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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, 1997
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.)
777 Mariners Island Blvd.,
San Mateo, CA 94404
(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, Inc. and
London Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) or the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. YES X NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [__]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of $40.0625 on December 8, 1998 on the
New York Stock Exchange was $5,337,097,525. Calculation of holdings by
non-affiliates is based upon the assumption, for these purposes only, that
executive officers, directors, nominees, Registrant's Profit Sharing Plan and
persons holding 5% or more of Registrant's Common Stock are affiliates. Number
of shares of the Registrant's common stock outstanding at December 8, 1998:
251,514,637
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the Registrant's proxy statement for its Annual Meeting of
Stockholders to be held January 28, 1999, which was filed under cover of
Schedule 14A with the Securities and Exchange Commission (the "Commission") on
December 23, 1998 (the "Proxy Statement"), are incorporated by reference into
Part III of this report. In addition, certain portions of Registrant's Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Monthly Reports on Form
8-K and Proxy Statements under cover of Schedule 14A for the fiscal years 1992,
1993, 1994, 1995, 1996, 1997 and 1998 are incorporated by reference as Exhibits
under Item 14 of this Annual Report on Form 10-K.
INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE NUMBER
FORM 10-K REFERENCE TO THIS
REQUIRED INFORMATION 1998 ANNUAL REPORT
ON FORM 10-K
- -------------------------------------------------------------------------------
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
ITEM 7A. MARKET RISK DISCLOSURES
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Independent Auditors' Report
Statements of Consolidated Earnings
Consolidated Balance Sheets
Statements of Changes in Consolidated Stockholders'
Equity
Statements of Consolidated Comprehensive Income
Statements of Consolidated Cash Flows
Notes to Consolidated Financial Statements
Quarterly Information
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT
Proxy: "Proposal 1:Election of Directors" *
ITEM 11. EXECUTIVE COMPENSATION
Proxy: "Proposal 1:Election of Directors" *
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Proxy: "Voting Securities" *
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Proxy: "Proposal 1: Election of Directors - Certain
Relationships and Related Transactions" *
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
Consolidated Financial Statements
Reports on Form 8-K
List of Exhibits
* Incorporated by reference to the Proxy Statement.
PART I
Item 1. Business
(a) GENERAL DEVELOPMENT OF BUSINESS
Franklin Resources, Inc. ("FRI") and its predecessors have been engaged in the
financial services business since 1947. FRI was organized in Delaware in
November 1969. The term "Company" as used herein, unless the context otherwise
requires, refers to Franklin Resources, Inc. and its consolidated subsidiaries.
The Company's principal executive and administrative offices are at 777 Mariners
Island Boulevard, San Mateo, California 94404. As of September 30, 1998, the
Company employed over 8,600 employees on a worldwide basis, consisting of
officers, investment management, distribution, administrative, sales and
clerical support staff. The Company also employs additional temporary help as
necessary to meet unusual requirements. Management believes that its relations
with its employees are good.
FRI principally functions as a parent company primarily engaged, through various
subsidiaries, in providing investment management, marketing, distribution,
transfer agency and other administrative services to the open-end investment
companies of the Franklin("R") Templeton("R") Group and to U.S. and
international managed and institutional accounts. The Company also provides
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, the Company provides investment management,
marketing and distribution services to certain sponsored investment companies
organized in the Grand Duchy of Luxembourg ("SICAV Funds"), which are
distributed in marketplaces outside of North America, to certain investment
funds and portfolios in Canada ("Canadian Funds") as well as to certain other
international portfolios in the United Kingdom and elsewhere. The Franklin
Templeton Group of Funds consists of forty-two (42) open-end investment
companies with multiple portfolios.
The Company, through certain subsidiaries, also provides advisory services,
variable annuity products, and sponsors and manages public and private real
estate programs. Other subsidiaries offer consumer banking services, insured
deposits, dealer auto loans and credit cards. The Company also provides
custodial, trustee and fiduciary services to individual retirement accounts
("IRA") and profit sharing or money purchase plans, and to qualified retirement
plans and private trusts. From time to time, the Company also participates in
various investment management joint ventures. On a consolidated worldwide basis,
the Company provides U.S. and international individual and institutional
investors with a broad range of investment products and services designed to
meet varying investment objectives, which affords its clients the opportunity to
allocate their investment resources among various alternative investment
products as changing worldwide economic and market conditions warrant.
The Company in its present form includes three families of mutual
funds--Franklin, Templeton and Mutual Series ("TM"). The Company originated its
fund business with the Franklin Group of Funds("R") and added the other fund
families through the transactions described below.
On October 30, 1992, the Company acquired substantially all of the assets and
liabilities of the then investment advisor to the Templeton, Galbraith &
Hansberger Ltd. ("Templeton") financial services business (the "Templeton
Acquisition").
In November 1996, the Company through its wholly-owned subsidiary, Franklin
Mutual Advisers, Inc. acquired (the "Mutual Acquisition") certain assets and
liabilities of Heine Securities Corporation ("Heine"), 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"). Mutual Series is an open-end investment company which, at the time of
the Mutual Acquisition, had five (5) series funds. Subsequent to the Mutual
Acquisition, the Company has managed Mutual Series on a unified basis with its
other business operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" ("MD&A") and Note 2 of Notes to
the Financial Statements.
The purchase price paid at the closing of the Mutual Acquisition was funded
through a combination of the Company's available cash, securities and the sale
of commercial paper. The base purchase price consisted of $551 million in cash,
including acquisition expenses, and the delivery of 3.3 million shares of the
Company's common stock (the "Acquisition Shares"). The purchase price included
the deposit into escrow of $150 million to be invested in shares of Mutual
Series, which shares are being released over a five-year period from the date of
the acquisition, with a minimum $100 million retention for the full five-year
period. In addition to the base purchase price, the transaction included a
contingent payment ranging from $96.25 million to $192.5 million under certain
conditions if certain agreed-upon growth targets are met over the five years
following the closing. The first contingent payment of $64.2 million related to
these agreed-upon growth targets was made in the third quarter of fiscal 1998
and was accounted for as goodwill related to additional purchase price of the
Mutual Acquisition. Other payments are due in fiscal 2000 and 2001 if growth
targets are met. See Note 2 of Notes to the Financial Statements.
From the closing of the Mutual Acquisition until November 1998, Heine and its
chief executive officer, Michael F. Price, were required to limit their
ownership of the Company's common stock to no more than 4.9% and also agreed to
certain limitations on the transferability of the Acquisition Shares for this
same time period. For so long as Heine and Mr. Price maintain ownership of the
Acquisition Shares they must be voted in accordance with the recommendations of
the Company's Board of Directors. The Company generally has a right of first
offer in the event that Heine and Mr. Price wish to transfer any of the
Acquisition Shares. The Company has also granted certain registration rights
with respect to the Acquisition Shares. Mr. Price and five senior executives of
Heine entered into employment agreements assumed by Franklin Mutual Advisers,
Inc. ("FMAI") upon the consummation of the transaction.
Certain terms used in this Report
- ---------------------------------
When used in this report, the following terms generally apply unless otherwise
noted.
- --------------------------------------------------------------------------------
"Franklin Templeton funds" all of the funds
"Other Assets" closed-end investment companies, the
foreign based funds and the other
U.S. and international managed
and institutional accounts
"Franklin Templeton Group" all of the funds and the "Other Assets"
combined
- --------------------------------------------------------------------------------
As of September 30, 1998, total assets under management in the Franklin
Templeton Group were $208.6 billion, the make-up of which was approximately as
follows: for the open-end investment companies in the Franklin Templeton Group
(including variable annuities), $169.6 billion; and for all the Other Assets
(excluding variable annuities), $39.0 billion. This makes the Franklin Templeton
Group one of the largest investment management complexes in the United States.
The mix of assets under management by a large financial services complex such as
the Franklin Templeton Group can be segregated by type of assets, type of
investment vehicle, type of investor or geographic location of assets.
Mix of Assets Under Management ("AUM")
- -------------------------------------
Type of Assets Value in Billions % of AUM
- -------------- ----------------- --------
Global, International and U.S. Equity $ 119.6 57%
- -------------------------------------
Held for growth potential, income potential or various combinations
thereof by all types of investors, including institutional and separate
accounts on a worldwide basis.
Fixed-income $ 75.0 36%
- ------------
Both long and short-term, including money market fund assets, held by all
types of investors on a worldwide basis.
Hybrid Funds $14.0 7%
- ------------
Asset allocation, balanced, flexible and income-mixed funds.
Included in the above categories are $39.0 billion in Other Assets:
Separate Accounts $18.5 9%
-----------------
Assets managed in separate accounts for which Company subsidiaries act as
advisers; primarily equity-oriented.
International-based Funds $16.7 8%
-------------------------
Assets managed in international-based funds; investment objectives vary
but are primarily international and global equity-oriented.
U.S. Based Closed-End Funds $3.8 2%
---------------------------
Assets in U.S.-based funds in various investment vehicles.
Subsidiaries-Investment Management, Administration,
---------------------------------------------------
Distribution and Related Services
---------------------------------
The Company's principal line of business is providing investment management,
administration, distribution and related services for the Franklin Templeton
Group. This business is primarily conducted through the principal wholly-owned
direct and indirect subsidiary companies described below. Revenues are generated
primarily by subsidiaries that provide advisory and management services.
Revenues are derived primarily from investment management fees calculated as a
percentage of the value of assets under management. Annual rates vary and
generally decline as the level of assets managed increases.
Franklin Advisers, Inc.
Franklin Advisers, Inc. ("Advisers") is a California corporation formed in 1985
and is based in San Mateo, California. Advisers is registered as an investment
advisor with the Securities and Exchange Commission (the "SEC") under the
Investment Advisers Act of 1940 (the "Advisers Act"). Advisers provides
investment advisory, portfolio management and administrative services under
management agreements with most of the funds in the Franklin Group of Funds.
Advisers manages approximately $92.2 billion, representing approximately 44.2%
of the Company's total assets under management, and generates approximately
15.9% of total Company revenues.
Templeton Global Advisors Limited
Templeton Global Advisors Limited ("TGAL") is a Bahamian corporation located in
Nassau, Bahamas. TGAL is registered as an investment advisor with the SEC under
the Advisers Act. TGAL provides investment management services under various
agreements with certain of the Templeton funds, and Other Assets. TGAL is the
principal investment advisor to the Templeton funds and manages approximately
$44.1 billion, representing approximately 21.1% of the Company's total assets
under management.
Franklin Mutual Advisers, Inc.
Franklin Mutual Advisers, Inc. is a Delaware corporation formed in 1996 and is
based in Short Hills, New Jersey. FMAI is registered as an investment advisor
with the SEC under the Advisers Act. FMAI provides investment management and
portfolio management services under various agreements with Mutual Series. FMAI
principally serves as the investment manager to the Mutual Series funds and
manages approximately $25.4 billion, representing approximately 12.2% of the
Company's total assets under management.
Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. ("TICI") is a Florida corporation formed in
October 1979. Based in Ft. Lauderdale, Florida, TICI is the principal investment
advisor to the majority of the separate accounts. In addition, it provides
investment advisory portfolio management services to certain of the Templeton
funds and subadvisory services to certain of the Franklin funds. TICI manages
approximately $19.9 billion, representing approximately 9.6% of the Company's
total assets under management.
Templeton Asset Management Ltd.
Templeton Asset Management Ltd. ("Templeton Singapore") is a corporation
organized under the laws of, and is based in, Singapore. It is registered as the
foreign equivalent of an investment advisor in Singapore with the Monetary
Authority of Singapore and is also registered with the SEC under the Advisers
Act. A representative office of Templeton Singapore is registered as the foreign
equivalent of an investment advisor in Hong Kong. Templeton Singapore provides
investment advisory and related services to certain Templeton funds and
portfolios. Templeton Singapore is principally an investment advisor to emerging
market equity portfolios.
Franklin Advisory Services, Inc.
Franklin Advisory Services, Inc. ("FASI") is a Delaware corporation formed in
1996 and is based in Fort Lee, New Jersey. FASI is registered as an investment
advisor with the SEC under the Advisers Act. FASI provides investment advisory
and portfolio management services under management agreements with certain funds
in the Franklin Group of Funds also provides sub-advisory services to
non-affiliated entities.
Franklin Templeton Services, Inc.
Franklin Templeton Services, Inc. ("FTSI") is a Delaware corporation formed in
1996 and is based in San Mateo, California. FTSI provides business management
services, including fund accounting, securities pricing, trading, compliance and
other related administrative activities under various management agreements to
most of the U.S. Franklin Templeton funds.
Templeton/Franklin Investment Services (Asia) Limited
Templeton/Franklin Investment Services (Asia) Limited is a corporation organized
under the laws of, and is based in, Hong Kong. It was formed in late 1993 to
distribute and service the Company's financial products in Asia.
Templeton Management Limited
Templeton Management Limited is a Canadian corporation formed in October 1982,
and is registered in Canada as the foreign equivalent of an investment advisor
and a mutual fund dealer with the Ontario Securities Commission. It provides
investment advisory, portfolio management, distribution and administrative
services under various management agreements with the Canadian Funds and with
private and institutional accounts.
Franklin/Templeton Distributors, Inc.
Franklin/Templeton Distributors, Inc. ("Distributors") is a New York corporation
formed in 1947. It is registered with the SEC as a broker-dealer and is a member
of the National Association of Securities Dealers, Inc. (the "NASD"). As the
principal underwriter of the shares of most of the Franklin Templeton funds, it
earns underwriting commissions on the distribution of shares of the funds.
Templeton/Franklin Investment Services, Inc.
Templeton/Franklin Investment Services, Inc. ("TFIS") is a Delaware corporation
formed in October 1987 and is registered with the SEC as a broker-dealer and an
investment advisor. Its principal business activities include: (i) through its
Templeton Portfolio Advisory division, serving as a sponsor of a comprehensive
fee (wrap account) program, in which it provides investment advisory and
broker-dealer services, as well as serving as investment adviser in other
broker-dealer wrap account programs and directly as an adviser for separate
accounts; and (ii) serving as a direct marketing broker-dealer for institutional
investors in the Franklin Templeton Group.
Franklin/Templeton Investor Services, Inc.
Franklin/Templeton Investor Services, Inc. ("FTIS") is a California corporation
formed in 1981 which provides shareholder record keeping services and acts as
transfer agent and dividend-paying agent for the Franklin Templeton open-end
funds. FTIS is registered with the SEC as a transfer agent under the Securities
Exchange Act of 1934 (the "Exchange Act"). FTIS is compensated under an
agreement with each fund on the basis of a fixed annual fee per account, which
varies with the fund and the type of services being provided, and is reimbursed
for out-of-pocket expenses.
Franklin Templeton Trust Company
Franklin Templeton Trust Company ("FTTC"), a California corporation formed in
October 1983, is a trust company licensed by the California Superintendent of
Banks. FTTC serves primarily as custodian for Individual Retirement Accounts and
profit sharing or money purchase plans whose assets are invested in the Franklin
Templeton funds, and as trustee or fiduciary of private trusts and retirement
plans.
Templeton Funds Trust Company
Templeton Funds Trust Company ("TFTC"), a Florida corporation formed in December
1985, is a trust company licensed by the Florida Office of the Comptroller. TFTC
serves as trustee of commingled trusts for qualified retirement plans.
Franklin Management, Inc.
Franklin Management, Inc. ("FMI"), a California corporation organized in
February 1978, is a registered investment advisor for private accounts. FMI also
provides advisory services to third party broker-dealer wrap fee programs.
Franklin Agency, Inc.
Franklin Agency, Inc. is a California corporation organized in December 1971,
which currently provides variable insurance product development for the Franklin
Templeton Group.
Templeton Funds Annuity Company
Templeton Funds Annuity Company ("TFAC") is a Florida corporation formed in
January 1984 which offers variable annuity products. TFAC is principally
regulated by the Florida Department of Insurance and Florida's Treasurer.
Templeton International, Inc.
Templeton International, Inc. is a Delaware corporation organized in September
1992 and acts as the holding company for a number of the Templeton international
subsidiaries.
Templeton Worldwide, Inc.
Templeton Worldwide, Inc. is a Delaware corporation organized in July 1992 as
the parent holding company for all of the Templeton companies.
Other Investment Advisory, Distribution, Research and Related Subsidiaries are
organized and/or located in California, Canada, Florida, Australia, the Bahamas,
Bermuda, Brazil, China, Cyprus, France, Germany, India, Italy, Luxembourg,
Mauritius, Poland, Russia, South Africa, Switzerland and the United Kingdom, and
provide investment advisory and related services to other subsidiaries of the
Company and to various U.S. and foreign portfolios and private and institutional
accounts. In addition, the Company, through various subsidiaries, has opened or
is in the process of opening branch offices or in some instances forming
subsidiaries in various other international locations, including Argentina,
Hungary, Japan, Korea, the Netherlands, Sweden, Taiwan and Vietnam.
Subsidiaries-Other Financial Services
-------------------------------------
In addition to its principal business activity of providing investment
management and related services, during all or portions of the fiscal year, the
Company was also engaged in two (2) other lines of business in the financial
services marketplace conducted through the subsidiaries described below:
consumer lending services and the management of public and private real estate
programs.
Consumer Lending Services
Franklin Bank (the "Bank"), a 98.2%-owned subsidiary of the Company, is a
non-Federal Reserve member California State chartered bank. The Bank was formed
in 1974 and was acquired by the Company in December 1985. The Bank, with total
assets of $104.7 million as of September 30, 1998, provides consumer banking
products and services such as credit cards, auto loans, deposit accounts and
consumer loans. The Bank does not exercise its commercial lending powers in
order to maintain its status as a "non-bank bank" pursuant to the provisions of
the Competitive Equality Banking Act of 1987 ("CEBA") which permits the Company,
a "non-banking company" prior to CEBA, to remain exempt from the Bank Holding
Company Act under the "grandfathering" provisions of CEBA.
Franklin Capital Corporation
Franklin Capital Corporation ("FCC") is a Utah corporation formed in June 1993
to expand the Company's auto lending activities. FCC conducts its business
primarily in the Western region of the United States and originates its loans
through a network of auto dealerships representing a wide variety of makes and
models. FCC offers several different loan programs to finance new and used
vehicles. FCC has in the past acquired credit card receivables from the Bank. As
of September 30, 1998, FCC's total assets included $38.1 million of gross
automobile contracts and $51.1 million of gross credit card receivables. In
September 1998, FCC securitized approximately $134.3 million of auto loan
receivables but continues to service those receivables for a fee. See Note 4 of
Notes to the Financial Statements.
Real Estate Subsidiaries
The Company's real estate-related line of business is conducted primarily
through two (2) subsidiary corporations. Franklin Properties, Inc. ("FPI") is a
real estate investment and management company organized in California in April
1988, which manages a publicly-traded real estate investment trust. Franklin
Select Realty Trust, Inc. is managed by FPI under an advisory agreement and is
publicly traded on the American Stock Exchange. Property Resources, Inc.
("PRI"), a California corporation organized in April 1967 and acquired by the
Company in December 1985, serves as general partner, property manager or advisor
for certain other real estate investment programs.
Investment Management
---------------------
The Franklin Templeton Group accommodates a variety of investment objectives,
including capital appreciation, growth and income, income, tax-free income and
preservation of capital. In seeking to achieve such objectives, each portfolio
emphasizes different investment securities. Portfolios that seek capital
appreciation invest primarily in equity securities in a wide variety of
international and U.S. markets; some seek broad national market exposure, while
others focus on narrower sectors such as precious metals, health care, emerging
technology, mid-cap companies, small-cap companies, real estate securities and
utilities. Portfolios seeking income focus on taxable and tax-exempt money
market instruments, tax-exempt municipal bonds, global fixed-income securities,
fixed-income debt securities of corporations and of the U.S. government and its
agencies and instrumentalities such as the Government National Mortgage
Association, the Federal National Mortgage Association, and the Federal Home
Loan Mortgage Corporation. Still others focus on investments in particular
countries and regions. A majority of the assets managed are equity-oriented.
In addition to closed-end funds, many of which are described below, the Other
Assets include portfolios managed for the world's largest corporations,
endowments, charitable foundations, pension funds, wealthy individuals and other
institutions. Investment management services for such portfolios focus on
specific client objectives utilizing the various investment techniques offered
by the Franklin Templeton Group.
Shares of the open-end funds in the Franklin Templeton Group generally were sold
during fiscal 1998 at their respective net asset value per share plus a sales
charge, which varies depending upon the type of fund and the amount purchased.
Exceptions were shares sold without an up-front sales charge in the Company's
money market funds; Class II shares discussed below and other similar products;
and funds specifically designed for institutional investors. In accordance with
certain terms and conditions described in the prospectuses for such funds,
certain investors are eligible to purchase shares at net asset value or at
reduced sales charges, and investors may generally exchange their shares of a
fund at net asset value for shares within the same class of another fund in the
Franklin Templeton Group without the payment of additional sales charges.
As of September 30, 1998, the net asset holdings of the five (5) largest funds
in the Franklin Templeton Group (some of which are investment companies and some
of which are series of other investment companies) were Franklin California Tax
Free Income Fund, Inc ($15.9 billion), Templeton Growth Fund ($12.3 billion),
Templeton Foreign Fund ($11.7 billion), the Franklin Custodian Funds-U.S.
Government ($9.4 billion) and the Franklin Custodian Funds-Income ($8.7
billion). At September 30, 1998, these five (5) mutual funds represented, in the
aggregate, 27.8% of all assets under management in the Franklin Templeton Group.
General Fund Description
-------------------------
The Investment Company Institute (the "ICI"), an industry group of which the
Company is a member, has developed detailed definitions for the investment
objectives of U.S.-based open-end mutual funds and variable annuity
sub-accounts. In addition to the open-end U.S.-based fund assets described in
the chart below, the Company also manages approximately $39.0 billion in other
funds and accounts (the "Other Assets"). Approximately $18.5 billion of these
assets are managed in separate accounts for which Company subsidiaries act as
advisors. The investment objectives of these accounts vary but are primarily
equity-oriented. Of the Other Assets, $16.7 billion is managed in
international-based funds whose investment objectives vary but are primarily
international and global equity-oriented. Finally, $3.8 billion of Other Assets
is in U.S.-based funds in various investment vehicles. The Other Assets in the
aggregate comprised approximately 19% of the Company's assets under management
during the last fiscal year.
The categories used in this chart are more precise than the broad investment
objective categories used in MD&A and in the Company's Consolidated Financial
Statements. The following is a summary of the Company's U.S.-based open-end
mutual funds and dedicated insurance products funds categorized using the ICI
definitions.
FRANKLIN TEMPLETON FUNDS - U.S. BASED OPEN END
----------------------------------------------
CATEGORY TYPE NO. OF
(and approximate assets under INVESTMENT OF NO. OF INSURANCE
management, OBJECTIVE INVESTMENTS MUTUAL PRODUCT
in billions) FUNDS FUNDS
- ---------------------------------------------------------------------------------------------------------------------------
I. EQUITY ($87.8)
- ---------------------------------------------------------------------------------------------------------------------------
A. Capital Appreciation ($13.2) Seek growth of capital;
dividends are not a primary
consideration
- ---------------------------------------------------------------------------------------------------------------------------
1. Aggressive Growth Funds Short-term capital Common stock of small, 2 1
appreciation growth companies
- ---------------------------------------------------------------------------------------------------------------------------
2. Growth Funds Long-term capital Common stock of 6 3
appreciation well-established companies
- ---------------------------------------------------------------------------------------------------------------------------
3. Sector Funds Capital appreciation Companies in related 7 3
fields or specific
industries
- ---------------------------------------------------------------------------------------------------------------------------
B. World Equity ($50.8) Invest primarily in stocks of
foreign companies
- ---------------------------------------------------------------------------------------------------------------------------
1. Emerging Market Funds Companies based in 2 2
various less-developed
regions of the world
- ---------------------------------------------------------------------------------------------------------------------------
2. Global Equity Funds Equity securities traded 10 3
worldwide, including
equity securities of U.S.
companies
- ---------------------------------------------------------------------------------------------------------------------------
3. International Equity At least two-thirds of 4 3
Funds the portfolio must be
equity securities of
companies outside of the
U.S.
- ---------------------------------------------------------------------------------------------------------------------------
4. Regional Equity Funds Companies based in a 4 1
specific part of the
world, or in a specific
country
- ---------------------------------------------------------------------------------------------------------------------------
C. Total Return ($23.8) Seek a combination of income
and capital appreciation
- ---------------------------------------------------------------------------------------------------------------------------
1. Growth and Income Funds Combine long-term capital Common stock of 8 3
growth with steady income established companies
dividends with both the potential
for growth and good
dividend-paying records
- ---------------------------------------------------------------------------------------------------------------------------
II. HYBRID ($10.8) A mix of equity and debt
securities
- ---------------------------------------------------------------------------------------------------------------------------
A. Asset Allocation Funds ($0.7) High total return A mix of equities, 4 2
fixed-income securities
and money market
instruments; funds are
required to maintain a
precise weighting of
asset classes
- ---------------------------------------------------------------------------------------------------------------------------
B. Flexible Portfolio Funds ($0.1) High total return Common stock, bonds and 1
other debt securities,
and money market
securities
- ---------------------------------------------------------------------------------------------------------------------------
C. Income-mixed Funds ($10.0) High level of current income Variety of income 1 1
for shareholders. Capital producing securities,
appreciation is not a primary including equities and
objective fixed-income securities
- ---------------------------------------------------------------------------------------------------------------------------
III. TAXABLE BOND ($16.1)
- ---------------------------------------------------------------------------------------------------------------------------
A. Corporate Bond ($0.3) Seek current income Debt securities of
corporations
- ---------------------------------------------------------------------------------------------------------------------------
1. Corporate Bond High level of income At least two-thirds of 1
Funds: General assets in corporate bonds
with no explicit
restrictions on average
maturity
- ---------------------------------------------------------------------------------------------------------------------------
2. Corporate Bond High level of current income At least two-thirds of 1
Funds: Short Term assets in corporate bonds
with an average maturity
of one to five years
- ---------------------------------------------------------------------------------------------------------------------------
B. High Yield ($3.9) Current income At least two-thirds of 1 1
assets in lower rated
corporate bonds
- ---------------------------------------------------------------------------------------------------------------------------
C. World Bond ($0.6) Current income Debt securities of
foreign companies and
governments
- ---------------------------------------------------------------------------------------------------------------------------
1. Global Bonds Current income Worldwide debt securities, 2 1
Funds: General with no stated average
maturity or an average
maturity of more than
five years. Up to 25%
of assets may be
invested in U.S. companies
- ---------------------------------------------------------------------------------------------------------------------------
2. Global Bond Current income Debt securities 2
Funds: Short Term worldwide, with an
average maturity of one
to five years. Up to 25%
of assets may be invested
in U.S. companies
- ---------------------------------------------------------------------------------------------------------------------------
3. Other World Bonds Funds Current income At least two-thirds of 2
assets in a combination
of foreign government and
corporate debt
- ---------------------------------------------------------------------------------------------------------------------------
D. Government Bond ($10.7) High current income Taxable bonds issued or
backed by the U.S.
Government
- ---------------------------------------------------------------------------------------------------------------------------
1. Government Bond Funds: High current income U.S. Government 1
Intermediate Term securities that have an
average maturity of five
years to ten years
- ---------------------------------------------------------------------------------------------------------------------------
2. Government Bond Funds: High current income U.S. Government 1
Short Term securities that have an
average maturity of one
to five years
- ---------------------------------------------------------------------------------------------------------------------------
3. Mortgage-backed Funds High current income At least two-thirds of 6
assets in pooled
mortgage-backed securities
- ---------------------------------------------------------------------------------------------------------------------------
E. Strategic Income ($0.6) High current income Domestic fixed-income 2 4
securities
- ---------------------------------------------------------------------------------------------------------------------------
IV. MUNICIPAL BOND ($50.5)
- ---------------------------------------------------------------------------------------------------------------------------
A. State Municipal Bond High after-tax yields Bonds issued by a
Funds ($34.7) for state residents single state or which
are exempt
from
regular
income
taxation
in that
state,
with an
average
maturity
of more
than five
years
- -------------------------------------------------------------------------------------------------------------------------
1. State Municipal Bond High after-tax yields Municipal bonds of a single 36
Funds: general for state residents state with an average maturity
of more than five years, which
are exempt from federal
and state income tax
- ---------------------------------------------------------------------------------------------------------------------------
B. National Municipal Bond High after-tax yields A national mix of municipal
Funds ($15.8) bonds
- ---------------------------------------------------------------------------------------------------------------------------
1. National Municipal Bond High after-tax yields Municipal bonds with an 4
Funds: General average maturity of more
than five
years or
no
specific
stated
maturity,
usually
exempt
from
federal
income
tax, but
may be
taxed by
state or
local
laws.
- --------------------------------------------------------------------------------------------------------------------------
V. MONEY MARKET FUNDS ($4.4)
- ---------------------------------------------------------------------------------------------------------------------------
A. Taxable Money Market Maintain stable net asset Short-term, high-grade
Funds ($3.5) value securities
- --------------------------------------------------------------------------------------------------------------------------
1. Taxable Money Market Stable net asset value U.S. Treasury obligations
Funds: Government and other financial instruments
issued or guaranteed by the U.S.
Government
- ---------------------------------------------------------------------------------------------------------------------------
Money market instruments, 5 2
2. Taxable Money Market Stable net asset value including certificates of
Funds: Non-government deposit of large banks,
commercial paper and
bankers' acceptances
- ---------------------------------------------------------------------------------------------------------------------------
B. Tax Exempt Money Market Income exempt from federal Municipal securities with
Funds ($0.9) tax and/or state and local relatively short
tax maturities; average
maturity must be 90 days
or less
- ---------------------------------------------------------------------------------------------------------------------------
1. National Tax-Exempt Income that is not taxed by Municipal securities with 1
Money Market Funds the federal government relatively short
maturities
- ---------------------------------------------------------------------------------------------------------------------------
2
2. State Tax-Exempt Income that is exempt from Short-term municipal
Money Market Funds federal tax and from state bonds of a single state
taxes for state residents
- ---------------------------------------------------------------------------------------------------------------------------
Recent Fund Introductions and Changes
- -------------------------------------
A new investment company, Franklin Floating Rate Trust, was introduced in
October 1997. Among other funds introduced was the Franklin Bond Fund, which was
added to the Franklin Investors Securities Trust in August 1998. In May 1998,
sales commenced for two (2) new series of the Franklin Valuemark Funds and four
(4) new series of Templeton Variable Products Series Fund: Value Securities Fund
and Global Health Securities Fund, and Franklin Growth Investments Fund,
Franklin Small Cap Investments Fund, Mutual Discovery Investments Fund, and
Mutual Shares Investments Fund, respectively. During the fiscal year, five (5)
funds were liquidated, one (1) Franklin fund merged into another Franklin fund,
and one (1) Templeton fund merged into another Templeton fund.
During fiscal 1998, seventy-nine (79) retail Franklin Templeton funds offered
multiple classes of shares in response to investor demand for varying load
structures. Of these funds, forty-five (45) offered Class I and Class II shares,
seven (7) offered Class I and Advisor Class Shares, and twenty-seven (27)
offered Class I, Class II and Advisor Class Shares (or the Mutual Series
equivalent to Advisor Class Shares, called Class Z Shares). In addition, nine
(9) variable annuity funds offered its shares in two separate classes.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Information on the Company's operations in various geographic areas of the world
and a breakout of business segment information is contained in Note 7 of Notes
to the Financial Statements.
(c) NARRATIVE DESCRIPTION OF BUSINESS
Investment Management and Administrative Services
-------------------------------------------------
The Company, through its various subsidiaries described above, provides
investment advisory, portfolio management, transfer agency, business management
agent and administrative services to the Franklin Templeton Group. Such services
are provided pursuant to agreements in effect with each of the U.S. registered
Franklin Templeton funds open- and closed-end investment companies. Comparable
agreements are in effect with foreign registered funds and with other managed
accounts. The management agreements for the U.S. registered Franklin Templeton
funds continue in effect for successive annual periods, providing such
continuance is specifically approved at least annually by a majority vote cast
in person at a meeting of such funds' Boards of Trustees or Directors called for
that purpose, or by a vote of the holders of a majority of the funds'
outstanding voting securities. In either event, the continuance must be approved
by a majority of such funds' trustees or directors who are not parties to such
agreement or interested persons of the funds or the Company within the meaning
of the Investment Company Act of 1940 (the "40 Act"). Trustees and directors of
the funds' boards are hereinafter referred to as "directors". Foreign registered
funds have various termination rights and provisions.
Each such agreement automatically terminates in the event of its "assignment"
(as defined in the 40 Act) and either party may terminate the agreement without
penalty after written notice ranging from thirty (30) to sixty (60) days.
"Assignment" is defined in the 40 Act as including any direct or indirect
transfer of a controlling block of voting stock. Control is defined as the power
to exercise a controlling influence over the management or policies of a
company.
If there were to be a termination of a significant number of the management
agreements between the Franklin Templeton funds and the Company's subsidiaries
or with respect to a significant portion of the Other Assets, such termination
would have a material adverse impact upon the Company. To date, no management
agreements of the Company or any of its subsidiaries with any of the Franklin
Templeton funds have been involuntarily terminated. Changes in the customer base
of institutional investors occur on a regular basis. Since the Templeton
Acquisition and the Mutual Acquisition to date, assets under management in the
category of Other Assets set forth above have continued to grow.
As of September 30, 1998, substantially all of the shares of the various
directly and indirectly owned subsidiary companies were owned directly by the
Company or subsidiaries thereof, except with respect to a limited number of
foreign entities and limited minority ownership of certain other companies. As
of December 8, 1998, Charles B. Johnson, Rupert H. Johnson, Jr. and R. Martin
Wiskemann beneficially owned approximately 19.02%, 15.20% and 9.55%,
respectively, of the outstanding voting common stock of the Company.
Under the terms of the management agreements with the Franklin Templeton funds,
the various subsidiary companies described above generally supervise and
implement such funds' investment activities and provide the administrative
services and facilities which are necessary to the operation of such funds'
business. Such subsidiary companies also conduct research and provide investment
advisory services and, subject to and in accordance with any directions such
funds' boards may issue from time to time, such subsidiary companies determine
which securities such funds will purchase, hold or sell. In addition, such
subsidiary companies take all steps necessary to implement such decisions,
including the selection of brokers and dealers to execute transactions for such
funds, in accordance with detailed criteria set forth in the management
agreement for such funds and applicable law and practice. Similar services are
rendered with respect to the Other Assets.
Generally, FRI or a subsidiary provides and pays the salaries of personnel who
serve as officers of the Franklin Templeton funds, including the President and
such other administrative personnel as are necessary to conduct such funds'
day-to-day business operations, including maintaining a fund's portfolio
records, answering shareholder inquiries, providing information, creating and
publishing literature, compliance with securities regulations, maintaining
accounting systems and controls, preparation of annual reports and other
administrative activities.
The funds generally pay their own expenses such as legal and auditing fees,
reporting and board and shareholder meeting costs, SEC and state registration
and similar expenses. Generally, the funds pay advisory companies a fee payable
monthly based upon a fund's net assets. Annual rates under the various
investment management agreements range from .05% to a maximum of 2.00% and are
generally reduced as net assets exceed various threshold levels.
The investment management agreements permit advisory companies to act as an
advisor to more than one fund so long as such companies' ability to render
services to each of such funds is not impaired, and so long as purchases and
sales appropriate for all such funds are made on a proportionate or other
equitable basis. Management of the Company and the directors of the funds
regularly review the fund fee structures in light of fund performance, the level
and range of services provided, industry conditions and other relevant factors.
Advisory fees are generally waived or voluntarily reduced when a new fund is
established and then increased to contractual levels with the growth in net
assets.
The investment advisory services provided by such advisory companies include
fundamental investment research and valuation analyses, encompassing original
country, 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
other research. In this regard, some brokerage business from the funds is
allocated in recognition of value-added research services received.
Fixed-income research includes economic analysis, credit analysis and value
analysis. The economic analysis function monitors and evaluates numerous factors
that influence the supply and demand for credit on a worldwide basis. Credit
analysis researches the creditworthiness of debt issuers and their individual
short-term and long-term debt issues. Yield spread differential analysis reviews
the relative value of market sectors that represent buying and selling
opportunities.
Additional administrative services are provided by FTIS, which receives
administrative fees from the funds for providing shareholder record keeping
services and for acting as transfer and dividend-paying agent for the funds. As
of September 30, 1998, such amounts was based upon an annual fee per shareholder
account, ranging between $14.79 and $18.00, a pro-rated portion of which was
paid monthly.
Distribution and Marketing
- --------------------------
Distributors acts as the principal underwriter and distributor of shares of the
open-end Franklin Templeton funds. Distributors has entered into underwriting
agreements with the funds, which generally provide for Distributors to pay the
expenses for fund shares. Although the Company does significant advertising and
sales promotions through media sources, fund shares are sold primarily through a
large network of independent participating securities dealers. As of September
30, 1998, approximately 3,880 local, regional and national securities brokerage
firms offered shares of the Franklin Templeton funds for sale to the investing
public. The Company has approximately fifty (50) general wholesalers and six (6)
retirement and three (3) insurance wholesalers who interface with the
broker-dealer community. Fund shares are offered to individual investors,
qualified groups, trustees, IRA and profit sharing or money purchase plans,
employee benefit plans, trust companies, bank trust departments and
institutional investors. In addition, various management and advisory services,
commingled and pooled accounts, wrap fee arrangements and various other private
investment management services are offered to certain private and institutional
investors.
Broker-dealers are paid various fees for services in matching investors with
funds whose investment objectives match such investors' goals. Broker-dealers
also assist in explaining the operations of the funds, in servicing the account
and in various other distribution services.
Most of the U.S. based Franklin Templeton funds have a multi-class share
structure whereby Class I shares are sold with a maximum front-end sales charge
ranging from a low of 1.50% to a high of 5.75%. Reductions in the maximum sales
charges may be available depending upon the amount invested and the type of
investor. Class II shares, which were introduced during the 1995 fiscal year,
have a hybrid, level load structure combining aspects of conventional front-end,
back-end and level-load pricing. Class II shares are subject to an initial sales
charge of 1% paid immediately by the investor. Also, in connection with the
distribution of Class II shares, a principal distribution subsidiary of the
Company has in the past paid, and may in the future pay, an additional 1% to
third-party intermediaries. Class II shares are also generally subject to a 1%
contingent deferred sales charge, charged to the investor and returned to the
Company, on redemptions within eighteen (18) months of purchase. See "Risk
Factors and Cautionary Statements" below. Class II shares are also subject to
higher on-going Rule 12b-1 fees, as described below. The Company's multi-class
share structure was adopted to provide investors with greater payment
alternatives for their investment programs. Money market funds are sold to
investors with no sales charge. In addition, certain funds and classes of shares
which have no sales charges (Advisor class shares with respect to Franklin
Templeton funds and Z Class shares with respect to Mutual Series) are offered to
institutions and investment advisory (both affiliated and unaffiliated) clients.
Advisor and Z Class shares are also available to officers, directors and
employees of the Company and the funds, as well as to holders of Franklin Mutual
Series funds on the date of the Mutual Acquistion.
Most of the U.S. registered Franklin Templeton funds, with the exception of
certain Franklin Templeton money market funds, have also 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 fund boards and by a majority of
disinterested fund directors. All such Plans are subject to termination at any
time by a majority vote of the disinterested directors or by the funds'
shareholders. The Plans permit the funds to bear certain expenses relating to
the distribution of their shares.
Fees under the Plans for Class I shares range in amount from a low of .10% per
annum of average daily net assets to a high of .50% while Class II share fees
range between .65% to 1%. The implementation of the Plans provided for a lower
fee on Class I shares acquired prior to the adoption of such Plans. Fees from
the Plans are paid primarily to third party dealers who provide service to their
shareholder accounts, and also engage in distribution activities. Distributors
may also receive reimbursement from the funds for expenses involved in
distributing the funds, such as advertising, and reimbursement for a 1% payment
to dealers on sales of Class II shares, subject to the Plans' limitations on
amounts.
As of September 30, 1998, there were approximately 8.9 million shareholder
accounts in the worldwide Franklin Templeton Group.
Revenues
- --------
As shown in the Consolidated Financial Statements, the Company's revenues are
derived primarily from its investment management activities. As set forth in the
table captioned "MD&A-Operating Revenues", revenues from investment management
fees have comprised approximately 55%, 56% and 54% in 1998, 1997 and 1996,
respectively, of total operating revenue for each of the three (3) fiscal years
reported. Underwriting commissions, from gross sales and reinvestments of
products subject to commissions contributed to revenues approximately 38%, 38%,
and 39% in 1998, 1997 and 1996 respectively. Shareholder servicing fees from
mutual fund activities contributed 6% in each of 1998, 1997 and 1996.
Other Financial Services
- ------------------------
The Company's consumer lending, dealer auto loan and real estate businesses do
not contribute significantly to either the revenues or the net income of the
Company. The Company's real estate operations have incurred net losses since
inception and the Company does not anticipate any immediate improvement in this
line of business. There was a significant reduction in gross charge-offs and
delinquency rates in the auto loan business during fiscal 1997 and 1998. A more
detailed analysis of the financial effects of loan losses and delinquency rates
in the Company's consumer lending and dealer auto loan business, as well as the
funding of this activity, is contained in the "MD&A-Operating Revenues".
Regulatory Considerations
- -------------------------
Virtually all aspects of the Company's businesses are subject to various
foreign, federal and state laws and regulations. As discussed above, the Company
and a number of its subsidiaries are registered with various foreign, federal
and state governmental agencies. These supervisory agencies have broad
administrative powers, including the power to limit or restrict the Company from
carrying on its business if it fails to comply with applicable laws and
regulations. In the event of non-compliance, the possible sanctions which may be
imposed include suspending individual employees, limiting the Company's (or a
subsidiary's) ability to engage in business for specified periods of time,
revoking the investment advisor or broker-dealer registrations and censures and
fines.
The Company's officers, directors and employees may from time to time own
securities which are also held by the funds. The Company's internal policies
with respect to individual investments by certain employees, including officers
and directors who are employed by the Company, require prior clearance and
reporting of some transactions and restrict certain transactions so as to reduce
the possibility of conflicts of interest. The Company's compliance procedures
meet the standards outlined in the most recent guidelines of the ICI related to
securities transactions by employees, officers and directors of investment
companies.
To the extent that existing or future regulations cause or contribute to reduced
sales of fund shares or investment products or impair the investment performance
of the funds or such other investment products, the Company's aggregate assets
under management and its revenues might be adversely affected. Changes in
regulations affecting free movement of international currencies might also
adversely affect the Company.
The Company, including certain of its subsidiaries, is subject to increased
scrutiny and a substantially-increased volume of compliance reporting related to
its plan, activities and the associated costs related to the Year 2000, as
discussed in more detail in "MD&A-Year 2000."
Since 1993, the NASD Conduct Rules have limited the amount of aggregate sales
charges which may be paid in connection with the purchase and holding of
investment company shares sold through brokers. The effect of the rule might be
to limit the amount of fees that could be paid pursuant to a fund's 12b-1 Plan
to Distributors, a subsidiary of the Company that earns underwriting commissions
on the distribution of fund shares. Such limitations would apply in a situation
where a fund has no, or limited, new sales for a prolonged period of time. None
of the Franklin Templeton funds are in, or close to, that situation at the
present time.
Competition
- -----------
The financial services industry is highly competitive and has increasingly
become a global industry. As a result, comparative market data is not readily
available. There are over 7,000 open-end investment companies of varying sizes,
investment policies and objectives whose shares are being offered to the public
in the United States. Due to the Company's international presence and varied
product mix, it is difficult to assess the Company's market position relative to
other investment managers on a worldwide basis, but the Company believes that it
is one of the more widely diversified investment managers in the United States.
The Company believes that its strong equity and fixed-income base coupled with
its strong global presence will serve its competitive needs well over time. The
Company continues its focus on service to customers, performance on investments
and extensive marketing activities with its strong broker-dealer and other
financial institution distribution network.
The Company is in competition with the financial services and other investment
alternatives offered by stock brokerage and investment banking firms, insurance
companies, banks, savings and loan associations and other financial
institutions. Many of these competitors have substantially greater resources
than the Company. Although the banking industry continues to expand its
sponsorship of proprietary funds distributed through third-party distributors,
the Company has and continues to actively pursue sales relationships with banks
and insurance companies to broaden its distribution network in response to such
competitive pressures.
As investor interest in the mutual fund industry has increased, competitive
pressures have increased on sales charges of broker-dealer distributed funds.
The Company believes that, although this trend will continue, a significant
portion of the investing public still relies on the services of the
broker-dealer community, particularly during weaker market conditions. However,
in response to competitive pressures or for other similar reasons, the Company
might be forced to lower or further adjust sales charges, substantially all of
which are currently paid by the Company to broker-dealers and other financial
intermediaries. The Company has experienced increased demand for payments to its
distribution channels and anticipates that this trend will continue. The
reduction in such sales charges paid to broker-dealers could make the sale of
shares of the Franklin Templeton funds somewhat less attractive to the
broker-dealer community, which could in turn have a material adverse effect on
the Company's revenues. The Company believes that it is well positioned to deal
with such changes in marketing trends as a result of its already extensive
advertising activities and broad based marketplace recognition.
The Company advertises the Franklin Templeton Group in major national financial
publications, as well as on radio and television to promote brand name
recognition and to assist its distribution network. Such activities included
purchasing network and cable programming, sponsorship of sporting events, such
as the "Franklin Templeton Shark Shoot-Out", sponsorship of The Nightly Business
Report on public television, and extensive newspaper and magazine advertising.
Further aspects of competition are discussed below under "Risk Factors and
Cautionary Statements".
Asset Mix
- ---------
As discussed above, the Company's revenues are derived primarily from investment
management activities. Broadly speaking, the direction and amount of change in
the net assets of the funds are dependent upon two factors: (1) the level of
sales of shares of the funds as compared to redemptions of shares of the funds;
and (2) the increase or decrease in the market value of the securities owned by
the funds. As the Company's asset mix has shifted since 1992 from predominantly
fixed income to a majority of equity assets, the Company has become subject to
an increased risk of asset volatility from changes in the global equity markets.
This was evidenced in the fourth quarter of the fiscal year when a substantial
decline in the global equity markets caused a 12% reduction in the Company's
assets under management and an 11% decline in its operating revenues. In
addition, since the Company derives higher revenues and income from its equity
assets, such a shift in assets from equity back to primarily fixed-income would
have a greater than proportional impact on the Company's income and revenues.
Despite such volatility, management believes that in the long run the Franklin
Templeton Group is more competitive as a result of the greater diversity of
global investments and product mix available to its customers.
Market values are affected by many things, including the general condition of
national and world economics and the direction and volume of changes in interest
rates and/or inflation rates. Fluctuations in interest rates and in the yield
curve will have an effect on fixed-income assets under management as well as on
the flow of monies to and from fixed-income funds and, therefore, on the
Company's revenues from such funds. The effects of the foregoing factors on
equity funds and fixed-income funds often operate inversely and it is,
therefore, difficult to predict the net effect of any particular set of
conditions on the level of assets under management.
Although the Company and its assets under management are subject to political
and currency risks due to its international activities, its exposure to
fluctuations in foreign currency markets is limited, as is discussed in more
detail in "Risk Factors and Cautionary Statements" and "MD&A-Liquidity and
Capital Resources".
Forward-Looking Statements
When used in this Form 10-K and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and in oral
statements made with the approval of an authorized executive officer, the words
or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. All assumptions, anticipations,
expectations and forecasts contained herein are forward-looking statements that
involve risks and uncertainties. Discussions in "MD&A" about the Company's
estimated completion dates for phases of the Company's Year 2000 plan, related
cost estimates, statements about possible effects of the year 2000 Problem and
the Euro Issue, and possible contingency plans are also "forward-looking
statements." Such statements are subject to certain risks and uncertainties,
including those discussed under the caption "Risk Factors and Cautionary
Statements" below, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and should be
read in conjunction with the risk disclosure below. The Company wishes to advise
readers that the factors listed below could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from any opinions or statements expressed with respect to
future periods in any current statements.
The Company will not undertake and specifically declines any obligation to
release publicly the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Risk Factors and Cautionary Statements
The Company's revenues and income are derived primarily from the management of a
variety of financial services products. The financial services industry is
highly competitive, as discussed above. Such competition could negatively impact
the Company's market share, which could impact assets under management, from
which the bulk of the Company's revenues and income arise.
The Company is in competition with the financial services and other investment
alternatives offered by stock brokerage and investment banking firms, insurance
companies, banks, savings and loan associations and other financial
institutions. Such competition could negatively impact the Company's market
share, revenues and net income. Sales of mutual fund shares and other financial
services products can also be negatively affected by adverse general securities
market conditions, currency fluctuations, governmental regulations and
recessionary global economic conditions.
Securities dealers, whose large retail distribution systems play an important
role in the sale of shares of the Franklin, Templeton and Mutual Series funds,
also sponsor competing proprietary mutual funds. To the extent that these firms
limit or restrict the sale of Franklin, Templeton or Mutual Series funds shares
through their brokerage systems in favor of their proprietary mutual funds,
future sales may be negatively impacted and the Company's revenues might be
adversely affected. In addition, as the number of competitors in the investment
management industry increases, greater demands are placed on existing
distribution channels, which has caused distribution costs to increase.
The inability of the Company to compete and to distribute and sell its products
effectively would have a negative effect on the Company's level of assets under
management, related revenues and overall business and financial condition.
Many of the Company's competitors have substantially greater resources than the
Company. In addition, there has been a trend of consolidation in the mutual fund
industry which has resulted in stronger competitors. The banking industry also
continues to expand its sponsorship of proprietary funds distributed through
third party distributors. To the extent that banks limit or restrict the sale of
Franklin, Templeton or Mutual Series shares through their distribution systems
in favor of their proprietary mutual funds, assets under management might
decline and the Company's revenues might be adversely affected.
Certain portions of the Company's managed portfolios are invested in various
securities of corporations located or doing business in developing regions of
the world commonly known as emerging markets. These portfolios and the Company's
revenues derived from the management of such portfolios are subject to
significant risks of loss from unfavorable political and diplomatic
developments, currency fluctuations, social instability, changes in governmental
policies, expropriation, nationalization, confiscation of assets and changes in
legislation relating to foreign ownership. Foreign trading markets, particularly
in some emerging market countries are often smaller, less liquid, less regulated
and significantly more volatile.
The Company's assets under management include a significant number of global
equities, which increase the volatility of the Company's managed portfolios and
its revenue and income streams. From 1992 until mid-1998 equity investments
increased as a percentage of the Company's assets under management. The shift in
the Company's asset mix from primarily fixed-income to a combination of
fixed-income and global equities has increased the possibility of volatility in
the Company's managed portfolios due to the increased percentage of equity
investments managed. Declines in global securities markets that affect the value
of these equities, recently have caused and in the future will cause, revenue
declines and may have a material adverse impact on the Company's business,
financial condition and results of operations. In addition, the Company derives
higher revenues and income from its equity assets and therefore shifts in assets
from equity to fixed-income would have an adverse impact on the Company's income
and revenues.
The Company's ability to meet anticipated cash needs is dependent upon factors
including the value of the Company's assets, the creditworthiness of the Company
as perceived by lenders and the market value of the Company's stock. Similarly,
the Company's ability to securitize future portfolios of auto loan and credit
card receivables would also be affected by the market's perception of those
portfolios, finance rates offered by competitors, and the general market for
private debt. The Company's inability to meet cash needs for various reasons as
and when required could have a negative affect on the Company's financial
condition and business operations.
Market values are affected by many things, including the general condition of
national and world economics and the direction and volume of changes in interest
rates and/or inflation rates. A significant portion of the Company's assets
under management are fixed-income securities. Fluctuations in interest rates and
in the yield curve will have an effect on fixed-income assets under management
as well as on the flow of monies to and from fixed-income funds and, therefore,
on the Company's revenues from such funds. In addition, the impact of changes in
the equity marketplace may significantly affect assets under management. The
effects of the foregoing factors on equity funds and fixed-income funds often
operate inversely and it is, therefore, difficult to predict the net effect of
any particular set of conditions on the level of assets under management.
A number of mutual fund sponsors presently market their funds without sales
charges. As investor interest in the mutual fund industry has increased,
competitive pressures have increased on sales charges of broker-dealer
distributed funds. In response to such competitive pressures, the Company might
be forced to lower or further adjust sales charges, substantially all of which
are currently paid to broker-dealers and other financial intermediaries. The
reduction in such sales charges could make the sale of shares of the Franklin,
Templeton and Mutual Series funds less attractive to the broker-dealer
community, which could in turn have a material adverse effect on the Company's
revenues. In the alternative, the Company might be required to pay additional
fees, commissions or charges in connection with the distribution of its shares
which could have a negative effect on the Company's earnings.
Sales of Class II shares have increased relative to the Company's overall sales,
resulting in higher distribution expenses, which have caused distribution
expenses to exceed distribution revenues for certain products and put increasing
pressure on the Company's profit margins. If the Company is unable to fund
commissions on Class II shares using existing cash flow and debt facilities,
additional funding will be necessary. Past sales of Class II shares are not
necessarily indicative of future sales volume, and future sales of Class II
shares may be lower or higher as a result of changes in investor demand or
lessened or unsuccessful sales efforts by the Company.
As a result of increased competitive pressures, the Company is planning to
implement a new class of shares generally referred to as "B" shares, which have
no upfront sales charges paid by investors. However, such charges will still be
paid to third party intermediaries, which will create a significant cash
requirement. The Company anticipates that it will be able to finance these
charges from its existing cash flows and credit facilities. In the event that
future cash flows and credit facilities are insufficient to meet these cash
requirements, the Company's liquidity could be negatively impacted.
The Company's real estate activities are subject to fluctuations in the real
estate market place as well as to significant competition from companies with
much larger real estate portfolios giving them significantly greater economies
of scale.
The Company's auto loan receivables business and credit card receivable
activities are subject to significant fluctuations in those consumer market
places as well as to significant competition from companies with much larger
receivable portfolios. In addition, certain of the Company's competitors are
engaged in the financing of auto loans in connection with a much larger
automobile manufacturing businesses and may at times provide loans at
significantly below market interest rates in order to further the sale of
automobiles.
The consumer loan market is highly competitive. The Company competes with many
types of institutions including banks, finance companies, credit unions and the
finance subsidiaries of large automobile manufacturers. Interest rates the
Company can charge and, therefore, its yields vary based on this competitive
environment. The Company is reliant on its relationships with various automobile
dealers and this relationship is highly dependent on the rates and service that
the Company provides. There is no guarantee that in this competitive environment
the Company can maintain its relationships with these dealers. Auto loan and
credit card portfolio losses can also be influenced significantly by trends in
the economy and credit markets which negatively impact borrowers' ability to
repay loans.
Item 2. Properties
General
As of September 30, 1998, the Company leased offices and facilities in twelve
(12) locations in the immediate vicinity of its principal executive and
administrative offices located at 777 Mariners Island Boulevard, San Mateo,
California. In addition, the Company owns seven (7) buildings near Sacramento,
California, as well as six (6) buildings in St. Petersburg, Florida, two (2)
buildings in Nassau, Bahamas as well as substantial space in high rise office
buildings in Argentina and Singapore. Certain properties of the Company were
under construction during fiscal 1998 as described below. Since the Company is
operated on a unified basis, corporate activities, fund related activities,
accounting operations, sales, real estate and banking operations, auto loans and
credit cards, management information system activities, publishing and printing
operations, shareholder service operations and other business activities and
operations take place in a variety of such locations. The Company or its
subsidiaries also lease office space in Florida, New York, and Utah and in
several other states and in Australia, Bermuda, Brazil, Canada, Dubai, England,
France, Germany, Hong Kong, India, Italy, Japan, Luxembourg, Poland, Russia,
Scotland, South Africa, Taiwan, and Vietnam.
Property Description
Leased
As of September 30, 1998, the Company leased properties at the locations set
forth below:
Approximate Approximate Expiration
Location Square Footage Current Base Date
Monthly Rental
- -------------------------------------------------------------------------------
777 Mariners Island Boulevard
San Mateo, CA 94404 176,000 $435,000 September 2009
1147 & 1149 Chess Drive
Foster City, CA 94404 121,000 $114,000 June 2000
500 East Broward Boulevard
Ft. Lauderdale, FL 33394 121,000 $217,000 December 2000
555 Airport Boulevard
Burlingame, CA 94,000 $216,000 June 2006
1800 Gateway Drive
San Mateo, CA 94404 70,000 $207,000 August 2002
1810 Gateway Drive
San Mateo, CA 94404 52,000 $112,000 June 2000
2 Waters Drive
San Mateo, CA 94404 49,000 $70,000 July 1999
1950 Elkhorn Court
San Mateo, CA 94403 37,000 $43,000 July 2001
901 & 951 Mariners Island Between March
Boulevard 36,000 $72,000 1999 & April 2000
San Mateo, CA 94404
2000 Alameda de las Pulgas 36,000 $118,000 February 2005
San Mateo, CA 94403
51 JFK Parkway
Short Hills, NJ 28,000 $70,000 May 2005
1850 Gateway Drive
San Mateo, CA 94404 19,000 $34,000 July 2000
1400 Fashion Island Boulevard
San Mateo, CA 94404 17,000 $52,000 June 2002
Other U.S. Locations 50,000 -- --
Foreign Operations 201,000 -- --
Owned
The Company maintains a customer service facility in the property that it owns
at 10600 White Rock Road, Rancho Cordova, California. The Company occupies
75,000 square feet in this property and has leased out 46,000 square feet to a
third party until March 1999 at an approximate monthly rental of $69,000. The
Company owns an additional twenty-seven (27) acres of adjoining land on which it
has constructed four (4) office buildings totaling approximately 303,000 square
feet and a data center/warehouse facility of approximately 162,000 square feet.
The Company also owns a warehouse building in Rancho Cordova, California that is
approximately 69,000 square feet in size.
The Company owns six (6) facilities in St. Petersburg, Florida, including an
approximate 90,000 square foot office building and an approximate 117,000 square
foot facility devoted to a computer data center, training, warehouse and mailing
operations. Four (4) new office buildings of approximately 70,000 square feet
each have been built by the Company and were occupied in November 1997.
Shareholder servicing activities have been relocated to this new 280,000 square
foot campus development. During November 1998, the Company began construction of
a fifth office building in this campus and plans to occupy this building in June
2000.
The Company owns two (2) office buildings in Nassau, Bahamas, of approximately
14,000 square feet and approximately 25,000 square feet, respectively, as well
as a nearby condominium residence. The Company also owns three (3) separate
office-building floors of approximately 1,200, 8,000 and 10,000 square feet in
Shanghai, China, Buenos Aires, Argentina and Singapore, respectively.
Other
The Company is a joint tenant with a 60% undivided interest in the property
occupied by the Company at 777 Mariners Island Boulevard, San Mateo, California.
The joint venture acquired the property through a distribution from Mariner
Partners, a California limited partnership of which the Company was the sole
limited partner. The joint venture assumed the existing thirty-year non-recourse
financing for the property from Metropolitan Life Insurance Company at an
interest rate of 8.10% per annum, due November 2002. The principal balance
outstanding as of September 30, 1998 was $24.0 million.
Property Changes
In December 1997, the Company entered into a contract to acquire approximately
thirty-three (33) acres of undeveloped land ("Bay Meadows") located in San
Mateo, California for a total estimated purchase price of approximately $21.6
million. The Company has made a non-refundable escrow deposit of approximately
$1.75 million and in addition has expended approximately $2.2 million in
architectural and development fees. As a condition to approval of the Company's
planned use of the Bay Meadows property, the City of San Mateo has required
construction of roads, modification to a freeway interchange and other off-site
improvements. The Company is obligated to reimburse the seller of Bay Meadows
for a portion of the cost of certain of these off-site improvements. The Company
has been advised by the seller that the Company's share of such off-site
improvements may exceed $20 million. The Company is presently reviewing these
costs. A definitive closing date for the purchase of the property has not yet
been set.
The Company also executed a design build contract in July 1997, subject to
acquisition of the property, for the design and construction of a new 900,000
square foot campus at Bay Meadows. The total contract amount will not be final
until after the project is completely designed and building permits are issued
by the City of San Mateo, California, but is anticipated to cost in excess of
$180 million.
Item 3. Pending Legal Proceedings
Three complaints were filed by the same law firm, in January 1998, February
1998, and September 1998, in the U. S. District Court for the Southern District
of Florida, against Templeton Asset Management, Ltd., an indirect wholly-owned
subsidiary of the Company and the investment manager of the closed-end
investment company, Templeton Vietnam Opportunities Fund, Inc. (now known as
Templeton Vietnam and Southeast Asia Fund, Inc.); certain of the Fund's officers
and directors; the Company; and Templeton Worldwide, Inc., a Company subsidiary.
The suits are captioned James C. Roumell, plaintiff on behalf of himself and all
others similarly situated v. Templeton Asset Management, Ltd., et al., (Civil
Action No. 98-6059), Michael J. Wetta, plaintiff on behalf of himself and all
others similarly situated v. Templeton Asset Management, Ltd., et al. (Civil
Action No. 98-6170); and Richard Waksman, plaintiff on behalf of himself and all
others similarly situated v. Templeton Asset Management Ltd., et al., (Civil
Action No.98-7059).
All three complaints allege that the defendants committed various violations of
the Investment Company Act of 1940, relating to the Fund's decision to conduct a
tender offer commencing at the end of 1997. Wetta is also seeking to assert
claims under the Investment Advisers Act of 1940 and Maryland law. The
complaints seek monetary damages apparently in excess of $40 million and other
relief. Wetta is seeking an order rescinding Templeton Asset Management, Ltd.'s
advisory contract with the Fund and restitution of all amounts paid under such
contract. Although the plaintiffs have asserted claims against the directors of
the Fund and certain of its officers, they have not asserted claims directly
against the Fund, which is named only as a "nominal defendant" from which they
seek no recovery. Wetta has included two claims by which he is seeking the
above-mentioned relief in favor of the Fund.
The Company and the other defendants have moved to dismiss the Roumell and Wetta
cases on various legal grounds including the fact that the lawsuits
mischaracterize the "fundamental policies" of the Fund and fail to acknowledge
the basic investment objective of the Fund to pursue long-term capital
appreciation. The defendants will be moving to dismiss the Waksman complaint on
similar grounds in the near future. Management believes that these lawsuits are
without merit and intends to defend such actions vigorously.
In addition, the Company is involved from time to time in litigation relating to
claims arising in the normal course of business. Management is of the opinion
that the ultimate resolution of such claims will not materially affect the
Company's business or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of security holders.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information About the Company's Common Stock
The Company's common stock is traded on the New York Stock Exchange ("NYSE") and
the Pacific Exchange, Inc. under the ticker symbol BEN and the London Stock
Exchange under the ticker symbol FKR. On September 30, 1998, the closing price
of the Company's common stock on the NYSE was $29 7/8 per share. At December 8,
1998, there were approximately 3,900 shareholders of record. In addition, the
Company estimates that there are approximately 46,000 beneficial shareholders
whose shares are held in street name.
The following table sets forth the high and low sales prices for the Company's
common stock from the NYSE Composite Tape. All sales prices have been adjusted
retroactively to reflect the 1997 and 1998 stock dividends.
1998 Fiscal Year 1997 Fiscal Year
Quarter High Low High Low
- --------------------------------------------------------------------------------
October-December 51 7/8 39 3/4 24 7/8 21 9/16
January-March 57 1/4 38 32 9/16 22 1/8
April-June 57 7/8 47 9/16 37 1/8 25 15/16
July-September 54 7/8 253/4 47 1/4 36 1/4
The Company declared dividends of $0.20 per share in fiscal 1998 and $0.17 per
share in fiscal 1997. The Company expects to continue paying dividends on a
quarterly basis to common stockholders depending upon earnings and other
relevant factors.
Item 6. Selected Financial Highlights
In millions, except assets under
management and per share amounts
AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 1998 1997 1996 1995 1994
SUMMARY OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES $2,577.3 $2,163.3 $1,519.5 $1,253.3 $1,340.8
NET INCOME $ 500.5 $ 434.1 $ 314.7 $ 268.9 $ 251.3
FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $3,480.0 $3,095.2 $2,374.2 $2,244.7 $1,968.8
LONG-TERM DEBT $ 494.5 $ 493.2 $ 399.5 $ 382.4 $ 383.7
STOCKHOLDERS' EQUITY $2,280.8 $1,854.2 $1,400.6 $1,161.0 $ 930.8
OPERATING CASH FLOW $ 693.7 $ 428.5 $ 359.6 $ 296.5 $ 274.8
ASSETS UNDER MANAGEMENT
- ------------------------------------------------------------------------------------------------------------------------------------
IN BILLIONS $ 208.6 $ 226.0 $ 151.6 $ 130.8 $ 118.2
PER COMMON SHARE*
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS
BASIC $ 1.98 $ 1.72 $ 1.30 $ 1.10 $ 1.02
DILUTED $ 1.98 $ 1.71 $ 1.25 $ 1.07 $ 1.00
CASH DIVIDENDS $ 0.20 $ 0.17 $ 0.15 $ 0.13 $ 0.11
BOOK VALUE $ 9.06 $ 7.36 $ 5.82 $ 4.78 $ 3.80
* Prior year amounts have been restated to reflect the two-for-one stock split
paid on January 15, 1998.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
General
Franklin Resources, Inc. and its consolidated subsidiaries (the "Company")
derive substantially all of their revenues and net income from providing
investment management, administration, distribution and related services to the
Franklin, Templeton and Mutual Series funds, institutional accounts and other
investment products (collectively, the "Franklin Templeton Group"). The Company
has a diversified base of assets under management and a full range of investment
products and services to meet the needs of most individuals and institutions.
At September 30, 1998, the Company offered its services in a number of global
markets, featuring offices in over 20 different nations in six different
continents and employing over 8,600 people.
On November 1, 1996, the Company acquired the assets and liabilities of Heine
Securities Corporation ("Heine") (the "Acquisition"), the former investment
advisor to what is now known as Franklin Mutual Series Fund Inc., other funds
and private accounts ("Mutual"). See Notes 2 and 6 to the Financial Statements
and the outline of useful lives of intangible assets included in this discussion
under Operating Expenses.
Assets Under Management
- -----------------------
in billions
As of September 30,
1998 1997 1996
Franklin Templeton Group:
EQUITY
Global/international $84.8 $107.3 $65.8
Domestic (U.S.) 34.8 35.9 8.2
- --------------------------------------------------------------------------------
Total equity 119.6 143.2 74.0
- --------------------------------------------------------------------------------
HYBRID FUNDS 14.0 14.1 12.4
- --------------------------------------------------------------------------------
FIXED-INCOME
Tax-free 50.5 45.8 42.5
Taxable
Domestic (primarily
U.S. Government) 16.0 15.3 15.9
Global/international 3.7 3.9 3.2
- --------------------------------------------------------------------------------
Total fixed-income 70.2 65.0 61.6
- --------------------------------------------------------------------------------
MONEY FUNDS 4.8 3.7 3.6
- --------------------------------------------------------------------------------
Total end of period $208.6 $226.0 $151.6
- --------------------------------------------------------------------------------
Monthly average for the year $226.9 $192.0 $141.1
Hybrid funds include asset allocation, balanced, flexible and income-mixed
funds as defined by the Investment Company Institute. Previously these funds had
been included primarily in the equity category.
The Company's revenues are derived largely from the amount and composition of
assets under management.
Assets under management at September 30, 1998, were $17.4 billion (8%) lower
than they were at September 30, 1997. This decline in assets occurred primarily
as a result of market depreciation in equity portfolios during the last fiscal
quarter of 1998, as stock markets adjusted to global equity turmoil. Purchases
exceeded redemptions by $16.1 billion for the fiscal year, and in each fiscal
quarter except the last, where redemptions exceeded purchases by $2.4 billion.
During the year fixed-income and money fund assets grew 8% and 30%,
respectively, as the result of net fund inflows and market appreciation of
tax-free funds.
Results of Operations
The following table sets forth, for the periods indicated, amounts included in
the Consolidated Statements of Income of Franklin Resources, Inc. and the
percentage change in those amounts from period to period.
FRANKLIN RESOURCES, INC.
CONSOLIDATED INCOME STATEMENT DATA
IN MILLIONS, EXCEPT PER SHARE DATA Percent Change
FOR THE YEARS ENDED SEPTEMBER 30,
1998 1997 1996 1998 1997
OPERATING REVENUES
Investment management fees $1,413.2 $1,203.9 $827.5 17% 45%
Underwriting and distribution fees 982.7 823.7 598.3 19% 38%
Shareholder servicing fees 160.6 124.9 88.7 29% 41%
Other, net 20.8 10.8 5.0 93% 116%
- ----------------------------------------------------------------------------------------------------------------------
Total operating revenues 2,577.3 2,163.3 1,519.5 19% 42%
- ----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Underwriting and distribution 841.7 712.3 518.1 18% 37%
Compensation and benefits 553.1 447.2 325.1 24% 38%
Information systems, technology
and occupancy 181.7 135.4 88.5 34% 53%
Advertising and promotion 125.9 96.6 71.7 30% 35%
Amortization of deferred
sales commissions 105.4 59.5 24.2 77% 146%
Amortization of intangible assets 36.9 34.3 18.3 8% 87%
Other 90.5 86.5 56.5 5% 53%
- ----------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,935.2 1,571.8 1,102.4 23% 43%
- ----------------------------------------------------------------------------------------------------------------------
Operating income 642.1 591.5 417.1 9% 42%
OTHER INCOME (EXPENSE)
Investment and other income 56.7 49.5 50.4 15% (2)%
Interest expense (22.5) (25.3) (11.3) (11)% 124%
- ----------------------------------------------------------------------------------------------------------------------
Other income, net 34.2 24.2 39.1 41% (38)%
- ----------------------------------------------------------------------------------------------------------------------
Income before taxes on income 676.3 615.7 456.2 10% 35%
Taxes on income 175.8 181.6 141.5 (3)% 28%
- ----------------------------------------------------------------------------------------------------------------------
Net income $500.5 $434.1 $314.7 15% 38%
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT MARGIN 25% 27% 27% -- --
EARNINGS PER SHARE
Basic $1.98 $1.72 $1.30 15% 32%
Diluted $1.98 $1.71 $1.25 16% 37%
Net income and diluted earnings per share for 1998 increased by 15% and 16%,
respectively, principally as a result of increased investment management fee
revenues. Net income and diluted earnings per share for 1997 increased by 38%
and 37%, respectively, also principally as a result of increased investment
management fee revenues.
Operating Revenues
Investment management fees, the largest component of the Company's operating
revenues, are generally calculated under fixed fee arrangements, as a percentage
of the value of assets under management. Under various investment management
agreements, annual rates vary and generally decline as the average net assets of
the portfolios exceed certain threshold levels. The majority of mutual fund
investment management contracts are subject to periodic approval by each fund's
Board of Directors/Trustees. There have been no significant changes in the
investment management fee structures for the Franklin Templeton Group in the
periods under review. The Company's investment management fee revenues are
generally affected by market appreciation or depreciation in assets under
management as well as the flow of funds into or out of these portfolios.
During 1998, the Company reclassified revenues relating to the distribution
component of Canadian revenues from Investment management fees to Underwriting
and distribution fees. The Company believes this change more closely matches
revenue generated from distribution services with the expenses incurred. Prior
periods have been reclassified accordingly. Investment management fees increased
17% and 45% in fiscal 1998 and 1997, respectively, due to the 18% and 36%
increase in average assets under management during these periods. These
increases reflect both market appreciation and net purchases of mutual funds.
The Company's effective investment management fee rate (investment management
fees divided by average assets under management) remained relatively stable in
1998 at 0.62% compared to 0.63% in 1997. The 1997 rate increased significantly
from 1996 due to a shift in the Company's asset mix toward more equity products
which generally have higher fee rates. This shift was primarily the result of
the addition of Mutual Series products to the Company's asset mix and the
general growth in equity funds. Future changes in the composition of assets
under management may affect the effective investment management fee rates earned
by the Company.
Certain subsidiaries of the Company act as distributors for its sponsored funds
and receive commissions and distribution fees. Underwriting commissions are
earned primarily from fund sales. Distribution fees are generally based on the
level of assets under management. These distribution fees include 12b-1 fees,
paid by the funds in reimbursement for distribution expenses incurred up to a
maximum allowed by each fund. A significant portion of underwriting commissions
and distribution fees are paid to selling intermediaries. See the discussion of
the reclassification of Investment management fees above.
Underwriting and distribution fees increased 19% and 38% in 1998 and 1997,
respectively, primarily as a result of increases in mutual fund sales and
average assets under management.
Shareholder servicing fees are generally fixed charges per account that vary
with the particular type of fund and the service being rendered. Shareholder
servicing fees increased 29% and 41% in 1998 and 1997, respectively. The
increases were a result of an increase in fund shareholder accounts, as well as
an increase in the average per account charge for certain funds during the
second quarter of both 1998 and 1997.
Other, net consists primarily of revenues from the Company's banking and finance
subsidiaries, net of interest expense and the provision for loan losses. Other,
net increased 93% and 116% in 1998 and 1997, respectively, primarily as a result
of lower loan loss provision charges at the Company's banking and finance
subsidiaries. Actual gross charge offs decreased 38% in 1998 compared with a 43%
decrease in 1997. Revenues remained relatively stable as a result of increased
effective yields offset by 11% and 17% declines in average loans receivable, in
1998 and 1997, respectively. Banking/finance interest expense decreased in the
current periods due to a reduction in the average borrowing requirements of the
banking/finance group combined with a reduction in effective interest rates. As
described in Note 4 to the Financial Statements, the securitization of
approximately $134.3 million of auto loans that occurred in September 1998 did
not have a material impact on operating revenues or results of operations.
The Company has considered the potential impact of the effect on the
banking/finance subsidiaries of a 100 basis point movement in market interest
rates and does not expect it would have a material impact on the Company's
operating revenues or results of operations.
Operating Expenses
Underwriting and distribution includes sales commissions and distribution fees
paid to brokers and other third-party intermediaries. During both 1998 and 1997,
underwriting and distribution expenses increased consistent with increased
mutual fund sales and average assets under management.
Compensation and benefits increased 24% and 38% in 1998 and 1997, respectively,
reflecting an increase in the number of full-time employees and in temporary
labor costs. The Company experienced upward pressure on compensation and
benefits due to the Company's growth and expansion and due to the effects of a
very competitive labor market.
Information systems, technology and occupancy costs increased 34% and 53% in
1998 and 1997, respectively. During the past two years, the Company has embarked
upon major systems implementations, Year 2000 corrections and European Monetary
Unit preparations, and has upgraded its network, desktop and Internet
environments. The Company anticipates that such major systems undertakings will
continue to have an impact on the Company's operating results through the year
2000 and beyond. See the Year 2000 discussion below.
Advertising and promotion expenses increased 30% and 35% in 1998 and 1997,
respectively, mainly due to increased promotional activity and new marketing
campaigns.
Sales commissions on certain Franklin Templeton Group products sold without a
front-end sales charge are capitalized and amortized over periods not exceeding
four years -- the period in which management estimates that they will be
recovered from distribution plan payments and from contingent deferred sales
charges. Amortization of deferred sales commissions increased 77% and 146%,
respectively, during the periods under review as sales of these products
increased.
Amortization of intangibles increased in 1997 and 1998 as a result of the
Acquisition (see Note 2 to the Financial Statements). The Company has made a
determination to amortize goodwill and management contracts over a period of 40
years. Important factors in arriving at this conclusion include the relative
stability of the mutual fund industry, industry turnover rates of investment
management contracts, the Company's own experience, and its performance
expectations regarding acquisitions.
Other Income (Expense)
- ----------------------
Investment income increased 15% in 1998 due to the investment of increased
operating cash flows. Investment and other income declined in 1997 as a result
of the sale of a portion of the Company's investment portfolio used to finance
the Acquisition.
Interest expense decreased 11% in 1998, primarily due to increased operating
cash flows and to the capitalization of interest related to borrowings used to
finance construction of a number of new office buildings in 1998. During 1997,
interest expense increased 124% due to borrowings related to the Acquisition.
Taxes on Income
- ---------------
The Company's effective income tax rate decreased from approximately 30% in
fiscal 1997 and 31% in fiscal 1996 to approximately 26% of pretax income in
fiscal 1998 due to the relative proportion of non-U.S. pretax income and the
effects of tax law changes. The effective tax rate will continue to be
reflective of the relative contributions of foreign earnings that are subject to
reduced tax rates and that are not currently included in U.S. taxable income.
Financial Condition
- -------------------
At September 30, 1998, the Company's assets aggregated $3.5 billion, up from
$3.1 billion at September 30, 1997. Stockholders' equity approximated $2.3
billion compared to approximately $1.9 billion at September 30, 1997. The
increase in assets and stockholders' equity was primarily a result of increased
net income Outstanding debt (long-term and short-term) remained relatively
stable at $612.4 million at September 30, 1998, compared to $611.6 million at
September 30, 1997. The Company's ratio of earnings (before taxes) to fixed
charges (interest and the interest factor on rent) improved to 13.8 for 1998
compared to 12.0 for 1997. The Company's interest coverage ratio (pretax income
before interest expense divided by interest expense) was 17.8 for 1998 as
compared to 14.2 for 1997. The Company's overall weighted average interest rate
at September 30, 1998, including the effect of interest-rate swap agreements,
was 6.2% on $567.2 million of outstanding commercial paper and notes payable
(medium-term notes) as compared to 6.3% on $569.7 million of such debt
outstanding at September 30, 1997.
Cash provided by operating activities increased to $693.7 million in 1998, from
$428.5 million and $359.6 million in 1997 and 1996, respectively. During the
year ended September 30, 1998, the Company used net cash of $478.5 million for
investing activities. $494.5 million was used to purchase investments, $162.2
million was used to purchase property and equipment and $64.3 million was
related to the Acquisition. These amounts were partially offset by proceeds from
the securitization of auto loans and sales of investments. Net cash used in
financing activities during the year was $101.9 million, compared to $105.5
million provided by financing activities in 1997, primarily as a result of
$247.5 million less debt issued in 1998. During fiscal 1998, the Company paid
$49.3 million in dividends to stockholders and purchased 1,309,981 shares of its
common stock for $42.6 million.
The Company's auto loan and credit card receivables business activities are
subject to fluctuations in those consumer market places, as well as to
competition from companies with much larger receivable portfolios. Auto loan and
credit card portfolio results can also be influenced significantly by trends in
the economy and credit markets that may negatively impact borrowers' ability to
repay loans. Credit card and auto loans receivable decreased from 1997 levels
due to the impact of a securitization of auto loans with a net book value of
approximately $134.3 million in September 1998. The Company used the proceeds of
$131.4 million to reduce the Company's debt and to supplement working capital.
As a result of its more stringent underwriting policies, improved auto loan
collection efforts and enhanced systems supporting those activities, the Company
has experienced a decrease in loan losses since September 30, 1996. Any future
increases in the Company's investment in dealer auto loan and credit card
portfolios are expected to be funded either through existing debt facilities and
operating cash flows or through future securitizations of the portfolios.
Liquidity and Capital Resources
At September 30, 1998, the Company held $556.0 million in cash and cash
equivalents, as compared to $442.7 million at September 30, 1997. Liquid assets,
which consist of cash and cash equivalents, investments available-for-sale and
current receivables increased to $1,278.6 million at September 30, 1998 from
$889.7 million at September 30, 1997. Revolving credit facilities at September
30, 1998 aggregated $500 million of which $200 million was under a 364-day
facility. The remaining $300 million facility will expire in May 2003. At
September 30, 1998, approximately $490.7 million was available to the Company
under unused commercial paper and medium-term note programs.
Management expects that the principal needs for cash will be to advance sales
commissions, fund increased property and equipment acquisitions including
information systems, pay stockholder dividends and service debt. Management
believes that the Company's existing liquid assets, together with the expected
continuing cash flow from operations, its borrowing capacity under current
credit facilities and its ability to issue stock will be sufficient to meet its
present and reasonably foreseeable cash needs.
Results of operations will continue to be dependent upon general economic
growth, the strength of capital markets and the Company's ability to meet
investor demands with competitive products and services. Operating revenues will
be dependent upon the amount and composition of assets under management, mutual
fund sales, and the number of mutual fund investors, private and institutional
clients.
Despite the Company's global presence, a substantial portion of its foreign
subsidiaries' revenues and the majority of their monetary assets are U.S. and
Canadian dollar denominated. Over 95% of the Company's operating revenues were
earned in U.S. and Canadian dollars in both 1998 and 1997. Despite increased
fluctuation in world currency markets, the Company's exposure is limited and the
Company has not deemed it necessary to enter into foreign currency hedging
activities.
The Company participates in the financial derivatives markets to manage its
exposure to variable interest-rate fluctuations on a portion of its commercial
paper. The Company has entered into interest-rate swap agreements to convert
interest payment obligations under variable-rate debt instruments to fixed-rate
interest payment obligations. Through its interest-rate swap agreements and
medium-term note program, the Company has fixed the rates of interest it pays on
82% of its outstanding debt. See Note 8 to the Financial Statements.
Year 2000 Readiness Disclosure
Background. Many of the world's computer systems currently record years in a
two-digit format. Such computer systems may be unable to recognize, interpret or
use dates in and beyond the year 1999 correctly. Because the activities of many
businesses are affected by dates or are date-related, the inability to use such
date information correctly could lead to business disruptions both in the United
States and internationally (the "Year 2000 Problem").
Year 2000 Impact. The Company's businesses rely on a complex international
network of computer and communications systems which are owned and operated by
the Company and by third parties. The short time frames within which securities
prices must be transmitted and received, trade orders placed and taken, and
monies transferred -- all utilizing these systems -- increases the potential
impact of the Year 2000 Problem for the securities industry.
The Company is most dependent upon its mission-critical systems, those that are
required to perform its core business activities. The most important of these is
its domestic transfer agency system, which is the shareholder record keeping
system used to process transactions for the majority of the Company's mutual
fund shareholders. The transfer agency system is a third-party system which
interfaces with the Company's internal sub-systems. Although the vendor of the
transfer agency system has contractually committed to the Company that the
system will be made Year 2000 compliant, the vendor presently is behind in its
timetable to achieve such compliance. Because certain mission-critical
sub-systems cannot be tested until the transfer agency system is made Year 2000
compliant, the time frame for testing and any remediation of these sub-systems
has been shortened. Notwithstanding such delays, the Company believes that it
will complete its required testing in a time frame necessary to participate in
the Securities Industry Association ("SIA") testing currently scheduled to begin
in March 1999.
The Year 2000 Plan. As the Year 2000 plan progresses, the Company will focus on
Year 2000 certification of its core mission-critical information technology
("IT") systems, prioritizing them over other IT systems, and prioritizing IT
systems in general over non-IT systems.
Because the Year 2000 project is an ongoing company-wide endeavor, the state of
the Company's progress changes daily. The Company's Year 2000 compliance plan is
comprised of four phases: Assessment, Remediation, Testing and Implementation.
The Company currently plans to complete all phases of its Year 2000 plan with
respect to mission-critical systems by September 1999 and with respect to other
important systems as soon as possible thereafter, but in any event by December
31, 1999. Due to the large number of systems used worldwide by the Company, it
is most useful to focus on the status of mission-critical systems, as outlined
below.
Phase of % of Mission
Project Critical Complete
------------ ---------------------
Assessment 75%
Remediation 50%
Testing 30%
Implementation 30%
Assessment: systems are inventoried, budgets and strategies are created to
address identified problems. Remediation: software corrections, upgrades and
other fixes are made; questionnaires requesting Year 2000 compliance assurances
are sent to vendors and, in some cases, test scripts are requested. Testing:
internal systems are tested on a stand-alone basis; point-to-point testing
between the Company and third parties is conducted for some systems.
Implementation: systems that have been identified as being Year 2000 compliant
are put into normal business operation; end-user training is conducted.
Non-IT Systems. Other than third-party long distance telephone and data lines
and public utility electrical power, the Company's business operations are not
heavily dependent on non-IT components or systems, and none of the Company's
mission-critical systems is a non-IT system. The Company estimates that it has
completed approximately 50% to 75% of its assessment of the Company-owned or
- -managed non-IT components including building, mechanical, air conditioning,
electrical and security systems.
Third Parties and Year 2000. The Company's business operations are heavily
dependent upon a complex worldwide network of IT systems that are owned and
managed by third parties; including data feeds, trading systems, securities
transfer agent operations and stock market links. The Company has contacted all
of its major external suppliers of goods, services and data (other than
suppliers of electricity or long distance data and voicelines) to assess their
compliance efforts and the Company's exposure in the event of a failure of
third-party compliance efforts. The Company is in the process of validating and
reviewing the responses from these suppliers of mission-critical systems and in
some cases is seeking additional information, written assurances of
certification, or test scripts.
Cost Estimates. The total estimated costs associated with the required
modifications to become Year 2000 compliant range from $50 million to $60
million, not all of which is incremental to the Company's operations. The
estimated costs consist mainly of internal and third-party labor costs which are
expensed as incurred. The total amount expended on the project through September
30, 1998 was approximately $13 million. The Company believes that its existing
liquid assets, together with expected cash flow from operations, combined with
its borrowing capacity under existing credit facilities will be sufficient to
fund anticipated expenditures.
The Company's estimates of the total costs to complete the Year 2000 project
will continue to be refined in future periods. As is indicated in the analysis
above, approximately 75% to 80% of the expected costs of the Year 2000 project
have not yet been incurred. The Company anticipates that its expenditures will
increase during the next fiscal year as it moves the majority of its efforts
from the relatively inexpensive assessment phase to the more costly phases of
testing and remediation.
CONTINGENCY PLANNING. The Company is beginning to develop a contingency plan,
including identification of those mission critical systems for which it is
practical to develop a contingency plan. However, in an operation as complex and
geographically distributed as the Company's business there are limited
alternatives to certain of its mission-critical systems or public utilities. If
certain public utilities or mission-critical systems, such as the Company's
domestic transfer agency system, are not made Year 2000 compliant or fail, there
would be a material adverse impact upon the Company's business, financial
condition and results of operations. Although the Company is investigating
alternative solutions, it is unlikely that any adequate contingency plan can be
developed for such failures.
European Monetary Unit (The "Euro")
- -----------------------------------
On January 1, 1999, a single currency for the European Economic and Monetary
Union is scheduled to replace the national currency for participating member
countries which include countries in which the Company has offices or with which
it does substantial business. Many of the Company's managed funds and financial
products have substantial investments in countries whose currencies will be
replaced by the Euro. All aspects of the Company's investment process, including
trading, foreign exchange, payments, settlements, cash accounts, custodial
accounts and accounting will be affected by the implementation of the Euro (the
"Euro Issue"). The Company has created an interdepartmental team to address the
Euro Issue and is communicating with its external partners and vendors to assess
their readiness to manage the Euro Issue.
The establishment of the Euro may result in market volatility, expose
investments to currency risk due to fluctuations in multiple currencies, change
the economic environment and behavior of investors, or change the competitive
environment for the Company's business in Europe. Similarly, companies operating
in more than one country, such as the Company, may gain or lose competitive
advantages because of the Euro in ways that are not predictable. It is not
currently possible to predict the impact of the Euro on the business or
financial condition of European issuers which Company-sponsored funds may hold
in their portfolios or the impact on the value of fund shares.
The Company is not presently able to assess the cost impact of the Euro Issue on
the Company, but does not presently anticipate that it will have a material
adverse effect on the Company's cash flows, operations or operating results. The
Company is generally expensing costs incurred relating to the Euro Issue during
the period in which they are incurred.
SPECIFIC RISKS ASSOCIATED WITH THE YEAR 2000 AND THE EURO.
- ---------------------------------------------------------
The Company's ability to manage the Year 2000 Problem and the Euro Issue are
subject to uncertainties beyond its control that could cause actual results to
differ materially from what has been discussed above. Factors that could
influence the effect of the Year 2000 Problem and the Euro Issue include the
success of the Company in identifying systems and programs that are affected by
the Year 2000 Problem and the Euro Issue (for example, it is possible that the
SIA testing may reveal additional problems in the Company's systems). Other
facts include the nature and amount of testing, remediation, programming,
installation and systems work required to upgrade or to replace each of the
affected programs or systems; the rate, magnitude and availability of related
labor and consulting costs; the success of the Company in correcting its
internal systems and the success of the Company's external partners and
suppliers in addressing their respective Year 2000 Problems and the Euro Issue.
The failure of organizations such as those mentioned above under "Third Parties
and Year 2000" to resolve their own issues with respect to the Year 2000 Problem
or the Euro Issue could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company could
become subject to legal claims in the event of any Year 2000 or Euro problem in
the Company's business operations. In addition, the Company and its subsidiaries
are subject to regulation by various governmental authorities which could impose
sanctions or fines or cause the Company to cease operations. Also, investors
concerned about the Year 2000 Problem or the Euro Issue could withdraw monies
from the Company's funds resulting in a decline in assets under management which
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
CONSOLIDATED STATEMENTS OF INCOME
IN THOUSANDS
EXCEPT PER SHARE DATA
FOR THE YEARS ENDED SEPTEMBER 30,
1998 1997 1996
- -------------------------------------------------------------------------------
OPERATING REVENUES
Investment management fees $1,413,273 $1,203,923 $827,426
Underwriting and
distribution fees 982,647 823,677 598,297
Shareholder servicing fees 160,560 124,905 88,715
Other, net 20,792 10,770 5,035
- --------------------------------------------------------------------------------
Total operating revenues 2,577,272 2,163,275 1,519,473
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Underwriting and distribution 841,706 712,328 518,122
Compensation and benefits 553,085 447,169 325,135
Information systems, technology
and occupancy 181,665 135,391 88,500
Advertising and promotion 125,925 96,552 71,655
Amortization of deferred
sales commissions 105,405 59,468 24,237
Amortization of intangible
assets 36,857 34,294 18,348
Other 90,533 86,613 56,368
- -------------------------------------------------------------------------------
Total operating expenses 1,935,176 1,571,815 1,102,365
- --------------------------------------------------------------------------------
Operating income 642,096 591,460 417,108
OTHER INCOME (EXPENSE)
Investment and other income 56,723 49,586 50,458
Interest expense (22,535) (25,333) (11,336)
- --------------------------------------------------------------------------------
Other income, net 34,188 24,253 39,122
- --------------------------------------------------------------------------------
Income before taxes on income 676,284 615,713 456,230
Taxes on income 175,834 181,650 141,500
- --------------------------------------------------------------------------------
Net income $500,450 $434,063 $314,730
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Earnings per Share
Basic $1.98 $1.72 $1.30
Diluted $1.98 $1.71 $1.25
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
AS OF SEPTEMBER 30,
1998 1997
- --------------------------------------------------------------------------------
Assets
CURRENT ASSETS
Cash and cash equivalents $537,188 $434,864
Receivables
Franklin Templeton funds 204,826 213,547
Other 25,773 20,315
Investment securities, available-for-sale 470,065 189,674
Prepaid expenses and other 22,137 20,039
- --------------------------------------------------------------------------------
Total current assets 1,259,989 878,439
BANKING/FINANCE ASSETS
Cash and cash equivalents 18,855 7,877
Loans receivable, net 165,074 296,188
Investment securities, available-for-sale 21,847 24,232
Other 4,991 3,739
- --------------------------------------------------------------------------------
Total banking/finance assets 210,767 332,036
OTHER ASSETS
Deferred sales commissions 123,508 119,537
Property and equipment, net 349,229 241,224
Intangible assets, net 1,253,713 1,224,019
Receivable from banking/finance group 87,282 203,787
Other 195,561 96,158
- --------------------------------------------------------------------------------
Total other assets 2,009,293 1,884,72
- --------------------------------------------------------------------------------
Total assets $3,480,049 $3,095,200
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
AS OF SEPTEMBER 30,
1998 1997
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
CURRENT LIABILITIES
Compensation and benefits $156,253 $154,222
Commissions 53,174 46,125
Income taxes 67,319 31,908
Short-term debt 117,956 118,372
Other 82,691 54,873
- --------------------------------------------------------------------------------
Total current liabilities 477,393 405,500
BANKING/FINANCE LIABILITIES
Deposits
Interest bearing 81,615 91,433
Non-interest bearing 6,166 6,971
Payable to Parent 87,282 203,787
Other 3,018 2,213
- --------------------------------------------------------------------------------
Total banking/finance liabilities 178,081 304,404
OTHER LIABILITIES
Long-term debt 494,459 493,244
Other 49,349 37,831
Total other liabilities 543,808 531,075
- --------------------------------------------------------------------------------
Total liabilities 1,199,282 1,240,979
- --------------------------------------------------------------------------------
Commitments and Contingencies (Note 11)
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value,
1,000,000 shares
authorized; none issued -- --
Common stock, $0.10 par value,
500,000,000 shares authorized;
251,741,578 and 126,230,916 shares
issued; 251,741,578 and
126,031,900 shares outstanding,
for 1998 and 1997, respectively 25,174 12,623
Capital in excess of par value 93,033 91,207
Retained earnings 2,194,835 1,757,536
Less cost of treasury stock -- (11,070)
Other (32,275) 3,925
Total stockholders' equity 2,280,767 1,854,221
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $3,480,049 $3,095,200
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Stockholders' Equity
IN THOUSANDS
As of and for the years ended
September 30, 1998, 1997 and 1996
Capital
in Excess
Common Stock of Par Retained Treasury Stock
Shares Amount Value Earnings Shares Amount Other Total
....................................................................................................................................
Balance October 1,1995 82,265 $8,226 $92,190 $1,091,204 (1,325) $(48,519) $17,942 $1,161,043
----------------------------------------------------------------------------------------------------------------------------------
Net income 314,730 314,730
Purchase of treasury stock (1,001) (53,413) (53,413)
Cash dividends on common stock (35,421) (35,421)
Net unrealized gains on investments (10,644) (10,644)
Currency translation adjustments (752) (752)
Issuance of restricted shares, net 9,672 280 9,777 4,381 23,830
Other (636) 53 1,854 1,218
- ------------------------------------------------------------------------------------------------------------------------------------
Balance September 30, 1996 82,265 8,226 101,226 1,370,513 (1,993) (90,301) 10,927 1,400,591
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 434,063 434,063
Issuance of stock for Heine
acquisition 22,300 1,100 43,287 65,587
Exercise and purchase of option
rights related to subordinated
debentures, net 1,796 180 (47,914) 565 31,065 (16,669)
Issuance of 3-for-2 stock split 42,028 4,203 (4,203) --
Purchase of treasury stock (313) (19,135) (19,135)
Cash dividends on common stock (42,837) (42,837)
Net unrealized gains on investments 3,219 3,219
Currency translation adjustments (5,192) (5,192)
Issuance of restricted shares, net 96 10 14,360 352 19,455 (5,029) 28,796
Other 46 4 1,235 89 4,559 5,798
- ------------------------------------------------------------------------------------------------------------------------------------
Balance September 30, 1997 126,231 12,623 91,207 1,757,536 (200) (11,070) 3,925 1,854,221
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 500,450 500,450
Retirement of stock (205) (20) (12,580) 205 12,600 --
Issuance of 2-for-1 stock split 126,357 12,636 (12,636) --
Purchase of stock (1,279) (129) (39,522) (31) (2,941) (42,592)
Cash dividends on common stock (50,515) (50,515)
Market value of interest rate swaps (5,638) (5,638)
Net unrealized losses on investments (17,647) (17,647)
Currency translation adjustments (14,580) (14,580)
Issuance of restricted shares, net 397 40 37,773 (3) (116) 1,665 39,362
Other 241 24 16,155 29 1,527 17,706
---------------------------------------------------------------------------------------------------------------------------------
Balance September 30, 1998 251,742 $25,174 $93,033 $2,194,835 -- -- $(32,275) $2,280,767
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
For the years ended September 30,
1998 1997 1996
.......................................................................................................
NET INCOME $500,450 $434,063 $314,730
Adjustments to reconcile net income to
net cash provided by operating activities
Increase in receivables, prepaid expenses and other (15,711) (106,024) (33,405)
Increase in deferred sales commissions (109,376) (154,689) (40,080)
Increase in other current liabilities 54,031 22,370 3,315
Increase in income taxes payable 35,411 4,235 19,452
Increase in commissions payable 7,049 18,058 6,787
Increase in accrued compensation and benefits 37,728 102,171 41,328
Depreciation and amortization 191,374 123,908 64,728
Gains on disposition of assets (7,293) (15,563) (17,272)
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 693,663 428,529 359,583
- --------------------------------------------------------------------------------------------------------
Purchase of investments (494,495) (110,019) (70,768)
Liquidation of investments 88,310 98,826 107,287
Purchase of banking/finance investments (23,863) (27,120) (60,936)
Liquidation of banking/finance investments 26,277 28,376 59,316
Proceeds from securitization of
banking/finance loans receivable 131,362 -- --
Collections net of originations of
banking/finance loans receivable 5,930 50,215 104,132
Purchase of property and equipment (162,181) (82,973) (64,419)
Proceeds from sale of property 14,517 -- --
Acquisition of assets and liabilities of
Heine Securities Corporation (64,333) (550,742) --
- --------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (478,476) (593,437) 74,612
- --------------------------------------------------------------------------------------------------------
Decrease in bank deposits (10,623) (32,814) (38,155)
Exercise of common stock options 2,891 1,878 1,219
Dividends paid on common stock (49,274) (40,387) (34,650)
Purchase of stock (42,592) (19,135) (53,413)
Issuance of debt 168,927 416,410 134,377
Payments on debt (171,214) (128,807) (203,083)
Purchase of option rights from
subordinated debenture holders -- (91,685) --
- --------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (101,885) 105,460 (193,705)
- --------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 113,302 (59,448) 240,490
Cash and cash equivalents, beginning of year 442,741 502,189 261,699
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $556,043 $442,741 $502,189
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for:
Interest, including banking/finance group interest $40,801 $42,154 $36,619
Income taxes $104,306 $172,906 $122,486
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Value of common stock issued for the Acquisition -- $65,587 --
Value of common stock issued for redemption of debentures -- $75,015 --
Value of common stock issued in other transactions $37,697 $31,954 $18,667
The accompanying notes are an integral part of these consolidated financial
statements.
Notes to Consolidated Financial Statements
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Franklin Resources, Inc. and its consolidated subsidiaries (the "Company")
derive substantially all of their revenues and net income from providing
investment management, administration, distribution and related services to the
Franklin, Templeton and Mutual Series funds, institutional accounts and other
investment products (the "Franklin Templeton Group") that operate in the United
States, Canada, Europe and other international markets under various rules and
regulations set forth by the Securities and Exchange Commission, individual
state agencies and foreign governments. Services to the Franklin Templeton Group
are provided under contracts that set forth the fees to be charged for these
services. The majority of these contracts are subject to periodic review and
approval by each fund's Board of Directors/Trustees and shareholders. Currently,
no fund's revenues represent more than 10% of total revenues. Company revenues
are largely dependent on the total value and composition of assets under
management, which include domestic and international equity and debt portfolios.
Accordingly, fluctuations in financial markets and in the composition of assets
under management impact the Company's revenues and operating results.
Basis of Presentation.
- ----------------------
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles which require the use of estimates made by the
Company's management. Actual amounts may differ from these estimates. Certain
1996 and 1997 amounts have been reclassified to conform to 1998 presentation.
The consolidated financial statements include the accounts of Franklin
Resources, Inc. and its majority-owned subsidiaries. All material inter-company
accounts and transactions have been eliminated except the inter-company payable
from the banking/finance group to the parent to fund auto and credit card loans.
Operating revenues of the banking/finance group are included in Other net and
are presented net of related interest expense and the provision for loan losses.
Accordingly, reported interest expense excludes interest expense attributable to
the banking/finance group.
Cash and Cash Equivalents include cash on hand, demand deposits with banks, debt
instruments with original maturities of three months or less and other highly
liquid investments, including money market funds, which are readily convertible
into cash. Due to the relatively short-term nature of these instruments, the
carrying value approximates fair value.
Investment Securities, available-for-sale are carried at fair value. Fair values
for investments in the Franklin Templeton Group 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 a
separate component of stockholders' equity until realized.
Derivatives.
- ------------
The Company does not hold or issue derivative financial instruments for trading
purposes. The Company enters into interest-rate swap agreements to reduce
variable interest rate exposure with respect to its commercial paper. Under
these agreements the Company agrees to exchange, at specified intervals, the
difference between fixed- and variable-interest amounts calculated by reference
to an agreed-upon notional principal amount. The interest-rate differential
between the fixed pay-rate and the variable receive-rate is reflected as an
adjustment to interest expense over the life of the swaps.
At September 30, 1998 the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This standard requires that the Company recognize derivative
instruments at fair value in its financial statements. As a result, on September
30, 1998 the Company recognized a net interest rate swap liability of $5.6
million, estimated using the discounted value of estimated future cash flows.
Unrealized gains and losses on these instruments are recorded net of tax as a
separate component of stockholders' equity. These unrealized gains and losses
are recognized only on early termination of the agreements. The Company has not,
and does not intend to, terminate these agreements prior to their normal
expiration.
Loans Receivable.
- ------------------
Interest on auto installment loans is accrued principally using the rule of 78s
method, which approximates the interest method. Interest on all other loans is
accrued using the simple interest method. An allowance for loan losses is
established monthly based on historical experience, including delinquency and
loss trends. A loan is charged to the allowance when it is deemed to be
uncollectible, taking into consideration the value of the collateral, the
financial condition of the borrower and other factors. Recoveries on loans
previously charged off as uncollectible are credited to the allowance for loan
losses.
Deferred Sales Commissions.
- --------------------------
Sales commissions paid to financial intermediaries in connection with the sale
of shares of the Franklin Templeton Group sold without a front-end sales charge
are capitalized and amortized over periods not exceeding four years -- the
periods in which management estimates that they will be recovered from
distribution plan payments and from contingent deferred sales charges.
Property and Equipment are recorded at cost and are depreciated on the
straight-line basis over their estimated useful lives. Expenditures for repairs
and maintenance are charged to expense when incurred. Leasehold improvements are
amortized on the straight-line basis over their estimated useful lives or the
lease term, whichever is shorter.
Intangible Assets, consisting principally of the estimated value of mutual fund
management contracts and goodwill resulting from the acquisitions of the assets
of Templeton, Galbraith & Hansberger Ltd. and Heine Securities Corporation, are
being amortized on a straight-line basis over various lives ranging from 5 to 40
years. The Company has evaluated the potential impairment of its intangible
assets on the basis of the expected future undiscounted operating cash flows
without interest charges to be derived from these assets in relation to the
Company's carrying values and has determined that there is no impairment. At
some future period, if such evaluations indicate that the future undiscounted
cash flows without interest charges are not sufficient to recover the carrying
value of such assets, the assets will be adjusted to their fair values.
Recognition of Revenues.
- -----------------------
Investment management fees, shareholder servicing fees, investment income and
distribution fees are all recognized as earned. Underwriting commissions related
to the sale of the shares of the Franklin Templeton Group are recorded on the
trade date.
Advertising and Promotion.
- ---------------------------
Costs of advertising and promotion are expensed as the advertising appears in
the media.
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 a separate component of stockholders' equity. Foreign
currency transaction gains and losses are reflected in income currently.
Stock Splits.
- ------------
All common shares and per share amounts have been adjusted to give retroactive
effect to a three-for-two stock split declared December 1996 and a two-for-one
stock split declared December 1997. Stockholders' equity as of September 30,
1997 and 1996 has not been restated.
Dividends.
- ---------
During the years ended September 30, 1998, 1997 and 1996, the Company declared
dividends to common stockholders of $0.20, $0.17 and $0.15, respectively.
Earnings per Share.
- -------------------
During the year ended September 30, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("FAS 128"). FAS 128
requires companies to present basic and diluted earnings per share ("EPS"),
instead of primary and fully diluted EPS which were formerly required. The new
standard also makes certain modifications to EPS calculations. Under FAS 128,
diluted EPS amounts are computed by reflecting the potential impact of stock
options and restricted stock awards. The impact on previously reported EPS was
not material.
The weighted average number of shares and common stock equivalents used in
computing EPS in 1998, 1997 and 1996 were (in thousands) 252,723, 251,881 and
241,370 for basic and 252,941, 253,466 and 251,283 for diluted, respectively.
Stock-based Compensation.
- --------------------------
As allowed under the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), the Company has
elected to apply Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock-based plans. Accordingly, no compensation costs are recognized with
respect to stock options granted, nor with respect to shares issued under the
Employee Stock Investment Plan. Compensation expense is recognized for the
matching contribution that the Company may elect to make in connection with the
Employee Stock Investment Plan over the eighteen-month holding period and for
the full cost of restricted stock grants in the year that they are earned.
NOTE 2 ACQUISITION
On November 1, 1996, the Company acquired the assets and liabilities of Heine
Securities Corporation ("Heine") (the "Acquisition"), the former investment
advisor to what is now known as Franklin Mutual Series Fund Inc., other funds
and private accounts ("Mutual"). One of the Company's subsidiaries, Franklin
Mutual Advisers, Inc., now serves as the investment adviser to Mutual. The
transaction had a base purchase price of approximately $616 million. Heine
received $551 million in cash and 3.3 million shares of common stock (after the
effects of the stock splits paid January 15, 1997 and 1998). The Acquisition has
been accounted for using the purchase method of accounting..
In addition to the base purchase price, the purchase agreement, as amended, also
provides for contingent payments to Heine ranging from $96.25 million to $192.5
million under certain conditions if certain agreed-upon growth targets are met.
Agreed-upon growth targets range from 12.5% to 17.5% of management fee revenues
from Mutual over a five-year period from the date of the Acquisition. Payments
are pro-rated based upon the upper and lower range of the targets. The first
contingent payment of $64.2 million related to these agreed-upon growth targets
was made in the third quarter of fiscal 1998 and was accounted for as goodwill
related to additional purchase price of the Acquisition. Other payments are due
in fiscal 2000 and 2001 if growth targets are met. These payments are not
expected to have a material impact on the Company's financial condition or
results of operations. The first payment was funded from cash on hand and
existing credit facilities.
NOTE 3 INVESTMENT SECURITIES
Investment securities, available-for-sale at September 30, 1998 and 1997,
consisted of the following:
Gross
Amortized Unrealized Fair
in thousands Cost Gains Losses Value
......................................................................................................................
1998
Franklin Templeton Group $126,188 $7,568 $(12,522) $121,234
Debt (primarily U.S. Government) 367,894 220 (81) 368,033
Equities 2,130 809 (294) 2,645
- ----------------------------------------------------------------------------------------------------------------------
$496,212 $8,597 $(12,897) $491,912
- ----------------------------------------------------------------------------------------------------------------------
Gross
Amortized Unrealized Fair
in thousands Cost Gains Losses Value
......................................................................................................................
1997
Franklin Templeton Group $151,726 $21,552 -- $173,278
Debt (primarily U.S. Government) 33,176 341 $(134) 33,383
Equities 5,904 1,420 (79) 7,245
- ----------------------------------------------------------------------------------------------------------------------
$190,806 $23,313 $(213) $213,906
- ----------------------------------------------------------------------------------------------------------------------
At September 30, 1998, maturities of debt securities were as follows:
Amortized Fair
in thousands Cost Value
................................................................................
Due in one year or less $356,527 $356,647
Due after one year through three years 4,892 4,903
Due after three years 6,475 6,483
- --------------------------------------------------------------------------------
$367,894 $368,033
- --------------------------------------------------------------------------------
NOTE 4 BANKING/FINANCE GROUP LOANS AND ALLOWANCE FOR LOAN LOSSES
Activity of the banking/finance group's loans and allowance for loan losses for
the years ended September 30, 1998 and 1997 was as follows:
Net
Charge Loans
in thousands 1997 Additions Paydowns Offs Securitized 1998
....................................................................................................................................
Auto $239,355 $124,807 $(112,317) $(3,391) $(135,854) $112,600
Credit Card 78,248 4,102 (30,100) (799) 51,451
Other 3,992 8,380 (2,901) (2) 9,469
Unearned fees and discounts (16,847) (8,800) 19,582 (6,065)
- ------------------------------------------------------------------------------------------------------------------------------------
304,748 128,489 (125,736) (4,192) (135,854) 167,455
Allowance for loan losses (8,560) 408 4,192 1,579 (2,381)
- ------------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net $296,188 $128,897 $(125,736) -- $(134,275) $165,074
- ------------------------------------------------------------------------------------------------------------------------------------
Net
Charge Loans
in thousands 1996 Additions Paydowns Offs Securitized 1997
....................................................................................................................................
Auto $284,141 $92,708 $(131,058) $(6,436) $239,355
Credit Card 87,527 21,622 (29,974) (927) 78,248
Other 6,387 506 (2,736) (165) 3,992
Unearned fees and discounts (23,092) (7,400) 13,645 (16,847)
- ------------------------------------------------------------------------------------------------------------------------------------
354,963 107,436 (150,123) (7,528) 304,748
Allowance for loan losses (9,564) (6,524) 7,528 (8,560)
- ------------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net $345,399 $100,912 $(150,123) -- $296,188
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended September 30, 1998, 1997 and 1996, the interest expense of
the banking/finance group included in other operating revenues, net was $17.8
million, $21.2 million and $25.6 million, respectively.
At September 30, 1998 and 1997, the carrying value of loans receivable
approximated fair value. The fair value is estimated using interest rates that
consider the current credit and interest rate risk inherent in the loans and
current economic and lending conditions.
At September 30, 1998 and 1997, the carrying values of deposits approximated
fair value. The fair values of the banking subsidiary's demand deposit at the
reporting date are estimated using interest rates currently offered on demand
deposits with similar remaining maturities.
In September 1998, the Company sold auto loans receivable with a net book value
of $134.3 million to a securitization trust. The sale proceeds of this
securitization were $131.4 million. Gain from the sale of these assets, computed
as the difference between the sale proceeds, net of transaction costs, and the
Company's carrying value of the receivables, plus the present value of the
estimated excess future cash flows to be received by the Company over the life
of the securitization, was not material. Significant assumptions used in
determining the gain were an excess cash flow discount rate of 12% and a
cumulative credit loss rate of 2.02%.
NOTE 5 PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at September 30, 1998 and
1997:
Useful Lives
in thousands In Years 1998 1997
................................................................................
Furniture and equipment 3-5 $301,857 $183,648
Premises and leasehold improvements 5-35 155,206 126,561
Land -- 24,811 27,984
- --------------------------------------------------------------------------------
481,874 338,193
Less: Accumulated depreciation
and amortization (132,645) (96,969)
- --------------------------------------------------------------------------------
$349,229 $241,224
- --------------------------------------------------------------------------------
NOTE 6 INTANGIBLE ASSETS
The following is a summary of intangible assets at September 30, 1998 and 1997:
Amortization
in thousands Period In Years 1998 1997
................................................................................
Goodwill 40 $842,206 $775,831
Management contracts 40 524,962 524,962
Other intangibles 5-15 31,546 31,546
- --------------------------------------------------------------------------------
1,398,714 1,332,339
Accumulated amortization (145,001) (108,320)
- --------------------------------------------------------------------------------
$1,253,713 $1,224,019
- --------------------------------------------------------------------------------
NOTE 7 SEGMENT INFORMATION
The Company conducts operations in five principal geographic areas of the world:
the United States, Canada, the Bahamas, Europe and Asia/Pacific. Revenues by
geographic area include fees and commissions charged to customers and fees
charged to affiliates. Identifiable assets are those assets used exclusively in
the operations of each geographic area.
Information is summarized below:
(in thousands) 1998 1997 1996
................................................................................
OPERATING REVENUES
United States $1,814,458 $1,665,076 $1,140,900
Canada 228,834 170,659 100,167
Bahamas 305,612 253,398 175,470
Europe 135,026 87,346 45,494
Asia/Pacific 159,391 177,588 113,900
Eliminations (66,049) (190,792) (56,458)
- --------------------------------------------------------------------------------
Total $2,577,272 $2,163,275 $1,519,473
- --------------------------------------------------------------------------------
OPERATING INCOME:
United States $258,193 $249,700 $193,821
Canada 68,077 49,374 29,131
Bahamas 225,980 175,518 115,826
Europe 2,071 1,629 742
Asia/Pacific 87,775 115,239 77,588
- --------------------------------------------------------------------------------
Total $642,096 $591,460 $417,108
- -------------------------------------------------------------------------------
IDENTIFIABLE ASSETS:
United States $1,321,179 $1,302,166 $848,156
Canada 117,878 122,335 69,547
Bahamas 440,882 449,112 432,088
Europe 33,133 32,028 24,912
Asia/Pacific 160,918 181,191 154,503
Corporate assets 1,406,059 1,008,368 844,961
- --------------------------------------------------------------------------------
Total $3,480,049 $3,095,200 $2,374,167
- --------------------------------------------------------------------------------
Summarized below are the business segments:
in thousands Operating
Identifiable Income/
1998 Assets Revenues (Loss)
................................................................................
Investment management $1,863,223 $2,558,449 $637,444
Banking/finance 210,767 18,823 4,652
- --------------------------------------------------------------------------------
Company totals $2,073,990 $2,577,272 $642,096
- --------------------------------------------------------------------------------
1997
................................................................................
Investment management $1,754,796 $2,154,658 $596,562
Banking/finance 332,036 8,617 (5,102)
- --------------------------------------------------------------------------------
Company totals $2,086,832 $2,163,275 $591,460
- --------------------------------------------------------------------------------
1996
................................................................................
Investment management $1,135,608 $1,516,294 $428,198
Banking/finance 393,598 3,179 (11,090)
- --------------------------------------------------------------------------------
Company totals $1,529,206 $1,519,473 $417,108
- --------------------------------------------------------------------------------
The investment management segment's assets are primarily intangibles and
receivables from, and investments in, the Franklin Templeton Group. The
banking/finance segment's assets are primarily investment securities and
consumer loans.
NOTE 8 DEBT
Debt at September 30, 1998 and 1997 was as follows:
1998 Weighted
in thousands Average Interest Rate 1998 1997
................................................................................
SHORT-TERM DEBT
Commercial paper 5.47% $59,300 $51,500
Notes payable 6.03% 50,000 60,000
Other -- 8,656 6,872
- -------------------------------------------------------------------------------
Total short-term debt $117,956 $118,372
- --------------------------------------------------------------------------------
1998 Weighted
in thousands Average Interest Rate 1998 1997
................................................................................
LONG-TERM DEBT
Commercial paper issued under
long-term borrowing agreements 5.47% $297,910 $298,245
Notes payable 6.26% 160,000 160,000
Other 36,549 34,999
- -------------------------------------------------------------------------------
Total long-term debt $494,459 $493,244
- --------------------------------------------------------------------------------
As of September 30, 1998, maturities of long-term debt are as follows:
in thousands
1999 $304,782
2000 106,872
2001 66,872
2002 6,871
2003 6,871
Thereafter 2,191
- --------------------------------------------------------------------------------
$494,459
---------
The Company has a revolving credit agreement with a group of commercial banks
that will allow it, at its option, to refinance commercial paper borrowings
through May 2003. In accordance with the Company's intention and ability to
refinance these obligations on a long-term basis, $297.9 million of commercial
paper at September 30, 1998 has been classified long-term. The credit agreements
include various restrictive covenants, including: a capitalization ratio,
interest coverage ratio, minimum working capital and limitation on additional
debt. The Company was in compliance with all covenants as of September 30, 1998.
At September 30, 1998, amounts available for issuance under the Company's
commercial paper program were $140.7 million.
At September 30, 1998, the Company had interest-rate swap agreements maturing
through October 2000, which effectively fixed interest rates on $295 million of
commercial paper. The Company's primary objective of holding these swap
agreements is to hedge against unfavorable movement in interest rates on its
commercial paper. These financial instruments are placed with major financial
institutions. The creditworthiness of the counterparties is subject to
continuous review and full performance is anticipated. Any potential loss from
failure of the counterparties to perform is deemed to be immaterial.
Notes payable represent the Company's participation in a medium-term note
program. Notes totaling $50 million and $100 million were issued during 1998 and
1997, respectively, with interest rates ranging from 5.96% to 6.19%. These notes
mature at various times from 1999 through 2001. Also during 1998, $60 million of
notes with interest at rates from 6.53% to 6.63% were retired at maturity. At
September 30, 1998, amounts available for issuance under the Company's
medium-term note program were $350 million.
At September 30, 1998 and 1997, the fair value of long-term debt approximated
its carrying value. The fair values of long-term debt are estimated using
interest rates currently offered to the Company for debt with similar remaining
maturities.
Note 9 Investment Income
in thousands 1998 1997 1996
................................................................................
Dividends $16,540 $14,141 $15,683
Interest 29,969 16,105 16,787
Realized gains, net 8,271 15,563 17,271
Foreign exchange gains/(losses), net (978) 2,245 (394)
Other 2,921 1,532 1,111
- --------------------------------------------------------------------------------
$56,723 $49,586 $50,458
- --------------------------------------------------------------------------------
Substantially all of the Company's dividend income was generated by investments
in the Franklin Templeton Group.
NOTE 10 TAXES ON INCOME
Taxes on income for the years ended September 30, 1998, 1997 and 1996 were
comprised of the following:
in thousands 1998 1997 1996
................................................................................
Current
Federal $87,148 $122,361 $98,803
State 30,903 33,874 23,118
Foreign 45,797 26,637 25,558
Deferred expense (benefit) 11,986 (1,222) (5,979)
- ------------------------------------------------------------------------------
Total provision $175,834 $181,650 $141,500
- -------------------------------------------------------------------------------
Included in income before taxes was $387.5 million, $358.9 million and $225.7
million, of foreign income for the years ended September 30, 1998, 1997 and
1996, respectively.
The major components of the net deferred tax liability/asset as of September 30,
1998 and 1997 were as follows:
in thousands 1998 1997
................................................................................
DEFERRED TAX ASSETS
State taxes $5,471 $6,844
Loan loss reserves 1,376 3,850
Deferred compensation 5,246 3,442
Restricted stock compensation plan 38,877 34,933
Net operating loss carryforwards 40,408 27,510
Other 13,352 10,230
- --------------------------------------------------------------------------------
Total deferred tax assets 104,730 86,809
- --------------------------------------------------------------------------------
Valuation allowance for net operating
loss carryforwards (40,408) (27,510)
- --------------------------------------------------------------------------------
Deferred tax assets, net of valuation allowance 64,322 59,299
DEFERRED TAX LIABILITIES
Partnership earnings 4,009 4,774
Net unrealized (losses)/gains on securities (92) 8,967
Depreciation on fixed assets 13,261 11,384
Prepaid expenses 16,333 15,419
Goodwill 20,850 9,297
Deferred Commissions 12,014 --
Other 6,976 6,664
- --------------------------------------------------------------------------------
Total deferred tax liabilities 73,351 56,505
- --------------------------------------------------------------------------------
Net deferred tax (liability) asset $(9,029) $2,794
- --------------------------------------------------------------------------------
At September 30, 1998, there were approximately $44 million of foreign net
operating loss carryforwards of which approximately $28 million expire between
2000 and 2006 and the remaining have an indefinite life. In addition, there are
approximately $434 million in state net operating loss carryforwards that expire
between 2006 and 2018. A valuation allowance has been recognized to offset the
related deferred tax assets due to the uncertainty of realizing the benefit of
the loss carryforwards.
A substantial portion of the undistributed earnings of the Company's foreign
subsidiaries has been reinvested for an indefinite period of time. Accordingly,
no U.S. federal or state income taxes have been provided thereon. At September
30, 1998, the cumulative amount of reinvested income for which no U.S. taxes
have been provided was approximately $874 million. Determination of the amount
of the unrecognized deferred U.S. income tax liability related to such
reinvested income is not practicable because of the numerous assumptions
associated with this hypothetical calculation; however, foreign tax credits
would be available to reduce some portion of this amount.
The following is a reconciliation between the amount of tax expense at the
federal statutory rate and taxes on income as reflected in operations for the
years ended September 30, 1998, 1997 and 1996, respectively:
in thousands 1998 1997 1996
................................................................................
U.S. federal statutory rate 35.0% 35.0% 35.0%
Federal taxes at statutory rate $236,699 $215,500 $159,786
State taxes, net of federal tax effect 20,973 21,099 18,167
Foreign earnings subject to reduced tax
rates for which no U.S. tax is provided (78,826) (69,973) (43,159)
Other (3,012) 15,024 6,706
- --------------------------------------------------------------------------------
Actual tax provision $175,834 $181,650 $141,500
- --------------------------------------------------------------------------------
Effective tax rate 26.0% 29.5% 31.0%
- --------------------------------------------------------------------------------
NOTE 11 COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under long-term operating leases
expiring at various dates through fiscal year 2017. Lease expense aggregated
$37.2 million, $27.6 million and $24.3 million for the fiscal years ended
September 30, 1998, 1997 and 1996, respectively.
At September 30, 1998, the Company's banking/finance group had commitments to
extend credit aggregating $372.3 million, principally under its credit card
lines.
The Company is involved in various claims and legal proceedings of a nature
considered normal to its business. While it is not feasible to predict or
determine the final outcome of these proceedings, management does not believe
that they should result in a materially adverse effect on the Company's
financial position, results of operations or liquidity.
NOTE 12 EMPLOYEE STOCK AWARD AND OPTION PLANS
The Company sponsors a Universal Stock Plan and an Annual Incentive Compensation
Plan ("AICP"), which were approved by the stockholders in 1994. Under the terms
of these plans, certain eligible employees may receive stock awards, principally
restricted stock which vests over three years and stock options. Under the terms
of the AICP, restricted stock awards are based on the Company's pretax profits.
The Universal Stock Plan provides for the issuance of up to 6 million shares of
the Company's stock for various stock-related awards, including those related to
the AICP. As of September 30, 1998 and 1997, the Company had approximately
641,476 and 1,386,010 shares, respectively, remaining available for grant under
the Universal Stock Plan, including those related to the AICP. In addition to
the annual award of stock under the AICP, the Company may award options and
other forms of stock-based compensation to certain employees, in accordance with
the terms of the Universal Stock Plan. Currently, only restricted stock and
stock options have been granted. The Compensation Committee of the Board of
Directors determines the terms and conditions of all stock-based compensation.
Total compensation cost recognized for stock-based compensation during 1998,
1997 and 1996 was $30.3 million, $42.2 million and $27.8 million, respectively.
Information regarding the stock options is as follows:
shares in thousands 1998 1997 1996
......................................................................................................................
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 333 $15.21 564 $10.71 649 $9.06
Granted 73 $47.16 78 $22.15 73 $18.81
Exercised (213) $13.25 (309) $8.75 (158) $7.65
Outstanding, end of year 193 $29.32 333 $15.21 564 $10.71
- --------------------------------------------------------------------------------------------------------------------
Exercisable, end of year 119 $23.65 140 $14.13 103 $14.19
- ---------------------------------------------------------------------------------------------------------------------
Range of exercise prices at September 30, 1998-- $4.57 to $47.16.
Weighted-average remaining contractual life -- 4 years.
All share and price information above has been adjusted to give retroactive
effect to a three-for-two stock split declared December 1996, and a two-for-one
stock split declared December 1997.
Had compensation costs for the Company's stock options granted after September
30, 1995 been determined in accordance with the provisions of FAS 123, the
Company's net income and earnings per share would not have been materially
affected because the number of such stock options is insignificant.
NOTE 13 EMPLOYEE STOCK INVESTMENT PLAN
In January 1998, the Company's stockholders approved a qualified,
non-compensatory Employee Stock Investment Plan ("ESIP"), which allows
participants who meet certain eligibility criteria to purchase shares of the
Company's common stock at 90% of its market value on certain defined dates. The
ESIP is open to substantially all employees of U.S. subsidiaries and certain
employees of non-U.S. subsidiaries. Participants made their first purchase of
stock under this plan effective as of July 31, 1998. The Company's stockholders
have approved 4,000,000 (post-split) shares of common stock for issuance under
the ESIP. At September 30, 1998, 87,309 shares had been purchased under the ESIP
at a price of $39.21.
In connection with the ESIP, the Company, at its sole discretion, can provide
matching grants to participants in the ESIP of whole or partial shares of the
Company's common stock. While reserving the right to change such determination,
the Company has initially indicated that it will provide one half-share for each
share held by a participant for a minimum holding period of eighteen months.
NOTE 14 QUARTERLY INFORMATION (UNAUDITED)
Quarter
in thousands First Second Third Fourth
......................................................................................................................
1998
Revenues $632,399 $673,691 $672,596 $598,586
Net income $130,515 $126,669 $131,013 $112,253
Common stock price per share:
High $51 7/8 $57 1/4 $57 7/8 $54 7/8
Low $39 3/4 $38 $47 9/16 $25 3/4
Earnings per share
Basic $0.52 $0.50 $0.52 $0.44
Diluted $0.52 $0.50 $0.52 $0.44
1997
Revenues $437,625 $519,196 $572,547 $633,907
Net income $96,229 $101,411 $111,188 $125,235
Common stock price per share:
High $24 7/8 $32 9/16 $37 1/8 $47 1/4
Low $21 9/16 $22 1/8 $25 15/16 $36 1/4
Earnings per share
Basic $0.38 $0.40 $0.44 $0.50
Diluted $0.38 $0.40 $0.44 $0.49
1996
Revenues $341,755 $393,199 $394,762 $389,757
Net income $73,951 $75,212 $81,066 $84,501
Common stock price per share:
High $19 3/8 $19 11/16 $20 9/16 $22 7/8
Low $15 9/16 $15 7/16 $17 7/8 $17 1/4
Earnings per share
Basic $0.30 $0.31 $0.34 $0.35
Diluted $0.30 $0.30 $0.32 $0.33
The Company's common stock is traded on the New York Stock Exchange ("NYSE") and
the Pacific Exchange under the ticker symbol BEN and the London Stock Exchange
under the ticker symbol FKR. On September 30, 1998, the closing price of the
Company's common stock on the NYSE was $29 7/8 per share. At November 1, 1998,
there were approximately 4,400 stockholders of record.
NOTE 15 NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130") establishes the disclosure requirements for reporting
comprehensive income in an entity's annual and interim financial statements.
Comprehensive income includes such items as foreign currency translation
adjustments and unrealized gains and losses on securities currently reported as
components of stockholders' equity. FAS 130 will require the Company to classify
items of comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately in the
equity section of the consolidated balance sheet. The Company is currently
considering the type of presentation it will adopt to comply with FAS 130. The
Company will comply with the requirements in the year ending September 30, 1999.
Statement of Financial Accounting Standards No. 131, "Disclosures of Segment
Information" establishes standards for the way a public enterprise reports
information about operating segments in annual financial statements and requires
that these enterprises report selected information about operating segments in
interim financial statements. The Company has not yet determined the effect, if
any, of this pronouncement on the consolidated financial statements. The Company
will comply with the requirements in the year ending September 30, 1999.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Executive Officers of Registrant
- --------------------------------
The following information on the executive officers of the Company is given as
of December 1, 1998:
Name Age Principal Occupation for the Past Five Years
- --------------------------------------------------------------------------------
Jennifer J. Bolt 34 Vice President of FRI since June 1994;
Executive Vice President, Franklin Bank
from August 1993 to October 1998; President
and Director, Franklin Capital Corporation,
since November 1993; employed by FRI in
various other capacities for more than the
past five (5) years.
Harmon E. Burns 53 Executive Vice President and Director of
FRI; Executive Vice President and Director
of Franklin/Templeton Distributors, Inc.
and Franklin Templeton Services, Inc.;
Executive Vice President of Franklin
Advisers, Inc.; Director, Templeton
Worldwide, Inc., Franklin/Templeton
Investor Services, Inc. and Franklin Mutual
Advisers, Inc.; officer and/or director, as
the case may be, of most other principal
U.S. subsidiaries of FRI; officer and/or
director or trustee, as the case may be, of
53 of the investment companies in the
Franklin Templeton Group of Funds.
Martin L. Flanagan 38 Senior Vice President and Chief Financial
Officer of FRI; President of Franklin
Templeton Services, Inc., Executive Vice
President and Chief Financial Officer of
Franklin Advisers, Inc., Executive Vice
President and Director of Templeton
Worldwide, Inc.; officer of most of the
subsidiaries of FRI since March 1993; and
officer and/or director, trustee or
managing partner, as the case may be, of
most other principal U.S. subsidiaries of
FRI; and of 53 of the investment companies
in the Franklin Templeton Group of Funds.
Prior to 1993, employed by various
Templeton entities.
Deborah R. Gatzek 49 Senior Vice President of FRI since March
1990; General Counsel since January 1996;
Vice President of FRI from, 1986 to 1990;
Senior Vice President, Franklin/Templeton
Distributors, Inc. and Franklin Templeton
Services, Inc.; Executive Vice President,
Franklin Advisers, Inc.; officer of most
other principal U.S. subsidiaries of FRI;
and officer of 53 of the investment
companies in the Franklin Templeton Group
of Funds.
Donna S. Ikeda 42 Vice President since October 1993;
re-joined FRI in August 1993. Previously
employed from 1982 to 1990 as Director of
Human Resources and also held position as
Manager/Assistant Vice President of
Shareholder Services, Retirement Plan
Phone Service and Customer New Accounts.
From 1990 until August 1993,
Vice President, Human Resources for G.T.
Capital Management, Inc. and G.T. Global
Financial Services, Inc., mutual fund
management and financial services companies.
Charles B. Johnson 65 President, Chief Executive Officer and
Director of FRI; Chairman and Director,
Franklin Advisers, Inc. and
Franklin/Templeton Distributors, Inc.;
Director, Templeton Worldwide, Inc.,
Franklin Bank, Franklin/Templeton Investor
Services, Inc. and Franklin Mutual
Advisers, Inc.; officer and/or director, as
the case may be, of most other principal
U.S. subsidiaries of FRI; officer and/or
director or trustee, as the case may be, of
50 of the investment companies in the
Franklin Templeton Group of Funds.
Charles E. Johnson 42 Senior Vice President and Director of FRI;
President and Director, Templeton
Worldwide, Inc.; President, Franklin/
Templeton Distributors Inc.; Chairman and
Director, Franklin Agency, Inc. and
Templeton Investment Counsel, Inc.;
Director, Franklin Mutual Advisers, Inc.;
Vice President, Franklin Advisers, Inc.;
officer and/or director, as the case may
be, of other U.S. and international
subsidiaries of FRI; officer and/or
director or trustee, as the case may be, of
34 of the investment companies in the
Franklin Templeton Group of Funds.
Gregory E. Johnson 37 Vice President of FRI since June 1994;
President, Franklin/Templeton Distributors,
Inc. since September 1994; Vice President,
Franklin Advisers, Inc. Prior to that
time, Senior Vice President and Assistant
National Sales Manager, Franklin/Templeton
Distributors, Inc.; Employee of Franklin
Resources, Inc. and its subsidiaries in
administrative and portfolio management
capacities since January 1986; officer of
one investment company in the Franklin
Group of Funds.
Rupert H. Johnson, Jr. 58 Executive Vice President and Director of
FRI; Director and President, Franklin
Advisers, Inc.; Director and Executive Vice
President, Franklin/Templeton Distributors,
Inc.; Director, Franklin/Templeton Investor
Services, Inc., Templeton Worldwide, Inc.,
Franklin Bank and Franklin Mutual Advisers,
Inc.; officer and/or director or trustee,
as the case may be, of most other principal
U.S. subsidiaries of FRI and of 53 of the
investment companies in the Franklin
Templeton Group of Funds.
Gordon F. Jones 51 Vice President and Chief Information
Officer of FRI since March 1995. From
March 1990 to March 1995, Vice President of
Novell, Inc., a worldwide network systems
company; Vice President and Chief
Information Officer of Novell, Inc. from
March 1994 to March 1995.
Leslie M. Kratter 53 Vice President of FRI since March 1993 and
Secretary since March 1998. Employed by
FRI since January 1992. Secretary of
Franklin Advisers, Inc., Franklin/Templeton
Distributors, Inc., Templeton Worldwide,
Inc., and a number of FRI's subsidiaries.
Kenneth A. Lewis 37 Vice President, Corporate Controller of
FRI, Senior Vice President and Controller
of Templeton Worldwide, Inc., and an
officer of several other U.S. subsidiaries
of FRI. Prior to the Templeton
Acquisition, employed by various Templeton
entities.
William J. Lippman 73 Senior Vice President of FRI since March
1990; Director, Templeton Worldwide, Inc.;
and officer and/or director or trustee of
six of the investment companies in the
Franklin Group of Funds. Until June 1988,
President, Chief Executive Officer, and
Director of L.F. Rothschild Fund
Management, Inc., Director of L.F.
Rothschild Asset Management, Inc.,
Administrative Managing Director and
Director of L.F. Rothschild & Co.,
Incorporated.
Charles R. Sims 37 Treasurer of FRI and officer of various
subsidiaries of FRI. Employed by FRI since
1989. From August 1991 to October 1997,
Vice President and Chief Financial Officer
and from February 1992 to October 1997,
Director of Canadian operations.
Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Peter M. Sacerdote,
a director of the Company, is a brother-in-law of Charles B. Johnson and Rupert
H. Johnson, Jr., Charles E. Johnson is the son of Charles B. Johnson and the
nephew of Rupert H. Johnson, Jr. and Peter Sacerdote. Gregory E. Johnson is the
son of Charles B. Johnson, the nephew of Rupert H. Johnson, Jr. and Peter
Sacerdote and the brother of Jennifer Bolt and Charles E. Johnson. Jennifer Bolt
is the daughter of Charles B. Johnson, the niece of Rupert H. Johnson, Jr. and
Peter Sacerdote, and the sister of Charles E. Johnson and Gregory E. Johnson.
Leslie M. Kratter is the spouse of Deborah R. Gatzek.
Information regarding the biographies of the Directors of FRI and Compliance
with Section 16(a) of the Exchange Act is incorporated by reference to the Proxy
Statement section entitled "Proposal 1: Election of Directors."
Item 11. Executive Compensation
Incorporated by reference to the Proxy Statement section entitled "Proposal 1:
Election of Directors."
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the Proxy Statement section entitled "Voting
Securities."
Item 13. Certain Relationships and Related Transactions
Incorporated by reference to the Proxy Statement section entitled "Proposal 1:
Election of Directors - Certain Relationships and Related Transactions."
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Please see the index in Item 8 for a list of the financial statements
filed as part of this report.
(2) Please see the index in Item 8 for a list of the financial statement
schedules filed as part of this report.
(3) The following exhibits are filed as part of this report:
(3)(i)(a) Registrant's Certificate of Incorporation, as filed November
28, 1969, incorporated by reference to Exhibit (3)(i) to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1994 (the "1994 Annual Report")
(3)(i)(b) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1, 1985, incorporated by
reference to Exhibit (3)(ii) to the 1994 Annual Report
(3)(i)(c) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1, 1987, incorporated by
reference to Exhibit (3)(iii) to the 1994 Annual Report
(3)(i)(d) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated by
reference to Exhibit (3)(iv) to the 1994 Annual Report
(3)(ii) Registrant's By-Laws are incorporated by reference to
Form 10 (File No. 06952), incorporated by reference to
Exhibit (3)(v) to the 1994 Annual Report
4 Indenture between the Registrant and The Chase Manhattan Bank (formerly
Chemical Bank), as trustee, dated as of May 19, 1994, incorporated by
reference to Exhibit 4 to the Company's Registration Statement on Form
S-3, filed on April 14, 1994
10.1 Representative Distribution Plan between Templeton Growth
Fund, Inc. and Franklin/Templeton Investor Services, Inc.
incorporated by reference to Exhibit 10.1 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 Exhibit 10.3 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 Exhibit 10.5 to
the 1993 Annual Report
10.4 Representative Management Agreement between Advisers and the Franklin
Group of Funds incorporated by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1992 (the "1992 Annual Report")
10.5 Representative Distribution 12b-1 Plan between Distributors and the
Franklin Group of Funds incorporated by reference to Exhibit 10.3 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 Exhibit 10.1 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 Exhibit 10.2 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 Exhibit 10.3
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 Exhibit 10.4 to the June 1995
Quarterly Report
10.12 Representative Dealer Agreement between Franklin/Templeton
Distributors, Inc. and Dealer, incorporated by reference to
Exhibit 10.5 to the June 1995 Quarterly Report
10.13 Representative Investment Management Agreement between
Templeton Investment Counsel, Inc. and Client (ERISA),
incorporated by reference to Exhibit 10.6 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 Exhibit 10.7 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 Exhibit 10.16 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 Exhibit
10.17 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 Exhibit 10.18 to the 1995 Annual Report
10.18 Representative Dealer Agreement between Franklin/Templeton
Distributors, Inc. and Dealer, incorporated by reference to
Exhibit 10.19 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 Exhibit 10.20 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
Exhibit 10.21 to the 1995 Annual Report
10.21 Representative Sub-Distribution Agreement between Templeton,
Galbraith & Hansberger Ltd. and Sub-Distributor, incorporated
by reference to Exhibit 10.22 to the 1995 Annual Report
10.22 Representative Non-Exclusive Underwriting Agreement between
Templeton Growth Fund, Inc. and Templeton Franklin Investment
Services (Asia) Limited, dated September 18, 1995, incorporated by
reference to Exhibit 10.23 to the 1995 Annual Report
10.23 Representative Shareholder Services Agreement between
Franklin/Templeton Investor Services, Inc. and Templeton
Franklin Investment Services (Asia) Limited, dated September 18, 1995,
incorporated by reference to Exhibit 10.24 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 Exhibit 2 to Registrant'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 Investor Services, Inc. and PFPC Inc.,
incorporated by reference to Exhibit 10.25 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 Exhibit 10.26 to the
1996 Annual Report
10.27 Representative Administration Agreement between Templeton
Growth Fund, Inc. and Franklin Templeton Services, Inc.,
incorporated by reference to Exhibit 10.27 to the 1996 Annual
Report
10.28 Representative Sample of Fund Administration Agreement with
Franklin Templeton Services, Inc., incorporated by reference
to Exhibit 10.28 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 Exhibit 10.29 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 Exhibit 10.30 to the 1996 Annual
Report
10.31 Representative Management Agreement between Franklin
Valuemark Funds and Franklin Mutual Advisers, Inc., incorporated by
reference to Exhibit 10.31 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
Exhibit 10.32 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 Exhibit 10.33 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 Exhibit 10.35
to the 1997 Annual Report
10.36 1998 Universal Stock Incentive Plan approved October 16, 1998 by the
Board of Directors, incorporated by reference to the Company's Proxy
Statement filed under cover of Schedule 14A on December 23, 1998 in
connection with its Annual Meeting of Stockholders to be 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
Exhibit 10.1 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 Exhibit 10.1 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.
10.40 Representative Investment Management Agreement between
Templeton Investment Counsel, Inc. and Client (NON-ERISA), as
amended.
12 Computation of Ratios of Earnings to Fixed Charges
21 List of Subsidiaries
23 Consent of Independent Accountants
27 Financial Data Schedule
* Compensatory Plan
(b)(1) Current Report on Form 8-K dated October 23, 1998 was filed on October
23, 1998 attaching Registrant's press release dated October 23, 1998
under Items 5 and 7.
(c) See Item 14(a)(3) above.
(d) No separate financial statements are required; schedules are included
in Item 8.
SIGNATURES
Pursuant to the requirements of Section 13 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 11, 1998 By /s/ Charles B. Johnson
----------------------
Charles B. Johnson, President
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 11, 1998 By /s/ Charles B. Johnson
----------------------
Charles B. Johnson, Chief
Executive Officer and Director
Date: December 11, 1998 By /s/ Harmon E. Burns
-------------------
Harmon E. Burns, Executive Vice
President and Director
Date: December 11, 1998 By /s/ Martin L. Flanagan
----------------------
Martin L. Flanagan, Senior Vice
President and Chief Financial Officer
Date: December 11, 1998 By /s/ F. Warren Hellman
---------------------
F. Warren Hellman, Director
Date: December 11, 1998 By /s/ Charles E. Johnson
----------------------
Charles E. Johnson, Senior Vice
President and Director
Date: December 11, 1998 By /s/ Rupert H. Johnson, Jr.
--------------------------
Rupert H. Johnson, Jr., Executive Vice
President and Director
Date: December 11, 1998 By /s/ Harry O. Kline
------------------
Harry O. Kline, Director
Date: December 11, 1998 By /s/ Kenneth A. Lewis
--------------------
Kenneth A. Lewis, Vice President
and Corporate Controller
Date: December 11, 1998 By /s/ James A. McCarthy
---------------------
James A. McCarthy, Director
Date: December 11, 1998 By /s/ Peter M. Sacerdote
----------------------
Peter M. Sacerdote, Director
Date: December 11, 1998 By /s/ Louis E. Woodworth
----------------------
Louis E. Woodworth, Director
ITEM
(3)(i)(a) Registrant's Certificate of Incorporation, as filed November
28, 1969, incorporated by reference to Exhibit (3)(i) to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1994 (the "1994 Annual Report")
(3)(i)(b) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1, 1985, incorporated by
reference to Exhibit (3)(ii) to the 1994 Annual Report
(3)(i)(c) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1, 1987, incorporated by
reference to Exhibit (3)(iii) to the 1994 Annual Report
(3)(i)(d) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated by
reference to Exhibit (3)(iv) to the 1994 Annual Report
(3)(ii) Registrant's By-Laws are incorporated by reference to
Form 10 (File No. 06952), incorporated by reference to
Exhibit (3)(v) to the 1994 Annual Report
4 Indenture between the Registrant and The Chase Manhattan Bank (formerly
Chemical Bank), as trustee, dated as of May 19, 1994, incorporated by
reference to Exhibit 4 to the Company's Registration Statement on Form
S-3, filed on April 14, 1994
10.1 Representative Distribution Plan between Templeton Growth
Fund, Inc. and Franklin/Templeton Investor Services, Inc.
incorporated by reference to Exhibit 10.1 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 Exhibit 10.3 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 Exhibit 10.5 to
the 1993 Annual Report
10.4 Representative Management Agreement between Advisers and the Franklin
Group of Funds incorporated by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1992 (the "1992 Annual Report")
10.5 Representative Distribution 12b-1 Plan between Distributors and the
Franklin Group of Funds incorporated by reference to Exhibit 10.3 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 Exhibit 10.1 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 Exhibit 10.2 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 Exhibit 10.3
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 Exhibit 10.4 to the June 1995
Quarterly Report
10.12 Representative Dealer Agreement between Franklin/Templeton
Distributors, Inc. and Dealer, incorporated by reference to
Exhibit 10.5 to the June 1995 Quarterly Report
10.13 Representative Investment Management Agreement between
Templeton Investment Counsel, Inc. and Client (ERISA),
incorporated by reference to Exhibit 10.6 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 Exhibit 10.7 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 Exhibit 10.16 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 Exhibit
10.17 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 Exhibit 10.18 to the 1995 Annual Report
10.18 Representative Dealer Agreement between Franklin/Templeton
Distributors, Inc. and Dealer, incorporated by reference to
Exhibit 10.19 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 Exhibit 10.20 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
Exhibit 10.21 to the 1995 Annual Report
10.21 Representative Sub-Distribution Agreement between Templeton,
Galbraith & Hansberger Ltd. and Sub-Distributor, incorporated
by reference to Exhibit 10.22 to the 1995 Annual Report
10.22 Representative Non-Exclusive Underwriting Agreement between
Templeton Growth Fund, Inc. and Templeton Franklin Investment
Services (Asia) Limited, dated September 18, 1995, incorporated by
reference to Exhibit 10.23 to the 1995 Annual Report
10.23 Representative Shareholder Services Agreement between
Franklin/Templeton Investor Services, Inc. and Templeton
Franklin Investment Services (Asia) Limited, dated September 18, 1995,
incorporated by reference to Exhibit 10.24 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 Exhibit 2 to Registrant'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 Investor Services, Inc. and PFPC Inc.,
incorporated by reference to Exhibit 10.25 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 Exhibit 10.26 to the
1996 Annual Report
10.27 Representative Administration Agreement between Templeton
Growth Fund, Inc. and Franklin Templeton Services, Inc.,
incorporated by reference to Exhibit 10.27 to the 1996 Annual
Report
10.28 Representative Sample of Fund Administration Agreement with
Franklin Templeton Services, Inc., incorporated by reference
to Exhibit 10.28 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 Exhibit 10.29 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 Exhibit 10.30 to the 1996 Annual
Report
10.31 Representative Management Agreement between Franklin
Valuemark Funds and Franklin Mutual Advisers, Inc., incorporated by
reference to Exhibit 10.31 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
Exhibit 10.32 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 Exhibit 10.33 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 Exhibit 10.35
to the 1997 Annual Report
10.36 1998 Universal Stock Incentive Plan approved October 16, 1998 by the
Board of Directors, incorporated by reference to the Company's Proxy
Statement filed under cover of Schedule 14A on December 23, 1998 in
connection with its Annual Meeting of Stockholders to be 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
Exhibit 10.1 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 Exhibit 10.1 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.
10.40 Representative Investment Management Agreement between
Templeton Investment Counsel, Inc. and Client (NON-ERISA), as
amended.
12 Computation of Ratios of Earnings to Fixed Charges
21 List of Subsidiaries
23 Consent of Independent Accountants
27 Financial Data Schedule
* Compensatory Plan
(b)(1) Current Report on Form 8-K dated October 23, 1998 was filed on October
23, 1998 attaching Registrant's press release dated October 23, 1998
under Items 5 and 7.
(c) See Item 14(a)(3) above.
(d) No separate financial statements are required; schedules are included
in Item 8.