Ltd. ("FTFB&T"), a licensed bank and
trust company in the
14
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Bahamas; and Franklin Templeton Bank & Trust, F.S.B. ("FTB&T"). All of the trust
companies referenced above have full trust powers. FTB&T, among other functions,
exercises full trust powers and serves primarily as custodian of Individual
Retirement Accounts ("IRA") and business retirement plans.
G. ALTERNATIVE INVESTMENT PRODUCTS
-------------------------------
Our subsidiary Darby is primarily engaged in sponsoring and managing investment
funds that invest in private equity and mezzanine lending transactions in
emerging markets, particularly Latin America and Asia. Darby offers these
investment funds through private placements to institutional and select high
net-worth individual investors. Darby is also engaged in advising or
sub-advising investment funds that invest in emerging markets fixed income
securities on a global basis, including privately offered funds and one fund
that is listed on the Luxembourg Stock Exchange.
H. SUMMARY OF OUR SPONSORED INVESTMENT PRODUCTS
--------------------------------------------
Our sponsored investment products are offered to retail, institutional, high
net-worth and separate account clients, which include individual investors,
qualified groups, trustees, tax-deferred (such as IRAs in the U.S. and RSPs in
Canada) or money purchase plans, employee benefit and profit sharing plans,
trust companies, bank trust departments and institutional investors in
approximately 137 countries.
1. Investment Objectives
The sponsored investment products that we offer accommodate a variety of
investment goals, spanning the spectrum of our clients' risk tolerance - from
capital appreciation with our more growth-oriented products to capital
preservation with our fixed-income offerings. In seeking to achieve such
objectives, each portfolio emphasizes different strategies and invests in
different types of securities.
Our equity investment products include some that are considered value-oriented,
others that are considered growth-oriented, and some that use a combination of
growth and value characteristics, generally identified as blend or core
products. Value investing focuses on identifying companies that our research
analysts and portfolio managers believe are undervalued based on a number of
different factors, usually put in the context of historical ratios such as
price-to-earnings or price-to-book value. Our growth portfolios maintain a
philosophy of identifying future drivers of growth that are not reflected in a
company's current stock price by the determination of our research analysts and
portfolio managers. Paramount to all of our different equity products is the
incorporation of independent, fundamental research through our own in-house
staff of analysts. Our approach across the variety of equity products emphasizes
bottom-up stock selection within a disciplined portfolio construction process,
and is based on our ongoing assessment of risk and return at the security and
portfolio levels.
Portfolios seeking income generally focus on one or more of the following
securities: taxable and tax-exempt money market instruments, tax-exempt
municipal bonds, global fixed-income securities, fixed-income debt securities of
corporations and of the U.S. government and its sponsored agencies and
instrumentalities such as the Government National Mortgage Association, the
Federal National Mortgage Association, and the Federal Home Loan Mortgage
Corporation, or of the various states in the U.S. Still others focus on
investments in particular countries and regions, such as emerging markets.
We also provide investment management and related services to a number of
closed-end investment companies whose shares are traded on various major U.S.
and some international stock exchanges. In addition, we provide investment
management, marketing and distribution services to SICAV ("Societe
d'Investissement a Capital Variable") funds and umbrella unit trusts organized
in Luxembourg and Ireland, respectively, which are distributed in international
market places, as well as to locally organized funds in various countries
outside the U.S.
Our sponsored investment products also include portfolios managed for some of
the world's largest corporations, endowments, charitable foundations, pension
funds, wealthy individuals and other institutions. We use various investment
techniques to focus on specific client objectives for these specialized
portfolios.
15
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2. Types of Sponsored Investment Products
As of September 30, 2004 we had $361.9 billion in assets under management. Our
U.S.-registered open-end mutual funds (excluding our insurance products trust)
accounted for $206.4 billion of our assets under management. As of September 30,
2004, the net assets under management of our five (5) largest funds were
Franklin Income Fund ($26.3 billion), Templeton Growth Fund ($19.2 billion),
Templeton Foreign Fund ($15.6 billion), Franklin California Tax-Free Income
Fund, Inc. ($13.1 billion), and Mutual Shares Fund ($11.1 billion). These five
mutual funds represented, in the aggregate, 23.6% of all sponsored investment
product assets under management.
Franklin Templeton Variable Insurance Products Trust, our insurance products
trust, offers 21 funds to U.S. investors, with assets of $15.7 billion as of
September 30, 2004. Our insurance product funds are available as investment
options through variable insurance contracts. Most of these funds have been
fashioned after some of our more popular U.S. retail funds offered to the
general public and are managed, in most cases, by the same investment adviser.
Our U.S. closed-end and interval funds accounted for $5.2 billion of our assets
under management. U.S. wrap fee, partnership, and trust accounts made up $7.4
billion of our assets under management. On a Company-wide basis, institutional
separate and high net-worth accounts accounted for $74.1 billion of assets under
management.
In addition, $53.1 billion of our assets under management were held in funds and
open-end and closed-end accounts that are sold outside of the United States, and
whose investment objectives vary, but are primarily international and global
equity-oriented.
The following table shows the various types of our U.S.-registered open-end
funds and dedicated insurance product funds as of September 30, 2004, and is
categorized using the Investment Company Institute ("ICI") definitions, which
are more detailed than the broad investment objective definitions used in MD&A
and in our Consolidated Financial Statements.
U.S.-REGISTERED OPEN-END FUNDS (a)
CATEGORY
(AND APPROXIMATE ASSETS UNDER MANAGEMENT,
AS OF SEPTEMBER 30, 2004) NO. OF
NO. OF INSURANCE
MUTUAL PRODUCT
IN BILLIONS INVESTMENT OBJECTIVE FUNDS FUNDS
- ----------------------------------- ------------------------------------------- --------- ----------
I. EQUITY FUNDS ($122.9)
- ----------------------------------- ------------------------------------------- --------- ----------
A. Capital Appreciation Funds Seek capital appreciation; dividends are
($25.9) not a primary consideration.
- ----------------------------------- ------------------------------------------- --------- ----------
1. Aggressive Growth Funds Invest primarily in common stocks of
small, growth companies. 6 1
- ----------------------------------- ------------------------------------------- --------- ----------
2. Growth Funds Invest primarily in common stocks of
well-established companies. 15 2
- ----------------------------------- ------------------------------------------- --------- ----------
3. Sector Funds Invest primarily in companies in related
fields. 8 2
- ----------------------------------- ------------------------------------------- --------- ----------
B. World Equity Funds ($65.0) Invest primarily in stocks of companies
located throughout the world.
- ----------------------------------- ------------------------------------------- --------- ----------
1. Emerging Market Funds Invest primarily in companies based in
developing regions of the world. 2 1
- ----------------------------------- ------------------------------------------- --------- ----------
2. Global Equity Funds Invest primarily in equity securities
traded worldwide, including those of U.S.
companies. 12 2
- ----------------------------------- ------------------------------------------- --------- ----------
3. International Equity Funds Invest primarily in equity securities of
companies located outside the United
States. 8 1
- ----------------------------------- ------------------------------------------- --------- ----------
(a) This table excludes separately managed accounts, trust and partnership
accounts and closed-end funds. A significant number of institutional assets are
invested in U.S. open-end mutual funds and are disclosed in the table.
16
- --------------------------------------------------------------------------------
CATEGORY
(AND APPROXIMATE ASSETS UNDER MANAGEMENT,
AS OF SEPTEMBER 30, 2004) NO. OF
NO. OF INSURANCE
MUTUAL PRODUCT
IN BILLIONS INVESTMENT OBJECTIVE FUNDS FUNDS
- ----------------------------------- ------------------------------------------- --------- ----------
4. Regional Equity Funds Invest in companies based in a specific
part of the world. 2 0
- ----------------------------------- ------------------------------------------- --------- ----------
C. Total Return Funds ($32.0) Seek a combination of current income and
capital appreciation.
- ----------------------------------- ------------------------------------------- --------- ----------
1. Growth and Income Funds Invest primarily in common stocks of
established companies with the potential
for growth and a consistent record of
dividend payments. 8 3
- ----------------------------------- ------------------------------------------- --------- ----------
II. HYBRID FUNDS ($28.8) May invest in a mix of equities,
fixed-income securities, and derivative
instruments.
- ----------------------------------- ------------------------------------------- --------- ----------
A. Asset Allocation Funds ($0.6) Invest in various asset classes including,
but not limited to, equities, fixed-income
securities, and money market instruments.
They seek high total return by maintaining
precise weightings in asset classes. 14 1
- ----------------------------------- ------------------------------------------- --------- ----------
B. Income-Mixed Funds ($28.2) Invest in a variety of income-producing
securities, including equities and
fixed-income securities. These funds seek a
high level of current income without regard
to capital appreciation. 5 1
- ----------------------------------- ------------------------------------------- --------- ----------
III. TAXABLE BOND FUNDS ($17.1)
- ------------------------------------------------------------------------------ --------- -----------
A. High Yield Funds ($3.2) Invest two-thirds or more of their
portfolios in lower-rated U.S. corporate
bonds (Baa or lower by Moody's and BBB or
lower by Standard & Poor's rating services). 2 1
---------------------------------- ------------------------------------------- --------- -----------
B. World Bond Funds ($1.7) Invest in debt securities offered by foreign
companies and governments. They seek the
highest level of current income available
worldwide.
---------------------------------- ------------------------------------------- --------- -----------
1. Global Bonds Funds: Invest in debt securities worldwide with
General no stated average maturity or an average
maturity of five years or more. These funds
may invest up to 25 percent of assets in
companies located in the United States. 2 2
---------------------------------- ------------------------------------------- --------- -----------
2. Global Bond Funds: Invest in debt securities worldwide with an
Short Term average maturity of one to five years. These
funds may invest up to 25 percent of assets
in companies located in the United States. 1 0
---------------------------------- ------------------------------------------- --------- -----------
3. Other World Bond Funds Invest in international bond and emerging
market debt funds, foreign government and
corporate debt instruments. Two-thirds
of an international bonds fund's portfolio
must be invested outside the United States.
Emerging market debt funds invest primarily
in debt from underdeveloped regions of the
world. 1 0
---------------------------------- ------------------------------------------- --------- -----------
C. Government Bond Funds ($9.9) Invest in U.S. government bonds of varying
maturities. They seek high current income.
---------------------------------- ------------------------------------------- --------- -----------
17
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CATEGORY
(AND APPROXIMATE ASSETS UNDER MANAGEMENT,
AS OF SEPTEMBER 30, 2004) NO. OF
NO. OF INSURANCE
MUTUAL PRODUCT
IN BILLIONS INVESTMENT OBJECTIVE FUNDS FUNDS
- ----------------------------------- ------------------------------------------- --------- ----------
1. Government Bond Funds: Invest two-thirds or more of their
Intermediate Term portfolios in U.S. government securities
with an average maturity of five to ten
years. Securities utilized by investment
managers may change with market conditions. 0 1
---------------------------------- ------------------------------------------- --------- -----------
2. Government Bond Funds: Invest two-thirds or more of their
Short Term portfolios in U.S. government securities
with an average maturity of one to five
years. Securities utilized by investment
managers may change with market
conditions. 1 0
---------------------------------- ------------------------------------------- --------- -----------
3. Mortgage-Backed Funds Invest two-thirds or more of their
portfolios in pooled mortgage-backed
securities. 5 0
---------------------------------- ------------------------------------------- --------- -----------
D. Strategic Income Funds ($1.4) Invest in a combination of U.S.
fixed-income securities to provide a high
level of current income. 2 2
---------------------------------- ------------------------------------------- --------- -----------
E. Corporate Bond Funds ($0.9) Seek current income by investing in high-
quality debt securities issued by U.S.
corporations.
---------------------------------- ------------------------------------------- --------- -----------
1. Corporate Bond Funds: Invest two-thirds or more of their
Short Term portfolios in U.S. corporate bonds with
an average maturity of one to five
years. These funds seek a high level of
income with less price volatility than
intermediate-term bond funds. 1 0
- ---------------------------------- ------------------------------------------- --------- -----------
IV. TAX-FREE BOND FUNDS ($48.8)
- ------------------------------------------------------------------------------ --------- -----------
A. State Municipal Bond Invest primarily in municipal bonds
Funds ($34.1) issued by a particular state. These funds
seek high after-tax income for residents of
individual states.
- ---------------------------------- ------------------------------------------- --------- -----------
1. State Municipal Bond Invest primarily in the single-state
Funds: municipal bonds with an average maturity
General of greater than five years or no specific
stated maturity. The income from these funds
is largely exempt from federal as well as
state income tax for residents of the state. 29 0
- ---------------------------------- ------------------------------------------- --------- -----------
2.State Municipal Bond Invest primarily in single-state municipal
Funds: bonds with an average maturity of one to
Short Term five years. The income from these funds is
largely exempt from federal as well as state
income tax for residents of the state. 2 0
- ---------------------------------- ------------------------------------------- --------- -----------
B. National Municipal Bond Invest primarily in the bonds of various
Funds ($14.7) municipal issuers in the United States.
These funds seek high current income free
from federal income tax.
- ---------------------------------- ------------------------------------------- --------- -----------
1. National Municipal Bond Invest primarily in municipal bonds with
Funds: an average maturity of more than five
General years or no specific stated maturity. 4 0
- ---------------------------------- ------------------------------------------- --------- -----------
2. National Municipal Bond Invest primarily in municipal bonds with
Funds: an average maturity of one to five years.
Short Term 1 0
- ---------------------------------- ------------------------------------------- --------- -----------
18
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CATEGORY
(AND APPROXIMATE ASSETS UNDER MANAGEMENT,
AS OF SEPTEMBER 30, 2004) NO. OF
NO. OF INSURANCE
MUTUAL PRODUCT
IN BILLIONS INVESTMENT OBJECTIVE FUNDS FUNDS
- ----------------------------------- ------------------------------------------- --------- ----------
V. MONEY MARKET FUNDS ($4.5)
- ------------------------------------------------------------------------------ --------- -----------
A. Taxable Money Market Invest in short-term, high-grade money
Funds ($3.6) market securities and must have average
maturities of 90 days or less. These
funds seek the highest level of income
consistent with preservation of capital
(i.e., maintaining a stable share price).
- ---------------------------------- ------------------------------------------- --------- -----------
1. Taxable Money Market Invest primarily in U.S. Treasury
Funds: obligations and other financial
Government instruments issued or guaranteed by the
U.S. government, its agencies, or its
instrumentalities. 1 0
- ---------------------------------- ------------------------------------------- --------- -----------
2. Taxable Money Market Invest primarily in a variety of money
Funds: market instruments, including certificates
Non-Government of deposit from larger banks, commercial
paper, and bankers' acceptances. 6 1
- ---------------------------------- ------------------------------------------- --------- -----------
B. Tax-Exempt Money Market Invest in short-term municipal securities
Funds ($0.9) and must have average maturities of 90 days
or less. These funds seek the highest level
of income - free from federal and, in some
cases, state and local taxes - consistent
with preservation of capital.
- ---------------------------------- ------------------------------------------- --------- -----------
1. National Tax-Exempt Invest in short-term securities of various
Money Market Funds U.S. municipal issuers. 1 0
- ---------------------------------- ------------------------------------------- --------- -----------
2. State Tax-Exempt Invest primarily in short-term securities
Money Market Funds of municipal issuers in a single state to
achieve the highest level of tax-free
income for residents of that state. 2 0
- ---------------------------------- ------------------------------------------- --------- -----------
19
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The following table sets forth the types of our non-U.S. open-end funds as of
September 30, 2004 and is categorized by investment objectives and sales region.
NON-U.S. OPEN-END FUNDS (a)
---------------------------
CATEGORY
(AND APPROXIMATE ASSETS UNDER MANAGEMENT,
AS OF SEPTEMBER 30, 2004) NO. OF
MUTUAL
FUNDS BY SALES
IN BILLIONS INVESTMENT OBJECTIVE REGION
- ----------------------------------- ------------------------------------------- --------------- ----
I. EQUITY FUNDS ($30.4)
- ----------------------------------- ------------------------------------------- --------------- ----
A. Global/International Equity Invest in securities of companies traded Asia Pacific: 33
($27.9) worldwide, including foreign and U.S. Canada: 21
companies. U.K./Europe: 30
- ----------------------------------- ------------------------------------------- --------------- ----
B. Domestic (U.S.) Equity ($2.5) Invest in equity securities of U.S. Canada: 6
companies. U.K./Europe: 11
- ----------------------------------- ------------------------------------------- --------------- ----
II. FIXED-INCOME FUNDS ($12.1)
- ------------------------------------------------------------------------------- --------------- ----
A. Global/International Invest worldwide in debt securities Asia Pacific: 31
Fixed-Income ($4.7) offered by foreign companies and Canada: 3
governments. These funds may invest U.K./Europe: 8
assets in debt securities offered by
companies located in the U.S.
- ----------------------------------- ------------------------------------------- --------------- ----
B. Domestic Fixed-Income ($7.4) Invest in debt securities offered by U.S. Asia Pacific: 1
companies and the U.S. government and/or Canada: 2
municipalities located in the U.S. U.K./Europe: 5
- ----------------------------------- ------------------------------------------- --------------- ----
III. HYBRID FUNDS ($1.9) May invest in a mix of global equity, Asia Pacific: 17
fixed-income securities and derivative Canada: 5
instruments. U.K./Europe: 4
- ----------------------------------- ------------------------------------------- --------------- ----
IV. TAXABLE MONEY FUNDS ($2.3) Market securities issued or guaranteed by Asia Pacific: 5
domestic or global governments or Canada: 3
agencies. U.K./Europe: 2
- ----------------------------------- ------------------------------------------- --------------- ----
(a) Does not include the Franklin Templeton Global Fund, the Fiduciary Emerging
Markets Bond Fund plc, nor fund-of-fund mutual funds. For purposes of this
table, we consider the sales region to be where a fund is based and
primarily sold and not necessarily the region where a particular fund is
invested. Many funds are also distributed across different sales regions
(e.g., SICAV funds are based, primarily sold in and therefore considered to
be within the U.K./Europe sales region, although also distributed in the
Asia Pacific sales region), but are only designated a single sales region
in the table.
3. Fund Introductions, Mergers and Liquidations
In an effort to address changing market conditions and evolving investor needs,
we periodically introduce new funds, merge existing funds or liquidate existing
funds. During the fiscal year ended September 30, 2004, we added and introduced
a number of funds in the U.S., Canada and other regions internationally.
In the U.S., product line optimization was a key focus during the fiscal year.
Recognizing investor preferences and general industry trends, we continued to
promote existing core offerings as well as diversified asset allocation
portfolios. We added a new portfolio to our Franklin Templeton Allocator Series,
a group of fund-of-fund mutual funds that invest in many of our core products.
We also expanded the distribution of our alternative products to address the
rising demand in the retail channel. We continued to work closely with
institutional clients, providing separate account management as well as
customized investment solutions for many high net worth investors.
In Canada, we introduced the Bissett Income Trust & Dividend Fund, together with
the Bissett Canadian Short Term Bond Fund, to meet the growing demand for
income-oriented products in the Canadian investment marketplace. We added the
Templeton China Tax Class fund managed by Mark Mobius to take advantage of
growth opportunities in China, Hong Kong and Taiwan. Other new offerings
included a new Canadian growth portfolio and tax class versions for the
Quotential Program, one of the best selling broker/dealer-distributed
20
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wrap programs in Canada. Additionally, we added the Bissett All
Canadian Focus Fund, that uses a pre-determined quantitative screening model and
the Franklin Templeton Canadian Small Cap Fund.
In other regions internationally, we strategically launched new core funds and
investment products that addressed the unique needs of local markets. In the
United Kingdom, we continued to expand our local product offering through the
introduction of two new funds. While in India, two new sub funds were
introduced, that were designed to provide investors with choices in their asset
allocation models. In other country specific markets, including Korea, Singapore
and Italy, we initiated new locally demanded products to support those expanding
businesses.
During the fiscal year ended September 30, 2004, the following fund mergers and
liquidations occurred: 1 variable insurance fund merged into another variable
insurance fund; 1 U.S.-registered open-end fund was merged into another
U.S.-registered open-end fund; 3 U.S.-registered mutual funds were liquidated; 7
non-U.S.-registered open-end funds were merged into other non-U.S.-registered
open-end funds and 26 non-U.S.-registered open-end funds were liquidated.
II. BANKING/FINANCE OPERATIONS
--------------------------
Our secondary business segment is banking/finance, which offers select
retail-banking and consumer lending services.
Our subsidiary, Fiduciary Trust, is a New York state chartered bank and provides
private banking services primarily to high net-worth clients who maintain trust,
custody and/or investment management accounts with Fiduciary Trust. Fiduciary
Trust's private banking and credit products include, among others, loans secured
by marketable securities, foreign exchange services, deposit accounts and other
banking services. As discussed in Investment Management and Related Services,
Fiduciary Trust also offers investment management, trust and estate, custody and
related services to institutional accounts and high net-worth individuals and
families.
Franklin Capital Corporation ("FCC") is a subsidiary of FRI, which engages
primarily in the purchase, securitization and servicing of retail installment
sales contracts ("automobile contracts") originated by independent automobile
dealerships. FCC is incorporated and headquartered in Utah and conducts its
business primarily in the Western region of the U.S. As of September 30, 2004,
FCC's total assets included $105.0 million of outstanding automobile contracts.
During fiscal 2004, FCC securitized approximately $482.2 million of automobile
contract receivables for which it maintains servicing rights. As of September
30, 2004, FCC serviced $768.9 million of receivables that have been securitized
to date. See Note 7 in the Notes to the Consolidated Financial Statements.
Our securitized automobile contracts business is subject to marketplace
fluctuation and competes with businesses with significantly larger portfolios.
Auto loan portfolio losses can be influenced significantly by trends in the
economy and credit markets, which reduce borrowers' ability to repay loans. A
more detailed analysis of loan losses and delinquency rates in our consumer
lending and dealer auto loan business is contained in Note 6 in the Notes to the
Consolidated Financial Statements.
Our subsidiary Franklin Templeton Bank & Trust, F.S.B. ("FTB&T"), with total
assets of $145.2 million, as of September 30, 2004, provides FDIC insured
deposit accounts and general consumer loan products such as credit card loans,
unsecured loans, loans secured by marketable securities, mortgage loans, debit
card products and auto loans. FTB&T (formerly known as Franklin Bank) became
chartered as a federal savings bank on May 1, 2000 when the Office of Thrift
Supervision approved FTB&T's application to convert from a California state
banking charter to a federal thrift charter. Immediately following the
conversion of FTB&T's state charter to a federal thrift charter, Franklin
Templeton Trust Company, a California chartered trust company, was merged into
FTB&T and continues to perform its prior activities as a division of FTB&T and
Franklin Templeton Fiduciary Bank & Trust, Ltd. ("FTFB&T"), a licensed bank and
trust company in the Bahamas.
Our other banking subsidiaries include, among others, FTCI (Cayman) Ltd., a
licensed bank and trust company in the Cayman Islands and FTFB&T.
21
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REGULATORY CONSIDERATIONS
Virtually all aspects of our business, including those conducted through our
various subsidiaries, are subject to various federal, state, and foreign
regulation and supervision. Domestically, we are subject to regulation and
supervision by, among others, the SEC, the NASD, the Federal Reserve Board (the
"FRB"), the Federal Deposit Insurance Corporation ("FDIC"), the Office of Thrift
Supervision and the New York State Banking Department. Globally, we are subject
to regulation and supervision by, among others, the Office of the Superintendent
of Financial Institutions as well as provincial financial services regulators in
Canada, and the Ontario and Alberta Securities Commissions, the Monetary
Authority of Singapore, the Financial Services Authority in the United Kingdom,
the Central Bank of Ireland, the Securities and Futures Commission of Hong Kong,
the Korean Ministry of Finance and Economy, the Financial Supervisory Commission
and the Financial Supervisory Services in Korea, the Securities Exchange Board
of India, the China Securities Regulatory Commission, the Taiwan Securities and
Futures Commission, the Ministry of Finance, and the Commerce Department,
Ministry of Economic Affairs in Taiwan. The Advisers Act imposes numerous
obligations on our subsidiaries, which are registered in the United States as
investment advisers, including record keeping, operating and marketing
requirements, disclosure obligations and prohibitions on fraudulent activities.
The '40 Act imposes similar obligations on the investment companies that are
advised by our subsidiaries. The SEC is authorized to institute proceedings and
impose sanctions for violations of the Advisers Act and the '40 Act, ranging
from fines and censure to termination of an investment adviser's registration.
As part of various investigations by the SEC, the U.S. Attorney for the Northern
District of California, the New York Attorney General, the California Attorney
General, the U.S. Attorney for the District of Massachusetts, the Securities
Division of the Office of the Secretary of the Commonwealth of Massachusetts,
the Florida Department of Financial Services and the Commissioner of Securities,
the West Virginia Attorney General, the Vermont Department of Banking,
Insurance, Securities, and Health Care Administration and the National
Association of Securities Dealers, relating to certain practices in the mutual
fund industry, including late trading, market timing and marketing support
payments to securities broker/dealers who sell fund shares, the Company and
certain of its subsidiaries, as well as certain current or former executives and
employees of the Company, received requests for information and/or subpoenas to
testify or produce documents. The Company and its current employees provided
documents and information in response to these requests and subpoenas. In
addition, the Company has responded, and in one instance is currently
responding, to requests for similar kinds of information from regulatory
authorities in some of the foreign countries where the Company conducts its
global asset management business. See also Note 13 in the Notes to the
Consolidated Financial Statements.
FRI and many of the investment companies advised by our various subsidiaries are
also subject to the federal and state laws affecting corporate governance,
including the Sarbanes-Oxley Act of 2002, as well as rules adopted by the SEC.
As a NYSE listed company, we are also subject to the rules of the NYSE,
including the corporate governance standards.
Since 1993, the NASD Conduct Rules have limited the amount of aggregate sales
charges which may be paid in connection with the purchase and holding of
investment company shares sold through broker/dealers. The effect of the rule is
to limit the amount of fees that could be paid pursuant to a fund's 12b-1 Plan
to FTDI, our principal underwriting and distribution subsidiary, which earns
underwriting commissions on the distribution of fund shares in the United
States.
Following the acquisition of Fiduciary Trust in fiscal year 2001, the Company
became a bank holding company under the BHC Act and is subject to supervision
and regulation by the FRB. Pursuant to the GLB Act, a bank holding company may
elect to become a financial holding company if each of its subsidiary banks and
other depository institution subsidiaries is well capitalized, is well managed
and has at least a "satisfactory" rating under the Community Reinvestment Act
("CRA"). Because we are a qualifying bank holding company under the GLB Act, we
also became a financial holding company, which enables us to affiliate with a
far broader range of financial companies than had previously been permitted for
bank holding companies. Permitted affiliates include securities brokers,
underwriters and dealers, investment managers, mutual fund distributors,
insurance companies and companies engaged in other activities that are financial
in nature or incidental to a financial activity. The FRB's regulations specify
that organizing, sponsoring, and managing a mutual fund are activities that are
permissible for financial holding companies under certain guidelines.
22
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The FRB may impose limitations, restrictions, or prohibitions on the activities
or acquisitions of a financial holding company if the FRB believes that the
Company does not have the appropriate financial and managerial resources to
commence or conduct an activity, make an acquisition, or retain ownership of a
company. The GLB Act establishes the FRB as the umbrella supervisor for
financial holding companies and adopts an administrative approach to regulation
that generally requires the FRB to defer to the actions and requirements of the
U.S. "functional" regulators of subsidiary broker/dealers, investment advisers,
investment companies, insurance companies, and other regulated non-depository
institutions.
Under federal law, a depository institution is prohibited from paying a dividend
if the depository institution would thereafter be "undercapitalized" as
determined by the federal bank regulatory agencies. FRB policy provides that, as
a matter of prudent banking, a bank holding company generally should not pay
dividends unless its net income is sufficient to fully fund the dividends and
the prospective rate of earnings retention appears to be consistent with the
capital needs, asset quality and overall financial condition of the holding
company and its bank and thrift institution subsidiaries. As we are a bank
holding company, this policy may be applied to us even though we are also a
financial holding company.
Almost every aspect of the operations and financial condition of our banking and
thrift subsidiaries are subject to extensive regulation and supervision and to
various requirements and restrictions under federal and state law, including
requirements governing capital adequacy, management practices, liquidity,
branching, earnings, loans, dividends, investments, reserves against deposits,
and the provision of services. The relevant federal banking regulatory agencies
and the state banking regulatory agencies have authority to prohibit a bank or a
bank holding company from engaging in what, in the opinion of the regulatory
body, constitutes an unsafe or unsound practice.
Each of our banking subsidiaries is subject to restrictions under federal law
that limit transactions with FRI and its non-bank subsidiaries, including loans
and other extensions of credit, investments or asset purchases. These and
various other transactions, including any payment of money to FRI and its
non-bank subsidiaries, must be on terms and conditions that are, or in good
faith would be, offered to companies that are not affiliated with these
companies.
Federal banking agencies are required to take prompt supervisory and regulatory
actions with respect to institutions that do not meet minimum capital standards.
There are five defined capital tiers, the highest of which is "well
capitalized". A depository institution is generally prohibited from making
capital distributions, including paying dividends, or paying management fees to
a holding company if the institution would thereafter be undercapitalized.
Undercapitalized institutions may not accept, renew or roll over brokered
deposits. To remain a financial holding company, each company's banking
subsidiaries must be well capitalized and well managed. As of September 30,
2004, our bank and thrift subsidiaries continued to be considered "well
capitalized" and "well managed". If a banking subsidiary of a financial holding
company has not received a rating of at least "satisfactory" on its most recent
CRA examination, the FRB may prohibit the financial holding company or its
banking subsidiary from engaging in additional financial activities. Each of our
banking subsidiaries currently has a CRA rating of satisfactory or better.
The FRB has adopted various capital guidelines for bank holding companies. The
GLB Act generally prohibits the FRB from imposing capital requirements on
functionally regulated non-bank subsidiaries of a financial holding company,
such as broker/dealers and investment advisers.
The federal banking agencies have broad enforcement powers, including the power
to terminate deposit insurance, impose substantial fines and other civil and
criminal penalties and appoint a conservator or receiver. Failure to comply with
applicable laws, regulations and supervisory agreements could subject FRI, our
thrift and banking subsidiaries, as well as officers, directors and other
so-called "institution-affiliated parties" of these organizations to
administrative sanctions and potentially substantial civil money penalties. In
addition, the appropriate federal banking agency may appoint the FDIC as
conservator or receiver for a banking institution, or the FDIC may appoint
itself if any one or more of a number of circumstances exist.
COMPETITION
The financial services industry is highly competitive and has increasingly
become a global industry. There are approximately 8,100 open-end investment
companies of varying sizes, investment policies and objectives whose shares are
being offered to the public in the U.S. Due to our international presence and
varied product
23
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mix, it is difficult to assess our market position relative to other investment
managers on a worldwide basis, but we believe that we are one of the more widely
diversified investment managers in the U.S. We believe that our equity and
fixed-income asset mix coupled with our global presence will serve our
competitive needs well over the long term. We continue to focus on the
performance of our investment products, service to customers and extensive
marketing activities with our strong broker/dealer and other financial
institution distribution network as well as high net-worth customers.
We face strong competition from numerous investment management, stock brokerage
and investment banking firms, insurance companies, banks, savings and loan
associations and other financial institutions, which offer a wide range of
financial and investment management services to the same institutional accounts,
separate accounts and high net-worth customers that we are seeking to attract.
In recent years, there has been a trend of consolidation in the financial
services industry, resulting in stronger competitors with greater financial
resources than us.
We rely largely on intermediaries to sell and distribute Franklin Templeton
mutual fund shares. In addition to offering our products, many of these
intermediaries also have mutual funds under their own names that compete
directly with our products. These intermediaries could decide to limit or
restrict the sale of our fund shares, which could lower our future sales and
cause our revenues to decline. We have and continue to pursue sales
relationships with all types of intermediaries to broaden our distribution
network. We have experienced increased costs related to maintaining our
distribution channels and we anticipate that this trend will continue.
We have implemented an award winning Internet platform to compete with the
rapidly developing and evolving capabilities being offered with this technology.
Together with several large financial services companies, we made a capital
investment in the development of an industry-wide Internet portal, known as
Advisorcentral.com, which provides our broker/dealer and investment adviser
customers with the ability to view their clients' holdings using one log-in ID.
As investor interest in the mutual fund industry has increased, competitive
pressures have increased on sales charges of broker/dealer distributed funds. We
believe that, although this trend will continue, a significant portion of the
investing public still relies on the services of the broker/dealer or financial
adviser community, particularly during weaker market conditions.
We believe that we are well positioned to deal with changes in marketing trends
as a result of our already extensive advertising activities and broad based
marketplace recognition. We conduct significant advertising and promotional
campaigns through various media sources to promote brand recognition. We
advertise in major national financial publications, as well as on radio and
television to promote brand name recognition and to assist our distribution
network. Such activities include purchasing network and cable programming,
sponsorship of sporting events, and extensive newspaper and magazine
advertising.
Diverse and strong competition affects the banking/finance segment of our
business as well, and limits the fees that can be charged for our services. For
example, in the banking segment we compete with many types of institutions for
consumer loans, including the finance subsidiaries of large automobile
manufacturers, which have offered special incentives to stimulate automobile
sales, including no-interest loans. These product offerings by our competitors
limit the interest rates that we can charge on consumer loans.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Information on our operations in various geographic areas of the world and a
breakout of business segment information is contained in Note 18 in the Notes to
the Consolidated Financial Statements.
INTELLECTUAL PROPERTY
We have used, registered, and/or applied to register certain trademarks and
service marks to distinguish our sponsored investment products and services from
those of our competitors in the U.S. and in foreign countries and jurisdictions,
including, but not limited to, Franklin(R), Templeton(R), Bissett(R), Mutual
Series(R) and FiduciaryTM. We enforce our trademark, service mark and trade name
rights in the U.S. and abroad.
24
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EMPLOYEES
As of September 30, 2004, we employed approximately 6,700 employees and operated
offices in 27 countries. We consider our relations with our employees to be
satisfactory.
AVAILABLE INFORMATION
Franklin Resources, Inc. files reports with the SEC. Copies of any of these
filings can be obtained from the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. Information on the operation of the Public
Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
We also file reports with the SEC electronically via the Internet. The SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers who file electronically with
the SEC, at http://www.sec.gov. Additional information about Franklin Resources,
Inc. can also be obtained at our website at http://www.franklintempleton.com. We
make available free of charge on our website our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.
CORPORATE GOVERNANCE GUIDELINES. The Company has adopted Corporate Governance
Guidelines. The Corporate Governance Guidelines are posted on the Company's
website and are available in print to any shareholder who requests a copy.
COMMITTEE CHARTERS. The Board of Directors has an Audit Committee, Compensation
Committee and Corporate Governance Committee. The Board of Directors has adopted
written charters for each committee, which are posted on the Company's website
and are available in print to any shareholder who requests a copy.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information on the executive officers of FRI, including their
principal occupations for the past five (5) years, is given as of November 30,
2004.
PENELOPE S. ALEXANDER
Age 44
Vice President, Human Resources - U.S. of FRI since May 2003; officer of other
FRI subsidiaries; employed by FRI or its subsidiaries in various other
capacities for more than the past five (5) years.
JAMES R. BAIO
Age 50
Senior Vice President and Chief Financial Officer of FRI since May 2003; officer
of other FRI subsidiaries; employed by FRI or its subsidiaries in various other
capacities for more than the past five (5) years.
JENNIFER J. BOLT
Age 40
Senior Vice President and Chief Information Officer of FRI since May 2003;
officer and/or director of other FRI subsidiaries since June 1994; employed by
FRI or its subsidiaries in various other capacities for more than the past five
(5) years. Director, Keynote Systems, Inc. since April 2004.
HARMON E. BURNS
Age 59
Director Since 1991
Vice Chairman and Director of FRI; formerly Executive Vice President and
director of FRI for more than the past five (5) years; Member - Office of the
Chairman of FRI; officer and/or director of many other FRI subsidiaries; officer
and/or director or trustee in 49 investment companies of Franklin Templeton
Investments.
25
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MARTIN L. FLANAGAN
Age 44
President and Co-Chief Executive Officer of FRI; formerly Senior Vice President
and Chief Financial Officer for more than the past five (5) years; officer
and/or director of many other FRI subsidiaries; officer, director and/or trustee
in 49 investment companies of Franklin Templeton Investments.
HOLLY E. GIBSON
Age 38
Vice President - Corporate Communications of FRI since May 2003 and Director of
Corporate Communications for more than the past five (5) years.
BARBARA J. GREEN
Age 57
Vice President and Deputy General Counsel of FRI since January 2000 and
Secretary of FRI since October 2003; officer of many other FRI subsidiaries;
officer in 52 investment companies of Franklin Templeton Investments.
DONNA S. IKEDA
Age 48
Vice President, Human Resources - International of FRI since May, 2003 and
formerly Vice President - Human Resources of FRI for more than the past five (5)
years.
CHARLES B. JOHNSON
Age 71
Director Since 1969
Chairman of the Board and director of FRI for more than the past five (5) years;
formerly Chief Executive Officer; Member - Office of the Chairman of FRI;
officer and/or director of many other FRI subsidiaries; officer and/or director
or trustee in 46 investment companies of Franklin Templeton Investments.
GREGORY E. JOHNSON
Age 43
President and Co-Chief Executive Officer of FRI; formerly Vice President of FRI
for more than the past five (5) years; officer of many other FRI subsidiaries
and in 2 investment companies of Franklin Templeton Investments.
RUPERT H. JOHNSON, JR.
Age 64
Director Since 1969
Vice Chairman of FRI; formerly Executive Vice President and director of FRI for
more than the past five (5) years; Member - Office of the Chairman of FRI;
officer and/or director of many other FRI subsidiaries; officer and/or director
or trustee in 49 investment companies of Franklin Templeton Investments.
LESLIE M. KRATTER
Age 59
Senior Vice President (since 2000) and Assistant Secretary (since October 2003)
of FRI; formerly Secretary from March 1998 to October 2003 and Vice President of
FRI since March 1993.
KENNETH A. LEWIS
Age 43
Vice President and Treasurer of FRI since June 2002 and officer of many other
FRI subsidiaries for more than the past five (5) years.
26
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JOHN M. LUSK
Age 46
Vice President of FRI since January 2004; officer of other FRI subsidiaries;
employed by FRI or its subsidiaries in various other capacities for more than
the past five (5) years.
MURRAY L. SIMPSON
Age 67
Executive Vice President and General Counsel of FRI since January 2000; officer
in 51 investment companies of Franklin Templeton Investments. Previously
Managing Director and Chief Executive Officer of Franklin Templeton Investments
(Asia) Limited (formerly, Templeton Franklin Investment Services (Asia),
Limited) from 1994-2000.
CHARLES R. SIMS
Age 43
Vice President of FRI and officer of many other FRI subsidiaries for the past
five (5) years.
ANNE M. TATLOCK
Age 65
Vice Chairman, Member - Office of the Chairman and a director of FRI from
January 2001 to December 2004; Chairman of the Board, Chief Executive Officer
(since 2000), and Director of Fiduciary Trust, a subsidiary of FRI; formerly
President of Fiduciary Trust for more than the past five (5) years; officer
and/or director of certain other subsidiaries of FRI. Director, Fortune Brands,
Inc. and Merck & Co., Inc.
FAMILY RELATIONS. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Peter M. Sacerdote, a director of FRI, is a brother-in-law of Charles B. Johnson
and Rupert H. Johnson, Jr. Gregory E. Johnson is the son of Charles B. Johnson,
the nephew of Rupert H. Johnson, Jr. and Peter Sacerdote and the brother of
Jennifer Bolt. Jennifer Bolt is the daughter of Charles B. Johnson, the niece of
Rupert H. Johnson, Jr. and Peter Sacerdote and the sister of Gregory E. Johnson.
ITEM 2. PROPERTIES.
We conduct our worldwide operations using a combination of leased and owned
facilities. While we believe we have sufficient facilities to conduct business
during fiscal 2005, we will continue to lease, acquire and dispose of facilities
throughout the world as necessary.
We lease space domestically primarily in California, Connecticut, Delaware,
Florida, Georgia, New Jersey, New York, Utah, Washington, Wisconsin and the
District of Columbia, and internationally in various locations, including
Australia, Belgium, Brazil, Canada, China, England, France, Germany, Holland,
Hong Kong, India, Ireland, Italy, Japan, Korea, Luxembourg, Poland, Russia,
Scotland, Spain, Sweden, Switzerland, Taiwan, Turkey, United Arab Emirates and
Venezuela. As of September 30, 2004, we leased and occupied approximately
939,000 square feet of space. We have also leased and subsequently subleased to
third parties a total of 305,000 square feet of space.
In addition, we own 4 buildings in San Mateo, California, 5 buildings near
Sacramento, California, 5 buildings in St. Petersburg, Florida, 2 buildings in
Nassau, Bahamas, 4 buildings in India, as well as space in office buildings in
Argentina, China and Singapore. During this past year we acquired the 4
buildings in San Mateo, California that we previously occupied under an
operating lease with a related lessor trust. The buildings we own consist of
approximately 1.64 million square feet. We have leased to third parties
approximately 100,000 square feet of excess owned space. Since we operate on a
unified basis, corporate activities, fund related activities, accounting
operations, sales, retail-banking and consumer lending operations, management
information system activities, publishing and printing operations, shareholder
service operations and other business activities and operations take place in a
variety of such locations.
27
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ITEM 3. LEGAL PROCEEDINGS.
On September 20, 2004, Franklin Resources, Inc. announced that two of its
subsidiaries, Franklin Advisers, Inc. (as used in this section, "Franklin
Advisers") and Franklin Templeton Alternative Strategies, Inc.("FTAS") reached
an agreement with the Securities Division of the Office of the Secretary of the
Commonwealth of Massachusetts (the "State of Massachusetts") related to the
previously-reported administrative complaint filed on February 4, 2004. The
administrative complaint concerned one instance of market timing.
Under the terms of the settlement consent order issued by the State of
Massachusetts, Franklin Advisers and FTAS consented to the entry of a cease and
desist order and agreed to pay a $5 million administrative fine to the State of
Massachusetts (the "Massachusetts Consent Order"). Franklin Resources, Inc.
recorded this expense in the quarter ended September 30, 2004. The Massachusetts
Consent Order included two different sections: "Statements of Fact" and
"Violations of Massachusetts Securities Laws." Franklin Advisers and FTAS
admitted the facts in the Statements of Fact.
On October 25, 2004, the State of Massachusetts filed a second administrative
complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing (in which it
described the Massachusetts Consent Order and stated that "Franklin did not
admit or deny engaging in any wrongdoing") failed to state that FAV and FTAS
admitted the Statements of Fact portion of the Massachusetts Consent Order (the
"Second Complaint"). Franklin Resources, Inc. reached a second agreement with
the State of Massachusetts on November 19, 2004, resolving the Second Complaint.
As a result of the November 19, 2004 settlement, Franklin Resources, Inc. filed
a new Form 8-K. The terms of the original settlement did not change and there
was no monetary fine associated with this second settlement.
In addition, Franklin Resources, Inc. and certain of its subsidiaries (as used
in this section, together, the "Company") and certain Franklin Templeton mutual
funds (the "Funds") current and former officers, employees, and directors have
been named in multiple lawsuits in different federal courts in Nevada,
California, Illinois, New York, and Florida, alleging violations of various
federal securities laws and seeking, among other things, monetary damages and
costs. Specifically, the lawsuits claim breach of duty with respect to alleged
arrangements to permit market timing and/or late trading activity, or breach of
duty with respect to the valuation of the portfolio securities of certain
Templeton Funds managed by Company subsidiaries, resulting in alleged market
timing activity. The majority of these lawsuits duplicate, in whole or in part,
the allegations asserted in the first Massachusetts administrative complaint
described above. The lawsuits are styled as class actions, or derivative actions
on behalf of either the named Funds or the Company. Additionally, Franklin
Templeton Investments Corp. ("FTIC") was recently served with a class action
market timing complaint in Quebec, Canada, entitled Huneault v. AGF Funds, Inc.,
et al., Case No. 500-06-000256-046, filed on October 25, 2004 in the Superior
Court for the Province of Quebec, District of Montreal.
To date, more than 240 similar lawsuits against at least 19 different mutual
fund companies have been filed in federal district courts throughout the
country. Because these cases involve common questions of fact, the Judicial
Panel on Multidistrict Litigation (the "Judicial Panel") ordered the creation of
a multidistrict litigation in the United States District Court for the District
of Maryland, entitled "In re Mutual Funds Investment Litigation" (the "MDL").
The Judicial Panel then transferred similar cases from different districts to
the MDL for coordinated or consolidated pretrial proceedings.
As of December 13, 2004, the following lawsuits are pending against the Company
(and in some instances, against certain of the Funds) and have been transferred
to the MDL:
Kenerley v. Templeton Funds, Inc., et al., Case No. 03-770 GPM, filed on
November 19, 2003 in the United States District Court for the Southern District
of Illinois; Cullen v. Templeton Growth Fund, Inc., et al., Case No. 03-859 MJR,
filed on December 16, 2003 in the United States District Court for the Southern
District of Illinois and transferred to the United States District Court for the
Southern District of Florida on March 29, 2004; Jaffe v. Franklin AGE High
Income Fund, et al., Case No. CV-S-04-0146-PMP-RJJ, filed on February 6, 2004 in
the United States District Court for the District of Nevada; Lum v. Franklin
Resources, Inc., et al., Case No. C 04 0583 JSW, filed on February 11, 2004 in
the United States District Court for the Northern District of California;
Fischbein v. Franklin AGE High Income Fund, et al., Case No. C 04 0584 JSW,
filed on February 11, 2004 in the United States District Court for the Northern
District of California; Beer v. Franklin AGE High Income Fund, et al., Case No.
8:04-CV-249-T-26 MAP, filed on February 11, 2004 in the United States District
28
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Court for the Middle District of Florida; Bennett v. Franklin Resources, Inc.,
et al., Case No. CV-S-04-0154-HDM-RJJ, filed on February 12, 2004 in the United
States District Court for the District of Nevada; Dukes v. Franklin AGE High
Income Fund, et al., Case No. C 04 0598 MJJ, filed on February 12, 2004, in the
United States District Court for the Northern District of California; McAlvey v.
Franklin Resources, Inc., et al., Case No. C 04 0628 PJH, filed on February 13,
2004 in the United States District Court for the Northern District of
California; Alexander v. Franklin AGE High Income Fund, et al., Case No. C 04
0639 SC, filed on February 17, 2004 in the United States District Court for the
Northern District of California; Hugh Sharkey IRA/RO v. Franklin Resources,
Inc., et al., Case No. 04 CV 1330, filed on February 18, 2004 in the United
States District Court for the Southern District of New York; D'Alliessi, et al.
v. Franklin AGE High Income Fund, et al., Case No. C 04 0865 SC, filed on March
3, 2004 in the United States District Court for the Northern District of
California; Marcus v. Franklin Resources, Inc., et al., Case No. C 04 0901 JL,
filed on March 5, 2004 in the United States District Court for the Northern
District of California; Banner v. Franklin Resources, Inc., et al., Case No. C
04 0902 JL, filed on March 5, 2004 in the United States District Court for the
Northern District of California; Denenberg v. Franklin Resources, Inc., et al.,
Case No. C 04 0984 EMC, filed on March 10, 2004 in the United States District
Court for the Northern District of California; Hertz v. Burns, et al., Case No.
04 CV 02489, filed on March 30, 2004 in the United States District Court for the
Southern District of New York.
Plaintiffs in the MDL filed consolidated amended complaints on September 29,
2004. It is anticipated that defendants will file motions to dismiss in the
coming months.
As previously reported, various subsidiaries of Franklin Resources, Inc., as
well as certain Templeton Funds, have also been named in multiple lawsuits filed
in state courts in Illinois, alleging breach of duty with respect to the
valuation of the portfolio securities of certain Templeton Funds managed by such
subsidiaries as follows:
Bradfisch v. Templeton Funds, Inc., et al., Case No. 2003 L 001361, filed on
October 3, 2003 in the Circuit Court of the Third Judicial Circuit, Madison
County, Illinois; Woodbury v. Templeton Global Smaller Companies Fund, Inc., et
al., Case No. 2003 L 001362, filed on October 3, 2003 in the Circuit Court of
the Third Judicial Circuit, Madison County, Illinois; Kwiatkowski v. Templeton
Growth Fund, Inc., et al., Case No. 03 L 785, filed on December 17, 2003 in the
Circuit Court of the Twentieth Judicial Circuit, St. Clair County, Illinois;
Parise v. Templeton Funds, Inc., et al., Case No. 2003 L 002049, filed on
December 22, 2003 in the Circuit Court of the Third Judicial Circuit, Madison
County, Illinois.
These lawsuits are state court actions and are not subject to the MDL.
In addition, the Company, as well as certain current and former officers,
employees, and directors, have been named in multiple lawsuits alleging
violations of various securities laws and pendent state law claims relating to
the disclosure of directed brokerage payments and/or payment of allegedly
excessive advisory, commission, and distribution fees. These lawsuits are styled
as class actions and derivative actions brought on behalf of certain Funds, and
are as follows:
Stephen Alexander IRA v. Franklin Resources, Inc., et al., Case No. 04-982 JLL,
filed on March 2, 2004 in the United States District Court for the District of
New Jersey; Strigliabotti v. Franklin Resources, Inc., et al., Case No. C 04
0883 SI, filed on March 4, 2004 in the United States District Court for the
Northern District of California; Tricarico v. Franklin Resources, Inc., et al.,
Case No. CV-04-1052 JAP, filed on March 4, 2004 in the United States District
Court for the District of New Jersey; Miller v. Franklin Mutual Advisors, LLC,
et al., Case No. 04-261 DRH, filed on April 16, 2004 in the United States
District Court for the Southern District of Illinois and transferred to the
United States District Court for the District of New Jersey on August 5, 2004
(plaintiffs voluntarily dismissed this action, without prejudice, on October 22,
2004); Wilcox v. Franklin Resources, Inc., et al., Case No. 04-2258 WHW, filed
on May 12, 2004 in the United States District Court for the District of New
Jersey; Bahe, Custodian CGM Roth Conversion IRA v. Franklin/Templeton
Distributors, Inc. et al., Case No. 04-11195 PBS, filed on June 3, 2004 in the
United States District Court for the District of Massachusetts.
The United States District Court for the District of New Jersey consolidated for
pretrial purposes three of the above lawsuits (Stephen Alexander IRA, Tricarico,
and Wilcox) into a single action, entitled "In re Franklin Mutual Funds Fee
Litigation." Plaintiffs in those three lawsuits filed a consolidated amended
complaint on October 4, 2004.
Management strongly believes that the claims made in each of the lawsuits
identified above are without merit and intends to vigorously defend against
them.
29
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Please also see the discussion of certain governmental proceedings and
investigations in Note 13, "Commitments and Contingencies - Governmental
Investigations, Proceedings and Actions", of Notes to Consolidated Financial
Statements included in Part II of this report.
Except for the matters described above, there have been no material developments
in the litigation previously reported in our Form 10-Q for the period ended June
30, 2004, as filed with the SEC on August 13, 2004. We are involved from time to
time in litigation relating to claims arising in the normal course of business.
Management is of the opinion that the ultimate resolution of such claims will
not materially affect our business or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of our security holders.
30
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
(a) Our common stock is traded on the NYSE and the Pacific Exchange under the
ticker symbol "BEN", and the London Stock Exchange under the ticker symbol
"FRK". On September 30, 2004, the closing price of FRI's common stock on the
NYSE was $55.76 per share. At November 30, 2004, there were approximately 4,997
shareholders of record.
The following table sets forth the high and low sales prices for our common
stock on the NYSE.
2004 FISCAL YEAR 2003 FISCAL YEAR
-------------- -------------- ------------ --------------
QUARTER HIGH LOW HIGH LOW
- ------------------------------------ -------------- -------------- ------ ------------ --------------
October-December $52.25 $43.39 $37.85 $27.90
January-March $62.10 $52.02 $37.01 $29.99
April-June $57.81 $48.10 $40.85 $32.84
July-September $56.47 $46.85 $46.95 $38.66
- ------------------------------------ -------------- -------------- ------ ------------ --------------
We declared dividends of $0.34 per share in fiscal 2004 (or $0.085 per share per
quarter) and $0.30 per share in fiscal 2003 (or $0.075 per share per quarter).
We expect to continue paying dividends on a quarterly basis to holders of our
common stock depending upon earnings and other relevant factors.
(b) None.
(c) Issuer Purchases of Equity Securities.
The following table provides information with respect to the shares of common
stock we purchased during the three months ended September 30, 2004:
(C) TOTAL
NUMBER OF (D) MAXIMUM
SHARES NUMBER OF
PURCHASED AS SHARES THAT
PART OF MAY YET BE
(A) TOTAL PUBLICLY PURCHASED
NUMBER OF (B) AVERAGE ANNOUNCED UNDER THE
SHARES PRICE PAID PLANS OR PLANS OR
PERIOD PURCHASED PER SHARE PROGRAMS PROGRAMS
- -------------------------------------------------------------------------------------
July 1, 2004 through
July 31, 2004 8,189 $49.77 8,189 13,544,492
August 1, 2004 through
August 31, 2004 13,409 $48.46 13,409 13,531,083
September 1, 2004 through
September 30, 2004 300,000 $53.68 300,000 13,231,083
- -------------------------------------------------------------------------------------
TOTAL 321,598 321,598
- -------------------------------------------------------------------------------------
Under a stock repurchase program authorized by our Board of Directors in
September of 1985, we can repurchase shares of our common stock on the open
market and in private transactions in accordance with applicable securities
laws. In August 2002, May 2003, and August 2003, we announced increases in the
number of shares available for repurchase under our stock repurchase program
totaling 30.0 million shares, of which, approximately 13.2 million shares remain
available for repurchase as of September 30, 2004. Our stock repurchase program
is not subject to an expiration date.
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ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS
(in millions, except assets under management, per share amounts and employee headcount)
AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002 2001 2000
- ------------------------------------------------ --------- ---------- ---------- ---------- ---------
SUMMARY OF OPERATIONS
Operating revenues $3,438.2 $2,632.1 $2,522.9 $2,357.0 $2,340.8
Net income 706.7 502.8 432.7 484.7 562.1
FINANCIAL DATA
Total assets $8,228.1 $6,970.7 $6,422.7 $6,265.7 $4,042.4
Long-term debt 1,196.4 1,108.9 595.1 566.0 294.1
Stockholders' equity 5,106.8 4,310.1 4,266.9 3,977.9 2,965.5
Operating cash flow 943.4 536.4 735.2 553.2 701.7
ASSETS UNDER MANAGEMENT (in billions)
Period ending $361.9 $301.9 $247.8 $246.4 $229.9
Simple monthly average 340.2 269.8 263.2 243.4 227.7
PER COMMON SHARE
Earnings
Basic $2.84 $1.98 $1.66 $1.92 $2.28
Diluted 2.80 1.97 1.65 1.91 2.28
Cash dividends 0.34 0.30 0.28 0.26 0.24
Book value 20.45 17.53 16.50 15.25 12.17
EMPLOYEE HEADCOUNT 6,696 6,504 6,711 6,868 6,489
- ------------------------------------------------ --------- ---------- ---------- ---------- ---------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
In this section, we discuss our results of operations and our financial
condition. 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. For this reason, you should not rely too heavily on
them and should review the "Risk Factors" section, where we discuss these
statements 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 accounts, high net-worth clients, private accounts and
other investment products. This is our primary business activity and operating
segment. The mutual funds and other products that we advise, collectively called
our sponsored investment products, are distributed to the public globally under
six distinct names:
* Franklin
* Templeton
* Mutual Series
* Bissett
* Fiduciary Trust
* Darby Overseas
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Our sponsored investment products include a broad range of global/international
equity, U.S. domestic, hybrid, 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 selected retail-banking services to high net-worth
individuals, foundations and institutions, and consumer lending services. Our
consumer lending activities include automotive lending related to the purchase,
securitization, and servicing of retail installment sales contracts originated
by independent automobile dealerships, consumer credit and debit cards, real
estate equity lines, and home equity/mortgage loans.
EXECUTIVE SUMMARY
Fiscal 2004 was challenging for the mutual fund industry as various regulatory
bodies continued their investigations of certain industry practices. We are
working with a number of government regulators who are looking into matters
involving frequent trading (commonly referred to as "market timing") policies
and practices, marketing support payments to securities broker/dealers who sell
fund shares, and other industry concerns.
Despite the scrutiny, key performance measures continued to improve in fiscal
2004. Our diluted earnings per share grew to $2.80 in fiscal 2004, as compared
to $1.97 in fiscal 2003 and $1.65 in fiscal 2002. Our operating margin increased
to 27% in fiscal 2004, as compared to 25% in fiscal 2003 and 23% in fiscal 2002.
Market appreciation and excess sales over redemptions increased our assets under
management to an all-time record of $361.9 billion at September 30, 2004, as
compared to $301.9 billion at September 30, 2003 and $247.8 billion at September
30, 2002. Our effective investment management fee rate (investment management
fees divided by simple monthly average assets under management) was 0.58% in
fiscal 2004, as compared to 0.55% in fiscal 2003 and 0.56% in fiscal 2002.
As our client base broadens geographically, we remain attentive to the
specialized needs of these clients and continue to expand the investment choices
available to them. To that end, on October 1, 2003, we completed the acquisition
of Darby Overseas Investments, Ltd. and Darby Overseas Partners, L.P.
(collectively "Darby"), a group specializing in private equity, mezzanine and
emerging markets fixed-income products. In fiscal 2002, we acquired Pioneer ITI
AMC Limited ("Pioneer"), an Indian investment management company.
RESULTS OF OPERATIONS
The table below presents the highlights of our operations for the last three
fiscal years.
(in millions except per share amounts)
2004 2003
FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002 VS 2003 VS 2002
- ---------------------------------- ----------- ------------- ------------- -------------- -----------
NET INCOME $706.7 $502.8 $432.7 41% 16%
EARNINGS PER COMMON SHARE
Basic $2.84 $1.98 $1.66 43% 19%
Diluted 2.80 1.97 1.65 42% 19%
OPERATING MARGIN 27% 25% 23% -- --
- ---------------------------------- ----------- ------------- ------------- -------------- -----------
Net income increased by 41% and diluted earnings per share increased by 42% in
fiscal 2004. The increase was primarily due to higher operating revenues
consistent with a 26% increase in our simple monthly average assets under
management, higher gross sales on which commissions are earned, and an increase
in billable shareholder accounts. These increases were partially offset by
higher underwriting and distribution expenses, higher compensation and benefits
expense, the provision for governmental investigations, proceedings and actions
and a higher effective tax rate in fiscal 2004 as compared to the prior year.
The decline in diluted weighted-average shares outstanding from 254.7 million in
fiscal 2003 to 252.2 million in fiscal 2004, also contributed to the increase in
diluted earnings per common share. The decrease in diluted weighted-average
33
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shares outstanding resulted from stock repurchases, especially in the latter
half of fiscal 2003, partially offset by an increase in dilution from the
assumed conversion of stock options granted as the price of our common stock
increased during fiscal 2004.
Net income increased by 16% and diluted earnings per share increased by 19% in
fiscal 2003 primarily due to higher operating revenues consistent with a 3%
increase in our simple monthly average assets under management, as well as
higher investment and other income in fiscal 2003 due to an other-than-temporary
decline in the value of certain investments in fiscal 2002.
ASSETS UNDER MANAGEMENT
(in billions)
2004 2003
AS OF THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002 VS 2003 VS 2002
- ------------------------------------ --------- ------------- ------------- -------------- -----------
EQUITY
Global/international $132.9 $99.8 $76.5 33% 30%
Domestic (U.S.) 66.4 55.4 41.4 20% 34%
- ------------------------------------ --------- ------------- ------------- -------------- -----------
TOTAL EQUITY 199.3 155.2 117.9 28% 32%
HYBRID 59.0 45.8 36.6 29% 25%
FIXED-INCOME
Tax-free 51.3 52.2 52.8 (2)% (1)%
Taxable
Domestic (U.S.) 31.3 31.1 26.1 1% 19%
Global/international 14.2 11.8 8.6 20% 37%
- ------------------------------------ --------- ------------- ------------- -------------- -----------
TOTAL FIXED-INCOME 96.8 95.1 87.5 2% 9%
MONEY MARKET 6.8 5.8 5.8 17% --
- ------------------------------------ --------- ------------- ------------- -------------- -----------
TOTAL $361.9 $301.9 $247.8 20% 22%
- ------------------------------------ --------- ------------- ------------- -------------- -----------
Simple monthly average for the year /1 $340.2 $269.8 $263.2 26% 3%
- ------------------------------------ --------- ------------- ------------- -------------- -----------
/1 Investment management fees from approximately 45% of our assets under
management at September 30, 2004 were calculated using daily average assets
under management.
Our assets under management at September 30, 2004 were $361.9 billion, 20%
higher than they were a year ago, due to excess sales over redemptions of $22.4
billion and market appreciation of $38.9 billion, primarily in the first half of
fiscal 2004. Simple monthly average assets under management, which are generally
more indicative of investment management fee revenue trends than the year over
year change in ending assets under management, increased 26% during fiscal 2004.
The simple monthly average mix of assets under management for the last three
fiscal years is shown below.
FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002
- -----------------------------------------------------------------------------------------------------
PERCENTAGE OF SIMPLE MONTHLY AVERAGE ASSETS UNDER MANAGEMENT
Equity 54% 49% 52%
Fixed-income 28% 34% 31%
Hybrid 16% 15% 15%
Money market 2% 2% 2%
- -----------------------------------------------------------------------------------------------------
TOTAL 100% 100% 100%
- -----------------------------------------------------------------------------------------------------
34
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The following table presents industry data showing average effective investment
management fee rates /1 for the years ended September 30, 2004, 2003, and 2002.
The data was obtained from Lipper(R) Inc. and our actual effective fee rates may
vary from these rates.
FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002
- ------------------------------------ ---------------------- ---------------------- ------------------
EQUITY
Global/international 0.72% 0.71% 0.71%
Domestic (U.S.) 0.53% 0.54% 0.55%
HYBRID 0.40% 0.42% 0.45%
FIXED-INCOME
Tax-free 0.42% 0.42% 0.43%
Taxable
Domestic (U.S.) 0.43% 0.43% 0.43%
Global/international 0.57% 0.60% 0.59%
MONEY MARKET 0.26% 0.27% 0.27%
- ------------------------------------ ---------------------- ---------------------- ------------------
/1 Industry asset-weighted average management fee rates were calculated using
information available from Lipper(R) Inc. at September 30, 2004 and include
all U.S.-based, open-ended funds that reported expense data to Lipper(R)
Inc. as of the funds' most recent annual report date, and for which
expenses were greater or equal to zero. The averages combine retail and
institutional funds data and include all share classes and distribution
channels, without exception. Variable annuity products are not included.
For the 2004 fiscal year, our effective investment management fee rate
(investment management fees divided by simple monthly average assets under
management) increased to 0.58% from 0.55% in fiscal 2003. The change in the mix
of assets under management, resulting from higher excess sales over redemptions
and appreciation for equity as compared to fixed-income products, led to the
increase in the effective investment management fee rate. Generally, equity
products carry higher management fees than fixed-income products.
For the 2003 fiscal year, our effective investment management fee rate declined
to 0.55% from 0.56% in fiscal 2002. The change in the mix of assets under
management, resulting from higher relative excess sales over redemptions and
appreciation for fixed-income as compared to equity products, led to the slight
decrease in the effective investment management fee rate.
Assets under management by sales office location were as follows:
(in billions)
AS OF THE YEARS ENDED SEPTEMBER 30, 2004 % OF TOTAL 2003 % OF TOTAL
- ------------------------------------------------------ --------------------- ------------ --------------- ----------------
United States $265.3 73% $225.0 74%
Canada 25.8 7% 20.9 7%
Europe 29.5 8% 20.4 7%
Asia/Pacific and other /1 41.3 12% 35.6 12%
- ------------------------------------------------------ --------------------- ------------ --------------- ----------------
TOTAL $361.9 100% $301.9 100%
- ------------------------------------------------------ --------------------- ------------ --------------- ----------------
/1 Includes multi-jurisdictional assets under management.
Approximately 73% of our assets under management at September 30, 2004
originated from our U.S. sales offices and approximately 69% of our revenues
originated in the United States in fiscal 2004. Due to the global nature of our
business operations, investment advisory and administrative services may be
performed in locations unrelated to the location of the shareholder.
35
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Components of the change in our assets under management were as follows:
(in billions)
2004 2003
AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002 VS 2003 VS 2002
- -------------------------------------------- ----------- ---------------- ---------------- ------------------ ------------
Beginning assets under management $301.9 $247.8 $246.4 22% 1%
Sales 96.8 81.3 72.4 19% 12%
Reinvested dividends 4.9 3.7 4.8 32% (23)%
Redemptions (74.4) (66.9) (57.5) 11% 16%
Distributions (7.1) (6.0) (7.2) 18% (17)%
Acquisitions 0.9 -- 0.8 N/A (100)%
Appreciation (depreciation) 38.9 42.0 (11.9) (7%) N/A
- -------------------------------------------- ----------- ---------------- ---------------- ------------------ ------------
ENDING ASSETS UNDER MANAGEMENT $361.9 $301.9 $247.8 20% 22%
- -------------------------------------------- ----------- ---------------- ---------------- ------------------ ------------
Excess sales over redemptions were $22.4 million in fiscal 2004 as compared to
$14.4 million in fiscal 2003 and $14.9 million in fiscal 2002. Gross product
sales increased 19% while redemptions increased 11% in 2004. Darby added $0.9
billion in assets under management, related to private equity, mezzanine and
emerging markets fixed-income products as of the acquisition date, on October 1,
2003. Our acquisition of Pioneer, in July 2002, increased our assets under
management by $0.8 billion as of the date of this acquisition.
Our products experienced $38.9 billion in appreciation in fiscal 2004, as
compared to $42.0 billion in fiscal 2003 and market depreciation of $11.9
billion in fiscal 2002.
OPERATING REVENUES
The table below presents the percentage change in each revenue category between
fiscal 2004 and fiscal 2003 and between fiscal 2003 and fiscal 2002.
PERCENTAGE OF TOTAL REVENUES
2004 2003 -------------------------------------
VS 2003 VS 2002 2004 2003 2002
- --------------------------------------------------- ----------- -------------- --------------- --------------- ------------
Investment management fees 32% 2% 57% 57%
Underwriting and distribution fees 35% 7% 34% 32% 31%
Shareholder servicing fees 12% 14% 7% 8% 8%
Consolidated sponsored investment
products income, net 3,684% N/A -- -- --
Other, net (8%) 5% 2% 3% 3%
- --------------------------------------------------- ----------- -------------- --------------- --------------- ------------
TOTAL OPERATING REVENUES 31% 4% 100% 100% 100%
- --------------------------------------------------- ----------- -------------- --------------- --------------- ------------
INVESTMENT MANAGEMENT FEES
Investment management fees, accounting for 57% of our operating revenues in
fiscal 2004, include both investment advisory and administration fees. These
fees are generally calculated under contractual arrangements with our sponsored
investment products as a percentage of the market value of assets under
management. Annual rates vary by 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 increased 32% in fiscal 2004 consistent with a 26%
increase in simple monthly average assets under management and an increase in
our effective investment management fee rate resulting from a shift in average
asset mix toward equity products, which generally carry a higher management fee
than fixed-income assets.
Investment management fees increased 2% in fiscal 2003 consistent with a 3%
increase in simple monthly average assets under management, partially offset by
a slight decline in our effective investment management fee rate resulting from
a shift in average asset mix toward fixed-income products.
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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.
Many of 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 and other
regulatory limitations. We pay a significant portion of underwriting and
distribution fees to the financial advisers and other intermediaries who sell
our sponsored investment products to the public on our behalf. See the
description of underwriting and distribution expenses below.
Overall, underwriting and distribution fees increased 35% in fiscal 2004.
Underwriting fees increased 33% primarily due to a 19% increase in gross product
sales along with a change in the sales mix. Distribution fees increased 36%
consistent with a 26% increase in simple monthly average assets under management
and a change in the asset and share class mix.
Underwriting and distribution fees increased 7% in fiscal 2003. Underwriting
fees increased 8% primarily due to a 12% increase in gross product sales,
partially offset by a change in the sales mix. Distribution fees increased 6%
consistent with a 3% increase in simple monthly average assets under management
and a change in the asset and share class mix.
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 12% in fiscal 2004. The increase reflects
an 18% increase in simple monthly average billable shareholder accounts,
primarily due to the overall increase in number of shareholder accounts billable
under revised shareholder service fee agreements in the United States that
became effective on January 1, 2003, partially offset by a decline in fee rates
chargeable on accounts closed in the prior calendar year, under these
agreements.
Shareholder servicing fees increased 14% in fiscal 2003. The increase reflects
an increase in the overall number of billable shareholder accounts, partially
offset by a decline in fee rates chargeable on accounts closed in the prior
calendar year, under revised shareholder service fee agreements in the United
States that became effective on January 1, 2003. The 0.7 million shareholder
accounts added in July 2002 as a result of the acquisition of Pioneer also
contributed to the increase in average billable accounts in fiscal 2003.
CONSOLIDATED SPONSORED INVESTMENT PRODUCTS INCOME, NET
Consolidated sponsored investment products income, net reflects the net
operating income of majority-owned sponsored investment products, including
dividends received. The increase in fiscal 2004 reflects an increase in the
number of products that have been consolidated in our results of operations.
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OTHER, NET
Other, net consists primarily 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, and are
reduced by interest expense and the provision for probable loan losses.
Other, net decreased 8% in fiscal 2004 due to lower realized gains on sale of
automotive loans and decreased interest income on investments, partially offset
by a decrease in the provision for probable loan losses related to our consumer
lending portfolio and lower interest expense. Other, net increased 5% in fiscal
2003 as a result of higher net interest income and auto loan servicing income,
partially offset by lower custody fees.
OPERATING EXPENSES
The table below presents the percentage change in each expense category between
fiscal 2004 and fiscal 2003 and between fiscal 2003 and fiscal 2002.
PERCENTAGE OF TOTAL
EXPENSES
2004 2003 -----------------------
VS 2003 VS 2002 2004 2003 2002
- ---------------------------------------------- -------------- ----------- ---------- ------- --------
Underwriting and distribution 35% 7% 41% 39% 37%
Compensation and benefits 18% 1% 31% 33% 33%
Information systems, technology and occupancy (4)% (3)% 11% 14% 15%
Advertising and promotion 21% (14)% 4% 4% 6%
Amortization of deferred sales commissions 35% 9% 4% 4% 3%
Amortization of intangible assets 4% (1)% 1% 1% 1%
Provision for mutual fund proceedings, actions
and investigations N/A N/A 4% N/A N/A
September 11, 2001 (recovery) expense, net 588% N/A (1)% -- N/A
Other 24% 19% 5% 5% 5%
- ---------------------------------------------- -------------- ----------- ---------- ------- --------
TOTAL OPERATING EXPENSES 26% 2% 100% 100% 100%
- ---------------------------------------------- -------------- ----------- ---------- ------- --------
UNDERWRITING AND DISTRIBUTION
Underwriting and distribution includes expenses paid to financial advisers and
other third parties for selling, distributing and providing ongoing services to
investors in our sponsored investment products. Underwriting and distribution
expenses increased 35% in fiscal 2004 and 7% in fiscal 2003 consistent with
similar trends in underwriting and distribution revenues.
COMPENSATION AND BENEFITS
Compensation and benefits increased 18% during fiscal 2004. The increase
resulted primarily from an increase in bonus expense under the Amended and
Restated Annual Incentive Compensation Plan, which awards cash and stock bonuses
based, in part, on our performance. In addition, merit salary increases
effective in October 2003 and additional compensation and benefit costs related
to the acquisition of Darby in October 2003 increased costs in fiscal 2004. The
increase was partly reduced by the decline of retention bonus commitments
related to the acquisition of Fiduciary Trust Company International ("Fiduciary
Trust") in April 2001, as we fulfilled cash payout obligations under the
employee retention and transition compensation program that were required to be
paid within approximately two years of the acquisition date. We employed
approximately 6,700 people at September 30, 2004 as compared to about 6,500 at
September 30, 2003. In order to attract and retain talented individuals, 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.
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Compensation and benefits increased 1% during fiscal 2003. Although we
experienced a decrease in retention bonus commitments related to the acquisition
of Fiduciary Trust, we also experienced increases in employee insurance and
other benefits costs in fiscal 2003. We employed approximately 6,500 people at
September 30, 2003 compared to approximately 6,700 at September 30, 2002.
INFORMATION SYSTEMS, TECHNOLOGY AND OCCUPANCY
Information systems, technology and occupancy costs decreased 4% in fiscal 2004.
This decrease was primarily due to lower depreciation levels for equipment and
software related to a decrease in purchases of information system and technology
equipment as certain of our technology equipment is periodically replaced with
new equipment under our technology outsourcing agreement, as well as a
stabilization in the number and the scope of new technology project initiatives.
The decline in information systems and technology expense was partly offset by
an increase in outside data services as well as an increase in building
depreciation related to the consolidation of our headquarters campus in
accordance with FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities (revised December 2003)" ("FIN 46-R") in our results of operation
effective December 31, 2003 and subsequent purchase of the property in September
2004. Information systems, technology and occupancy costs decreased 3% in fiscal
2003. This decrease was primarily due to lower depreciation levels for equipment
and software.
Details of capitalized information systems and technology costs for the last
three fiscal years were as follows:
(in millions) 2004 2003 2002
- ----------------------------------------------------------------------------------------------------
Net carrying amount at beginning of period $79.1 $121.5 $162.9
Additions during period, net of disposals and other
adjustments 16.3 25.8 35.6
Net assets purchased through acquisitions 0.3 -- 0.2
Amortization during period (44.4) (68.2) (77.2)
- ----------------------------------------------------------------------------------------------------
NET CARRYING AMOUNT AT END OF PERIOD $51.3 $79.1 $121.5
- ----------------------------------------------------------------------------------------------------
ADVERTISING AND PROMOTION
Advertising and promotion increased 21% during fiscal 2004 and decreased 14% in
fiscal 2003. The increase in fiscal 2004 was due to the elimination of directed
brokerage effective November 28, 2003 and higher expenditures on direct
advertising campaigns and marketing materials. We are committed to investing 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,
and Class C shares are sold without a front-end sales charge effective January
1, 2004. However, our U.S. distribution subsidiary pays a commission on these
sales. We defer and amortize all up-front commissions paid by our distribution
subsidiaries in excess of commissions we receive from shareholders, over 12
months to 8 years depending on share class or financing arrangements.
We have arranged to finance our Class B and certain of our Class 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 sold by LFL to third-parties. In
contrast to the U.S. arrangement, LFL has entered into direct agreements with
our Canadian and European sponsored investment products, and, as a result, we do
not record DCA from these sources on our Consolidated Balance
39
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Sheets. The boards of the funds that offer Class B shares have approved a
proposal to cease the offering of Class B shares to new investors and existing
shareholders desiring to make additional purchases. Existing Class B
shareholders would continue to be permitted to exchange shares into Class B
shares of different funds. Existing Class B shareholders would also be permitted
to continue to reinvest dividends in additional Class B shares. The cessation of
purchases of Class B shares by new investors and existing shareholders will be
effective in the first calendar quarter of 2005 and may have a negative effect
on the overall sales of the funds' shares.
Amortization of deferred sales commissions increased 35% in fiscal 2004 from the
prior year primarily due to increased gross product sales. Amortization of
deferred sales commissions increased 9% in fiscal 2003 from the prior year
primarily due to increased gross product sales and because LFL did not sell any
U.S. DCA in a securitization transaction in fiscal 2003, while it sold
approximately $61.5 million U.S. DCA in fiscal 2002.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets increased 4% in fiscal 2004 and decreased 1%
in fiscal 2003, primarily due to foreign currency movements in intangible assets
not denominated in U.S. dollars. As of March 31, 2004, we completed our most
recent 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, 2003.
PROVISION FOR GOVERNMENTAL INVESTIGATIONS, PROCEEDINGS AND ACTIONS
In fiscal 2004, we recognized charges to income aggregating to $105.0 million
($80.6 million, net of taxes) related to ongoing governmental investigations,
proceedings and actions. See also Risk Factors below.
SEPTEMBER 11, 2001 RECOVERY, NET
In January 2004, we received $32.5 million from our insurance carrier for claims
related to the September 11, 2001 terrorist attacks that destroyed Fiduciary
Trust's headquarters. These proceeds represented final recoveries for claims
submitted to our insurance carrier. We realized a gain of $30.3 million ($18.3
million, net of taxes). All remaining contingencies related to our insurance
claims have been resolved.
OTHER INCOME (EXPENSES)
Other income (expenses) includes net realized and unrealized investment gains
(losses) of consolidated sponsored investment products, investment and other
income, and interest expense. Investment and other income is comprised primarily
of dividends, interest income and realized gains and losses from investments,
income from investments accounted for using the equity method of accounting,
minority interest expense, and foreign currency exchange gains and losses.
Net other income increased to $63.0 million in fiscal 2004 as compared to $52.1
million in fiscal 2003 due to higher net investment gains related to
consolidated sponsored investment products and higher dividends, interest, net
realized gains and equity method income from our investments. The increase was
partially offset by higher interest expense related to the issuance of five-year
senior notes in April 2003 and minority interest expense related to the
consolidated sponsored investment products.
Net other income was $52.1 million in fiscal 2003 as compared to a net expense
of $7.2 million in fiscal 2002 due to a $60.1 million other-than-temporary
decline in value of some of our investments recognized in the fourth quarter of
fiscal 2002.
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 pre-tax income (primarily from our investment
management business) 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
for fiscal 2004 increased to 29% compared to 28% in fiscal 2003 and 25% in
fiscal 2002. The effective tax rate
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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.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes certain key financial data relating to our
liquidity, and sources and uses of capital:
(in millions)
AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002
- ----------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Assets
Liquid assets $4,279.3 $3,272.3 $2,826.0
Cash and cash equivalents 2,917.2 1,053.7 980.6
Liabilities
Commercial paper $170.0 $-- $--
Convertible Notes 530.1 520.3 514.2
Medium Term Notes 420.0 420.0 --
Other long-term debt 246.3 168.6 81.0
Total debt 1,372.4 1,123.7 611.5
CASH FLOW DATA
Operating cash flows $943.4 $536.4 $735.2
Investing cash flows 941.7 (259.8) (215.1)
Financing cash flows (21.6) (203.5) (135.7)
- ----------------------------------------------------------------------------------------------------
Liquid assets, which consist of cash and cash equivalents, investments (trading
and available-for-sale) and current receivables, increased from fiscal 2003,
primarily due to cash provided by operating activities. Cash and cash
equivalents include cash, debt instruments with maturities of three months or
less at the purchase date and other highly liquid investments that are readily
convertible into cash, including money market funds. Cash and cash equivalents
increased in fiscal 2004 as we held a larger portion of liquid assets in debt
instruments, primarily term deposits, with maturities of three months or less
from the purchase date, resulting in an increase in cash and cash equivalents
and a decrease in investment securities, available-for-sale.
The increase in total debt outstanding from September 30, 2003 relates to $170.0
million of commercial paper issued in September 2004 to purchase the assets of a
lessor trust that held our corporate headquarter campus. The lessor trust had
previously been consolidated in our financial statements in December 2003 in
accordance with the guidance of FIN 46-R. In addition, other long-term debt
increased as our long-term financing liability recognized in relation to U.S.
DCA financed by LFL, has increased in fiscal 2004, as LFL has not sold any U.S.
DCA in a securitization transaction since fiscal 2002.
The increase in operating cash flows in fiscal 2004 included $706.7 million in
net income and $215.5 million in proceeds from the securitization of loans held
for sale, net of originations. The increase in investing cash flows in fiscal
2004 related primarily to excess liquidations of investments over purchases of
$1,061.2 million. Financing activities in fiscal 2004 included the issuance of
$170.0 million of commercial paper and $128.9 million in common stock option
exercises. In addition, during the year ended September 30, 2004, we purchased
and retired 1.3 million shares of our common stock at a cost of $67.6 million.
At September 30, 2004, approximately 13.2 million shares remained available for
repurchase under board authorizations. We purchased and retired 15.3 million
shares at a cost of $580.6 million, and 3.7 million shares at a cost of $115.9
million in the years ended September 30, 2003 and 2002.
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CAPITAL RESOURCES
We believe that we can meet our present and reasonably foreseeable operating
cash needs and future commitments through existing liquid assets, continuing
cash flows from operations, borrowing capacity under current credit facilities,
the ability to issue debt or equity securities, and mutual fund sales commission
financing arrangements. In particular, we expect to finance future investment in
our banking/finance activities through operating cash flows, debt, increased
deposit base, and through the securitization of a portion of the receivables
from consumer lending activities.
As of September 30, 2004, we had $300.0 million of debt and equity securities
available to be issued under shelf registration statements filed with the SEC
and $330.0 million of additional commercial paper available for issuance. Our
committed revolving credit facilities at September 30, 2004 totaled $420.0
million, of which, $210.0 million was under a 364-day facility expiring in June
2005. The remaining $210.0 million facility is under a five-year facility that
will expire in June 2007. In addition, at September 30, 2004, our
banking/finance operating segment had $523.6 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 investment management segment finances Class B and certain Class C DCA
arising from our U.S., Canadian and European operations through LFL, a company
in which we have a 49% ownership interest. Class B and C sales commissions that
we have financed globally through LFL during fiscal 2004, were approximately
$163.4 million compared to $161.3 million in fiscal 2003. LFL's ability to
access credit facilities and the securitization market will directly affect our
existing financing arrangements.
Our banking/finance operating segment finances its automotive lending activities
through operational cash flows, inter-segment loans and by selling its auto
loans in securitization transactions with qualified special purpose entities,
which then issue asset-backed securities to private investors. Beginning in
fiscal 2005, automotive lending activities may also be financed by issuing auto
loan backed variable funding notes to institutional investors, and as a result,
we expect that inter-segment lending activities may decrease. Gross sale
proceeds from auto loan securitization transactions were $488.5 million in
fiscal 2004 and $464.4 million in fiscal 2003. Our ability to access the
securitization market will directly affect our plans to finance the auto loan
portfolio in the future.
USES OF CAPITAL
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 technology
infrastructure and business processes, pay shareholder dividends and repay and
service debt.
In May 2001, we received approximately $490.0 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, when the price of our stock reaches certain
thresholds. To date, we have repurchased Convertible Notes with a face value of
$5.9 million principal amount at maturity, for their accreted value of $3.5
million, in cash. We may redeem the remaining Convertible Notes for cash on or
after May 11, 2006 or make additional repurchases, at the option of the holders,
on May 11 of 2006, 2011, 2016, 2021 and 2026. In this event, we may choose to
pay the accreted value of the Convertible Notes in cash or shares of our common
stock. The amount that the holders may redeem in the future will depend on,
among other factors, the performance of our common stock.
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CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table summarizes contractual cash obligations and commitments as
of September 30, 2004. We believe that we can meet these obligations and
commitments thorough existing liquid assets, continuing cash flows from
operations and borrowing capacity under current credit facilities.
(in millions) PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------
LESS THAN 1 MORE THAN 5
CONTRACTUAL OBLIGATIONS AND COMMITMENTS TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
- ------------------------------------------------------- ------------ ---------------- ----------- ------------ ------------
Non-current debt $1,196.4 $35.0 $72.0 $494.7 $594.7
Operating leases /1 271.6 29.9 55.7 47.0 139.0
Purchase obligations /2 407.7 119.3 108.7 71.4 108.3
Loan origination commitments 242.4 216.4 -- -- 26.0
Defined benefit plan obligation /3 18.6 18.6 -- -- --
Capital contribution commitments /4 7.3 4.9 2.4 -- --
- ------------------------------------------------------- ------------ ---------------- ----------- ------------ ------------
TOTAL $2,144.0 $424.1 $238.8 $613.1 $868.0
- ------------------------------------------------------- ------------ ---------------- ----------- ------------ ------------
/1 Operating lease obligations are presented net of future receipts on
contractual sublease arrangements totaling $44.3 million as of September
30, 2004.
/2 Purchase obligations include contractual amounts that will be due to
purchase goods and services to be used in our operations and may be
cancelled at earlier times than those indicated under certain conditions
that may include termination fees. In particular, under an agreement to
outsource management of our data center and distributed server operations
that we can terminate any time after July 1, 2006, 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, reaching a payment of
approximately $2.2 million in July 2008.
/3 Defined benefit plan obligation relates to our expected contribution to a
noncontributory retirement plan and a nonqualified supplemental plan that
will be made when the final approval of the noncontributory retirement plan
termination is received from the Internal Revenue Service.
/4 Capital contribution commitments relate to our contractual commitments to
fund certain of our sponsored investment products.
CONTINGENT OBLIGATIONS
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 September 30, 2004, the maximum
potential amount of future payments was $23.6 million relating to guarantees
made prior to January 1, 2003. In addition, our consolidated balance sheet at
September 30, 2004 included a $0.6 million liability to reflect obligations
arising from auto securitization transactions subsequent to December 31, 2002.
At September 30, 2004, the banking/finance operating segment had issued
financial standby letters of credit totaling $2.5 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, were secured
by marketable securities with a fair value of $2.1 million as of September 30,
2004 and commercial real estate.
OFF-BALANCE SHEET ARRANGEMENTS
As discussed above, we obtain financing for sales commissions that we pay to
broker/dealers on Class B and certain Class C shares through LFL, a company
established in Ireland to provide DCA financing. We hold a 49% ownership
interest in LFL and we account for this ownership interest using the equity
method of accounting. Our exposure to loss related to our investment in LFL is
limited to the carrying value of our investment and loans, and interest and fees
receivable from LFL. At September 30, 2004, those amounts approximated $53.2
million. During fiscal 2004, we recognized a pre-tax charge of approximately
$1.8 million for our share of its net loss over this period.
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As discussed above, 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. Our
main objective in entering in securitization transactions is to obtain financing
for auto loan activities. Securitized loans held by the securitization trusts
totaled $768.9 million at September 30, 2004 and $680.7 million at September 30,
2003.
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. In addition,
please refer to Note 1 to the Consolidated Financial Statements for further
discussion of our accounting policies.
Goodwill and Other Intangible Assets
At September 30, 2004 our assets included intangible assets as follows:
(in millions)
NET CARRYING AMOUNT
- --------------------------------------------------------------------------------
Goodwill $1,381.8
Intangible assets - definite-lived 191.7
Intangible assets - indefinite-lived 479.8
- --------------------------------------------------------------------------------
TOTAL $2,053.3
- --------------------------------------------------------------------------------
We make significant estimates and assumptions when valuing goodwill and other
intangibles in connection with the initial purchase price allocation of an
acquired entity, as well as when evaluating impairment of intangibles on an
ongoing basis.
Under Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", we are required to test the fair value of goodwill and
indefinite-lived intangibles when there is an indication of impairment, or at
least once a year. Goodwill impairment is indicated when the carrying amount of
a reporting unit exceeds its implied fair value, calculated based on anticipated
discounted cash flows. In estimating the fair value of the reporting unit, we
use valuation techniques based on discounted cash flows similar to models
employed in analyzing the purchase price of an acquisition target.
Intangible assets subject to amortization are reviewed for impairment on the
basis of the expected future undiscounted operating cash flows, without interest
charges, to be derived from these assets. We review definite-lived intangible
assets for impairment when there is an indication of impairment, or at least
once a year.
During the quarter ended March 31, 2004, 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, 2003.
In performing our analysis, we used certain assumptions and estimates including
those related to discount rates and the expected future period of cash flows to
be derived from the assets, based on, among other factors, historical trends and
the characteristics of the assets. While we believe that our testing was
appropriate, 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. As of September 30, 2004, and based on tax laws in effect as of
this date, it is our intention to continue to indefinitely reinvest the
undistributed earnings of foreign subsidiaries. As a result, we have not made a
provision for U.S. taxes and have not recorded a deferred tax liability on $2.5
billion of cumulative undistributed earnings recorded by
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foreign subsidiaries as of September 30, 2004. Changes to our policy of
reinvesting foreign earnings may have a significant effect on our financial
condition and results of operation.
The American Jobs Creation Act of 2004 (the "Act") was signed into law on
October 22, 2004. Under a provision of the Act, we may elect to repatriate
certain earnings of our foreign-based subsidiaries at a reduced tax rate in
either of our fiscal years ending September 30, 2005 or September 30, 2006. We
are currently evaluating the effect of this repatriation provision; however, we
do not expect to complete this evaluation until after the U.S. Congress or the
U.S. Department of the Treasury issue additional guidance regarding this
provision. The range of possible amounts we are considering for repatriation is
between zero and $1.9 billion and the potential range of income tax associated
with amounts subject to the reduced rate is between zero and $117.0 million.
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 fiscal 2002, we recognized $60.1 million for an other-than-temporary decline
in the value of certain investments. We classify securities as trading when it
is management's intent at the time of purchase to sell the security within a
short period of time. Accordingly, we record unrealized gains and losses on
these securities in our consolidated income.
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 September 30, 2004 to provide for any probable losses that may arise
from these matters. See also "Legal Proceedings" included in Part I, Item 3 of
this report and "Risk Factors" below.
VARIABLE INTEREST ENTITIES
Under FIN 46-R, a variable interest entity ("VIE") is an entity in which the
equity investment holders have not contributed sufficient capital to finance its
activities or the equity investment holders do not have defined rights and
obligations normally associated with an equity investment. FIN 46-R 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.
Evaluating whether related entities are VIEs and determining if we qualify as
the primary beneficiary of these VIEs, is highly complex and involves the use of
estimates and assumptions. To determine our interest in the expected losses or
residual returns of each VIE, we performed an expected cash flow analysis using
certain discount rate and volatility assumptions based on available historical
information and management's estimates. Based on our analysis, we did not
consolidate any VIEs in our financial statements as of September 30, 2004. While
we believe that our testing and approach were appropriate, future changes in
estimates and assumptions may affect our decision and lead to the consolidation
of one or more VIEs in our financial statements.
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IMPACT OF INFLATION
Our Consolidated Financial Statements and related Notes are presented in
historical dollars without considering the effect of inflation. Since a
significant portion of our assets are liquid in nature, the potential effect of
inflation is mitigated. In addition, the majority of our revenues and related
expenses are denominated in U.S. dollars, a currency that has not been
significantly affected by the impact of changes in prices in recent years. To
the extent that a potential rise in inflation may affect the securities and the
consumer lending markets, it may adversely affect our financial position and
results of operation in the future.
BANKING/FINANCE GROUP INTEREST INCOME AND MARGIN ANALYSIS
The following table presents the banking/finance operating segment's net
interest income and margin for the fiscal years ended September 30, 2004, 2003
and 2002:
2004 2003 2002
--------- -------- -------- ------------ -------- -------- ------------ -------- -------
(in millions) AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
- ---------------------------------- --------- -------- -------- ------------ -------- -------- ------------ -------- -------
Federal funds sold and
securities purchased under
agreements to resell $32.1 $0.3 0.93% $59.8 $0.9 1.51% $91.5 $1.4 1.53%
Investment securities, available-
for-sale 321.4 11.0 3.42% 421.3 18.2 4.32% 368.7 18.4 4.99%
Loans to banking clients /1 451.3 27.7 6.14% 460.3 30.4 6.60% 490.7 33.5 6.83%
- ---------------------------------- --------- -------- ------- ------------ -------- ------- ------------ -------- ------
Total earning assets $804.8 $39.0 4.85% $941.4 $49.5 5.26% $950.9 $53.3 5.61%
Interest-bearing deposits $597.5 $4.3 0.72% $692.8 $6.4 0.92% $814.2 $9.8 1.20%
Inter-segment debt 88.2 1.4 1.59% 121.5 2.5 2.06% 150.6 5.4 3.59%
Federal funds purchased and
securities sold under
agreements to repurchase 15.6 0.2 1.28% 20.8 0.3 1.44% 19.2 0.4 2.08%
- ---------------------------------- --------- -------- ------- ------------ -------- ------- ------------ -------- ------
Total interest-bearing
liabilities $701.3 $5.9 0.84% $835.1 $9.2 1.10% $984.0 $15.6 1.59%
- ---------------------------------- --------- -------- ------- ------------ -------- ------- ------------ -------- ------
Net interest income and margin $33.1 4.11% $40.3 4.28% $37.7 3.96%
- ---------------------------------- --------- -------- ------- ------------ -------- ------- ------------ -------- ------
/1 Non-accrual loans are included in the average loans receivable balance.
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QUARTERLY INFORMATION (UNAUDITED)
(in thousands except per share data)
QUARTER FIRST SECOND THIRD FOURTH
- ---------------------------------------- ------------------ ------------- ------------- ------------
2004
Operating revenues $809,666 $878,995 $867,815 $881,732
Operating income $222,860 $225,210 $240,986 $241,769
Net income $172,296 $172,791 $173,896 $187,681
Earnings per share
Basic $0.70 $0.69 $0.70 $0.75
Diluted $0.69 $0.68 $0.69 $0.74
Dividend per share $0.085 $0.085 $0.085 $0.085
Common stock price per share
High $52.25 $62.10 $57.81 $56.47
Low $43.39 $52.02 $48.10 $46.85
- ----------------------------------------------------------------------------------------------------
2003
Operating revenues $606,836 $614,711 $685,949 $724,628
Operating income $139,455 $139,706 $169,375 $199,540
Net income $109,760 $109,603 $131,388 $152,079
Earnings per share
Basic $0.43 $0.43 $0.52 $0.61
Diluted $0.43 $0.43 $0.52 $0.61
Dividend per share $0.075 $0.075 $0.075 $0.075
Common stock price per share
High $37.85 $37.01 $40.85 $46.95
Low $27.90 $29.99 $32.84 $38.66
- ----------------------------------------------------------------------------------------------------
2002
Operating revenues $619,211 $627,010 $667,150 $609,488
Operating income $142,865 $148,019 $153,852 $140,766
Net income $118,519 $119,996 $125,690 $68,518
Earnings per share
Basic $0.45 $0.46 $0.48 $0.26
Diluted $0.45 $0.46 $0.48 $0.26
Dividend per share $0.070 $0.070 $0.070 $0.070
Common stock price per share
High $37.85 $44.15 $44.48 $43.15
Low $30.85 $34.52 $39.45 $29.52
- ----------------------------------------------------------------------------------------------------
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 broker/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
broker/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.
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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 advisers. Increasing competition for
these distribution channels and recent regulatory initiatives, have 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 advisers 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 advisers 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 VOLATILITY OF THE ASSETS WE
MANAGE CAUSED BY CHANGES IN THE FINANCIAL AND 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. 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 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, including
economic and credit market downturns.
WE FACE RISKS ASSOCIATED WITH CONDUCTING OPERATIONS IN NUMEROUS FOREIGN
COUNTRIES. We sell mutual funds and offer investment advisory and related
services in many different regulatory jurisdictions around the world, and intend
to continue to expand our operations internationally. Regulators in these
jurisdictions could change their policies or laws in a manner that might
restrict or otherwise impede our ability to distribute or register investment
products in their respective markets.
OUR ABILITY TO SUCCESSFULLY INTEGRATE WIDELY VARIED BUSINESS LINES CAN BE
IMPEDED BY SYSTEMS AND OTHER TECHNOLOGICAL LIMITATIONS. Our continued success in
effectively managing and growing our business both domestically and abroad,
depends on our ability to integrate the varied accounting, financial,
information and operational systems of our various businesses on a global basis.
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 certain Class 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.
CERTAIN OF THE PORTFOLIOS WE MANAGE, INCLUDING OUR EMERGING MARKET PORTFOLIOS,
AND RELATED REVENUES ARE VULNERABLE TO MARKET-SPECIFIC POLITICAL OR 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.
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WE ARE SUBJECT TO FEDERAL RESERVE BOARD REGULATION. Upon completion of our
acquisition of Fiduciary Trust 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 (the "FRB"). We are subject to the restrictions,
limitations, or prohibitions of the Bank Holding Company Act of 1956 and the
Gramm-Leach-Bliley Act. The FRB may impose additional limitations or
restrictions on our activities, including if the FRB believes that we do not
have the appropriate financial and managerial resources to commence or conduct
an activity or make an acquisition.
TECHNOLOGY AND OPERATING RISK AND LIMITATIONS 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.
GOVERNMENTAL INVESTIGATIONS, SETTLEMENTS OF SUCH INVESTIGATIONS, ONGOING AND
PROPOSED GOVERNMENTAL ACTIONS, AND REGULATORY EXAMINATIONS OF THE COMPANY AND
ITS BUSINESS ACTIVITIES AS WELL AS CIVIL LITIGATION ARISING OUT OF OR RELATED TO
SUCH MATTERS COULD ADVERSELY IMPACT OUR ASSETS UNDER MANAGEMENT, INCREASE COSTS
AND NEGATIVELY IMPACT THE PROFITABILITY OF THE COMPANY AND FUTURE FINANCIAL
RESULTS. As part of various investigations by the Securities and Exchange
Commission ("SEC"), the U.S. Attorney for the Northern District of California,
the New York Attorney General, the California Attorney General, the U.S.
Attorney for the District of Massachusetts, the Securities Division of the
Office of the Secretary of the Commonwealth of Massachusetts, the Florida
Department of Financial Services and the Commissioner of Securities, the West
Virginia Attorney General, the Vermont Department of Banking, Insurance,
Securities, and Health Care Administration and the National Association of
Securities Dealers, Inc. ("NASD"), relating to certain practices in the mutual
fund industry, including late trading, market timing and marketing support
payments to securities dealers who sell fund shares, Franklin Resources, Inc.
and certain of its subsidiaries (as used in this section, together, the
"Company"), as well as certain current or former executives and employees of the
Company, received requests for information and/or subpoenas to testify or
produce documents. The Company and its current employees provided documents and
information in response to these requests and subpoenas. In addition, the
Company responded, and in one instance is currently responding, to requests for
similar kinds of information from regulatory authorities in some of the foreign
countries where the Company conducts its global asset management business.
Franklin Templeton Investments Corp. ("FTIC"), a Company subsidiary and the
investment manager of Franklin Templeton's Canadian mutual Funds, has been
cooperating with and responding to requests for information from the Ontario
Securities Commission (the "OSC") relating to the OSC's review of frequent
trading practices within the Canadian mutual fund industry. On December 10,
2004, FTIC received a letter indicating that the staff of the OSC is
contemplating enforcement proceedings against FTIC before the OSC. In its
letter, the OSC staff expressed the view that, over the period of February 1999
to February 2003, there were certain accounts that engaged in a frequent trading
market timing strategy in certain funds being managed by FTIC. The letter also
gave FTIC the opportunity to respond to the issues raised in the letter and to
provide the OSC staff with additional information relevant to these matters. The
Company expects to enter into discussions with the OSC staff in an effort to
resolve the issues raised in the OSC's review. The Company cannot predict the
likelihood of whether those discussions will result in a settlement, or the
terms of any such settlement.
On December 9, 2004, the staff of the NASD informed the Company that it has made
a preliminary determination to recommend a disciplinary proceeding against
Franklin/Templeton Distributors, Inc. ("FTDI"), alleging that FTDI violated
certain NASD rules by the use of directed brokerage commissions to pay for sales
and marketing support. FTDI has also received a separate letter from the NASD
staff advising FTDI of the NASD staff's preliminary determination to recommend a
disciplinary proceeding against FTDI alleging violation of certain NASD rules
relating to FTDI's Top Producers program. The Company believes that any such
charges are unwarranted.
On August 2, 2004, Franklin Resources, Inc. announced that its subsidiary,
Franklin Advisers, Inc. ("Franklin Advisers") reached an agreement with the SEC
that resolved the issues resulting from the previously disclosed SEC
investigation into market timing activity. In connection with that agreement,
the SEC issued an "Order instituting administrative and cease-and-desist
proceedings pursuant to sections 203(e) and 203(k) of the Investment Advisers
Act of 1940 and sections 9(b) and 9(f) of the Investment Company Act of 1940,
making findings and imposing remedial sanctions and a cease and desist order"
(the "Order"). The SEC's Order
49
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concerned the activities of a limited number of third parties that ended in 2000
and those that were the subject of the first Massachusetts administrative
complaint described below.
Under the terms of the SEC's Order, pursuant to which Franklin Advisers neither
admitted nor denied any of the findings contained therein, Franklin Advisers
agreed to pay $50 million to be distributed to shareholders of certain of the
Franklin Templeton mutual funds ("Funds"), of which $20 million was a civil
penalty. The settlement was provided for as part of a charge of $60 million
($45.6 million, net of taxes) recorded in the fiscal quarter ended March 31,
2004. This charge represented the Company's estimate of the anticipated
settlement and related legal and distribution costs.
The Order required Franklin Advisers to, among other things:
* Enhance and periodically review compliance policies and procedures,
and establish a corporate ombudsman;
* Establish a new internal position whose responsibilities shall include
compliance matters related to conflicts of interests; and
* Retain an Independent Distribution Consultant to develop a plan to
distribute the $50 million settlement to Fund shareholders.
The Order further provided that in any related investor actions, Franklin
Advisers would not benefit from any offset or reduction of any investor's claim
by the amount of any distribution from the above-described $50 million to such
investor that is proportionately attributable to the civil penalty paid by
Franklin Advisers.
On September 20, 2004, Franklin Resources, Inc. announced that two of its
subsidiaries, Franklin Advisers, Inc. and Franklin Templeton Alternative
Strategies, Inc. ("FTAS"), reached an agreement with the Securities Division of
the Office of the Secretary of the Commonwealth of Massachusetts (the "State of
Massachusetts") related to the previously-disclosed administrative complaint
filed on February 4, 2004. The administrative complaint concerned one instance
of market timing that was also a subject of the August 2, 2004 settlement that
Franklin Advisers reached with the SEC, as described above.
Under the terms of the settlement consent order issued by the State of
Massachusetts, Franklin Advisers and FTAS consented to the entry of a cease and
desist order and agreed to pay a $5 million administrative fine to the State of
Massachusetts (the "Massachusetts Consent Order"). Franklin Resources, Inc.
recorded this expense in the quarter ended September 30, 2004. The Massachusetts
Consent Order included two different sections: "Statements of Fact" and
"Violations of Massachusetts Securities Laws." Franklin Advisers and FTAS
admitted the facts in the Statements of Fact.
On October 25, 2004, the State of Massachusetts filed a second administrative
complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing (in which it
described the Massachusetts Consent Order and stated that "Franklin did not
admit or deny engaging in any wrongdoing") failed to state that Franklin
Advisers and FTAS admitted the Statements of Fact portion of the Massachusetts
Consent Order (the "Second Complaint"). Franklin Resources, Inc. reached a
second agreement with the State of Massachusetts on November 19, 2004, resolving
the Second Complaint. As a result of the November 19, 2004 settlement, Franklin
Resources, Inc. filed a new Form 8-K. The terms of the original settlement did
not change and there was no monetary fine associated with this second
settlement.
On November 17, 2004, Franklin Resources, Inc. announced that FTDI reached an
agreement with the CAGO, resolving the issues resulting from the CAGO's
investigation concerning sales and marketing support payments. The Company
believes that the settlement of the CAGO matter is in the best interest of the
Company and its Fund shareholders. Under the terms of the settlement, FTDI
neither admitted nor denied the allegations in the CAGO's complaint and agreed
to pay $2 million as a civil penalty, $14 million to Franklin Templeton funds
and $2 million to the CAGO for its investigative costs.
As a result of the CAGO settlement, the results for the quarter and fiscal year
ended September 30, 2004 announced on October 28, 2004 were adjusted to include
an additional charge to income of $18.5 million ($12.2 million, net of tax).
This adjustment was made in accordance with generally accepted accounting
principles in the United States, which require the Company to update estimates
when additional information becomes available after the end of the reporting
period but prior to the issuance of the financial statements with respect to
loss contingencies that existed as of the date of the financial statements.
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On December 13, 2004, Franklin Resources, Inc. announced that its subsidiaries
FTDI and Franklin Advisers reached an agreement with the SEC, resolving the
issues resulting from the SEC's investigation concerning marketing support
payments to securities dealers who sell Fund shares. In connection with that
agreement, the SEC issued an "Order Instituting Administrative and
Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions
Pursuant to Section 203(e) and 203(k) of the Investment Advisers Act of 1940,
Sections 9(b) and 9(f) of the Investment Company Act of 1940, and Section 15(b)
of the Securities Exchange Act of 1934 (the "Order").
The Company believes that the settlement of this matter is in the best interest
of the Company and its Fund shareholders. Under the terms of the Order, in which
FTDI and Franklin Advisers neither admitted nor denied the findings contained
therein, they agreed to pay the Funds a penalty of $20 million and $1 in
disgorgement. FTDI and Franklin Advisers also agreed to implement certain
measures and undertakings relating to marketing support payments to
broker-dealers for the promotion or sale of Fund shares, including making
additional disclosures in the Funds' Prospectuses and Statements of Additional
Information. The Order further requires the appointment of an independent
distribution consultant, at the Company's expense, who shall develop a plan for
the distribution of the penalty and disgorgement to the Funds. A charge of $21.5
million ($17.3 million, net of taxes) was recorded by the Company in its fiscal
quarter ended June 30, 2004 related to this matter.
INTERNAL INQUIRIES. The Company also conducted its own internal fact-finding
inquiry with the assistance of outside counsel to determine whether any Fund
shareholders, including Company employees, were permitted to engage in late
trading or in market timing transactions contrary to the policies of the
affected Fund and, if so, the circumstances and persons involved. The Company's
internal inquiry regarding market timing and late trading is complete. We did
not find any late trading, though we identified various instances of frequent
trading. One officer of a subsidiary of Franklin Resources, Inc. was placed on
administrative leave and subsequently resigned from his position with the
Company in December 2003.
We found no instances of inappropriate mutual fund trading by any portfolio
manager, investment analyst or officer of Franklin Resources, Inc. As previously
disclosed, the Company identified some instances of frequent trading in shares
of certain Funds by a few current or former employees in their personal 401(k)
plan accounts. These individuals included one trader and one officer of the
Funds. Pending our further inquiry, these two individuals were placed on
administrative leave and the officer resigned from his positions with the Funds.
The independent directors of the Funds and the Company also retained independent
outside counsel to review these matters and to report their findings and
recommendations. Based on independent counsel's findings and recommendations,
the Company reinstated the trader. The independent counsel concluded that some
instances of the former Fund officer's trading violated Company policy, and the
Company was prepared to institute appropriate disciplinary action. Subsequently,
the former Fund officer resigned from his employment with the Company. The
Company does not believe there were any losses to the Funds as a result of this
trading.
CLASS ACTION AND OTHER LAWSUITS. The Company has been named in shareholder class
and other actions related to some of the matters described above. See "Legal
Proceedings" included in Part I, Item 3 of this report. Management believes that
the claims made in the lawsuits are without merit and intends to vigorously
defend against them. It is possible that the Company may be named in additional
similar civil actions related to some of the matters described above.
REGULATORY OR LEGISLATIVE ACTIONS AND REFORMS, PARTICULARLY THOSE SPECIFICALLY
FOCUSED ON THE MUTUAL FUND INDUSTRY, COULD ADVERSELY IMPACT OUR ASSETS UNDER
MANAGEMENT, INCREASE COSTS AND NEGATIVELY IMPACT THE PROFITABILITY OF THE
COMPANY AND FUTURE FINANCIAL RESULTS. Pending regulatory and legislative actions
and reforms affecting the mutual fund industry may significantly increase the
Company's costs of doing business and/or negatively impact its revenues, either
of which could have a material negative impact on the Company's financial
results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the normal course of business, our financial position is subject to market
risk: the potential loss due to changes in the value of investments including
those 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.
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Our banking/finance operating segment is exposed to interest rate fluctuations
on its loans receivable, debt securities held, and deposit liabilities. 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 September 30, 2004, we have considered the potential impact of
the effect on the banking/finance operating segment balances, individually and
collectively, of a 100 basis point (1%) movement in market interest rates. Based
on our analysis, we do not expect that this change would have a material impact
on our operating revenues or results of operations in either scenario.
Our investment management operating segment is exposed to changes in interest
rates through its investment in debt securities and its outstanding debt. We
minimize the impact of interest rate fluctuations related to our investments in
debt securities by managing the maturities of these securities, and through
diversification. Our exposure to interest rate changes related to our debt
issuances is not material since a significant percentage of our outstanding debt
is at fixed interest rates.
We are subject to foreign exchange risk through our foreign operations. We
operate primarily in the United States, but also provide services and earn
revenues in Canada, the Bahamas, Europe, Asia, South America, Africa and
Australia. Our exposure to foreign exchange risk is minimized since a
significant portion of these revenues and associated expenses are denominated in
U.S. dollars. 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 and through investments held by majority-owned sponsored
investment products that we consolidate. To mitigate this risk, we maintain a
diversified investment portfolio. Our exposure to equity price fluctuations is
also minimized as we sponsor a broad range of investment products in various
global jurisdictions.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index of Consolidated Financial Statements for the years ended September 30,
2004, 2003, and 2002.
CONTENTS PAGE
Consolidated Financial Statements of Franklin Resources, Inc.:
Consolidated Statements of Income
for the years ended September 30, 2004, 2003, and 2002 54
Consolidated Balance Sheets
as of the years ended September 30, 2004 and 2003 56
Consolidated Statements of Stockholders' Equity and Comprehensive Income
as of and for the years ended September 30, 2004, 2003, and 2002 58
Consolidated Statements of Cash Flows
for the years ended September 30, 2004, 2003, and 2002 60
Notes to Consolidated Financial Statements 62
Report of Independent Registered Public Accounting Firm 93
All schedules have been omitted as the information is provided in the financial
statements or in related notes thereto or is not required to be filed as the
information is not applicable.
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CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002
- ----------------------------------------------------------------------------------------------------
OPERATING REVENUES
Investment management fees $1,970,628 $1,487,331 $1,462,655
Underwriting and distribution fees 1,150,922 852,350 797,023
Shareholder servicing fees 244,063 217,225 191,302
Consolidated sponsored investment products income, net 3,519 93 --
Other, net 69,076 75,125 71,878
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Total operating revenues 3,438,208 2,632,124 2,522,858
OPERATING EXPENSES
Underwriting and distribution 1,035,111 768,519 720,560
Compensation and benefits 769,438 649,882 645,104
Information systems, technology and occupancy 273,540 285,329 294,161
Advertising and promotion 112,017 92,399 106,877
Amortization of deferred sales commissions 98,893 73,501 67,608
Amortization of intangible assets 17,604 16,961 17,107
Provision for governmental investigations, proceedings and
actions 105,000 -- --
September 11, 2001 recovery, net (30,277) (4,401) --
Other 126,057 101,858 85,939
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Total operating expenses 2,507,383 1,984,048 1,937,356
Operating income 930,825 648,076 585,502
OTHER INCOME (EXPENSES)
Consolidated sponsored investment products gains, net 3,393 1,645 --
Investment and other income 90,306 70,392 5,075
Interest expense (30,658) (19,910) (12,302)
- ----------------------------------------------------------------------------------------------------
Other income (expenses), net 63,041 52,127 (7,227)
Income before taxes on income and cumulative effect of
an accounting change 993,866 700,203 578,275
Taxes on income 291,981 197,373 145,552
- ----------------------------------------------------------------------------------------------------
Income before cumulative effect of an accounting change,
net of tax 701,885 502,830 432,723
Cumulative effect of an accounting change, net of tax 4,779 -- --
- ----------------------------------------------------------------------------------------------------
NET INCOME $706,664 $502,830 $432,723
- ----------------------------------------------------------------------------------------------------
[Table continued on next page]
See accompanying notes to the consolidated financial statements
54
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[Table continued from previous page]
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002
- ----------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income before cumulative effect of an accounting change $2.82 $1.98 $1.66
Cumulative effect of an accounting change 0.02 -- --
- ----------------------------------------------------------------------------------------------------
NET INCOME $2.84 $1.98 $1.66
- ----------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income before cumulative effect of an accounting change $2.78 $1.97 $1.65
Cumulative effect of an accounting change 0.02 -- --
- ----------------------------------------------------------------------------------------------------
NET INCOME $2.80 $1.97 $1.65
- ----------------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE $0.34 $0.30 $0.28
- ----------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
55
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(in thousands)
AS OF THE YEARS ENDED SEPTEMBER 30, 2004 2003
- ----------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $2,814,184 $1,017,023
Receivables 406,247 338,292
Investment securities, trading 257,329 41,379
Investment securities, available-for-sale 432,665 1,480,554
Deferred taxes and other 133,787 91,579
- ----------------------------------------------------------------------------------------------------
Total current assets 4,044,212 2,968,827
BANKING/FINANCE ASSETS
Cash and cash equivalents 103,004 36,672
Loans held for sale 82,481 3,006
Loans receivable, net 334,676 467,666
Investment securities, available-for-sale 265,870 358,387
Other 39,813 52,694
- ----------------------------------------------------------------------------------------------------
Total banking/finance assets 825,844 918,425
NON-CURRENT ASSETS
Investments, other 388,819 280,356
Deferred sales commissions 299,069 215,816
Property and equipment, net 470,578 356,772
Goodwill 1,381,757 1,335,517
Other intangible assets, net 671,500 684,281
Receivable from banking/finance group 37,784 102,864
Other 108,572 107,891
- ----------------------------------------------------------------------------------------------------
Total non-current assets 3,358,079 3,083,497
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $8,228,135 $6,970,749
- ----------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
56
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(in thousands)
AS OF THE YEARS ENDED SEPTEMBER 30, 2004 2003
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Compensation and benefits $284,483 $225,446
Commercial paper and current maturities of long-term debt 170,000 287
Accounts payable and accrued expenses 249,789 112,630
Commissions 128,341 95,560
Income taxes 76,862 43,500
Other 11,640 11,103
- -------------------------------------------------------------------------------------------------------
Total current liabilities 921,115 488,526
BANKING/FINANCE LIABILITIES
Deposits 555,746 633,983
Payable to parent 37,784 102,864
Other 65,187 65,133
- -------------------------------------------------------------------------------------------------------
Total banking/finance liabilities 658,717 801,980
NON-CURRENT LIABILITIES
Long-term debt 1,196,409 1,108,881
Deferred taxes 236,126 203,498
Other 32,895 32,412
- -------------------------------------------------------------------------------------------------------
Total non-current liabilities 1,465,430 1,344,791
- -------------------------------------------------------------------------------------------------------
Total liabilities 3,045,262 2,635,297
MINORITY INTEREST 76,089 25,344
COMMITMENTS AND CONTINGENCIES (NOTE 13)
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; 249,680,498
and 245,931,522 shares issued and outstanding, for 2004 and 2003 24,968 24,593
Capital in excess of par value 255,137 108,024
Retained earnings 4,751,504 4,129,644
Accumulated other comprehensive income 75,175 47,847
- -------------------------------------------------------------------------------------------------------
Total stockholders' equity 5,106,784 4,310,108
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,228,135 $6,970,749
- ----------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
57
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS)
SHARES CAPITAL IN
AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003, AND 2002 COMMON STOCK COMMON STOCK EXCESS OF PAR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, OCTOBER 1, 2001 260,798 $26,080 $657,878
Net income
Other comprehensive income
Net unrealized loss on investments
Currency translation adjustments
Minimum pension liability adjustment
Total comprehensive income
Purchase of stock (3,929) (393) (124,538)
Cash dividends on common stock
Issuance of restricted shares, net 842 84 27,469
Employee stock plan (ESIP) shares 436 44 14,323
Proceeds from issuance of put options 6,954
Exercise of options and other 408 41 16,110
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2002 258,555 25,856 598,196
- ------------------------------------------------------------------------------------------------------------------------------------
Net income
Other comprehensive income
Net unrealized gains on investments
Currency translation adjustments
Minimum pension liability adjustment
Total comprehensive income
Purchase of stock (15,275) (1,528) (574,153)
Cash dividends on common stock
Issuance of restricted shares, net 913 91 28,282
Employee stock plan (ESIP) shares 524 52 16,785
Net put option premiums and settlements 1,335
Reclassification of put options to liability (7,289)
Exercise of options and other 1,215 122 44,868
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003 245,932 24,593 108,024
Net income
Other comprehensive income
Net unrealized gains on investments
Currency translation adjustments
Minimum pension liability adjustment
Total comprehensive income
Purchase of stock (1,347) (134) (67,458)
Cash dividends on common stock
Issuance of restricted shares, net 1,004 100 45,725
Employee stock plan (ESIP) shares 594 59 21,710
Tax benefit from employee stock plans 18,567
Exercise of options 3,497 350 128,569
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2004 249,680 $24,968 $255,137
- ------------------------------------------------------------------------------------------------------------------------------------
[Table continued on next page]
See accompanying notes to the consolidated financial statements.
58
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
[Table continued from previous page]
(IN THOUSANDS)
ACCUMULATED OTHER TOTAL TOTAL
AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
2004, 2003, AND 2002 EARNINGS INCOME (LOSS) EQUITY INCOME
- ------------------------------------------------ --------------- -------------------- ------------------ -----------------
BALANCE, OCTOBER 1, 2001 $3,342,979 $(49,041) $3,977,896
Net income 432,723 432,723 $432,723
Other comprehensive income
Net unrealized loss on investments (4,084) (4,084) (4,084)
Currency translation adjustments (837) (837) (837)
Minimum pension liability adjustment (5,780) (5,780) (5,780)
---------
Total comprehensive income $422,022
Purchase of stock (124,931)
Cash dividends on common stock (73,066) (73,066)
Issuance of restricted shares, net 27,553
Employee stock plan (ESIP) shares 14,367
Proceeds from issuance of put options 6,954
Exercise of options and other 16,151
- ------------------------------------------------ --------------- -------------------- ------------------ -----------------
BALANCE, SEPTEMBER 30, 2002 3,702,636 (59,742) 4,266,946
- ------------------------------------------------ --------------- -------------------- ------------------ -----------------
Net income 502,830 502,830 $502,830
Other comprehensive income
Net unrealized gain on investments 72,222 72,222 72,222
Currency translation adjustments 30,727 30,727 30,727
Minimum pension liability adjustment 4,640 4,640 4,640
--------
Total comprehensive income $610,419
Purchase of stock (575,681)
Cash dividends on common stock (75,822) (75,822)
Issuance of restricted shares, net 28,373
Employee stock plan (ESIP) shares 16,837
Net put option premiums and settlements 1,335
Reclassification of put options to liability (7,289)
Exercise of options and other 44,990
- ------------------------------------------------ --------------- -------------------- ------------------ -----------------
BALANCE, SEPTEMBER 30, 2003 4,129,644 47,847 4,310,108
- ------------------------------------------------ --------------- -------------------- ------------------ -----------------
Net income 706,664 706,664 $706,664
Other comprehensive income
Net unrealized gains on investments 9,292 9,292 9,292
Currency translation adjustments 16,895 16,895 16,895
Minimum pension liability adjustment 1,141 1,141 1,141
--------
Total comprehensive income $733,992
Purchase of stock (67,592)
Cash dividends on common stock (84,804) (84,804)
Issuance of restricted shares, net 45,825
Employee stock plan (ESIP) shares 21,769
Tax benefit from employee stock plans 18,567
Exercise of options 128,919
- ------------------------------------------------ --------------- -------------------- ------------------ -----------------
BALANCE, SEPTEMBER 30, 2004 $4,751,504 $75,175 $5,106,784
- ------------------------------------------------ --------------- -------------------- ------------------ -----------------
See accompanying notes to the consolidated financial statements.
59
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME $706,664 $502,830 $432,723
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
(Increase) decrease in receivables, prepaid expenses and other (69,836) (49,205) 66,266
Net advances of deferred sales commissions (182,146) (158,942) (102,092)
Increase (decrease) in other current liabilities 59,969 50,643 (4,705)
Provision for governmental investigations, proceedings and
actions 92,814 -- --
Increase (decrease) in deferred income taxes and taxes payable 49,150 (20,894) 72,025
Increase (decrease) in commissions payable 32,781 14,526 (2,485)
Increase in accrued compensation and benefits 110,555 30,367 26,655
Originations of loans held for sale (79,478) -- --
Net proceeds from securitization of loans held for sale 294,996 -- --
Net change in trading securities (215,950) (4,677) --
Equity in net income of affiliated companies (20,605) (6,934) (1,567)
Depreciation and amortization 183,437 177,420 183,121
(Gains) losses on asset disposal, net and other (18,993) 1,280 5,224
Other-than-temporary decline in investments value -- -- 60,068
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 943,358 536,414 735,233
Purchase of investments (2,346,070) (2,332,937) (1,501,253)
Liquidation of investments 3,407,267 1,977,077 1,284,557
Purchase of banking/finance investments (2,882) (275,407) (273,099)
Liquidation of banking/finance investments 97,542 439,264 209,678
Net proceeds from securitization of loans receivable 179,965 442,961 558,082
Net origination of loans receivable (337,114) (471,234) (426,386)
Additions of property and equipment (25,933) (52,653) (53,062)
Proceeds from sale of property and equipment 4,677 2,494 9,569
Acquisitions of subsidiaries, net of cash acquired (68,255) -- (51,779)
Insurance proceeds related to September 11, 2001 event 32,487 10,643 28,562
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 941,684 (259,792) (215,131)
(Decrease) increase in bank deposits (78,236) (99,588) 9,963
Exercise of common stock options 128,919 45,435 17,047
Net put option premiums and settlements -- 1,335 6,059
Dividends paid on common stock (82,006) (75,441) (71,778)
Purchase of stock (67,593) (575,681) (124,931)
Increase in debt 277,281 523,627 103,794
Payments on debt (199,914) (23,218) (75,859)
- --------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (21,549) (203,531) (135,705)
Increase (decrease) in cash and cash equivalents 1,863,493 73,091 384,397
Cash and cash equivalents, beginning of year 1,053,695 980,604 596,207
- --------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $2,917,188 $1,053,695 $980,604
- --------------------------------------------------------------------------------------------------------------------------
[Table continued on next page]
See accompanying notes to the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[Table continued from previous page]
(in thousands)
FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest, including banking/finance group interest except inter-
segment interest $35,347 $19,260 $16,746
Income taxes 238,730 142,799 125,083
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Value of common stock issued, primarily restricted stock $53,883 $28,465 $28,009
Total assets related to the consolidation of certain sponsored
investment products and a lessor trust, net of deconsolidated
assets 168,486 45,492 --
Total liabilities related to the consolidation of certain sponsored
investment products and a lessor trust, net of deconsolidated
liabilities 141,886 1,556 --
Fair value of subsidiary assets acquired 37,690 -- --
Fair value of subsidiary liabilities assumed 6,345 -- --
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
61
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
We derive the majority of our revenues and net income from providing investment
management, administration, distribution and related services to the Franklin,
Templeton, Mutual Series, Bissett, Fiduciary Trust and Darby Overseas funds,
institutional, high net-worth and other investment products, collectively called
our sponsored investment products. Services to our sponsored investment products
are provided under contracts that set forth the level and nature of the fees to
be charged for these services. The majority of our revenues relate to mutual
fund products that are subject to contracts that are periodically reviewed and
approved by each mutual fund's Board of Directors/Trustees and/or its
shareholders. Currently, no single sponsored investment product's revenues
represent more than 10% of total revenues.
BASIS OF PRESENTATION. The consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United States of
America, which require us to estimate certain amounts. Actual amounts may differ
from these estimates. Certain comparative amounts for prior years have been
reclassified to conform to the fiscal 2004 financial statement presentation.
The consolidated financial statements include the accounts of Franklin
Resources, Inc. and its subsidiaries ("Franklin Templeton Investments"). All
material inter-company accounts and transactions have been eliminated except
that we have not eliminated the receivable from banking/finance group and
payable to parent from our Consolidated Balance Sheets which represent balances
outstanding related to the funding of banking activities, including auto and
credit card loan financing. In addition, the related inter-company interest
expense is included in other, net revenue and the inter-company interest income
is included in investment and other income in our Consolidated Statements of
Income (see Note 20). This treatment provides additional information on funding
sources available to the banking/finance group and on its operations.
CASH AND CASH EQUIVALENTS include cash on hand, demand deposits with banks, debt
instruments with maturities of three months or less at the purchase date and
other highly liquid investments, including money market funds, which are readily
convertible into cash.
INVESTMENT SECURITIES, TRADING are carried at fair value based on the last
reported net asset value with changes in fair value recognized in our
consolidated net income. Trading securities include investments held by
majority-owned sponsored investment products that are consolidated in our
financial statements.
INVESTMENT SECURITIES, AVAILABLE-FOR-SALE are carried at fair value. Fair values
for investments in our sponsored investment products are based on the last
reported net asset value. Fair values for other investments are based on the
last reported price on the exchange on which they are traded. Realized gains and
losses are included in investment income currently based on specific
identification. Unrealized gains and losses are recorded net of tax as part of
accumulated other comprehensive income until realized.
When the cost of an investment exceeds its fair value, we review the investment
for an other-than-temporary decline in value. In making the determination of
whether the decline is other-than-temporary, we use a systematic methodology
that includes consideration of the duration and extent to which the fair value
is less than cost, the financial condition of the investee, including industry
and sector performance, and our intent and ability to hold the investment. When
a decline in fair value of an available-for-sale security is determined to be
other-than-temporary, the unrealized loss recorded net of tax in accumulated
other comprehensive income is realized as a charge to net income.
DERIVATIVES. Generally, we do not hold or issue derivative financial instruments
for trading purposes. Periodically, we enter into interest-rate swap agreements
to reduce variable interest-rate exposure with respect to our commercial paper,
designated as cash flow hedges, and to hedge exposures or modify the interest
rate characteristics of fixed-rate borrowings with maturities in excess of one
year, designated as fair value hedges. As of September 30, 2004, we held
interest rate swaps with a total notional amount of $51.7 million and these were
reported at their fair value of $1.4 million.
We periodically enter into spot and forward currency contracts as principal to
facilitate client transactions and, on limited occasions, hold currency options
for our own account. It is our policy that substantially all forward contracts
be covered no later than the close of business each day. Gains or losses on
these contracts are reflected in the Consolidated Statements of Income. The
gross fair market value of all contracts outstanding that had a positive fair
market value represents a credit exposure to the extent that counterparties fail
to settle
62
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their contractual obligations. This risk is mitigated by the use of master
netting agreements, careful evaluation of counterparty credit standings,
diversification and limits. Credit exposure was not significant at September 30,
2004.
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. These put options are carried at fair value with changes in fair
value recognized in our consolidated net income. At September 30, 2004, there
were no put options outstanding.
LOANS RECEIVABLE. Our banking/finance group offers retail-banking and consumer
lending services. We accrue interest on loans using the simple interest method.
The majority of retail-banking loans are at variable rates, which are adjusted
periodically. Loans originated and intended for sale are carried at the lower of
cost or estimated fair value in the aggregate. Net unrealized losses, if any,
are recognized through a valuation allowance included in other, net revenues.
ALLOWANCE FOR LOAN LOSSES. An allowance for probable loan losses on our consumer
loan portfolio is maintained at a level sufficient to absorb probable losses
inherent in the loan portfolio. Probable losses are estimated for the consumer
loan portfolio based on contractual delinquency status and historical loss
experience. The allowance on our consumer portfolio is based on aggregated
portfolio segment evaluations, generally by loan type, and reflects our judgment
of portfolio risk factors such as economic conditions, bankruptcy trends,
product mix, geographic concentrations and other similar items. A loan is
charged to the allowance for probable loan losses when it is deemed to be
uncollectible, taking into consideration the value of the collateral, the
financial condition of the borrower and other factors. Recoveries on loans
previously charged-off as uncollectible are credited to the allowance for
probable loan losses. Beginning in fiscal 2004, the allowance for probable loan
losses on our auto loan portfolio no longer includes a portion of acquisition
discounts from our purchase of automobile installment loan contracts, commonly
referred to as dealer holdbacks.
We have not recorded an allowance for probable loan losses on our retail-banking
loans and advances as these loans are generally payable on demand and are fully
secured by assets under our custody. Advances on customers' accounts are
generally secured or subject to rights of offset and, consistent with past
experience, no loan losses are anticipated.
Past due loans 90 days or more in both our consumer lending and retail-banking
portfolios are reviewed individually to determine whether they are collectible.
If warranted, after considering collateral level and other factors, loans 90
days past due are placed on non-accrual status. Interest collections on
non-accrual loans for which the ultimate collectibility of principal is
uncertain are applied as principal reductions; otherwise, such collections are
credited to income when received.
INVESTMENTS, OTHER include investments that we intend to hold for a period in
excess of one year at the time of purchase.
Investments are accounted for using the equity method of accounting if we are
able to exercise significant influence, but not control, over the investee.
Significant influence is generally considered to exist when an ownership
interest in the voting stock of the investee is between 20% and 50%, although
other factors, such as representation on the investee's board of directors and
the impact of commercial arrangements, are also considered in determining
whether the equity method of accounting is appropriate. Lower thresholds are
used for our investments in limited partnerships and limited liability companies
in determining whether we are able to exercise significant influence.
Entities in which we hold in excess of 50% ownership interest are consolidated
in our financial statements. We are also required to consolidate variable
interest entities in relation to which we are the primary beneficiary as defined
in FASB Interpretation No. 46, "Consolidation of Variable Interest Entities"
(revised December 2003) (see Note 2).
Generally, long-term investments, such as debt instruments, are carried at fair
value in accordance with our treatment of investment securities,
available-for-sale if we are unable to exercise significant influence over the
investee. These include collateralized debt obligations ("CDOs"), which are
valued based on cash flow
63
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projections. Investments are accounted for under the cost method if we are not
able to exercise significant influence over the investee and are not
exchange-traded.
Investments, other are adjusted for other-than-temporary declines in value. When
a decline in fair value of an investment carried at fair value is determined to
be other-than-temporary, the unrealized loss recorded net of tax in accumulated
other comprehensive income is realized as a charge to net income. When a decline
in fair value of an investment carried at cost is determined to be
other-than-temporary, the investment is written down to fair value and the loss
in indicated value is included in earnings.
DEFERRED SALES COMMISSIONS. Sales commissions paid to broker/dealers and other
investment advisers in connection with the sale of shares of our mutual funds
sold without a front-end sales charge are capitalized and amortized over periods
not exceeding eight years - the periods in which we estimate that they will be
recovered from distribution plan payments or from contingent deferred sales
charges.
PROPERTY AND EQUIPMENT are recorded at cost and are depreciated on the
straight-line basis over their estimated useful lives. Expenditures for repairs
and maintenance are charged to expense when incurred. We amortize leasehold
improvements on the straight-line basis over their estimated useful lives or the
lease term, whichever is shorter.
SOFTWARE DEVELOPED FOR INTERNAL USE. Internal and external costs incurred in
connection with developing or obtaining software for internal use are
capitalized. These capitalized costs are included in property and equipment, net
on our Consolidated Balance Sheets and are amortized beginning when the software
project is complete and the application is put into production, over the
estimated useful life of the software.
GOODWILL AND OTHER INTANGIBLE ASSETS. Intangible assets consist primarily of the
estimated value of mutual fund management contracts and customer base resulting
from our acquisition of the assets and liabilities of the following companies:
* Templeton, Galbraith & Hansberger Ltd. in October 1992
* Heine Securities Corporation in November 1996
* Bissett and Associates Investment Management Ltd. ("Bissett") in October 2000
* Fiduciary Trust Company International ("Fiduciary Trust") in April 2001
* Pioneer ITI AMC Limited ("Pioneer") in July 2002
* Darby Overseas Investments, Ltd. and Darby Overseas Partners, L.P.
(collectively "Darby") in October 2003
We amortize intangible assets over their estimated useful lives, using the
straight-line method, unless the asset is determined to have an indefinite
useful life. Amounts assigned to indefinite-lived intangible assets primarily
represent the value of contracts to manage mutual fund assets, for which there
is no foreseeable limit on the contract period.
Goodwill represents the excess cost of a business acquisition over the fair
value of the net assets acquired. In accordance with Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"), indefinite-lived intangible assets and goodwill are not amortized, but
are reviewed when there is an indication of impairment, or at least annually, to
determine whether the value of the assets is impaired.
When the carrying amount of indefinite-lived intangible assets exceeds the
implied fair value, an indication of impairment exists. Fair value is determined
based on anticipated discounted cash flows. Similarly, goodwill impairment is
indicated when the carrying amount of a reporting unit exceeds its implied fair
value. In estimating the fair value of the reporting unit, we use valuation
techniques based on discounted cash flows similar to models employed in
analyzing the purchase price of an acquisition target. When impairment of
goodwill or indefinite-lived intangible assets is indicated in the above tests,
impairment is determined by calculating the difference between the carrying
value of the asset reflected on the financial statements and its current fair
value, generally based on undiscounted cash flows. Any excess of carrying value
over the fair value would be recognized as an expense in the period in which the
impairment occurs.
Intangible assets subject to amortization are reviewed for impairment at each
reporting period on the basis of the expected future undiscounted operating cash
flows, without interest charges, to be derived from these assets. See Note 9 for
additional information regarding goodwill and other intangible assets.
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Our goodwill and other intangible assets have been assigned to our investment
management operating segment.
DEMAND AND INTEREST-BEARING DEPOSITS. The fair value of demand deposits are, by
definition, equal to their carrying amounts. Interest-bearing deposits are
variable rate and short-term and, therefore, the carrying amounts approximate
their fair values.
REVENUES. We recognize investment management fees, shareholder servicing fees,
investment income and distribution fees as earned, over the period in which
services are rendered. Performance-based investment management fees are
recognized when earned. Investment management fees are determined based on a
percentage of assets under management. Generally, shareholder servicing fees are
calculated based on the number of accounts serviced. We record underwriting
commissions related to the sale of shares of our sponsored investment products
on the trade date.
ADVERTISING AND PROMOTION. We expense costs of advertising and promotion as
incurred.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of foreign subsidiaries are
translated at current exchange rates as of the end of the accounting period, and
related revenues and expenses are translated at average exchange rates in effect
during the period. Net exchange gains and losses resulting from translation are
excluded from income and are recorded as part of accumulated other comprehensive
income. Foreign currency transaction gains and losses are reflected in income
currently.
DIVIDENDS. For the years ended September 30, 2004, 2003, and 2002, we declared
dividends to common stockholders of $0.34, $0.30 and $0.28 per share.
STOCK-BASED COMPENSATION. As permitted under the provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), we have elected to apply Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations in accounting for our stock-based plans. Accordingly, no
compensation costs are recognized with respect to stock options granted when the
exercise price is equal to the market value of the stock, or with respect to
shares issued under the Employee Stock Investment Plan ("ESIP"). We recognize
compensation expense for the matching contribution that we may elect to make in
connection with the ESIP over the 18-month holding period and for the full cost
of restricted stock grants as earned, in the year that the related services are
rendered.
If we had determined compensation costs for our stock option plans and our ESIP
(see descriptions in Notes 15 and 16) based upon fair values at the grant dates
in accordance with the provisions of SFAS 123, our net income and earnings per
share would have been reduced to the pro forma amounts indicated below. For pro
forma purposes, the estimated fair value of options was calculated using the
Black-Scholes option-pricing model and is amortized over the options' vesting
periods.
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002
- ------------------------------------------------------------------------------------------------------
Net income, as reported $706,664 $502,830 $432,723
Less: additional stock-based compensation expense
determined under the fair value method, net of tax 47,243 65,294 59,339
- ------------------------------------------------------------------------------------------------------
PRO FORMA NET INCOME $659,421 $437,536 $373,384
- ------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
As reported $2.84 $1.98 $1.66
Pro forma 2.65 1.72 1.43
DILUTED EARNINGS PER SHARE
As reported $2.80 $1.97 $1.65
Pro forma 2.62 1.72 1.42
- ------------------------------------------------------------------------------------------------------
65
- --------------------------------------------------------------------------------
The weighted-average estimated fair value of options granted on the date of
grant using Black-Scholes option-pricing model was as follows:
FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002
- ---------------------------------------------------------- ------------- -------------- ------------
Weighted-average fair value of options granted $25.62 $14.67 $16.14
Assumptions made:
Dividend yield 0.6% 0.8% 0.5%
Expected volatility 47.0% 40.0% 42.4%
Risk-free interest rate 3.8% 3.4% 4.4%
Expected life 7.5 years 7.4 years 5.7 years
- ---------------------------------------------------------- ------------- -------------- ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME is reported in our consolidated
statements of stockholders' equity and includes net income, minimum pension
liability adjustment, unrealized gains (losses) on investment securities
available-for-sale, net of income taxes, and currency translation adjustments.
The changes in net unrealized gains (losses) on investment securities include
reclassification adjustments relating to the net realized gains on the sale of
investment securities of $24.0 million, $9.3 million and $5.7 million during
fiscal 2004, 2003, and 2002. The tax effect of the change in unrealized gains
(losses) on investment securities was $1.8 million, $1.5 million and $4.5
million during fiscal 2004, 2003, and 2002.
EARNINGS PER SHARE. We computed earnings per share for the years ended September
30, 2004, 2003 and 2002 as follows:
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2004 2003 2002
- ----------------------------------------------------------------------------------------------------
Net income $706,664 $502,830 $432,723
- ----------------------------------------------------------------------------------------------------
Weighted-average shares outstanding - basic 249,166 253,714 261,239
Incremental shares from assumed conversions 2,986 967 815
- ----------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE SHARES OUTSTANDING - DILUTED 252,152 254,681 262,054
- ----------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income before cumulative effect of an accounting change $2.82 $1.98 $1.66
Cumulative effect of an accounting change 0.02 -- --
- ----------------------------------------------------------------------------------------------------
NET INCOME $2.84 $1.98 $1.66
- ----------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income before cumulative effect of an accounting change $2.78 $1.97 $1.65
Cumulative effect of an accounting change 0.02 -- --
- ----------------------------------------------------------------------------------------------------
NET INCOME $2.80 $1.97 $1.65
- ----------------------------------------------------------------------------------------------------
NOTE 2 - NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
Under FIN 46, a variable interest entity ("VIE") is an entity in which the
equity investment holders have not contributed sufficient capital to finance its
activities 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.
66
- --------------------------------------------------------------------------------
In December 2003, the FASB published FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities (revised December 2003)" ("FIN 46-R"), clarifying
FIN 46 and exempting certain entities from the provisions of FIN 46. Generally,
application of FIN 46-R is required in financial statements of public entities
that have interests in structures commonly referred to as special-purpose
entities for periods ending after December 15, 2003, and, for other types of
VIEs, for periods ending after March 15, 2004. We early adopted FIN 46-R as of
December 31, 2003, and, as a result, we recognized a cumulative effect of an
accounting change, net of tax, of $4.8 million as of this date to reflect the
accumulated retained earnings of VIEs in which we became an interest holder
prior to February 1, 2003 (see Note 13).
In December 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 132 (revised 2003), "Employers' Disclosures about Pensions and
Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88, and
106" ("SFAS 132"). SFAS 132 revises employers' disclosures about pension plans
and other post-retirement benefits plans and requires additional disclosures
about the assets, obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other defined benefit post-retirement plans.
SFAS 132 is effective for financial statements relating to fiscal years ending
after December 15, 2003 (see Note 17).
In March 2004, the FASB approved the consensus reached on the Emerging Issues
Task Force (EITF) Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments" ("EITF 03-1"). The
objective of this Issue is to provide guidance for identifying impaired
investments. EITF 03-1 also provides new disclosure requirements for investments
that are deemed to be temporarily impaired. The accounting provisions of EITF
03-1 are effective for all reporting periods beginning after June 15, 2004,
while the disclosure requirements are effective only for annual periods ending
after June 15, 2004. The adoption of EITF 03-1 did not have a significant impact
on our overall results of operations or financial position.
The EITF has proposed EITF No. 04-8, "The Effect of Contingently Convertible
Debt on Diluted Earnings per Share" ("EITF 04-8"), which will require the
inclusion of the potential conversion of our zero coupon convertible senior
notes (see Note 11) into common stock when calculating diluted earnings per
share even if the conditions that must be satisfied to allow conversion have not
been met. EITF 04-8 has not been ratified as of the date of this filing;
however, it is expected to be effective for reporting periods ending after
December 15, 2004. Based on our fiscal 2004 result, we estimated a negative
impact on diluted earnings per share of approximately $0.05, if the current
provisions of EITF 04-8 were approved.
NOTE 3 - ACQUISITIONS
On October 1, 2003, we acquired the remaining 87.3% interest in Darby Overseas
Investments, Ltd. and Darby Overseas Partners, L.P. (collectively "Darby") that
we did not own for an additional cash investment of approximately $75.9 million.
The acquisition cost was allocated to tangible net assets acquired ($31.3
million), definite-lived management contracts ($3.4 million) and goodwill ($41.2
million). These definite-lived intangible assets are being amortized over the
remaining contractual life of the sponsored investment products, ranging from
one to eight years, as of the date of purchase. At September 30, 2003, Darby had
approximately $0.9 billion in assets under management relating to private
equity, mezzanine and emerging markets fixed-income products.
On July 26, 2002, our 75% owned subsidiary, Templeton Asset Management (India)
Private Limited, acquired all of the issued and outstanding shares of Pioneer,
an Indian investment management company with approximately $0.8 billion in
assets under management as of the purchase date. This all-cash transaction was
valued at approximately $55.4 million. Our consolidated financial statements
include the operating results of Pioneer from July 26, 2002. We recognized
goodwill of $38.7 million and indefinite-lived management contracts of $13.1
million from this acquisition.
We have not presented pro forma combined results of operations for these
acquisitions because the results of operations as reported in the accompanying
Consolidated Statements of Income would not have been materially different.
67
- --------------------------------------------------------------------------------
NOTE 4 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents at September 30, 2004 and 2003, consisted of the
following:
(in thousands) 2004 2003
- ------------------------------------------------------------------------- ------------- ------------
Cash and due from banks $341,891 $260,530
Federal funds sold and securities purchased under agreements to resell 64,029 3,741
Money market funds, time deposits and other 2,511,268 789,424
- ------------------------------------------------------------------------- ------------- ------------
TOTAL $2,917,188 $1,053,695
- ------------------------------------------------------------------------- ------------- ------------
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 $1.9 million at September 30, 2004 and $1.5 million at
September 30, 2003.
NOTE 5 - INVESTMENT SECURITIES AND OTHER INVESTMENTS
Investment securities at September 30, 2004 and 2003, consisted of the
following:
AMORTIZED GROSS UNREALIZED FAIR
(in thousands) COST GAINS LOSSES VALUE
- -------------------------------------------------- ------------- ---------- ----------- ------------
2004
CURRENT
Investment securities, trading $248,536 $11,076 $(2,283) $257,329
Investment securities, available-for-sale
Sponsored investment products 300,251 35,076 (14,403) 320,924
Securities of U.S. states and political
subdivisions 16,379 456 (10) 16,825
Securities of U.S. Treasury, federal agencies and
other 342,751 4,039 (426) 346,364
Equities 13,866 561 (5) 14,422
- -------------------------------------------------- ------------- ---------- ----------- ------------
Total investment securities, available-for-sale 673,247 40,132 (14,844) 698,535
- -------------------------------------------------- ------------- ---------- ----------- ------------
TOTAL $921,783 $51,208 $(17,127) $955,864
- -------------------------------------------------- ------------- ---------- ----------- ------------
NON-CURRENT:
Investments, other
Investment in equity-method investees $193,699 $-- $-- $193,699
Equities and other 166,692 29,892 (1,464) 195,120
- -------------------------------------------------- ------------- ---------- ----------- ------------
TOTAL $360,391 $29,892 $(1,464) $388,819
- -------------------------------------------------- ------------- ---------- ----------- ------------
68
- --------------------------------------------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
(in thousands) COST GAINS LOSSES VALUE
- -------------------------------------------------- ------------- ---------- ----------- ------------
2003
CURRENT
Investment securities, trading $39,903 $1,510 $(34) $41,379
Investment securities, available-for-sale
Sponsored investment products 412,414 20,392 (7,634) 425,172
Securities of U.S. states and political subdivisions 11,423 593 -- 12,016
Securities of U.S. Treasury, federal agencies and
other 1,375,087 6,940 (1,132) 1,380,895
Equities 20,953 561 (656) 20,858
- -------------------------------------------------- ------------- ---------- ----------- -------------
Total investment securities, available-for-sale 1,819,877 28,486 (9,422) 1,838,941
- -------------------------------------------------- ------------- ---------- ----------- -------------
TOTAL $1,859,780 $29,996 $(9,456) $1,880,320
- -------------------------------------------------- ------------- ---------- ----------- -------------
NON-CURRENT
Investments, other
Investment in equity-method investees $183,036 $-- $-- $183,036
Equities and other 70,885 26,861 (426) 97,320
- -------------------------------------------------- ------------- ---------- ----------- -------------
TOTAL $253,921 $26,861 $(426) $280,356
- -------------------------------------------------- ------------- ---------- ----------- -------------
Investments, other included investments that we intend to hold for a period in
excess of one year. Investments in equity method investees include investment
partnerships where we have significant influence. Equities and other investments
include debt, including CDOs, and other securities with a determinable fair
value as well as investments carried at cost.
Gross unrealized losses on investment securities, available-for-sale and
investments, other at September 30, 2004 were deemed to be temporary in nature.
See Note 1 for a description of our investments valuation methodology.
As of September 30, 2004 and 2003, banking/finance operating segment investment
securities with aggregate carrying values of $24.1 million and $28.4 million
were pledged as collateral as required by federal and state regulators and the
Federal Home Loan Bank.
At September 30, 2004, maturities of securities of the U.S. Treasury and federal
agencies and the U.S. states and political subdivisions were as follows:
AMORTIZED
(in thousands) COST FAIR VALUE
- ---------------------------------------------------------------------- --------------- --------------
SECURITIES OF U.S. TREASURY AND FEDERAL AGENCIES
Due in one year or less $116,028 $116,011
Due after one year through five years 107,022 109,224
Due after five years through ten years -- --
Due after ten years 119,701 121,129
- ---------------------------------------------------------------------- --------------- --------------
TOTAL $342,751 $346,364
- ---------------------------------------------------------------------- --------------- --------------
SECURITIES OF U.S. STATES AND POLITICAL SUBDIVISIONS
Due in one year or less $8,768 $8,784
Due after one year through five years 5,175 5,466
Due after five years through ten years 997 1,077
Due after ten years 1,439 1,498
- ---------------------------------------------------------------------- --------------- --------------
TOTAL $16,379 $16,825
- ---------------------------------------------------------------------- --------------- --------------
69
- --------------------------------------------------------------------------------
NOTE 6 - LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of banking/finance operating segment loans receivable by major
category as of September 30, 2004 and 2003 is shown below. Included in
installment loans to individuals are auto and credit card receivables. Other
loans include secured loans made to Fiduciary Trust clients. No loan loss
allowance is recognized on Fiduciary Trust's retail-banking loans and advances
as described in Note 1.
(in thousands) 2004 2003
- -----------------------------------------------------------------------------------------------------
Commercial $60,979 $60,541
Real estate (subject to collateral) 43,177 67,598
Installment loans to individuals 89,558 190,754
Other 144,659 160,329
- -----------------------------------------------------------------------------------------------------
Loans receivable 338,373 479,222
Less: allowance for loan losses (3,697) (8,550)
- -----------------------------------------------------------------------------------------------------
LOANS RECEIVABLE, NET $334,676 $470,672
- -----------------------------------------------------------------------------------------------------
At both September 30, 2004, and 2003 real estate (subject to collateral) loans
included $3.0 million of loans held for sale. At September 30, 2004, installment
loans to individuals included $79.5 million of auto loans held for sale. Loans
held for sale are carried at the lower of cost or estimated fair value in the
aggregate.
Maturities of loans at September 30, 2004 were as follows:
AFTER 1
(IN THOUSANDS) ONE YEAR OR LESS THROUGH 5 YEARS AFTER 5 YEARS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
Commercial $60,979 $-- $-- $60,979
Real estate (subject to collateral) -- 28 43,149 43,177
Installment loans to individuals 68,581 17,275 3,702 89,558
Other 136,035 4,536 4,088 144,659
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $265,595 $21,839 $50,939 $338,373
- ---------------------------------------------------------------------------------------------------------------------------
The following table summarizes contractual maturities of loans due after one
year by repricing characteristic at September 30, 2004:
(IN THOUSANDS) CARRYING AMOUNT
- --------------------------------------------------------------------------------
Loans at predetermined interest rates $18,245
Loans at floating or adjustable rates 54,533
- --------------------------------------------------------------------------------
TOTAL $72,778
- --------------------------------------------------------------------------------
70
- --------------------------------------------------------------------------------
Changes in the allowance for loan losses during 2004 and 2003 were as follows:
(IN THOUSANDS) 2004 2003
- -----------------------------------------------------------------------------------------------------
Balance, beginning of year $8,550 $9,034
Provision for loan losses 5,201 13,423
Charge-offs (6,767) (8,046)
Recoveries 2,040 2,393
- -----------------------------------------------------------------------------------------------------
Total allowance for loan losses before other adjustments 9,024 16,804
Loans securitized (6,166) (12,020)
Dealer holdback and other 839 3,766
BALANCE, END OF YEAR $3,697 $8,550
- -----------------------------------------------------------------------------------------------------
Total net loan charge-offs as a percentage of average total loans 1.86% 1.23%
Allowance as a percentage of total loans 1.76% 1.78%
- -----------------------------------------------------------------------------------------------------
The following is a summary of delinquency information for fiscal 2004, 2003, and
2002:
(in thousands) 2004 2003 2002
- ------------------------------------------------------- -------------- --------------- --------------
Commercial loans, 90 days or more delinquent $-- $13,063 $300
Installment loans, 90 days or more delinquent 3,100 897 750
Non-accrual loans 435 510 439
- ------------------------------------------------------- -------------- --------------- --------------
NOTE 7 - 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
years ended September 30, 2004, 2003, and 2002:
(in thousands) 2004 2003 2002
- -----------------------------------------------------------------------------------------------------
Gross sale proceeds $488,519 $464,372 $565,154
Net carrying amount of loans sold 482,177 446,672 544,831
- -----------------------------------------------------------------------------------------------------
PRE-TAX GAIN $6,342 $17,700 $20,323
- -----------------------------------------------------------------------------------------------------
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:
2004 2003 2002
- -----------------------------------------------------------------------------------------------------
Excess cash flow discount rate (annual rate) 12.0% 12.0% 12.0%
Cumulative life loss rate 3.2% - 3.4% 3.7% - 4.3% 3.3% - 3.8%
Pre-payment speed assumption (average monthly rate) 1.6% - 1.8% 1.8% - 1.9% 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.
71
- --------------------------------------------------------------------------------
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 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:
(in thousands) 2004 2003
- ----------------------------------------------------------------------------------------------------
CARRYING AMOUNT/FAIR VALUE OF INTEREST-ONLY STRIPS $31,808 $36,010
- --------------------------------------------------
EXCESS CASH FLOW DISCOUNT RATE (ANNUAL RATE) 12.0% 12.0%
- --------------------------------------------
Impact on fair value of 10% adverse change $(240) $(493)
Impact on fair value of 20% adverse change (476) (971)
CUMULATIVE LIFE LOSS RATE 3.9% 3.9%
- -------------------------
Impact on fair value of 10% adverse change $(2,677) $(2,412)
Impact on fair value of 20% adverse change (5,354) (4,725)
PRE-PAYMENT SPEED ASSUMPTION (AVERAGE MONTHLY RATE) 1.8% 1.8%
- ---------------------------------------------------
Impact on fair value of 10% adverse change $(3,479) $(3,505)
Impact on fair value of 20% adverse change (6,894) (7,051)
- ----------------------------------------------------------------------------------------------------
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. The following is a summary
of cash flows received from and paid to securitization trusts.
(in thousands) 2004 2003 2002
- --------------------------------------------------------------------------------
Servicing fees received $13,435 $10,598 $7,921
Other cash flows received 24,703 18,283 15,375
Purchase of loans from trusts (11,889) (10,804) (8,659)
- --------------------------------------------------------------------------------
Amounts payable to the trustee related to loan principal and interest collected
on behalf of the trusts of $40.6 million as of September 30, 2004 and $34.4
million as of September 30, 2003 are included in other banking/finance
liabilities.
The securitized loan portfolio that we manage and the related delinquencies were
as follows:
(in thousands) 2004 2003
- --------------------------------------------------------------------------------
Securitized loans held by securitization trusts $768,936 $680,695
Delinquencies 13,301 12,911
- --------------------------------------------------------------------------------
Net charge-offs on the securitized loan portfolio were $15.1 million in fiscal
2004, $12.6 million in fiscal 2003 and $6.5 million in fiscal 2002.
72
- --------------------------------------------------------------------------------
NOTE 8 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at September 30, 2004 and
2003:
(in thousands) USEFUL LIVES IN YEARS 2004 2003
- --------------------------------------------------------------------------------------------------------------------------
Furniture, software and equipment 3 - 5 $563,156 $558,435
Premises and leasehold improvements 5 - 35 377,941 207,191
Land -- 71,267 71,383
- --------------------------------------------------------------------------------------------------------------------------
1,012,364 837,009
Less: Accumulated depreciation and amortization (541,786) (480,237)
- --------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET $470,578 $356,772
- --------------------------------------------------------------------------------------------------------------------------
NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS
We adopted Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141") and SFAS 142 on October 1, 2001. SFAS 141 and SFAS
142 address the initial recognition and measurement of intangible assets
acquired and the recognition and measurement of goodwill and other intangible
assets after acquisition. Under these standards, all goodwill and
indefinite-lived intangible assets, including those acquired before initial
application of the standards, are no longer amortized but are tested for
impairment at least annually.
All of our goodwill and intangible assets, including those arising from the
purchase of Fiduciary Trust in April 2001, relate to our investment management
operating segment. Non-amortized intangible assets represent the value of
management contracts related to certain of our sponsored investment products
that are indefinite-lived.
During the quarter ended March 31, 2004, we completed our annual impairment
testing of goodwill and indefinite-lived and definite-lived intangible assets
and we determined that there was no impairment in the value of these assets as
of October 1, 2003.
Intangible assets other than goodwill were as follows:
GROSS CARRYING ACCUMULATED NET CARRYING
(in thousands) AMOUNT AMORTIZATION AMOUNT
- ----------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2004
Amortized intangible assets
Customer base $233,205 $(54,716) $178,489
Other 34,933 (21,730) 13,203
- ----------------------------------------------------------------------------------------------------
268,138 (76,446) 191,692
Non-amortized intangible assets
Management contracts 479,808 -- 479,808
- ----------------------------------------------------------------------------------------------------
TOTAL $747,946 $(76,446) $671,500
- ----------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003
Amortized intangible assets
Customer base $232,800 $(39,057) $193,743
Other 31,546 (19,653) 11,893
- ----------------------------------------------------------------------------------------------------
264,346 (58,710) 205,636
Non-amortized intangible assets
Management contracts 478,645 -- 478,645
- ----------------------------------------------------------------------------------------------------
TOTAL $742,991 $(58,710) $684,281
- ----------------------------------------------------------------------------------------------------
73
- --------------------------------------------------------------------------------
The change in the carrying amount of goodwill during the year ended September
30, 2004 was as follows:
(in thousands)
- --------------------------------------------------------------------------------
Balance, October 1, 2003 $1,335,517
Darby acquisition (see Note 3) 41,155
Foreign currency movements 5,085
- --------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2004 $1,381,757
- --------------------------------------------------------------------------------
Estimated amortization expense for each of the next 5 fiscal years is as
follows:
(in thousands) FOR THE YEARS ENDING SEPTEMBER 30,
- --------------------------------------------------------------------------------
2005 $17,018
2006 17,018
2007 17,018
2008 17,018
2009 17,018
- --------------------------------------------------------------------------------
NOTE 10 - DEPOSITS
Deposits at September 30, 2004 and 2003 were as follows:
(in thousands) 2004 2003
- --------------------------------------------------------------------------------
DOMESTIC
Interest-bearing $493,238 $570,854
Noninterest-bearing 62,508 41,337
- --------------------------------------------------------------------------------
Total domestic deposits 555,746 612,191
- --------------------------------------------------------------------------------
FOREIGN
Interest-bearing -- 12,893
Noninterest-bearing -- 8,899
- --------------------------------------------------------------------------------
Total foreign deposits -- 21,792
- --------------------------------------------------------------------------------
TOTAL $555,746 $633,983
- --------------------------------------------------------------------------------
Maturities of time certificates in amounts of $100,000 or more at September 30,
2004 were:
(IN THOUSANDS) TOTAL
- --------------------------------------------------------------------------------
3 months or less $402
Over 3 months through 6 months 697
Over 6 months through 12 months 299
Over 12 months 397
- --------------------------------------------------------------------------------
TOTAL $1,795
- --------------------------------------------------------------------------------
74
- --------------------------------------------------------------------------------
NOTE 11 - DEBT
Outstanding debt at September 30, 2004 and September 30, 2003 consisted of the
following:
2004 2003
WEIGHTED WEIGHTED
(in thousands) 2004 AVERAGE RATE 2003 AVERAGE RATE
- ---------------------------------------------------- -------------- ---------------- --------------------- ---------------
CURRENT
Federal funds purchased $-- 1.60% $-- 0.98%
Federal Home Loan Bank advances 6,000 1.24% 14,500 1.33%
Commercial paper 170,000 1.82% -- N/A
Current maturities of long-term debt -- 287
- ---------------------------------------------------- -------------- ---------------- --------------------- ---------------
176,000 14,787
NON-CURRENT
Convertible Notes (including accrued interest) 530,120 1.88% 520,325 1.88%
Medium Term Notes 420,000 3.70% 420,000 3.70%
Other 246,289 168,556
- ---------------------------------------------------- -------------- ---------------- --------------------- ---------------
1,196,409 1,108,881
- ---------------------------------------------------- -------------- ---------------- --------------------- ---------------
TOTAL DEBT $1,372,409 $1,123,668
- ---------------------------------------------------- -------------- ---------------- --------------------- ---------------
As of September 30, 2004, maturities of long-term debt were as follows:
(IN THOUSANDS) CARRYING AMOUNT
- --------------------------------------------------------------------------------
2005 $34,996
2006 35,654
2007 36,325
2008 457,011
2009 37,710
Thereafter 594,713
- --------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $1,196,409
- --------------------------------------------------------------------------------
Federal funds purchased and Federal Home Loan Bank advances are included in
other liabilities of the banking/finance operating segment.
On December 31, 2003, we recognized a $164.9 million five-year note facility
that was used to finance the construction of our corporate headquarters campus
under the guidance of FIN 46-R (see Note 2). In September 2004, we purchased the
headquarter campus from the lessor trust that held these assets, and we issued
$170.0 million of commercial paper to finance the transaction.
In May 2001, we received approximately $490.0 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, when the price of our stock reaches certain
thresholds. To date, we have repurchased Convertible Notes with a face value of
$5.9 million principal amount at maturity, for their accreted value of $3.5
million, in cash. We may redeem the remaining Convertible Notes for cash on or
after May 11, 2006 or make additional repurchases, at the option of the holders,
on May 11 of 2006, 2011, 2016, 2021 and 2026. In this event, we may choose to
pay the accreted value of the Convertible Notes in cash or shares of our common
stock. The amount that the holders may redeem in the future will depend on,
among other factors, the performance of our common stock.
In April 2003, we completed the sale of five-year senior notes due April 15,
2008 totaling $420.0 million ("Medium Term Notes"). The Medium Term Notes, which
were offered to qualified institutional buyers only,
75
- --------------------------------------------------------------------------------
carry an interest rate of 3.7% and are not redeemable prior to maturity by
either the note holders or us. Interest payments are due semi-annually.
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 September 30, 2004 and September 30, 2003.
As of September 30, 2004, we had $300.0 million of debt and equity securities
available to be issued under shelf registration statements filed with the SEC
and $330.0 million of additional commercial paper available for issuance. Our
committed revolving credit facilities at September 30, 2004 totaled $420.0
million, of which, $210.0 million was under a 364-day facility expiring in June
2005. The remaining $210.0 million facility is under a five-year facility that
will expire in June 2007. In addition, at September 30, 2004, our
banking/finance operating segment had $523.6 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.
NOTE 12 - TAXES ON INCOME
Taxes on income for the years ended September 30, 2004, 2003, and 2002 were as
follows:
(in thousands) 2004 2003 2002
- ---------------------------------------------------------- ------------- ----------- -------------
Current expense
Federal $208,189 $125,743 $71,400
State 35,247 13,846 17,065
Foreign 54,894 31,329 38,653
Deferred expense (6,349) 26,455 18,434
- ---------------------------------------------------------- ------------- ----------- -------------
TOTAL PROVISION FOR INCOME TAXES $291,981 $197,373 $145,552
- ---------------------------------------------------------- ------------- ----------- -------------
Included in income before taxes was $477.4 million, $305.2 million and $283.7
million of foreign income for the years ended September 30, 2004, 2003, and
2002. The provision for U.S. income taxes includes benefits of $2.0 million for
the year ended September 30, 2004 related to the utilization of net operating
loss carry-forwards. In fiscal 2004, our income taxes payable for federal, state
and foreign purposes have been reduced by $18.6 million, which represent the tax
benefit associated with our employee stock plans. The benefit was recorded as an
increase in capital in excess of par value.
76
- --------------------------------------------------------------------------------
The major components of the net deferred tax liability as of September 30, 2004
and 2003 were as follows:
(in thousands) 2004 2003
- -----------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS
State taxes $10,455 $5,975
Loan loss reserves 1,365 3,251
Deferred compensation and employee benefits 26,730 27,259
Restricted stock compensation plan 37,351 38,074
Severance and retention compensation 2,140 3,250
Net operating loss and foreign tax credit carry-forwards 80,094 74,729
Provision for governmental investigations, proceedings and actions 21,593 --
Other 16,748 14,169
- -----------------------------------------------------------------------------------------------------
Total deferred tax assets 196,476 166,707
Valuation allowance for tax carry-forwards (80,094) (74,629)
- -----------------------------------------------------------------------------------------------------
Deferred tax assets, net of valuation allowance 116,382 92,078
DEFERRED TAX LIABILITIES
Depreciation on fixed assets 12,378 13,523
Goodwill and other purchased intangibles 161,232 153,009
Deferred commissions 18,442 17,056
Interest expense on convertible notes 31,196 21,116
Investments 5,418 1,951
Other 14,293 19,307
- -----------------------------------------------------------------------------------------------------
Total deferred tax liabilities 242,959 225,962
- -----------------------------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITY $(126,577) $(133,884)
- -----------------------------------------------------------------------------------------------------
At September 30, 2004, there were approximately $33.4 million of foreign net
operating loss carry-forwards, approximately $18.2 million of which expire
between 2005 and 2012 with the remaining carry-forwards having an indefinite
life. In addition, there were approximately $657.5 million in state net
operating loss carry-forwards that expire between 2005 and 2024. There were also
approximately $27.6 million in federal foreign tax credit carry-forwards, which
will expire between 2010 and 2014. A valuation allowance has been recognized to
offset the related deferred tax assets due to the uncertainty of realizing the
benefit of the loss and credit carry-forwards.
We have made no provision for U.S. taxes on $2,508.7 million of cumulative
undistributed earnings of foreign subsidiaries as those earnings are intended to
be reinvested for an indefinite period of time. Determination of the potential
amount of unrecognized deferred U.S. income tax liability related to such
reinvested income is not practicable because of the numerous assumptions
associated with this hypothetical calculation; however, foreign tax credits
would be available to reduce some portion of this amount. As of September 30,
2004, and based on tax laws in effect as of this date, it is our intention to
continue to indefinitely reinvest the undistributed earnings of foreign
subsidiaries.
The American Jobs Creation Act of 2004 (the "Act") was signed into law on
October 22, 2004. Under a provision of the Act, we may elect to repatriate
certain earnings of our foreign-based subsidiaries at a reduced tax rate in
either of our fiscal years ending September 30, 2005 or September 30, 2006. We
are currently evaluating the effect of this repatriation provision; however, we
do not expect to complete this evaluation until after the U.S. Congress or the
U.S. Department of the Treasury issue additional guidance regarding this
provision. The range of possible amounts we are considering for repatriation is
between zero and $1.9 billion and the potential range of income tax associated
with amounts subject to the reduced rate is between zero and $117.0 million.
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The following is a reconciliation between the amount of tax expense at the
Federal statutory rate and taxes on income as reflected in operations for the
years ended September 30, 2004, 2003, and 2002:
(in thousands) 2004 2003 2002
- ---------------------------------------------------------- ------------- ------------- -------------
Federal statutory rate 35% 35% 35%
Federal taxes at statutory rate $347,839 $245,071 $202,396
State taxes, net of Federal tax effect 18,675 9,640 10,661
Effect of foreign operations (96,770) (63,841) (52,269)
Effect of provision for governmental investigations,
proceedings and actions 12,950 -- --
Other 9,287 6,503 (15,236)
- ---------------------------------------------------------- ------------- ------------- -------------
ACTUAL TAX PROVISION $291,981 $197,373 $145,552
Effective tax rate 29% 28% 25%
- ---------------------------------------------------------- ------------- ------------- -------------
NOTE 13 - 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 campus in San Mateo, California from a lessor trust under an
operating lease that would have expired in fiscal 2005, with additional renewal
options for a further period of up to 10 years. In connection with this lease,
we were contingently liable for approximately $145.0 million in residual
guarantees, representing approximately 85% of the total construction costs of
$170.0 million. We were also contingently liable to purchase the corporate
headquarters campus for an amount equal to the final construction costs of
$170.0 million if an event of default occurred under the agreement.
On December 31, 2003, we consolidated the lessor trust under the provisions of
FIN 46-R and recognized, as a current liability, the loan principal of $164.9
million and minority interest of $5.1 million, which, in total, represented the
amount used to finance the construction of our corporate headquarters campus and
our maximum contingent liability under the agreements. In September 2004, we
purchased the assets held by the lessor trust and extinguished any related
contingent liability.
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 September 30, 2004, the maximum
potential amount of future payments was $23.6 million relating to guarantees
made prior to January 1, 2003. In addition, our consolidated balance sheet at
September 30, 2004 includes a $0.6 million liability to reflect obligations
arising from auto securitization transactions subsequent to December 31, 2002.
At September 30, 2004, our banking/finance operating segment had issued
financial standby letters of credit totaling $2.5 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, were secured
by marketable securities with a fair value of $2.1 million as of September 30,
2004 and commercial real estate.
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GOVERNMENTAL INVESTIGATIONS, PROCEEDINGS AND ACTIONS
GOVERNMENTAL INVESTIGATIONS AND SETTLEMENTS. As part of various investigations
by the Securities and Exchange Commission ("SEC"), the U.S. Attorney for the
Northern District of California, the New York Attorney General, the California
Attorney General, the U.S. Attorney for the District of Massachusetts, the
Securities Division of the Office of the Secretary of the Commonwealth of
Massachusetts, the Florida Department of Financial Services and the Commissioner
of Securities, the West Virginia Attorney General, the Vermont Department of
Banking, Insurance, Securities, and Health Care Administration and the National
Association of Securities Dealers, Inc. ("NASD"), relating to certain practices
in the mutual fund industry, including late trading, market timing and marketing
support payments to securities dealers who sell fund shares, Franklin Resources,
Inc. and certain of its subsidiaries (as used in this section, together, the
"Company"), as well as certain current or former executives and employees of the
Company, received requests for information and/or subpoenas to testify or
produce documents. The Company and its current employees provided documents and
information in response to these requests and subpoenas. In addition, the
Company responded, and in one instance is currently responding, to requests for
similar kinds of information from regulatory authorities in some of the foreign
countries where the Company conducts its global asset management business.
Franklin Templeton Investments Corp. ("FTIC"), a Company subsidiary and the
investment manager of Franklin Templeton's Canadian mutual funds, has been
cooperating with and responding to requests for information from the Ontario
Securities Commission (the "OSC") relating to the OSC's review of frequent
trading practices within the Canadian mutual fund industry. On December 10,
2004, FTIC received a letter indicating that the staff of the OSC is
contemplating enforcement proceedings against FTIC before the OSC. In its
letter, the OSC staff expressed the view that, over the period of February 1999
to February 2003, there were certain accounts that engaged in a frequent trading
market timing strategy in certain funds being managed by FTIC. The letter also
gave FTIC the opportunity to respond to the issues raised in the letter and to
provide the OSC staff with additional information relevant to these matters. The
Company expects to enter into discussions with the OSC staff in an effort to
resolve the issues raised in the OSC's review. The Company cannot predict the
likelihood of whether those discussions will result in a settlement, or the
terms of any such settlement.
On December 9, 2004, the staff of the NASD informed the Company that it has made
a preliminary determination to recommend a disciplinary proceeding against
Franklin/Templeton Distributors, Inc. ("FTDI"), alleging that FTDI violated
certain NASD rules by the use of directed brokerage commissions to pay for sales
and marketing support. FTDI has also received a separate letter from the NASD
staff advising FTDI of the NASD staff's preliminary determination to recommend a
disciplinary proceeding against FTDI alleging violation of certain NASD rules
relating to FTDI's Top Producers program. The Company believes that any such
charges are unwarranted.
On August 2, 2004, Franklin Resources, Inc. announced that its subsidiary,
Franklin Advisers, Inc. ("Franklin Advisers") reached an agreement with the SEC
that resolved the issues resulting from the previously disclosed SEC
investigation into market timing activity. In connection with that agreement,
the SEC issued an "Order instituting administrative and cease-and-desist
proceedings pursuant to sections 203(e) and 203(k) of the Investment Advisers
Act of 1940 and sections 9(b) and 9(f) of the Investment Company Act of 1940,
making findings and imposing remedial sanctions and a cease and desist order"
(the "Order"). The SEC's Order concerned the activities of a limited number of
third parties that ended in 2000 and those that were the subject of the first
Massachusetts administrative complaint described below.
Under the terms of the SEC's Order, pursuant to which Franklin Advisers neither
admitted nor denied any of the findings contained therein, Franklin Advisers
agreed to pay $50 million to be distributed to shareholders of certain of the
Franklin Templeton mutual funds ("Funds"), of which $20 million was a civil
penalty. The settlement was provided for as part of a charge of $60 million
($45.6 million, net of taxes) recorded in the fiscal quarter ended March 31,
2004. This charge represented the Company's estimate of the anticipated
settlement and related legal and distribution costs.
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The Order required Franklin Advisers to, among other things:
* Enhance and periodically review compliance policies and procedures,
and establish a corporate ombudsman;
* Establish a new internal position whose responsibilities shall include
compliance matters related to conflicts of interests; and
* Retain an Independent Distribution Consultant to develop a plan to
distribute the $50 million settlement to Fund shareholders.
The Order further provided that in any related investor actions, Franklin
Advisers would not benefit from any offset or reduction of any investor's claim
by the amount of any distribution from the above-described $50 million to such
investor that is proportionately attributable to the civil penalty paid by
Franklin Advisers.
On September 20, 2004, Franklin Resources, Inc. announced that two of its
subsidiaries, Franklin Advisers, Inc. and Franklin Templeton Alternative
Strategies, Inc. ("FTAS"), reached an agreement with the Securities Division of
the Office of the Secretary of the Commonwealth of Massachusetts (the "State of
Massachusetts") related to the previously-disclosed administrative complaint
filed on February 4, 2004. The administrative complaint concerned one instance
of market timing that was also a subject of the August 2, 2004 settlement that
Franklin Advisers reached with the SEC, as described above.
Under the terms of the settlement consent order issued by the State of
Massachusetts, Franklin Advisers and FTAS consented to the entry of a cease and
desist order and agreed to pay a $5 million administrative fine to the State of
Massachusetts (the "Massachusetts Consent Order"). Franklin Resources, Inc.
recorded this expense in the quarter ended September 30, 2004. The Massachusetts
Consent Order included two different sections: "Statements of Fact" and
"Violations of Massachusetts Securities Laws." Franklin Advisers and FTAS
admitted the facts in the Statements of Fact.
On October 25, 2004, the State of Massachusetts filed a second administrative
complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing (in which it
described the Massachusetts Consent Order and stated that "Franklin did not
admit or deny engaging in any wrongdoing") failed to state that Franklin
Advisers and FTAS admitted the Statements of Fact portion of the Massachusetts
Consent Order (the "Second Complaint"). Franklin Resources, Inc. reached a
second agreement with the State of Massachusetts on November 19, 2004, resolving
the Second Complaint. As a result of the November 19, 2004 settlement, Franklin
Resources, Inc. filed a new Form 8-K. The terms of the original settlement did
not change and there was no monetary fine associated with this second
settlement.
On November 17, 2004, Franklin Resources, Inc. announced that FTDI reached an
agreement with the CAGO, resolving the issues resulting from the CAGO's
investigation concerning sales and marketing support payments. The Company
believes that the settlement of the CAGO matter is in the best interest of the
Company and its Fund shareholders. Under the terms of the settlement, FTDI
neither admitted nor denied the allegations in the CAGO's complaint and agreed
to pay $2 million as a civil penalty, $14 million to Franklin Templeton funds
and $2 million to the CAGO for its investigative costs.
As a result of the CAGO settlement, the results for the quarter and fiscal year
ended September 30, 2004 announced on October 28, 2004 were adjusted to include
an additional charge to income of $18.5 million ($12.2 million, net of tax).
This adjustment was made in accordance with generally accepted accounting
principles in the United States, which require the Company to update estimates
when additional information becomes available after the end of the reporting
period but prior to the issuance of the financial statements with respect to
loss contingencies that existed as of the date of the financial statements.
On December 13, 2004, Franklin Resources, Inc. announced that its subsidiaries
FTDI and Franklin Advisers reached an agreement with the SEC, resolving the
issues resulting from the SEC's investigation concerning marketing support
payments to securities dealers who sell Fund shares. In connection with that
agreement, the SEC issued an "Order Instituting Administrative and
Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions
Pursuant to Section 203(e) and 203(k) of the Investment Advisers Act of 1940,
Sections 9(b) and 9(f) of the Investment Company Act of 1940, and Section 15(b)
of the Securities Exchange Act of 1934 (the "Order").
The Company believes that the settlement of this matter is in the best interest
of the Company and its Fund shareholders. Under the terms of the Order, in which
FTDI and Franklin Advisers neither admitted nor denied
80
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the findings contained therein, they agreed to pay the Funds a penalty of $20
million and $1 in disgorgement. FTDI and Franklin Advisers also agreed to
implement certain measures and undertakings relating to marketing support
payments to broker-dealers for the promotion or sale of Fund shares, including
making additional disclosures in the Funds' Prospectuses and Statements of
Additional Information. The Order further requires the appointment of an
independent distribution consultant, at the Company's expense, who shall develop
a plan for the distribution of the penalty and disgorgement to the Funds. A
charge of $21.5 million ($17.3 million, net of taxes) was recorded by the
Company in its fiscal quarter ended June 30, 2004 related to this matter.
INTERNAL INQUIRIES. The Company also conducted its own internal fact-finding
inquiry with the assistance of outside counsel to determine whether any Fund
shareholders, including Company employees, were permitted to engage in late
trading or in market timing transactions contrary to the policies of the
affected Fund and, if so, the circumstances and persons involved. The Company's
internal inquiry regarding market timing and late trading is complete. We did
not find any late trading, though we identified various instances of frequent
trading. One officer of a subsidiary of Franklin Resources, Inc. was placed on
administrative leave and subsequently resigned from his position with the
Company in December 2003.
We found no instances of inappropriate mutual fund trading by any portfolio
manager, investment analyst or officer of Franklin Resources, Inc. As previously
disclosed, the Company identified some instances of frequent trading in shares
of certain Funds by a few current or former employees in their personal 401(k)
plan accounts. These individuals included one trader and one officer of the
Funds. Pending our further inquiry, these two individuals were placed on
administrative leave and the officer resigned from his positions with the Funds.
The independent directors of the Funds and the Company also retained independent
outside counsel to review these matters and to report their findings and
recommendations. Based on independent counsel's findings and recommendations,
the Company reinstated the trader. The independent counsel concluded that some
instances of the former Fund officer's trading violated Company policy, and the
Company was prepared to institute appropriate disciplinary action. Subsequently,
the former Fund officer resigned from his employment with the Company. The
Company does not believe there were any losses to the Funds as a result of this
trading.
OTHER LEGAL PROCEEDINGS
In addition, the Company and certain Funds, current and former officers,
employees, and directors have been named in multiple lawsuits in different
federal courts in Nevada, California, Illinois, New York, and Florida, alleging
violations of various federal securities laws and seeking, among other things,
monetary damages and costs. Specifically, the lawsuits claim breach of duty with
respect to alleged arrangements to permit market timing and/or late trading
activity, or breach of duty with respect to the valuation of the portfolio
securities of certain Templeton Funds managed by Company subsidiaries, resulting
in alleged market timing activity. The majority of these lawsuits duplicate, in
whole or in part, the allegations asserted in the Massachusetts administrative
complaint described above. The lawsuits are styled as class actions, or
derivative actions on behalf of either the named Funds or the Company.
Additionally, FTIC was recently served with a class action market timing
complaint in Quebec, Canada, entitled Huneault v. AGF Funds, Inc., et al., Case
No. 500-06-000256-046, filed on October 25, 2004 in the Superior Court for the
Province of Quebec, District of Montreal.
To date, more than 240 similar lawsuits against at least 19 different mutual
fund companies have been filed in federal district courts throughout the
country. Because these cases involve common questions of fact, the Judicial
Panel on Multidistrict Litigation (the "Judicial Panel") ordered the creation of
a multidistrict litigation in the United States District Court for the District
of Maryland, entitled "In re Mutual Funds Investment Litigation" (the "MDL").
The Judicial Panel then transferred similar cases from different districts to
the MDL for coordinated or consolidated pretrial proceedings.
As of December 13, 2004, the following lawsuits are pending against the Company
(and in some instances, against certain of the Funds) and have been transferred
to the MDL:
Kenerley v. Templeton Funds, Inc., et al., Case No. 03-770 GPM, filed on
November 19, 2003 in the United States District Court for the Southern District
of Illinois; Cullen v. Templeton Growth Fund, Inc., et al., Case No. 03-859 MJR,
filed on December 16, 2003 in the United States District Court for the Southern
District of Illinois and transferred to the United States District Court for the
Southern District of Florida on March 29, 2004; Jaffe v. Franklin AGE High
Income Fund, et al., Case No. CV-S-04-0146-PMP-RJJ, filed on February 6, 2004 in
the United States District Court for the District of Nevada; Lum v. Franklin
Resources, Inc., et al., Case No. C 04 0583 JSW, filed on February 11, 2004 in
the United States District Court for the Northern
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District of California; Fischbein v. Franklin AGE High Income Fund, et al., Case
No. C 04 0584 JSW, filed on February 11, 2004 in the United States District
Court for the Northern District of California; Beer v. Franklin AGE High Income
Fund, et al., Case No. 8:04-CV-249-T-26 MAP, filed on February 11, 2004 in the
United States District Court for the Middle District of Florida; Bennett v.
Franklin Resources, Inc., et al., Case No. CV-S-04-0154-HDM-RJJ, filed on
February 12, 2004 in the United States District Court for the District of
Nevada; Dukes v. Franklin AGE High Income Fund, et al., Case No. C 04 0598 MJJ,
filed on February 12, 2004, in the United States District Court for the Northern
District of California; McAlvey v. Franklin Resources, Inc., et al., Case No. C
04 0628 PJH, filed on February 13, 2004 in the United States District Court for
the Northern District of California; Alexander v. Franklin AGE High Income Fund,
et al., Case No. C 04 0639 SC, filed on February 17, 2004 in the United States
District Court for the Northern District of California; Hugh Sharkey IRA/RO v.
Franklin Resources, Inc., et al., Case No. 04 CV 1330, filed on February 18,
2004 in the United States District Court for the Southern District of New York;
D'Alliessi, et al. v. Franklin AGE High Income Fund, et al., Case No. C 04 0865
SC, filed on March 3, 2004 in the United States District Court for the Northern
District of California; Marcus v. Franklin Resources, Inc., et al., Case No. C
04 0901 JL, filed on March 5, 2004 in the United States District Court for the
Northern District of California; Banner v. Franklin Resources, Inc., et al.,
Case No. C 04 0902 JL, filed on March 5, 2004 in the United States District
Court for the Northern District of California; Denenberg v. Franklin Resources,
Inc., et al., Case No. C 04 0984 EMC, filed on March 10, 2004 in the United
States District Court for the Northern District of California; Hertz v. Burns,
et al., Case No. 04 CV 02489, filed on March 30, 2004 in the United States
District Court for the Southern District of New York.
Plaintiffs in the MDL filed consolidated amended complaints on September 29,
2004. It is anticipated that defendants will file motions to dismiss in the
coming months.
As previously reported, various subsidiaries of Franklin Resources, Inc., as
well as certain Templeton Funds, have also been named in multiple lawsuits filed
in state courts in Illinois, alleging breach of duty with respect to the
valuation of the portfolio securities of certain Templeton Funds managed by such
subsidiaries as follows:
Bradfisch v. Templeton Funds, Inc., et al., Case No. 2003 L 001361, filed on
October 3, 2003 in the Circuit Court of the Third Judicial Circuit, Madison
County, Illinois; Woodbury v. Templeton Global Smaller Companies Fund, Inc., et
al., Case No. 2003 L 001362, filed on October 3, 2003 in the Circuit Court of
the Third Judicial Circuit, Madison County, Illinois; Kwiatkowski v. Templeton
Growth Fund, Inc., et al., Case No. 03 L 785, filed on December 17, 2003 in the
Circuit Court of the Twentieth Judicial Circuit, St. Clair County, Illinois;
Parise v. Templeton Funds, Inc., et al., Case No. 2003 L 002049, filed on
December 22, 2003 in the Circuit Court of the Third Judicial Circuit, Madison
County, Illinois.
These lawsuits are state court actions and are not subject to the MDL.
In addition, the Company, as well as certain current and former officers,
employees, and directors, have been named in multiple lawsuits alleging
violations of various securities laws and pendent state law claims relating to
the disclosure of directed brokerage payments and/or payment of allegedly
excessive advisory, commission, and distribution fees. These lawsuits are styled
as class actions and derivative actions brought on behalf of certain Funds, and
are as follows:
Stephen Alexander IRA v. Franklin Resources, Inc., et al., Case No. 04-982 JLL,
filed on March 2, 2004 in the United States District Court for the District of
New Jersey; Strigliabotti v. Franklin Resources, Inc., et al., Case No. C 04
0883 SI, filed on March 4, 2004 in the United States District Court for the
Northern District of California; Tricarico v. Franklin Resources, Inc., et al.,
Case No. CV-04-1052 JAP, filed on March 4, 2004 in the United States District
Court for the District of New Jersey; Miller v. Franklin Mutual Advisors, LLC,
et al., Case No. 04-261 DRH, filed on April 16, 2004 in the United States
District Court for the Southern District of Illinois and transferred to the
United States District Court for the District of New Jersey on August 5, 2004
(plaintiffs voluntarily dismissed this action, without prejudice, on October 22,
2004); Wilcox v. Franklin Resources, Inc., et al., Case No. 04-2258 WHW, filed
on May 12, 2004 in the United States District Court for the District of New
Jersey; Bahe, Custodian CGM Roth Conversion IRA v. Franklin/Templeton
Distributors, Inc. et al., Case No. 04-11195 PBS, filed on June 3, 2004 in the
United States District Court for the District of Massachusetts.
The United States District Court for the District of New Jersey consolidated for
pretrial purposes three of the above lawsuits (Stephen Alexander IRA, Tricarico,
and Wilcox) into a single action, entitled "In re Franklin
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Mutual Funds Fee Litigation." Plaintiffs in those three lawsuits filed a
consolidated amended complaint on October 4, 2004.
Management strongly believes that the claims made in each of the lawsuits
identified above are without merit and intends to vigorously defend against
them. The Company cannot predict with certainty, however, the eventual outcome
of the remaining governmental investigations or private lawsuits, nor whether
they will have a material negative impact on the Company. Public trust and
confidence are critical to the Company's business and any material loss of
investor and/or client confidence could result in a significant decline in
assets under management by the Company, which would have an adverse effect on
future financial results. If the Company finds that it bears responsibility for
any unlawful or inappropriate conduct that caused losses to our Funds, we are
committed to making the Funds or their shareholders whole, as appropriate. The
Company is committed to taking all appropriate actions to protect the interests
of our Funds' shareholders.
In addition, pending regulatory and legislative actions and reforms affecting
the mutual fund industry may significantly increase the Company's costs of doing
business and/or negatively impact its revenues, either of which could have a
material negative impact on the Company's financial results.
OTHER COMMITMENTS AND CONTINGENCIES
We lease office space and equipment under long-term operating leases expiring at
various dates through fiscal year 2021. Lease expense aggregated $44.7 million,
$45.6 million and $40.6 million for the fiscal years ended September 30, 2004,
2003, and 2002. Sublease income totaled $7.2 million, $6.5 million and $6.2
million for the fiscal years ended September 30, 2004, 2003, and 2002. Future
minimum lease payments under non-cancelable operating leases are as follows:
(in thousands) AMOUNT
- --------------------------------------------------------------------------------
2005 $29,866
2006 29,833
2007 25,880
2008 24,503
2009 22,522
Thereafter 138,958
- --------------------------------------------------------------------------------
TOTAL MINIMUM LEASE PAYMENTS $271,562
- --------------------------------------------------------------------------------
Under FIN 46-R, we have determined that we are a significant variable interest
holder in a number of sponsored investment products as well as in LFL, a company
incorporated in Ireland whose sole business purpose is to finance our deferred
commission assets. As of September 30, 2004, total assets of sponsored
investment products in which we held a significant interest were approximately
$1,553.5 million and our exposure to loss as a result of our interest in these
products was $256.1 million. LFL had approximately $475.7 million in total
assets at September 30, 2004. Our exposure to loss related to our investment in
LFL was limited to the carrying value of our investment in and loans to LFL, and
interest and fees receivable from LFL aggregating approximately $53.2 million.
This amount represents our maximum exposure to loss and does not reflect our
estimate of the actual losses that could result from adverse changes.
In July 2003, we renegotiated an agreement to outsource management of our data
center and distributed server operations, originally signed in February 2001. 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 September 30, 2004, 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, reaching a payment of approximately $2.2 million in July 2008.
At September 30, 2004, the banking/finance operating segment had commitments to
extend credit aggregating $242.4 million, primarily under its credit card lines.
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NOTE 14 - CONSOLIDATED SPONSORED INVESTMENT PRODUCTS
The following tables present the effect on our consolidated results of
operations and financial position of consolidating majority-owned sponsored
investment products.
(in thousands) SPONSORED
BEFORE INVESTMENT
FOR THE YEAR ENDED SEPTEMBER 30, 2004 CONSOLIDATION PRODUCTS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Investment management fees $1,972,141 $(1,513) $1,970,628
Underwriting and distribution fees 1,151,092 (170) 1,150,922
Shareholder servicing fees 244,097 (34) 244,063
Consolidated sponsored investment products income, net -- 3,519 3,519
Other, net 69,076 -- 69,076
- --------------------------------------------------------------------------------------------------------------------------
Total operating revenues 3,436,406 1,802 3,438,208
- --------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 2,507,383 -- 2,507,383
Operating income 929,023 1,802 930,825
OTHER INCOME (EXPENSES)
Consolidated sponsored investment products gains, net -- 3,393 3,393
Investment and other income 91,816 (1,510) 90,306
Interest expense (30,658) -- (30,658)
- --------------------------------------------------------------------------------------------------------------------------
Other income, net 61,158 1,883 63,041
Income before taxes on income and cumulative effect of an
accounting change 990,181 3,685 993,866
Taxes on income 290,880 1,101 291,981
- --------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of an accounting change, net of
tax 699,301 2,584 701,885
Cumulative effect of an accounting change, net of tax (3,189) 7,968 4,779
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME $696,112 $10,552 $706,664
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84
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(in thousands) SPONSORED
BEFORE INVESTMENT
AS OF THE YEAR ENDED SEPTEMBER 30, 2004 CONSOLIDATION PRODUCTS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets $3,926,558 $117,654 $4,044,212
Banking/finance assets 825,844 -- 825,844
Non-current assets 3,386,964 (28,885) 3,358,079
- --------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $8,139,366 $88,769 $8,228,135
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $891,436 $29,679 $921,115
Banking/finance liabilities 658,717 -- 658,717
Non-current liabilities 1,465,430 -- 1,465,430
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,015,583 29,679 3,045,262
- --------------------------------------------------------------------------------------------------------------------------
Minority interest 17,080 59,009 76,089
Total stockholders' equity 5,106,703 81 5,106,784
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,139,366 $88,769 $8,228,135
- --------------------------------------------------------------------------------------------------------------------------
NOTE 15 - EMPLOYEE STOCK AWARD AND OPTION PLANS
We sponsor the 2002 Universal Stock Incentive Plan (the "USIP") and the Amended
and Restated Annual Incentive Compensation Plan (the "AICP"). Under the terms of
these plans, eligible employees may receive cash and stock awards based on the
performance of Franklin Templeton Investments and that of the individual
employee. The USIP provides for the issuance of up to 36.0 million shares of our
common stock for various stock-related awards, including those related to the
AICP. As of September 30, 2004 and prior to considering fiscal 2004 grants, we
had approximately 9.3 million shares available for grant under the USIP,
including those related to the AICP. In addition to the annual award of stock
under the plan, we may award options and other forms of stock-based compensation
to some employees. The Compensation Committee of the Board of Directors
determines the terms and conditions of awards under the plans. Total stock-based
compensation cost during fiscal 2004, 2003, and 2002 was $67.9 million, $37.2
million and $42.1 million.
Information regarding stock options is as follows:
2004 2003 2002
------------------ ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
(shares in thousands) SHARES PRICE SHARES PRICE SHARES PRICE
- ------------------------------------ --------- -------- ------------ --------- ----------- ---------
Outstanding, beginning of year 13,289 $36.11 11,679 $37.00 8,397 $36.94
Granted 1,824 $48.83 3,565 $33.18 4,208 $37.10
Exercised/cancelled (3,844) $36.15 (1,955) $36.06 (926) $37.03
Outstanding, end of year 11,269 $38.16 13,289 $36.11 11,679 $37.00
Exercisable, end of year 8,512 $37.29 8,654 $36.40 5,479 $36.66
- ------------------------------------ --------- -------- ------------ --------- ----------- ---------
The range of exercise prices for these outstanding options at September 30, 2004
was from $31.04 to $49.93. Of the exercisable options, 72% were exercisable at
prices ranging from $32.90 to $38.38. The weighted-average remaining contractual
life for the options was 6.8 years. Generally, these options vest over a 3-year
period and are exercisable for up to 10 years from the grant date.
85
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NOTE 16 - EMPLOYEE STOCK INVESTMENT PLAN
We have a qualified, non-compensatory Employee Stock Investment Plan ("ESIP"),
which allows participants who meet certain eligibility criteria to buy shares of
our common stock at 90% of their market value on defined dates. Our stockholders
approved 4 million shares of common stock for issuance under the ESIP. The ESIP
is open to substantially all employees of U.S. subsidiaries and some employees
of non-U.S. subsidiaries. At September 30, 2004, approximately 2,090,000 shares
had been purchased on a cumulative basis under the ESIP at a weighted-average
price of $31.52.
In connection with the ESIP, we may, at our election, provide matching grants to
participants in the ESIP of whole or partial shares of common stock. While
reserving the right to change this determination, we have indicated that we will
provide one half-share for each share held by a participant for a minimum period
of 18 months. We made our first matching grant in fiscal 2000. During fiscal
2004, 2003, and 2002, we issued approximately 132,000, 104,000 and 85,000 shares
at an average market price of $52.24, $39.47 and $35.47.
NOTE 17 - OTHER COMPENSATION AND BENEFIT PLANS
Fiduciary Trust has a noncontributory retirement plan (the "Retirement Plan")
covering substantially all its employees hired before we acquired it. Fiduciary
Trust also maintains a nonqualified supplementary executive retirement plan
("SERP") to pay defined benefits in excess of limits imposed by Federal tax law
to participants in the retirement plan who attain age 55 and ten years of
service as of the plan termination date. In April 2003, the Board of Directors
of Fiduciary Trust approved a resolution to terminate both the Retirement Plan
and the SERP as of June 30, 2003. In December 2003, Fiduciary Trust filed for
approval of the Retirement Plan termination with the Internal Revenue Service.
Since Fiduciary Trust has not been notified that the Internal Revenue Service
has approved the Retirement Plan termination, a curtailment gain (loss) has not
yet been recorded in accordance with Statement of Financial Accounting Standards
No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits".
In addition to these pension plans, Fiduciary Trust sponsors a defined benefit
healthcare plan that provides post-retirement medical benefits to full-time
employees who have worked ten years and attained age 55 while in the service of
Fiduciary Trust, or have met alternate eligibility criteria. The defined benefit
healthcare plan was closed to new entrants in April 2003.
The following table summarizes the funded status and the amounts recognized in
the Consolidated Balance Sheets for the Retirement Plan and SERP, under pension
benefits, and for the defined healthcare plan, under other benefits.
PENSION BENEFITS OTHER BENEFITS
------------------ ----------------
(in thousands) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $29,516 $31,635 $6,968 $5,094
Service cost -- 969 48 29
Interest cost 1,567 1,291 402 320
Participant contributions -- -- (767) --
Benefits paid (4,789) (3,823) (502) (195)
Actuarial losses (gains) 3,412 (557) 421 758
Plan amendments -- -- -- 962
- -----------------------------------------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR $29,706 $29,515 $6,570 $6,968
- -----------------------------------------------------------------------------------------------------
86
- --------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
------------------ ----------------
(in thousands) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $15,091 $16,592 $-- $--
Actual return on assets 458 1,454 -- --
Employer contributions 390 868 502 195
Participant contributions -- -- -- --
Benefits paid (4,789) (3,823) (502) (195)
- ------------------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $11,150 $15,091 $-- $--
- ------------------------------------------------------------------------------------------------------
Funded status $(18,556) $(14,424) $(6,570) $(6,967)
Unrecognized actuarial loss -- 1,140 662 1,058
Unrecognized prior service cost (credit) -- -- 705 961
- ------------------------------------------------------------------------------------------------------
NET LIABILITY $(18,556) $(13,284) $(5,203) $(4,948)
- ------------------------------------------------------------------------------------------------------
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEETS
Accrued benefit cost recognized $(18,556) $(14,424) $(5,203) $(4,948)
Intangible asset -- -- -- --
Accumulated other comprehensive income -- 1,140 -- --
- -------------------------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED $(18,556) $(13,284) $(5,203) $(4,948)
- ------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 5.00%/5.06% 5.31%/5.50% 5.75% 6.00%
Expected return on plan assets 6.00% 8.00% N/A N/A
Increase in compensation rate N/A N/A 4.50% 4.50%
- ------------------------------------------------------------------------------------------------------
The following table summarizes the components of net periodic benefit cost for
fiscal 2004, 2003 and 2002 for all plans.
PENSION BENEFITS OTHER BENEFITS
-------------------------- -------------------------
(in thousands) 2004 2003 2002 2004 2003 2002
- --------------------------------------- ---------- --------- --------- ----------- -------- ----------
Service cost $-- $969 $1,781 $48 $29 $40
Interest cost 1,567 1,291 2,057 402 320 314
Expected return on plan assets (902) (774) (1,497) -- -- --
Amortization of prior service cost -- (128) 183 256 -- --
Actuarial losses 5,681 3,800 -- 51 -- --
- --------------------------------------- ---------- --------- --------- ----------- -------- ----------
NET PERIODIC BENEFIT COST $6,346 $5,158 $2,524 $757 $349 $354
- --------------------------------------- ---------- --------- --------- ----------- -------- ----------
During fiscal 2004, we have not made any contribution to the Retirement Plan.
Based on our most recent valuation, we anticipate that we will contribute an
additional $14.4 million to the Retirement Plan and an additional $4.2 million
to the SERP, when final approval of the Retirement Plan termination is received
from the Internal Revenue Service. We accrued the benefit liability for this
anticipated funding in our financial statements during the fiscal year ended
September 30, 2004.
Following the acquisition of Fiduciary Trust, we established an $85.0 million
retention pool aimed at retaining key Fiduciary Trust employees, under which
employees will receive both cash payments and options. Salaried employees who
remain continuously employed through the applicable dates are eligible for
compensation under the program. Excluding the value of options granted, the
value of the retention plan is $68 million, and is being expensed over a period
ranging from one to five years. We expensed $1.6 million, $10.2 million and
$25.5
82
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million in fiscal 2004, 2003, and 2002, including the acceleration of retention
payments related to the September 11, 2001 events as described in Note 19.
NOTE 18 - 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, Bissett, Fiduciary
Trust and Darby Overseas sponsored investment products. The banking/finance
segment offers selected retail-banking services to high net-worth individuals,
foundations and institutions, and consumer lending services. Our consumer
lending activities include automotive lending related to the purchase,
securitization, and servicing of retail installment sales contracts originated
by independent automobile dealerships, consumer credit and debit cards, real
estate equity lines, and home equity/mortgage loans.
Financial information for our two operating segments is presented in the table
below. Operating revenues of the banking/finance segment are reported net of
interest expense and the provision for probable loan losses.
(in thousands)
INVESTMENT BANKING/
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 2004 MANAGEMENT FINANCE TOTALS
- ---------------------------------------------------------- ------------- --------------- -----------
Assets $7,402,291 $825,844 $8,228,135
Operating revenues 3,380,891 57,317 3,438,208
Interest revenue - inter-segment 1,393 -- 1,393
September 11, 2001 recovery, net (30,277) -- (30,277)
Interest expense 30,658 N/A 30,658
Income before taxes 965,614 28,252 993,866
- ---------------------------------------------------------- ------------- --------------- -----------
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 2003
- ---------------------------------------------------------- ------------- --------------- -----------
Assets $6,052,324 $918,425 $6,970,749
Operating revenues 2,571,253 60,871 2,632,124
Interest revenue - inter-segment 2,501 -- 2,501
September 11, 2001 recovery, net (4,401) -- (4,401)
Interest expense 19,910 N/A 19,910
Income before taxes 658,571 41,632 700,203
- ---------------------------------------------------------- ------------- --------------- -----------
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 2002
- ---------------------------------------------------------- ------------- --------------- -----------
Assets $5,370,766 $1,051,972 $6,422,738
Operating revenues 2,467,412 55,446 2,522,858
Interest revenue - inter-segment 5,415 -- 5,415
Interest expense 12,302 N/A 12,302
Income before taxes 546,396 31,879 578,275
- ---------------------------------------------------------- ------------- --------------- -----------
88
- --------------------------------------------------------------------------------
Operating revenues of the banking/finance segment included above were as
follows:
(in thousands)
FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002
- ---------------------------------------------------------- ------------- --------------- -----------
Interest on loans $27,957 $31,134 $33,523
Interest and dividends on investment securities 10,950 18,595 19,804
- ---------------------------------------------------------- ------------- --------------- -----------
Total interest income 38,907 49,729 53,327
Interest on deposits 4,420 6,119 9,812
Interest on short-term debt 203 436 392
Interest expense - inter-segment 1,393 2,501 5,415
- ---------------------------------------------------------- ------------- --------------- -----------
Total interest expense 6,016 9,056 15,619
Net interest income 32,891 40,673 37,708
Other income 28,822 33,621 31,628
Provision for probable loan losses (5,201) (13,423) (13,890)
- ---------------------------------------------------------- ------------- --------------- -----------
TOTAL OPERATING REVENUES $56,512 $60,871 $55,446
- ---------------------------------------------------------- ------------- --------------- -----------
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. As further described in Note 1, inter-segment interest
income and expense are not eliminated in our Consolidated Statements of Income.
The investment management segment incurs substantially all of our depreciation
and amortization costs and expenditures on long-lived assets.
We conduct operations in the following principal geographic areas of the world:
the United States, Canada, the Bahamas, Europe, Asia, South America, Africa and
Australia. For segment reporting purposes, we have combined Asia, South America,
Africa and Australia into one category - Other. Revenues by geographic area
include fees and commissions charged to customers and fees charged to
affiliates.
Information by geographic area is summarized below:
(in thousands)
FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002
- --------------------------------------------------------- -------------- -------------- ------------
OPERATING REVENUES
United States $2,379,108 $1,888,987 $1,773,889
Canada 230,433 188,531 205,752
Bahamas 493,504 326,687 319,129
Europe 104,110 72,467 79,689
Other 231,053 155,452 144,399
- --------------------------------------------------------- -------------- -------------- ------------
TOTAL $3,438,208 $2,632,124 $2,522,858
- --------------------------------------------------------- -------------- -------------- ------------
PROPERTY AND EQUIPMENT, NET
United States $420,301 $303,457 $338,763
Canada 3,546 4,007 5,151
Bahamas 9,879 6,861 7,299
Europe 6,268 6,045 6,371
Other 30,584 36,402 36,588
- --------------------------------------------------------- -------------- -------------- ------------
TOTAL $470,578 $356,772 $394,172
- --------------------------------------------------------- -------------- -------------- ------------
89
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NOTE 19 - SEPTEMBER 11, 2001 EVENT
On September 11, 2001, the headquarters of our subsidiary company, Fiduciary
Trust, at Two World Trade Center was destroyed in the terrorist attacks on New
York City (the "September 11, 2001 Event"). We have since leased office space
for Fiduciary Trust in midtown Manhattan, to resume permanent operations. The
following table shows the financial impact of the event recognized at September
30, 2004, 2003 and 2002:
(in thousands) 2004 2003 2002
- ----------------------------------------------------------------- ------------ ----------- ---------
Cumulative September 11, 2001 costs recognized as of end of year $69,140 $68,945 $64,853
September 11, 2001 (recovery) expense, net (30,277) (4,401) --
- ----------------------------------------------------------------- ------------ ----------- ---------
In January 2004, we received $32.5 million from our insurance carrier for claims
related to the September 11, 2001 terrorist attacks that destroyed Fiduciary
Trust's headquarters. These proceeds represented final recoveries for claims
submitted to our insurance carrier. We realized a gain of $30.3 million, before
income taxes of $12.0 million, in the reporting period ending March 31, 2004, in
accordance with guidance provided under FASB Statement No. 5 "Accounting for
Contingencies" and Emerging Issues Task Force Abstract "Accounting for the
Impact of the Terrorist Attacks of September 11, 2001", as remaining
contingencies related to our insurance claims have been resolved.
NOTE 20 - OTHER INCOME (EXPENSES)
Other income (expenses) for the years ended September 30, 2004, 2003 and 2002
consisted of the following:
(in thousands) 2004 2003 2002
- ---------------------------------------------------------- ------------- ------------- -------------
CONSOLIDATED SPONSORED INVESTMENT PRODUCTS
Consolidated sponsored investment products net unrealized
(losses) gains $(484) $1,476 $--
Consolidated sponsored investment products net realized
gains 3,877 169 --
- ---------------------------------------------------------- ------------- ------------- -------------
Total 3,393 1,645 --
INVESTMENT AND OTHER INCOME
Dividends 14,778 13,328 12,934
Interest income from banking/finance group 1,393 2,501 5,415
Other interest income 27,301 25,187 32,381
Equity in net income of affiliated companies 20,605 6,934 1,567
Realized gains on sale of assets 30,395 15,213 9,183
Realized losses on sale of assets (5,771) (6,639) (5,201)
Other-than-temporary decline in investments value -- -- (60,068)
Foreign exchange gains (losses), net 4,668 10,069 (5,661)
Other (3,063) 3,799 14,525
- ---------------------------------------------------------- ------------- ------------- -------------
Total 90,306 70,392 5,075
Interest expense (30,658) (19,910) (12,302)
- ---------------------------------------------------------- ------------- ------------- -------------
OTHER INCOME (EXPENSES), NET $63,041 $52,127 $(7,227)
- ---------------------------------------------------------- ------------- ------------- -------------
During fiscal 2002, we recognized a $60.1 million other-than-temporary decline
in value of investments. Substantially all of our dividend income and realized
gains (losses) on sale of assets were generated by investments in our sponsored
investment products.
90
- --------------------------------------------------------------------------------
NOTE 21 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. The methods and assumptions used to
estimate fair values of our financial instruments are described below (see Note
1).
Due to the short-term nature and liquidity of cash and cash equivalents and
receivables, the carrying amounts of these assets in the Consolidated Balance
Sheets approximated fair value.
Investment securities, trading are carried at fair value with changes in fair
value recognized in our consolidated net income.
Investment securities, available-for-sale are carried at fair market value as
required by generally accepted accounting principles in the United States.
Loans held for sale are originated and intended for sale and are carried at the
lower of cost or estimated fair value in the aggregate. Estimated fair value is
calculated using discounted cash flow analyses. Net unrealized losses, if any,
are recognized through a valuation allowance included in other, net revenues.
Loans receivable, net are valued using interest rates that consider the current
credit and interest rate risk inherent in the loans and the current economic and
lending conditions. The majority of retail-banking loans are at variable rates,
which are adjusted periodically. We utilize interest rate swaps to hedge the
interest rate risk on those retail-banking loans that are at fixed rates and
have maturities longer than one year. As such, the fair value of retail-banking
loans approximates their carrying value.
The fair value of loans related to consumer lending are generally estimated
using discounted cash flow analyses. For certain consumer lending variable rate
loans with no significant credit concerns and frequent repricings, estimated
fair values are generally based on the carrying value.
Deposits of the banking/finance segment are valued using interest rates offered
by comparable institutions on deposits with similar remaining maturities. The
amounts in the Consolidated Balance Sheets approximated fair value.
Interest-rate swap agreements and foreign exchange contracts are carried at fair
value.
Debt is valued using publicly-traded debt with similar maturities, credit risk
and interest rates. The amounts in the Consolidated Balance Sheets approximate
fair values.
Guarantees and letters of credit have fair values based on the face value of the
underlying instrument.
NOTE 22 - BANKING REGULATORY RATIOS
Following the acquisition of Fiduciary Trust 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.
91
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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
September 30, 2004 and 2003, we exceeded the capital adequacy requirements
applicable to us as listed below.
MINIMUM FOR
OUR CAPITAL
ADEQUACY
(IN THOUSANDS) 2004 2003 PURPOSES
- ----------------------------------------------------------------------------------------------------
Tier 1 capital $3,144,919 $2,122,167 N/A
Total risk-based capital 3,148,617 2,130,717 N/A
Tier 1 leverage ratio 50% 40% 4%
Tier 1 risk-based capital ratio 76% 64% 4%
Total risk-based capital ratio 76% 64% 8%
- ----------------------------------------------------------------------------------------------------
92
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Franklin Resources, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statement of income, stockholders' equity and comprehensive income
and cash flows present fairly, in all material respects, the financial position
of Franklin Resources, Inc. and its subsidiaries at September 30, 2004 and 2003,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended September 30, 2004 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
December 13, 2004
93
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. 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 September 30, 2004. 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 September 30,
2004.
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 September 30, 2004, that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item with respect to our executive officers is
contained in Part I, Item 1 of this Form 10-K under the section, "Executive
Officers of the Registrant".
CODE OF ETHICS. The Company has adopted a Code of Ethics and Business Conduct
(the "Code of Ethics") that applies to the Registrant's principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, as well as directors,
officers and employees of the Company. The Code of Ethics is posted on the
Company's website (www.franklintempleton.com) and available in print free of
charge to any shareholder who requests a copy. Interested parties may address a
written request for a printed copy of the Code of Ethics to: Secretary, Franklin
Resources, Inc., One Franklin Parkway, San Mateo, California 94403-1906. We
intend to satisfy the disclosure requirement regarding any amendment to, or a
waiver of, a provision of the Code of Ethics for the Registrant's principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions by posting such information
on our website.
The information regarding directors of FRI, including the procedures by which
security holders may recommend nominees, members of the Audit Committee, the
Audit Committee financial expert, and compliance with Section 16(a) of the
Exchange Act, is incorporated by reference from the information provided under
the section entitled "Proposal 1: Election of Directors" from our Proxy
Statement.
NYSE ANNUAL CO-CEO CERTIFICATION. The Co-CEO's of the Company have previously
submitted to the New York Stock Exchange the annual certifications required by
Section 303A.12(a) of the NYSE Corporate Governance Rules.
ITEM 11. EXECUTIVE COMPENSATION.
The information in the Proxy Statement under the section entitled "Proposal 1:
Election of Directors" is incorporated herein by this reference.
94
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information about equity compensation
plans that have been approved by security holders and plans that have not been
approved by security holders.
EQUITY COMPENSATION PLAN INFORMATION /1
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
NUMBER OF SECURITIES WEIGHTED-AVERAGE UNDER EQUITY
TO BE ISSUED UPON EXERCISE PRICE OF COMPENSATION PLANS
EXERCISE OF OUTSTANDING (EXCLUDING
OUTSTANDING OPTIONS, OPTIONS, WARRANTS SECURITIES REFLECTED
WARRANTS AND RIGHTS AND RIGHTS IN COLUMN (a))
PLAN CATEGORY (a) (b) (c)
- ------------------------------------------- -- ---------------------- -- --------------------- --- ------------------------
Equity compensation plans approved by
security holders /2 11,268,840 /3 $38.16 9,977,018 /4
Equity compensation plans not approved by
security holders 0 0 0
- ------------------------------------------- -- ---------------------- -- --------------------- --- ------------------------
Total 11,268,840 $38.16 9,977,018
- ------------------------------------------- -- ---------------------- -- --------------------- --- ------------------------
(1) The table includes information for equity compensation plans assumed by the
Company in connection with acquisitions of the companies, which originally
established those plans.
(2) Consists of the 2002 Universal Stock Incentive Plan (the "2002 Stock Plan")
and the 1998 Employee Stock Investment Plan (the "Purchase Plan"). Equity
securities granted under the 2002 Stock Plan may include awards
contemplated by the Amended and Restated Annual Incentive Compensation Plan
and the 2004 Key Executive Incentive Compensation Plan.
(3) Excludes options to purchase accruing under the Company's Purchase Plan.
Under the Purchase Plan each eligible employee is granted a separate option
to purchase up to 2,000 shares of Common Stock each semi-annual accrual
period on January 31 and July 31 at a purchase price per share equal to 90%
of the fair market value of the Common Stock on the enrollment date or the
exercise date, whichever is lower.
(4) Includes shares available for future issuance under the Purchase Plan. As
of September 30, 2004, 1,436,376 of shares of Common Stock were available
for issuance under the Purchase Plan.
The information required by this Item with respect to Stock Ownership of Certain
Beneficial Owners and Management is incorporated by reference from the
information provided under the section entitled "Security Ownership of Principal
Shareholders" and "Security Ownership of Management" of our Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference from the
information provided under the section entitled "Proposal 1: Election of
Directors - Certain Relationships and Related Transactions" of our Proxy
Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item is incorporated by reference from the
information provided under the section entitled "Proposal 1: Election of
Directors - Fees Paid to Independent Registered Public Accounting Firm" of our
Proxy Statement.
95
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Please see the index in Item 8 on page 53 of this Annual Report for
a list of the financial statements filed as part of this report.
(a)(2) Please see the index in Item 8 on page 53 of this Annual Report for
a list of the financial statement schedules filed as part of this
report.
(a)(3) Exhibits.
EXHIBIT NO.
-----------
3(i)(a) Registrant's Certificate of Incorporation, as filed
November 28, 1969, incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994 (the "1994 Annual Report")
3(i)(b) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1, 1985, incorporated by
reference to the 1994 Annual Report
3(i)(c) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1, 1987, incorporated by
reference to the 1994 Annual Report
3(i)(d) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated by
reference to the 1994 Annual Report
3(ii) Registrant's Amended and Restated By-laws adopted November
12, 2002, incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30,
2002 (the "2002 Annual Report")
4.1 Indenture between the Registrant and The Chase Manhattan
Bank (formerly Chemical Bank), as trustee, dated as of May
19, 1994, incorporated by reference to the Company's
Registration Statement on Form S-3, filed on April 14, 1994
4.2 Indenture between Franklin Resources, Inc. and The Bank of
New York dated May 11, 2001, incorporated by reference to
the Registrant's Registration Statement on Form S-3, filed
on August 6, 2001
4.3 Form of Liquid Yield Option Note due 2031 (Zero
Coupon-Senior) (included in Exhibit 4.2 hereto)
4.4 Registration Rights Agreement between Franklin Resources,
Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") dated May 11, 2001, incorporated by
reference to the Registrant's Registration Statement on Form
S-3, filed on August 6, 2001
4.5 Form of 3.7% Senior Notes due 2008, incorporated by
reference to Exhibit 4.5 to the Company's Quarterly Report
on Form 10-Q for the period ended March 31, 2003 filed on
May 12, 2003
10.1 Representative Distribution Plan between Templeton Growth
Fund, Inc. and Franklin/Templeton Investor Services, Inc.,
incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1993 (the
"1993 Annual Report")
10.2 Representative Transfer Agent Agreement between Templeton
Growth Fund, Inc. and Franklin/Templeton Investor Services,
Inc., incorporated by reference to the 1993 Annual Report
10.3 Representative Investment Management Agreement between
Templeton Growth Fund, Inc. and Templeton, Galbraith &
Hansberger Ltd., incorporated by reference to the 1993
Annual Report
96
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10.4 Representative Management Agreement between Advisers and the
Franklin Group of Funds, incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1992 (the "1992 Annual Report")
10.5 Representative Distribution 12b-1 Plan between FTDI and the
Franklin Group of Funds, incorporated by reference to the
1992 Annual Report
10.6 Amended Annual Incentive Compensation Plan approved January
24, 1995, incorporated by reference to the Company's Proxy
Statement filed under cover of Schedule 14A on December 28,
1994 in connection with its Annual Meeting of Stockholders
held on January 24, 1995*
10.7 Universal Stock Plan approved January 19, 1994, incorporated
by reference to the Company's 1995 Proxy Statement filed
under cover of Schedule 14A on December 29, 1993 in
connection with its Annual Meeting of Stockholders held on
January 19, 1994*
10.8 Representative Amended and Restated Distribution Agreement
between Franklin/Templeton Distributors, Inc. and Franklin
Federal Tax-Free Income Fund, incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1995 (the "June 1995
Quarterly Report")
10.9 Distribution 12b-1 Plan for Class II shares between
Franklin/Templeton Distributors, Inc. and Franklin Federal
Tax-Free Income Fund, incorporated by reference to the June
1995 Quarterly Report
10.10 Representative Investment Management Agreement between
Templeton Global Strategy SICAV and Templeton Investment
Management Limited, incorporated by reference to the June
1995 Quarterly Report
10.11 Representative Sub-Distribution Agreement between
Templeton, Galbraith & Hansberger Ltd. and BAC Corp.
Securities, incorporated by reference to the June 1995
Quarterly Report
10.12 Representative Dealer Agreement between Franklin/Templeton
Distributors, Inc. and Dealer, incorporated by reference to
the June 1995 Quarterly Report
10.13 Representative Investment Management Agreement between
Templeton Investment Counsel, Inc. and Client (ERISA),
incorporated by reference to the June 1995 Quarterly Report
10.14 Representative Investment Management Agreement between
Templeton Investment Counsel, Inc. and Client (non-ERISA),
incorporated by reference to the June 1995 Quarterly Report
10.15 Representative Amended and Restated Transfer Agent and
Shareholder Services Agreement between Franklin/Templeton
Investor Services, Inc. and Franklin Custodian Funds, Inc.,
dated July 1, 1995, incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1995 (the "1995 Annual Report")
10.16 Representative Amended and Restated Distribution Agreement
between Franklin/Templeton Distributors, Inc. and Franklin
Custodian Funds, Inc., incorporated by reference to the 1995
Annual Report
10.17 Representative Class II Distribution Plan between
Franklin/Templeton Distributors, Inc. and Franklin Custodian
Funds, Inc., on behalf of its Growth Series, incorporated by
reference to the 1995 Annual Report
10.18 Representative Dealer Agreement between Franklin/Templeton
Distributors, Inc. and Dealer, incorporated by reference to
the 1995 Annual Report
10.19 Representative Mutual Fund Purchase and Sales Agreement for
Accounts of Bank and Trust Company Customers, effective July
1, 1995, incorporated by reference to the 1995 Annual Report
97
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10.20 Representative Management Agreement between Franklin Value
Investors Trust, on behalf of Franklin MicroCap Value Fund
and Franklin Advisers, Inc., incorporated by reference to
the 1995 Annual Report
10.21 Representative Sub-Distribution Agreement between
Templeton, Galbraith & Hansberger Ltd. and Sub-Distributor,
incorporated by reference to the 1995 Annual Report
10.22 Representative Non-Exclusive Underwriting Agreement between
Templeton Growth Fund, Inc. and Templeton/Franklin
Investments Services (Asia) Limited, dated September 18,
1995, incorporated by reference to the 1995 Annual Report
10.23 Representative Shareholder Services Agreement between
Franklin/Templeton Investor Services, Inc. and
Templeton/Franklin Investments Services (Asia) Limited,
dated September 18, 1995, incorporated by reference to the
1995 Annual Report
10.24 Agreement to Merge the Businesses of Heine Securities
Corporation, Elmore Securities Corporation, and Franklin
Resources, Inc., dated June 25, 1996, incorporated by
reference to the Company's Report on Form 8-K dated June 25,
1996
10.25 Subcontract for Transfer Agency and Shareholder Services
dated November 1, 1996 by and between Franklin/Templeton
Investor Services, Inc. and PFPC Inc., incorporated by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996 (the "1996 Annual
Report")
10.26 Representative Sample of Franklin/Templeton Investor
Services, Inc. Transfer Agent and Shareholder Services
Agreement, incorporated by reference to the 1996 Annual
Report
10.27 Representative Administration Agreement between Templeton
Growth Fund, Inc. and Franklin Templeton Services, Inc.,
incorporated by reference to the 1996 Annual Report
10.28 Representative Sample of Fund Administration Agreement with
Franklin Templeton Services, Inc., incorporated by reference
to the 1996 Annual Report
10.29 Representative Subcontract for Fund Administrative Services
between Franklin Advisers, Inc. and Franklin Templeton
Services, Inc., incorporated by reference to the 1996 Annual
Report
10.30 Representative Investment Advisory Agreement between
Franklin Mutual Series Fund, Inc. and Franklin Mutual
Advisers, Inc., incorporated by reference to the 1996 Annual
Report
10.31 Representative Management Agreement between Franklin
Valuemark Funds and Franklin Mutual Advisers, Inc.,
incorporated by reference to the 1996 Annual Report
10.32 Representative Investment Advisory and Asset Allocation
Agreement between Franklin Templeton Fund Allocator Series
and Franklin Advisers, Inc., incorporated by reference to
the 1996 Annual Report
10.33 Representative Management Agreement between Franklin New
York Tax-Free Income Fund, Inc. and Franklin Investment
Advisory Services, Inc., incorporated by reference to the
1996 Annual Report
10.34 1998 Employee Stock Investment Plan approved January 20,
1998, incorporated by reference to the Company's Proxy
Statement filed under cover of Schedule 14A on December 17,
1997 in connection with its Annual Meeting of Stockholders
held on January 20, 1998
10.35 System Development and Services Agreement dated as of
August 29, 1997 by and between Franklin/Templeton Investor
Services, Inc. and Sungard Shareholder Systems, Inc.,
incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1997
10.36 1998 Universal Stock Incentive Plan approved October 16,
1998 by the Board of Directors, incorporated by reference to
the Company's Proxy Statement filed under cover of Schedule
98
- --------------------------------------------------------------------------------
14A on December 23, 1998 in connection with its Annual
Meeting of Stockholders held on January 28, 1999*
10.37 Amendment No. 3 to the Agreement to Merge the Businesses of
Heine Securities Corporation, Elmore Securities Corporation,
and Franklin Resources, Inc., dated December 17, 1997,
incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended December 31,
1997
10.38 Representative Agreement for the Supply of Investment
Management and Administration Services, dated February 16,
1998, by and between Templeton Funds and Templeton
Investment Management Limited, incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998
10.39 Representative Investment Management Agreement between
Templeton Investment Counsel, Inc. and Client (ERISA), as
amended, incorporated by reference to the Company's Annual
Report on Form 10-K/A for the fiscal year ended September
30, 1998 (the "1998 Annual Report")
10.40 Representative Investment Management Agreement between
Templeton Investment Counsel, Inc. and Client (non-ERISA),
as amended, incorporated by reference to the 1998 Annual
Report
10.41 Representative Variable Insurance Fund Participation
Agreement among Templeton Variable Products Series Fund or
Franklin Valuemark Fund, Franklin/Templeton Distributors,
Inc. and an insurance company, incorporated by reference on
Form 10-Q for the quarter ended December 31, 1998
10.42 Purchase Agreement between Mariners Island Co-Tenancy and
Keynote Systems, Inc. dated April 25, 2000, incorporated by
reference to the Company's Report on Form 10-Q for the
quarterly period ended June 30, 2000
10.43 Acquisition Agreement dated July 26, 2000 among Franklin
Resources, Inc., FTI Acquisition and Bissett & Associates
Investment Management, Ltd., incorporated by reference to
the Company's Report on Form 8-K dated August 1, 2000
10.44 Agreement and Plan of Share Acquisition between Franklin
Resources, Inc. and Fiduciary Trust Company International
dated October 25, 2000, incorporated by reference to the
Company's Report on Form 8-K/A (Amendment No. 1) dated
October 25, 2000 and filed on October 26, 2000
10.45 Representative Amended and Restated Distribution Agreement
among Templeton Emerging Markets Fund, Templeton Canadian
Bond Fund, Templeton International Stock Fund, Templeton
Canadian Stock Fund, Templeton Global Smaller Companies
Fund, Templeton Global Bond Fund, Templeton Treasury Bill
Fund, Templeton Global Balanced Fund, Templeton
International Balanced Fund, Templeton Canadian Asset
Allocation Fund, Mutual Beacon Fund, Franklin U.S. Small Cap
Growth Fund, Templeton Balanced Fund, Templeton Growth Fund,
Ltd., Templeton Management Limited, and FEP Capital, L.P.
dated December 31, 1998, incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 2000 (the "2000 Annual Report")
10.46 Representative Purchase and Sales Agreement by and among
Franklin/Templeton Distributors, Inc., Franklin Resources,
Inc., and Lightning Finance Company Limited dated August 1,
1999, incorporated by reference to the 2000 Annual Report
10.47 Representative Advisory Agreement between Templeton Global
Advisors Limited and Templeton Asset Management Limited
dated December 21, 1999, incorporated by reference to the
2000 Annual Report
10.48 Representative Amended and Restated Commission Paying
Agreement between Templeton Global Strategy Funds, Templeton
Global Advisors Limited, Templeton Global Strategic Services
S.A., and Lightning Finance Company Limited dated January
31, 2000, incorporated by reference to the 2000 Annual
Report
99
- --------------------------------------------------------------------------------
10.49 Representative Variable Insurance Fund Participation
Agreement among Franklin Templeton Variable Insurance
Products Trust (formerly Franklin Valuemark Funds),
Franklin/Templeton Distributors, Inc., and CUNA Mutual Life
Insurance Company dated May 1, 2000, incorporated by
reference to the 2000 Annual Report
10.50 Stock Purchase Agreement between Good Morning Securities
Co., Ltd. and Templeton Investment Counsel, Inc. dated June
29, 2000, incorporated by reference to the 2000 Annual
Report
10.51 Agreement entered into between NEDCOR Investment Bank
Holdings Limited, NEDCOR Investment Bank Limited, Templeton
International, Inc., Franklin Templeton Asset Management
(Proprietary) Limited, and Templeton Global Advisors Limited
dated August 1, 2000, incorporated by reference to the 2000
Annual Report
10.52 Representative Amended and Restated Distribution Agreement
between Franklin/Templeton Distributors, Inc. and Franklin
Growth and Income Fund dated August 10, 2000, incorporated
by reference to the 2000 Annual Report
10.53 Employment Agreement entered into on December 22, 2000 by
and among Anne M. Tatlock, Fiduciary Trust Company
International and Franklin Resources, Inc., incorporated by
reference to the Company's Report on Form 10-Q for the
quarterly period ended December 31, 2000*
10.54 Amended and Restated 1998 Universal Stock Incentive Plan as
approved by the Board of Directors on October 28, 2000 and
the Stockholders at the Annual Meeting held on January 25,
2001, incorporated by reference to the Company's Report on
Form 10-Q for the quarterly period ended December 31, 2000*
10.55 Representative Sub-Advisory Agreement between FTTrust
Company, on behalf of Templeton International Smaller
Companies Fund, Templeton Investment Counsel, LLC, and
Templeton Asset Management Limited, dated January 23, 2001,
incorporated by reference to the Company's Report on Form
10-Q for the quarterly period ended March 31, 2001
10.56 Managed Operations Services Agreement between Franklin
Templeton Companies, LLC, and International Business
Machines Corporation dated February 6, 2001, incorporated by
reference to the Company's Report on Form 10-Q for the
quarterly period ended March 31, 2001
10.57 Representative Agency Agreement between FTTrust Company and
Franklin/Templeton Investor Services, LLC, dated April 1,
2001, incorporated by reference to the Company's Report on
Form 10-Q for the quarterly period ended March 31, 2001
10.58 Lease between RCPI Landmark Properties, L.L.C. and Franklin
Templeton Companies, LLC dated September 30, 2001,
incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 2001 (the
"2001 Annual Report")
10.59 Synthetic Lease Financing Facility Agreements dated
September 27, 1999, incorporated by reference to the 2001
Annual Report
10.60 Representative Amended and Restated Master Management
Agreement between Franklin Templeton Investment Corp., as
Trustee of mutual funds and Franklin Templeton Investment
Corp., as Manager, dated May 31, 2001, incorporated by
reference to the 2001 Annual Report
10.61 Representative Master Management Agreement dated May 31,
2001 between Franklin Templeton Tax Class Corp. and Franklin
Templeton Investments Corp., incorporated by reference to
the 2001 Annual Report
100
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10.62 Form of Deferred Compensation Agreement for Director's
Fees, as amended, incorporated by reference to the Company's
Report on Form 10-Q for the quarterly period ended March 31,
2002*
10.63 Franklin Resources, Inc. 1998 Employee Stock Investment
Plan as amended by the Board of Directors on October 10,
2002, incorporated by reference to the Company's Report on
Form S-8 filed on October 28, 2002*
10.64 Amended and Restated Five Year Facility Credit Agreement
dated June 5, 2002 between Franklin Resources, Inc. and The
Several Banks Parties Thereto, Bank of America, N.A. and The
Bank of New York, as Co-Syndication Agents, Citicorp USA
Inc. and BNP Paribas as Co-Documentation Agents and JP
Morgan Chase Bank, as Administrative Agent, incorporated by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 2002 (the "2002 Annual
Report")
10.65 Amended and Restated 364 Day Facility Credit Agreement
dated June 5, 2002 between Franklin Resources, Inc. and The
Several Banks Parties Thereto, Bank of America, N.A. and The
Bank of New York, as Co-Syndication Agents, Citicorp USA
Inc. and BNP Paribas as Co-Documentation Agents and JP
Morgan Chase Bank, as Administrative Agent, incorporated by
reference to the 2002 Annual Report
10.66 Settlement Agreement and Release of All Claims dated July
7, 2002 between Franklin Resources, Inc. and Allen J. Gula,
Jr., incorporated by reference to the 2002 Annual Report
10.67 Stock Purchase Agreements dated July 23, 2002 between
Templeton Asset Management (India) Private Limited and
Pioneer Investment Management, Inc. and various employee
shareholders, incorporated by reference to the 2002 Annual
Report
10.68 2002 Universal Stock Incentive Plan as approved by the
Board of Directors on October 10, 2002 and the Stockholders
at the Annual Meeting held on January 30, 2003, incorporated
by reference to the Company's Report on Form 10-Q for the
quarterly period ended December 31, 2002
10.69 Amendments dated July 2, 2001, June 10, 2002 and February
3, 2003 to the Managed Operations Services Agreement dated
February 6, 2001, between Franklin Templeton Companies, LLC
and International Business Machines Corporation,
incorporated by reference to the Company's Report on Form
10-Q for the quarterly period ended March 31, 2003
10.70 Representative Form of Franklin Templeton Investor
Services, LLC Transfer Agent and Shareholder Services
Agreement, incorporated by reference to the Company's Report
on Form 10-Q for the quarterly period ended March 31, 2003
10.71 Amendments dated July 1, 2003 and September 1, 2003 to the
Managed Operations Service Agreement dated February 6, 2001,
between Franklin Templeton Companies, LLC and International
Business Machines Corporation, incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 2003 (the "2003 Annual Report")
10.72 Purchase Agreement by and among Franklin Resources, Inc.,
Darby Holdings, Inc. and certain other named parties dated
as of August 1, 2003, incorporated by reference to the 2003
Annual Report
10.73 Amended and Restated 364 Day Facility Credit Agreement
dated June 4, 2003 between Franklin Resources, Inc. and The
Banks Parties Thereto, Bank of America, N.A. and The Bank of
New York, as Co-Syndication Agents, Citicorp USA Inc. and
BNP Paribas, as Co-Documentation Agents, and JP Morgan Chase
Bank, as Administrative Agent, incorporated by reference to
the 2003 Annual Report
10.74 Settlement and Release Agreement between Franklin
Resources, Inc. and Great Northern Insurance Company dated
January 15, 2004, incorporated by reference to the Company's
Report on Form 10-Q for the quarterly period ended March 31,
2004
101
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10.75 Amended and Restated 364 Day Facility Credit Agreement
dated June 3, 2004 between Franklin Resources, Inc. and The
Banks Parties Thereto, Bank of America, N.A. and The Bank of
New York, as Co-Syndication Agents, Citicorp USA Inc. and
BNP Paribas, as Co-Documentation Agents, and JP Morgan Chase
Bank, as Administrative Agent, incorporated by reference to
the Company's Report on Form 10-Q for the quarterly period
ended June 30, 2004
10.76 2004 Key Executive Incentive Compensation Plan approved by
the Board of Directors on December 11, 2003 and the
Stockholders at the Annual Meeting held on January 29, 2004
(the "2004 Annual Meeting"), incorporated by reference to
the Company's Proxy Statement filed under cover of Schedule
14A on December 24, 2003*
10.77 Amended and Restated Annual Incentive Compensation Plan
approved by the Board of Directors on December 11, 2003 and
the Stockholders at the 2004 Annual Meeting and referenced
in the Company's Proxy Statement filed under cover of
Schedule 14A on December 24, 2003 in connection with the
2004 Annual Meeting*
10.78 Form of Restricted Stock Award Agreement and Notice of
Restricted Stock Award under the Company's 2002 Universal
Stock Incentive Plan, incorporated by reference to the
Company's Report on Form 8-K filed with the SEC on November
12, 2004*
10.79 Form of Stock Option Agreement and Notice of Stock Option
Grant under the Company's 2002 Universal Stock Incentive
Plan, incorporated by reference to the Company's Report on
Form 8-K filed with the SEC on November 12, 2004*
10.80 Form of Restricted Stock Award Agreement and Notice of
Restricted Stock Award under the Company's 2002 Universal
Stock Incentive Plan, incorporated by reference to the
Company's Report on Form 8-K filed with the SEC on November
19, 2004*
10.81 Form of Restricted Stock Unit Award Agreement and Notice of
Restricted Stock Unit Award under the Company's 2002
Universal Stock Incentive Plan, referenced in the Company's
Report on Form 8-K filed with the SEC on November 19, 2004*
12 Computation of Ratios of Earnings to Fixed Charges
14 Code of Ethics and Business Conduct
21 List of Subsidiaries
23 Consent of Independent Registered Public Accounting Firm
31.1 Certification of Co-Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Co-Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.3 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Co-Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished herewith)
32.2 Certification of Co-Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished herewith)
32.3 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 (furnished herewith)
* Management/Employment Contract or Compensatory Plan or
Arrangement
(b) See Item 15(a)(3) above.
(c) No separate financial statements are required; schedules are included
in Item 8.
102
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: December 13, 2004 By: /S/ JAMES R. BAIO
-----------------
James R. Baio, Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Date: December 13, 2004 By: /S/ JAMES R. BAIO
-----------------
James R. Baio, Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: December 13, 2004 By: /S/ HARMON E. BURNS
-------------------
Harmon E. Burns, Vice Chairman, Member -
Office of the Chairman, and Director
Date: December 13, 2004 By: /S/ CHARLES CROCKER
-------------------
Charles Crocker, Director
Date: December 13, 2004 By: /S/ MARTIN L. FLANAGAN
----------------------
Martin L. Flanagan, President and Co-Chief
Executive Officer
(Principal Executive Officer)
Date: December 13, 2004 By: /S/ ROBERT D. JOFFE
-------------------
Robert D. Joffe, Director
Date: December 13, 2004 By: /S/ CHARLES B. JOHNSON
----------------------
Charles B. Johnson, Chairman, Member -
Office of the Chairman, and Director
Date: December 13, 2004 By: /S/ GREGORY E. JOHNSON
----------------------
Gregory E. Johnson, President and Co-Chief
Executive Officer
(Principal Executive Officer)
Date: December 13, 2004 By: /S/ RUPERT H. JOHNSON, JR.
--------------------------
Rupert H. Johnson, Jr., Vice Chairman,
Member - Office of the Chairman, and
Director
Date: December 13, 2004 By: /S/ THOMAS H. KEAN
------------------
Thomas H. Kean, Director
Date: December 13, 2004 By: /S/ CHUTTA RATNATHICAM
----------------------
Chutta Ratnathicam, Director
Date: December 13, 2004 By: /S/ PETER M. SACERDOTE
----------------------
Peter M. Sacerdote, Director
Date: December 13, 2004 By: /S/ LOUIS E. WOODWORTH
----------------------
Louis E. Woodworth, Director
103
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EXHIBIT INDEX
EXHIBIT NO.
- -----------
3(i)(a) Registrant's Certificate of Incorporation, as filed November 28,
1969, incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1994 (the "1994 Annual
Report")
3(i)(b) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1, 1985, incorporated by reference to
the 1994 Annual Report
3(i)(c) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1, 1987, incorporated by reference to
the 1994 Annual Report
3(i)(d) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated by reference to
the 1994 Annual Report
3(ii) Registrant's Amended and Restated By-laws adopted November 12, 2002,
incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 2002 (the "2002 Annual
Report")
4.1 Indenture between the Registrant and The Chase Manhattan Bank
(formerly Chemical Bank), as trustee, dated as of May 19, 1994,
incorporated by reference to the Company's Registration Statement on
Form S-3, filed on April 14, 1994
4.2 Indenture between Franklin Resources, Inc. and The Bank of New York
dated May 11, 2001, incorporated by reference to the Registrant's
Registration Statement on Form S-3, filed on August 6, 2001
4.3 Form of Liquid Yield Option Note due 2031 (Zero Coupon-Senior)
(included in Exhibit 4.2 hereto)
4.4 Registration Rights Agreement between Franklin Resources, Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
dated May 11, 2001, incorporated by reference to the Registrant's
Registration Statement on Form S-3, filed on August 6, 2001
4.5 Form of 3.7% Senior Notes due 2008, incorporated by reference to
Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 2003 filed on May 12, 2003
10.1 Representative Distribution Plan between Templeton Growth Fund, Inc.
and Franklin/Templeton Investor Services, Inc., incorporated by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1993 (the "1993 Annual Report")
10.2 Representative Transfer Agent Agreement between Templeton Growth Fund,
Inc. and Franklin/Templeton Investor Services, Inc., incorporated by
reference to the 1993 Annual Report
10.3 Representative Investment Management Agreement between Templeton
Growth Fund, Inc. and Templeton, Galbraith & Hansberger Ltd.,
incorporated by reference to the 1993 Annual Report
10.4 Representative Management Agreement between Advisers and the Franklin
Group of Funds, incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1992 (the
"1992 Annual Report")
10.5 Representative Distribution 12b-1 Plan between FTDI and the Franklin
Group of Funds, incorporated by reference to the 1992 Annual Report
10.6 Amended Annual Incentive Compensation Plan approved January 24, 1995,
incorporated by reference to the Company's Proxy Statement filed under
cover of Schedule 14A on December 28, 1994 in connection with its
Annual Meeting of Stockholders held on January 24, 1995*
10.7 Universal Stock Plan approved January 19, 1994, incorporated by
reference to the Company's 1995 Proxy Statement filed under cover of
Schedule 14A on December 29, 1993 in connection with its Annual
Meeting of Stockholders held on January 19, 1994*
10.8 Representative Amended and Restated Distribution Agreement between
Franklin/Templeton Distributors, Inc. and Franklin Federal Tax-Free
Income Fund, incorporated by reference to the
104
- --------------------------------------------------------------------------------
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1995 (the "June 1995 Quarterly Report")
10.9 Distribution 12b-1 Plan for Class II shares between Franklin/Templeton
Distributors, Inc. and Franklin Federal Tax-Free Income Fund,
incorporated by reference to the June 1995 Quarterly Report
10.10 Representative Investment Management Agreement between Templeton
Global Strategy SICAV and Templeton Investment Management Limited,
incorporated by reference to the June 1995 Quarterly Report
10.11 Representative Sub-Distribution Agreement between Templeton,
Galbraith & Hansberger Ltd. and BAC Corp. Securities, incorporated by
reference to the June 1995 Quarterly Report
10.12 Representative Dealer Agreement between Franklin/Templeton
Distributors, Inc. and Dealer, incorporated by reference to the June
1995 Quarterly Report
10.13 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (ERISA), incorporated by reference
to the June 1995 Quarterly Report
10.14 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (non-ERISA), incorporated by
reference to the June 1995 Quarterly Report
10.15 Representative Amended and Restated Transfer Agent and Shareholder
Services Agreement between Franklin/Templeton Investor Services, Inc.
and Franklin Custodian Funds, Inc., dated July 1, 1995, incorporated
by reference to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1995 (the "1995 Annual Report")
10.16 Representative Amended and Restated Distribution Agreement between
Franklin/Templeton Distributors, Inc. and Franklin Custodian Funds,
Inc., incorporated by reference to the 1995 Annual Report
10.17 Representative Class II Distribution Plan between Franklin/Templeton
Distributors, Inc. and Franklin Custodian Funds, Inc., on behalf of
its Growth Series, incorporated by reference to the 1995 Annual Report
10.18 Representative Dealer Agreement between Franklin/Templeton
Distributors, Inc. and Dealer, incorporated by reference to the 1995
Annual Report
10.19 Representative Mutual Fund Purchase and Sales Agreement for Accounts
of Bank and Trust Company Customers, effective July 1, 1995,
incorporated by reference to the 1995 Annual Report
10.20 Representative Management Agreement between Franklin Value Investors
Trust, on behalf of Franklin MicroCap Value Fund and Franklin
Advisers, Inc., incorporated by reference to the 1995 Annual Report
10.21 Representative Sub-Distribution Agreement between Templeton,
Galbraith & Hansberger Ltd. and Sub-Distributor, incorporated by
reference to the 1995 Annual Report
10.22 Representative Non-Exclusive Underwriting Agreement between Templeton
Growth Fund, Inc. and Templeton/Franklin Investments Services (Asia)
Limited, dated September 18, 1995, incorporated by reference to the
1995 Annual Report
10.23 Representative Shareholder Services Agreement between
Franklin/Templeton Investor Services, Inc. and Templeton/Franklin
Investments Services (Asia) Limited, dated September 18, 1995,
incorporated by reference to the 1995 Annual Report
10.24 Agreement to Merge the Businesses of Heine Securities Corporation,
Elmore Securities Corporation, and Franklin Resources, Inc., dated
June 25, 1996, incorporated by reference to the Company's Report on
Form 8-K dated June 25, 1996
10.25 Subcontract for Transfer Agency and Shareholder Services dated
November 1, 1996 by and between Franklin/Templeton Investor Services,
Inc. and PFPC Inc., incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1996 (the
"1996 Annual Report")
105
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10.26 Representative Sample of Franklin/Templeton Investor Services, Inc.
Transfer Agent and Shareholder Services Agreement, incorporated by
reference to the 1996 Annual Report
10.27 Representative Administration Agreement between Templeton Growth
Fund, Inc. and Franklin Templeton Services, Inc., incorporated by
reference to the 1996 Annual Report
10.28 Representative Sample of Fund Administration Agreement with Franklin
Templeton Services, Inc., incorporated by reference to the 1996 Annual
Report
10.29 Representative Subcontract for Fund Administrative Services between
Franklin Advisers, Inc. and Franklin Templeton Services, Inc.,
incorporated by reference to the 1996 Annual Report
10.30 Representative Investment Advisory Agreement between Franklin Mutual
Series Fund, Inc. and Franklin Mutual Advisers, Inc., incorporated by
reference to the 1996 Annual Report
10.31 Representative Management Agreement between Franklin Valuemark Funds
and Franklin Mutual Advisers, Inc., incorporated by reference to the
1996 Annual Report
10.32 Representative Investment Advisory and Asset Allocation Agreement
between Franklin Templeton Fund Allocator Series and Franklin
Advisers, Inc., incorporated by reference to the 1996 Annual Report
10.33 Representative Management Agreement between Franklin New York
Tax-Free Income Fund, Inc. and Franklin Investment Advisory Services,
Inc., incorporated by reference to the 1996 Annual Report
10.34 1998 Employee Stock Investment Plan approved January 20, 1998,
incorporated by reference to the Company's Proxy Statement filed under
cover of Schedule 14A on December 17, 1997 in connection with its
Annual Meeting of Stockholders held on January 20, 1998
10.35 System Development and Services Agreement dated as of August 29, 1997
by and between Franklin/Templeton Investor Services, Inc. and Sungard
Shareholder Systems, Inc., incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended September 30,
1997
10.36 1998 Universal Stock Incentive Plan approved October 16, 1998 by the
Board of Directors, incorporated by reference to the Company's Proxy
Statement filed under cover of Schedule 14A on December 23, 1998 in
connection with its Annual Meeting of Stockholders held on January 28,
1999*
10.37 Amendment No. 3 to the Agreement to Merge the Businesses of Heine
Securities Corporation, Elmore Securities Corporation, and Franklin
Resources, Inc., dated December 17, 1997, incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended December 31, 1997
10.38 Representative Agreement for the Supply of Investment Management and
Administration Services, dated February 16, 1998, by and between
Templeton Funds and Templeton Investment Management Limited,
incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1998
10.39 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (ERISA), as amended, incorporated
by reference to the Company's Annual Report on Form 10-K/A for the
fiscal year ended September 30, 1998 (the "1998 Annual Report")
10.40 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (non-ERISA), as amended,
incorporated by reference to the 1998 Annual Report
10.41 Representative Variable Insurance Fund Participation Agreement among
Templeton Variable Products Series Fund or Franklin Valuemark Fund,
Franklin/Templeton Distributors, Inc. and an insurance company,
incorporated by reference on Form 10-Q for the quarter ended December
31, 1998
10.42 Purchase Agreement between Mariners Island Co-Tenancy and Keynote
Systems, Inc. dated April 25, 2000, incorporated by reference to the
Company's Report on Form 10-Q for the quarterly period ended June 30,
2000
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10.43 Acquisition Agreement dated July 26, 2000 among Franklin Resources,
Inc., FTI Acquisition and Bissett & Associates Investment Management,
Ltd., incorporated by reference to the Company's Report on Form 8-K
dated August 1, 2000
10.44 Agreement and Plan of Share Acquisition between Franklin Resources,
Inc. and Fiduciary Trust Company International dated October 25, 2000,
incorporated by reference to the Company's Report on Form 8-K/A
(Amendment No. 1) dated October 25, 2000 and filed on October 26, 2000
10.45 Representative Amended and Restated Distribution Agreement among
Templeton Emerging Markets Fund, Templeton Canadian Bond Fund,
Templeton International Stock Fund, Templeton Canadian Stock Fund,
Templeton Global Smaller Companies Fund, Templeton Global Bond Fund,
Templeton Treasury Bill Fund, Templeton Global Balanced Fund,
Templeton International Balanced Fund, Templeton Canadian Asset
Allocation Fund, Mutual Beacon Fund, Franklin U.S. Small Cap Growth
Fund, Templeton Balanced Fund, Templeton Growth Fund, Ltd., Templeton
Management Limited, and FEP Capital, L.P. dated December 31, 1998,
incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 2000 (the "2000 Annual
Report")
10.46 Representative Purchase and Sales Agreement by and among
Franklin/Templeton Distributors, Inc., Franklin Resources, Inc., and
Lightning Finance Company Limited dated August 1, 1999, incorporated
by reference to the 2000 Annual Report
10.47 Representative Advisory Agreement between Templeton Global Advisors
Limited and Templeton Asset Management Limited dated December 21,
1999, incorporated by reference to the 2000 Annual Report
10.48 Representative Amended and Restated Commission Paying Agreement
between Templeton Global Strategy Funds, Templeton Global Advisors
Limited, Templeton Global Strategic Services S.A., and Lightning
Finance Company Limited dated January 31, 2000, incorporated by
reference to the 2000 Annual Report
10.49 Representative Variable Insurance Fund Participation Agreement among
Franklin Templeton Variable Insurance Products Trust (formerly
Franklin Valuemark Funds), Franklin/Templeton Distributors, Inc., and
CUNA Mutual Life Insurance Company dated May 1, 2000, incorporated by
reference to the 2000 Annual Report
10.50 Stock Purchase Agreement between Good Morning Securities Co., Ltd.
and Templeton Investment Counsel, Inc. dated June 29, 2000,
incorporated by reference to the 2000 Annual Report
10.51 Agreement entered into between NEDCOR Investment Bank Holdings
Limited, NEDCOR Investment Bank Limited, Templeton International,
Inc., Franklin Templeton Asset Management (Proprietary) Limited, and
Templeton Global Advisors Limited dated August 1, 2000, incorporated
by reference to the 2000 Annual Report
10.52 Representative Amended and Restated Distribution Agreement between
Franklin/Templeton Distributors, Inc. and Franklin Growth and Income
Fund dated August 10, 2000, incorporated by reference to the 2000
Annual Report
10.53 Employment Agreement entered into on December 22, 2000 by and among
Anne M. Tatlock, Fiduciary Trust Company International and Franklin
Resources, Inc., incorporated by reference to the Company's Report on
Form 10-Q for the quarterly period ended December 31, 2000*
10.54 Amended and Restated 1998 Universal Stock Incentive Plan as approved
by the Board of Directors on October 28, 2000 and the Stockholders at
the Annual Meeting held on January 25, 2001, incorporated by reference
to the Company's Report on Form 10-Q for the quarterly period ended
December 31, 2000*
10.55 Representative Sub-Advisory Agreement between FTTrust Company, on
behalf of Templeton International Smaller Companies Fund, Templeton
Investment Counsel, LLC, and Templeton Asset Management Limited, dated
January 23, 2001, incorporated by reference to the Company's Report on
Form 10-Q for the quarterly period ended March 31, 2001
107
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10.56 Managed Operations Services Agreement between Franklin Templeton
Companies, LLC, and International Business Machines Corporation dated
February 6, 2001, incorporated by reference to the Company's Report on
Form 10-Q for the quarterly period ended March 31, 2001
10.57 Representative Agency Agreement between FTTrust Company and
Franklin/Templeton Investor Services, LLC, dated April 1, 2001,
incorporated by reference to the Company's Report on Form 10-Q for the
quarterly period ended March 31, 2001
10.58 Lease between RCPI Landmark Properties, L.L.C. and Franklin Templeton
Companies, LLC dated September 30, 2001, incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2001 (the "2001 Annual Report")
10.59 Synthetic Lease Financing Facility Agreements dated September 27,
1999, incorporated by reference to the 2001 Annual Report
10.60 Representative Amended and Restated Master Management Agreement
between Franklin Templeton Investment Corp., as Trustee of mutual
funds and Franklin Templeton Investment Corp., as Manager, dated May
31, 2001, incorporated by reference to the 2001 Annual Report
10.61 Representative Master Management Agreement dated May 31, 2001 between
Franklin Templeton Tax Class Corp. and Franklin Templeton Investments
Corp., incorporated by reference to the 2001 Annual Report
10.62 Form of Deferred Compensation Agreement for Director's Fees, as
amended, incorporated by reference to the Company's Report on Form
10-Q for the quarterly period ended March 31, 2002*
10.63 Franklin Resources, Inc. 1998 Employee Stock Investment Plan as
amended by the Board of Directors on October 10, 2002, incorporated by
reference to the Company's Report on Form S-8 filed on October 28,
2002*
10.64 Amended and Restated Five Year Facility Credit Agreement dated June
5, 2002 between Franklin Resources, Inc. and The Several Banks Parties
Thereto, Bank of America, N.A. and The Bank of New York, as
Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas as
Co-Documentation Agents and JP Morgan Chase Bank, as Administrative
Agent, incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 2002 (the "2002
Annual Report")
10.65 Amended and Restated 364 Day Facility Credit Agreement dated June 5,
2002 between Franklin Resources, Inc. and The Several Banks Parties
Thereto, Bank of America, N.A. and The Bank of New York, as
Co-Syndication Agents, Citicorp USA Inc. and BNP Paribas as
Co-Documentation Agents and JP Morgan Chase Bank, as Administrative
Agent, incorporated by reference to the 2002 Annual Report
10.66 Settlement Agreement and Release of All Claims dated July 7, 2002
between Franklin Resources, Inc. and Allen J. Gula, Jr., incorporated
by reference to the 2002 Annual Report
10.67 Stock Purchase Agreements dated July 23, 2002 between Templeton Asset
Management (India) Private Limited and Pioneer Investment Management,
Inc. and various employee shareholders, incorporated by reference to
the 2002 Annual Report
10.68 2002 Universal Stock Incentive Plan as approved by the Board of
Directors on October 10, 2002 and the Stockholders at the Annual
Meeting held on January 30, 2003, incorporated by reference to the
Company's Report on Form 10-Q for the quarterly period ended December
31, 2002
10.69 Amendments dated July 2, 2001, June 10, 2002 and February 3, 2003 to
the Managed Operations Services Agreement dated February 6, 2001,
between Franklin Templeton Companies, LLC and International Business
Machines Corporation, incorporated by reference to the Company's
Report on Form 10-Q for the quarterly period ended March 31, 2003
10.70 Representative Form of Franklin Templeton Investor Services, LLC
Transfer Agent and Shareholder Services Agreement, incorporated by
reference to the Company's Report on Form 10-Q for the quarterly
period ended March 31, 2003
10.71 Amendments dated July 1, 2003 and September 1, 2003 to the Managed
Operations Service Agreement dated February 6, 2001, between Franklin
Templeton Companies, LLC and International Business
108
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Machines Corporation, incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended September 30,
2003 (the "2003 Annual Report")
10.72 Purchase Agreement by and among Franklin Resources, Inc., Darby
Holdings, Inc. and certain other named parties dated as of August 1,
2003, incorporated by reference to the 2003 Annual Report
10.73 Amended and Restated 364 Day Facility Credit Agreement dated June 4,
2003 between Franklin Resources, Inc. and The Banks Parties Thereto,
Bank of America, N.A. and The Bank of New York, as Co-Syndication
Agents, Citicorp USA Inc. and BNP Paribas, as Co-Documentation Agents,
and JP Morgan Chase Bank, as Administrative Agent, incorporated by
reference to the 2003 Annual Report
10.74 Settlement and Release Agreement between Franklin Resources, Inc. and
Great Northern Insurance Company dated January 15, 2004, incorporated
by reference to the Company's Report on Form 10-Q for the quarterly
period ended March 31, 2004
10.75 Amended and Restated 364 Day Facility Credit Agreement dated June 3,
2004 between Franklin Resources, Inc. and The Banks Parties Thereto,
Bank of America, N.A. and The Bank of New York, as Co-Syndication
Agents, Citicorp USA Inc. and BNP Paribas, as Co-Documentation Agents,
and JP Morgan Chase Bank, as Administrative Agent, incorporated by
reference to the Company's Report on Form 10-Q for the quarterly
period ended June 30, 2004
10.76 2004 Key Executive Incentive Compensation Plan approved by the Board
of Directors on December 11, 2003 and the Stockholders at the Annual
Meeting held on January 29, 2004 (the "2004 Annual Meeting"),
incorporated by reference to the Company's Proxy Statement filed under
cover of Schedule 14A on December 24, 2003*
10.77 Amended and Restated Annual Incentive Compensation Plan approved by
the Board of Directors on December 11, 2003 and the Stockholders at
the 2004 Annual Meeting and referenced in the Company's Proxy
Statement filed under cover of Schedule 14A on December 24, 2003 in
connection with the 2004 Annual Meeting*
10.78 Form of Restricted Stock Award Agreement and Notice of Restricted
Stock Award under the Company's 2002 Universal Stock Incentive Plan,
incorporated by reference to the Company's Report on Form 8-K filed
with the SEC on November 12, 2004*
10.79 Form of Stock Option Agreement and Notice of Stock Option Grant under
the Company's 2002 Universal Stock Incentive Plan, incorporated by
reference to the Company's Report on Form 8-K filed with the SEC on
November 12, 2004*
10.80 Form of Restricted Stock Award Agreement and Notice of Restricted
Stock Award under the Company's 2002 Universal Stock Incentive Plan,
incorporated by reference to the Company's Report on Form 8-K filed
with the SEC on November 19, 2004*
10.81 Form of Restricted Stock Unit Award Agreement and Notice of
Restricted Stock Unit Award under the Company's 2002 Universal Stock
Incentive Plan, referenced in the Company's Report on Form 8-K filed
with the SEC on November 19, 2004*
12 Computation of Ratios of Earnings to Fixed Charges
14 Code of Ethics and Business Conduct
21 List of Subsidiaries
23 Consent of Independent Registered Public Accounting Firm
31.1 Certification of Co-Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Co-Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.3 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Co-Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (furnished herewith)
109
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32.2 Certification of Co-Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (furnished herewith)
32.3 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 (furnished herewith)
* Management/Employment Contract or Compensatory Plan or Arrangement
110
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