Back to GetFilings.com
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____ to_____
Commission file 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. [ ]
1
Aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of $32.00 on December 3, 1999 on the
New York Stock Exchange was $4,325,127,104. 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 3, 1999:
250,264,170.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the Registrant's proxy statement for its Annual Meeting of
Stockholders to be held January 27, 2000, which was filed under cover of
Schedule 14A with the Securities and Exchange Commission (the "SEC") on December
16, 1999 (the "Proxy Statement"), are incorporated by reference into Part III of
this report.
INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE NUMBER
FORM 10-K REFERENCE TO THIS
REQUIRED INFORMATION 1999 ANNUAL REPORT
ON FORM 10-K
- -------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
General Business Summary
Investment Advisory and Related Services
Banking/Finance Operations
Regulatory Considerations
Competition
Company History
Company Background Information
Financial Information about Industry Segments
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 AND
RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
2
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
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: "Principal Holders of Voting Securities"
and "Security Ownership of Management" *
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.
3
Franklin Resources, Inc. files reports with the SEC. Copies of any of these
filings can be obtained from the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. Information on the operation of the Public
Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
We also file reports with the SEC electronically via the Internet. The SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC, at http: //www.sec.gov. Additional information about Franklin
Resources, Inc. can be obtained at our website at http:
//www.frk.com.
PART I
"Forward-looking Statements." When used in this Annual Report on Form 10-K,
words or phrases about the future such as "expected to," "could have," "will
continue," "anticipates," "estimates," or similar expressions are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Statements in "Business," "Management's Discussion and
Analysis" ("MD&A"), and elsewhere in this document that speculate about future
events are "forward-looking statements." These types of statements are subject
to certain risks and uncertainties as described below, including the factors in
"MD&A -- Specific Risks Associated with the Year 2000" and " -- Risk Factors."
These risks and uncertainties could cause our current expectations and
predictions in the forward-looking statements to be wrong. Forward-looking
statements are our best prediction at the time that they are made, and you
should not rely on them. Rather, you should read the forward-looking statements
in conjunction with the risk disclosures in this Annual Report. If a
circumstance occurs that causes any of our forward-looking statements to be
inaccurate, Franklin Resources, Inc. does not have an obligation to publicly
release the change to our expectations, or to make any revision to the
forward-looking statements.
Item 1. Business
General Business Summary
- ------------------------
Franklin Resources, Inc. ("FRI") was organized in Delaware in November 1969. FRI
and its predecessors, have been engaged in the financial services business since
1947. The common stock of FRI is traded on stock exchanges under the ticker
symbol "BEN" in the United States and elsewhere, and under the ticker symbol
"FKR" in London. The term "Franklin("R") Templeton("R")" as used in this
document, refers to Franklin Resources, Inc. and its consolidated subsidiaries.
4
The majority of our operating revenues, operating expenses and net income are
derived from providing investment advisory and related services to retail mutual
funds, institutional and private accounts, and other investment products
globally. Related services include transfer agency, fund administration,
custodial, trustee and fiduciary services. This is our primary business activity
and operating segment. The mutual funds and other products that we advise,
collectively called our sponsored investment products, are sold to the public
under three brand names: Franklin, Templeton, and Mutual Series("TM"). These
sponsored investment products include a broad range of domestic and
global/international equity, fixed-income and money market mutual funds, as well
as other investment products that meet a wide variety of investment needs of
individuals and institutions. From time to time, we also participate in various
investment management joint ventures.
Our secondary business activity and operating segment is banking/finance. Our
banking/finance group offers consumer lending and selected retail banking
services direct to the public.
The majority of our U.S.-registered funds are registered investment companies
under the Investment Company Act of 1940 (the " '40 Act"). Our sponsored
investment products include approximately 230 open-end and closed-end investment
companies. The open-end investment companies (mutual funds) are organized within
approximately 40 larger open-end investment companies with multiple portfolios.
Two of these mutual funds offer products only to the separate accounts of
insurance companies. On a consolidated worldwide basis, Franklin Templeton
provides U.S. and international individual and institutional investors with a
broad range of investment products and services designed to meet varying
investment objectives. This affords our clients the opportunity to allocate
their investment resources among various alternative investment products as
changing worldwide economic and market conditions warrant.
Franklin Templeton's equity investment products reflect both a value and a
growth style of investing. Value investing focuses on identifying companies
which our research analysts and portfolio managers believe are undervalued based
on a number of factors. Growth investing relies on the review of macro-economic,
industry and sector trends to identify companies that exhibit superior growth
potential relative to industry peers and the broad market. Unlike other
management styles that focus on short-term market trends, our portfolio team
invests in companies demonstrating long-term growth potential, based mainly on
proprietary in-house research.
5
We originated our fund business with the Franklin Group of Funds("R")and added
the other fund brand names through acquisitions, which are described in the
"Company History" section below. When used in this report, the following
terms generally apply unless otherwise noted. Information in this report is
given as of September 30, 1999 unless otherwise noted.
"Franklin Templeton mutual funds" All of the Franklin, Templeton and
or "Franklin Templeton funds" means: Mutual Series mutual funds.
"Sponsored investment products" means: All of the Franklin, Templeton and
Mutual Series mutual funds; closed-end
investment companies; foreign-based
investment products; and other U.S.
and international private and
institutional accounts.
Our revenues are largely dependent upon the level and relative composition of
assets under management. To a lesser degree, our revenues also depend upon on
the level of mutual fund sales and the number of mutual fund shareholder
accounts. These factors are discussed below under "Investment Advisory and
Related Services - Assets Under Management".
As of September 30, 1999, total assets under management by Franklin Templeton
were $218.1 billion. Assets under management included $170.2 billion in the
U.S.-registered mutual funds (including insurance dedicated funds), and $47.9
billion in closed-end investment companies, foreign-based investment products
and U.S. and foreign private and institutional accounts. This makes Franklin
Templeton one of the largest investment management complexes in the world.
I. Investment Advisory and Related Services
- --------------------------------------------
Franklin Templeton's principal line of business is providing investment,
advisory and management services. In support of our core business, Franklin
Templeton provides the following support services; fund administration,
shareholder processing, distribution and related services for the sponsored
investment products. Fund shares are offered to individual investors, qualified
groups, trustees, tax-deferred (such as IRA) or money purchase plans, employee
benefit and profit sharing plans, trust companies, bank trust departments and
institutional investors. In 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.
6
As discussed below in "MD&A", Franklin Templeton's revenues are derived
primarily from its investment advisory operating segment. Our revenues and
income are dependent upon many factors, such as the level and composition
of our assets under management, the numbers and types of shareholders in our
funds and our agreements with the advisers that sell our products to the public.
These factors are described below in the following sections:
a. Assets Under Management
b. Asset Mix
c. Investment Management and Related Services
d. Types of Shares Offered by Our Funds
e. Distribution, Marketing and Related Services
f. Shareholder Servicing
g. Investment Objectives of Funds
h. Product Categorization
a. Assets Under Management ("AUM")
- -----------------------------------
Franklin Templeton's revenues depend to a large extent upon the dollar value of
assets under management because we earn most of our fees based upon the amount
of assets in the accounts that we are advising.
Type of Assets Value in Billions % of Total AUM
- -------------- ----------------- --------------
Equity $ 134.4 61%
- ------
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 $ 67.9 31%
- ------------
Both long and short-term, held by all types of investors on a worldwide
basis.
Hybrid Funds $ 10.2 5%
- ------------
Asset allocation, balanced, flexible and income-mixed funds,
held by all types of investors on a worldwide basis.
Money Funds $ 5.6 3%
- -----------
Short-term liquid assets held by all types of investors on a worldwide
basis.
7
b. Asset Mix
- -------------
As discussed above, our revenues are derived primarily from investment
management activities. Broadly speaking, the change in the net assets of the
funds depends 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 Franklin
Templeton's asset mix has shifted since 1992 from predominantly fixed-income
securities to a majority of equity assets, Franklin Templeton has become subject
to an increased risk of asset, and therefore revenue, volatility from changes in
the domestic and global equity markets. This was evidenced in the fourth quarter
of fiscal 1998 when a substantial decline in the Asian and then the global
equity markets caused a 12% reduction in Franklin Templeton's assets under
management and an 11% decline in our operating revenues. In addition, because we
generally derive higher revenues and income from our equity assets, a shift in
assets from equity to fixed-income would have a greater than proportional impact
on total income and revenues. Despite such volatility, management believes that
in the long run Franklin Templeton is more competitive as a result of the
greater diversity of investment products available to its customers.
Many factors affect market values, 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
affect the value of fixed-income assets under management as well as the flow of
monies to and from fixed-income funds. In turn, this affects our revenues from
those funds. The multiplicity of factors impacting asset mix make it difficult
to predict the net effect of any particular set of conditions.
Although Franklin Templeton's assets under management are subject to political
and currency risk due to our international investment activities, our direct
exposure to fluctuations in foreign currency markets is limited, as is discussed
in more detail in "MD&A."
c. Investment Management and Related Services
- ------------------------------------------------
Franklin Templeton provides investment advisory, portfolio management, transfer
agency, business management agent and administrative services to sponsored
investment products. Various Franklin Templeton subsidiary companies manage and
implement the investment activities of sponsored mutual funds and provide the
business management and/or administrative services which are necessary to the
operation of each fund's business. Subsidiary companies also conduct research
and provide the investment advisory services and determine which securities the
funds will purchase, hold or sell as directed by each fund's board of trustees,
directors or administrative managers. In addition, the subsidiary companies take
all steps necessary to implement such decisions, including selecting brokers and
dealers, executing and settling trades in accordance with detailed criteria set
forth in the management agreement for each fund, and applicable law and
practice. Similar services are rendered with respect to the closed-end
investment companies, foreign-based funds and other U.S. and international
private and institutional accounts.
8
The investment advisory services provided by Franklin Templeton include
fundamental investment research and valuation analyses, including original
economic, political, industry and company research, company visits and
inspections, and the utilization of such sources as company public records and
activities, management interviews, company prepared information, and other
publicly available information, as well as analyses of suppliers, customers and
competitors. In addition, research services provided by brokerage firms are used
to support other research.
In some instances, brokerage firms agree to pay third-party providers for
research provided to Franklin Templeton's advisory subsidiaries in recognition
of brokerage business which may be (but is not contractually required to be)
directed to those brokerage firms by Franklin Templeton's advisory subsidiaries
in accordance with SEC regulations. In accordance with the provisions of the
Securities Exchange Act of 1934 (the " '34 Act") and as permitted by fund
prospectuses and contracts with individual accounts, the investment adviser may
also direct brokerage firms for execution services as permitted by the National
Association of Securities Dealers (the "NASD"). When best execution is available
from more than one broker, the investment adviser may direct trades to brokers
who sell shares of the funds advised by that investment adviser.
Fixed-income research includes economic, credit 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. Value analysis reviews yield spread differential and the
relative value of market sectors that represent buying and selling
opportunities.
Investment management and related services are provided pursuant to agreements
in effect with each of our U.S.-registered Franklin Templeton funds. Comparable
agreements are in effect with foreign-registered funds and with private
accounts. The management agreements for our U.S.-registered Franklin Templeton
funds must be renewed each year, and must be specifically approved at least
annually by a vote of such funds' board of trustees or directors or by a vote of
the holders of a majority of such funds' outstanding voting securities. In
either event, renewal must be approved by a majority vote of such funds'
trustees or directors who are not parties to such agreement or interested
persons of any such party (other than as members of the board) within the
meaning of the '40 Act, cast in person at a meeting called for that purpose.
Foreign registered funds have various termination rights, review and renewal
provisions that are not discussed in this report.
Each U.S. management or advisory agreement between Franklin Templeton and each
fund automatically terminates in the event of its "assignment" (as defined in
the '40 Act). "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. Therefore, if there was a change in control of Franklin Templeton,
such as through a merger or an acquisition, the majority of the U.S. management
and advisory agreements with the sponsored investment products would
automatically terminate. In addition, either party may terminate the agreement
without penalty after written notice ranging from 30 to 60 days.
9
If management agreements representing a significant portion of our assets under
management were terminated, it would have a material adverse impact on our
company. To date, no management agreements of Franklin Templeton with any of the
Franklin Templeton funds have been involuntarily terminated.
Franklin Templeton also provides investment management, advisory and related
services to closed-end investment companies, foreign-based funds and
institutional accounts. Changes in the customer base of institutional investors
occur on a regular basis.
The funds themselves have no employees. Generally, Franklin Templeton provides
and pays the salaries of personnel who serve as officers of the Franklin
Templeton funds, including the President and other administrative personnel as
necessary to conduct such funds' day-to-day business operations. These personnel
provide information, ensure compliance with securities regulations, maintain
accounting systems and controls, prepare annual reports and perform other
administrative activities. Various subsidiaries have contracts with the funds to
provide additional services including maintaining a fund's portfolio records,
answering shareholder inquiries, and creating and publishing literature.
The funds generally pay their own expenses such as legal, custody and auditing
fees, reporting costs, board and shareholder meeting costs, SEC and state
registration fees and similar expenses. The funds also pay Franklin Templeton a
fee payable monthly in arrears based upon a fund's net assets. Annual fee rates
under the various global investment management agreements generally range from
0.15% to a maximum of 2.00% and are often reduced as net assets exceed various
threshold levels.
Our investment management agreements permit Franklin Templeton to serve as an
adviser to more than one fund so long as our ability to render services to each
of the funds is not impaired, and so long as purchases and sales appropriate for
all of the advised funds are made on a proportionate or other equitable basis.
The management personnel of Franklin Templeton and the fund directors or boards
of trustees regularly review the fund advisory and other administrative fee
structures in light of fund performance, the level and range of services
provided, industry conditions and other relevant factors. Advisory and other
administrative fees are generally waived or voluntarily reduced when a new fund
is established and then increased to contractual levels within an established
timeline or as net asset values reach certain levels.
Franklin Templeton uses a "master/feeder" fund structure in limited situations.
This structure allows an investment adviser to manage a single portfolio of
securities at the "master fund" level and have multiple "feeder funds" invest
all of their respective assets into the master fund. Individual and
institutional shareholders invest in the "feeder funds" which can offer a
variety of service and distribution options. An advisory fee is charged at the
master fund level, and administrative and shareholder servicing fees are charged
at the feeder fund level.
Franklin Templeton also sponsors a real estate investment trust and several real
estate investment partnerships. A Franklin Templeton subsidiary earns management
fees pursuant to agreements with these investment vehicles. Franklin Templeton
is currently exiting this business. The revenues and expenses related to this
business are immaterial to Franklin Templeton.
10
d. Types of Shares Offered by Our Funds
- ----------------------------------------
Most of the U.S.-registered Franklin Templeton funds have a multi-class share
structure. Franklin Templeton adopted this share structure to provide investors
with greater sales charge alternatives for their investments. In 1999, we
changed the names of the share classes that we offer in the United States. Class
A shares (formerly Class I shares) represent a traditional fee structure whereby
the investor pays a commission at the time of purchase to the broker/dealer.
During 1999, we introduced Class B shares for 35 mutual funds, which have no
front-end sales charges but instead have a declining schedule of sales charges
(called contingent deferred sales charges) if the investor redeems within the
first six (6) years. For Class B shares, the commission is advanced by the
fund's distributor to pay the broker/dealer. Class C shares (formerly Class II
shares) have a hybrid, level load pricing structure combining aspects of
conventional front-end, back-end and level-load pricing.
In the United States, we also offer Advisor Class shares in Franklin and
Templeton funds and Z Class shares in Mutual Series funds on a limited basis,
both of which have no sales charges. The Advisor and Z Class shares are sold to
officers, directors and employees of Franklin Templeton, and are also offered to
institutions and investment advisory clients (both affiliated and unaffiliated),
as well as individuals investing $5 million or more. In addition, shareholders
who held shares of the Mutual Series funds at the time that Franklin Templeton
acquired Mutual Series may continue to purchase Z Class shares. Franklin
Templeton also sells money market funds to investors for no sales charge. Under
the terms and conditions described in the prospectuses or the statements of
additional information for some funds, certain investors can purchase shares at
net asset value or at reduced sales charges. In addition, investors may
generally exchange their shares of a fund at net asset value for shares within
the same class of another fund in the Franklin Templeton group without having
to pay additional sales charges.
The Franklin Templeton insurance product funds each have a two class share
structure, Class 1 and Class 2, both of which are sold at net asset value
without a sales load to the insurance company separate accounts. The only
difference between the two classes is that Class 2 shareholders pay a Rule 12b-1
Plan fee (as described below in "Distribution, Marketing and Related Services")
to Franklin Templeton, which is generally assessed quarterly at an annual rate
of 0.25% of the average daily net assets of that class. Proceeds of the Rule
12b-1 Plan fee are used to pay for distribution and other expenses of the Class
2 shares, and of the insurance contracts for which Class 2 shares are an
investment option.
11
The following table summarizes the U.S. retail fund sales and distribution fee
structure for various share classes.
Fees Paid by Shareholders to Franklin Templeton for Most U.S.-Registered Retail
- --------------------------------------------------------------------------------
Funds
- -----
- --------------------------- -------------------------- -------------------------- -----------------------
U.S. Retail Funds Class A shares Class B shares (c) Class C shares
- --------------------------- -------------------------- -------------------------- -----------------------
Sales Charge
at Time of Sale
Equity 5.75% (a) None. 1.0%
Fixed-income 4.25% (a) None. 1.0%
- --------------------------- -------------------------- -------------------------- ------------------------
Contingent Deferred Sales None. (b) 4% maximum declining to 1% if shareholder sells
Charge zero after 6 years shares within 18 months.
ownership of shares.
- --------------------------- -------------------------- -------------------------- ------------------------
Maximum Yearly
12b-1 Plan Fees
Equity 0.25% 1.0% 1.0%
Fixed-income
Taxable 0.25% 0.65% 0.65%
Tax-free 0.10% 0.65% 0.65%
- --------------------------- -------------------------- -------------------------- --------------------------
Types of investors that Any. Any. Any.
may purchase this share
class
- --------------------------- -------------------------- -------------------------- --------------------------
- --------------------------- ----------------------------------- ------------------------------------
U.S. Retail Funds Advisor Class shares Z Class shares (d)
- --------------------------- ----------------------------------- ------------------------------------
Sales Charge
at Time of Sale None. None.
Equity
Fixed-income
- --------------------------- ----------------------------------- ------------------------------------
Contingent Deferred Sales None. None.
Charge
- --------------------------- ----------------------------------- ------------------------------------
Maximum Yearly None. None.
12b-1 Plan Fees
- --------------------------- ----------------------------------- ------------------------------------
Types of investors that Officers, directors and employees Officers, directors and employees
may purchase this share of Franklin Templeton; of Franklin Templeton;
class Institutions, investment advisory Institutions, investment advisory
clients, individuals investing $5 clients, individuals investing $5
million or more in Franklin or million or more in Mutual Series
Templeton funds. funds.
- --------------------------- ----------------------------------- ------------------------------------
12
(a) Reductions in the maximum sales charges may be available depending upon the
amount invested and the type of investor. In some cases noted in each fund's
prospectus or statement of additional information, certain investors may invest
in Class A shares at net asset value (with no load). In connection with certain
of these no-load purchases, Franklin/Templeton Distributors, Inc. may make a
payment out of its own resources to a broker/dealer involved with that sale.
(b)For NAV purchases over $1 million, a contingent deferred sales charge of 1.0%
may apply to shares redeemed within one year.
(c) Class B shares convert to Class A shares after eight (8) years of ownership.
(d) When Franklin Resources, Inc. acquired the management contracts for Mutual
Series funds, the existing shares of Mutual Series funds were reclassified as Z
Class shares in exchange for the shares that they held at that time.
Shareholders who held shares of the Mutual Series funds at the time that
Franklin Templeton acquired Mutual Series may continue to purchase Z Class
shares.
e. Distribution, Marketing and Related Services
- ------------------------------------------------
Franklin/Templeton Distributors, Inc. ("Distributors"), a wholly-owned
subsidiary of Franklin Resources, Inc., acts as the principal underwriter and
distributor of shares of the U.S.-registered open-end Franklin Templeton funds.
Distributors has entered into underwriting agreements with the funds, which
generally provide for Distributors to pay the commission expenses for sales of
fund shares. Franklin Templeton fund shares are sold primarily through a large
network of independent intermediaries, including broker/dealers, banks and other
similar investment advisers. We are heavily dependent upon these distribution
channels and business relationships. There is increasing competition for access
to these channels, which has caused our distribution costs to rise and could
cause further increases in the future as competition continues and service
expectations increase. In addition, many intermediaries also have mutual funds
offered for sale under their own names that compete directly with our products.
These intermediaries could decide to limit or restrict the sale of our fund
shares, which could lower our future sales, increase redemption rates, and cause
our revenues to decline. As of September 30, 1999, approximately 3,700 local,
regional and national securities brokerage firms offered shares of the U.S.
- -registered Franklin Templeton funds for sale to the investing public. In the
United States, Franklin Templeton has approximately 62 general wholesalers and
six (6) retirement wholesalers who interface with the broker/dealer community.
Broker/dealers receive various fees from Distributors, including fees from
investors and the funds, for services in matching investors with funds whose
investment objectives match such investors' goals and risk profiles.
Broker/dealers may also receive fees for their assistance in explaining the
operations of the funds, in servicing the investor's account, reporting and
various other distribution services.
13
Most of the U.S.-registered Franklin Templeton funds, with the exception of
certain Franklin Templeton money market funds, have adopted distribution plans
(the "Plans") under Rule 12b-1 promulgated under the '40 Act ("Rule 12b-1"). The
Plans are established for an initial term of one (1) year and, thereafter, must
be approved annually by the 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, such as expenses for marketing, advertising, printing and sales
promotion. Fees under the Plans for the different share classes are shown above
in the chart under "Types of Shares Offered by Our Funds." The implementation of
the Plans provided for a lower fee on Class A shares acquired prior to the
adoption of such Plans. Fees from the Plans are paid primarily to third-party
dealers who provide service to the shareholder accounts, and also engage in
distribution activities. Distributors may also receive reimbursement from the
funds for various expenses that Distributors incurs involved in distributing the
funds, such as marketing, advertising, printing and sales promotion subject to
the Plans' limitations on amounts. Each fund has a percentage limit for these
type of expenses based on average assets under management.
Class B and C shares are generally more costly to us in the year of sale, but
they allow us to be competitive by increasing our presence in various
distribution channels. On September 30, 1999, Franklin Templeton concluded an
arrangement to finance payments of the Class B share broker commissions. The
repayment of the financing advances is limited to the cash flows generated by
the funds' 12b-1 Plans and by any contingent deferred sales charges collected in
connection with early redemptions (within six years after purchase).
The fees below generally apply to our U.S.-registered retail funds, however,
there are exceptions to this fee schedule for some funds.
14
Fees Paid by Franklin Templeton to Broker/Dealers and Other Intermediaries
- --------------------------------------------------------------------------
for Most U.S.-Registered Retail Funds
- -------------------------------------
U.S. Retail Funds Class A Shares Class B Shares Class C Shares
================= ================== ================ ================
Dealer Commission
at Time of Sale
Equity 5.0% 4.0% 2.0%
Fixed-income 4.0% 3.0% 2.0%
- ------------------ ------------- -------------- -------------
Maximum Yearly
12b-1 Plan Fees
Equity 0.25% 1.0% 1.0% (a)
Fixed-income
Taxable 0.25% 0.65% 0.65% (b)
Tax-free 0.10% 0.65% 0.65% (b)
- ------------------ ------------- ---------------- -------------
(a) Franklin Templeton retains a fee equal to 0.75% of the assets in the account
for the first twelve (12) months following the sale, after which it is paid
annually to the broker/dealer.
(b) Franklin Templeton retains a fee equal to 0.50% of the assets in the account
for the first twelve (12) months following the sale, after which it is paid
annually to the broker/dealer.
f. Shareholder Servicing
- -------------------------
Franklin/Templeton Investor Services, Inc. ("FTISI") is a Franklin Templeton
subsidiary which provides shareholder record keeping services and acts as
transfer agent and dividend-paying agent for the U.S.-registered Franklin
Templeton open-end funds. FTISI is registered with the SEC as a transfer agent
under the '34 Act. FTISI 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. FTISI
charges an annual fee per billable shareholder account.
Other subsidiaries provide the same services to the open-end funds offered for
sale in Canada, Europe and Asia under similar fee arrangements. As of September
30, 1999, there were approximately 9.6 million billable shareholder accounts in
the worldwide Franklin Templeton group.
15
g. Investment Objectives of Funds
- ----------------------------------
Franklin Templeton's sponsored investment products accommodate a variety of
investment goals, 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, such as emerging markets. A majority of the
assets managed are equity-oriented.
Franklin Templeton 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, we provide
investment management, marketing and distribution services to certain sponsored
investment companies organized in the Grand Duchy of Luxembourg (called "SICAV
Funds"), which are distributed in marketplaces outside of North America, to
certain investment funds and portfolios in Canada as well as to certain other
international portfolios in the United Kingdom and elsewhere.
In addition to closed-end funds, our sponsored investment products also include
portfolios managed for some of the world's largest corporations, endowments,
charitable foundations, pension funds, wealthy individuals and other
institutions. We use various investment techniques to focus on specific client
objectives for these specialized portfolios.
As of September 30, 1999, the net assets under management of our five (5)
largest funds were Franklin California Tax-Free Income Fund, Inc. ($14.5
billion), Templeton Growth Fund ($13.9 billion), Templeton Foreign Fund ($12.9
billion), Templeton World Fund ($9.3 billion) and the Franklin Custodian
Funds-U.S. Government ($8.3 billion). These five (5) mutual funds represented,
in the aggregate, 27.0% of all Franklin Templeton's assets under management.
16
Franklin Templeton also offers a total of 36 funds in the United States to
insurance company separate accounts as investment options for variable annuity
and variable life insurance contracts. Most of the funds related to variable
insurance contracts have been fashioned after some of the more popular funds
offered to the general public and are managed, in most cases, by the same
investment adviser.
h. Product Categorization -------------------------- The Investment Company
Institute (the "ICI"), an industry group of which Franklin Templeton is a
member, has developed detailed definitions for the investment objectives of
U.S.-registered mutual funds and variable annuity and variable life
sub-accounts. In addition to the mutual fund assets described in the chart
below, Franklin Templeton also manages approximately $47.9 billion, 22% of our
assets, in closed-end investment companies, foreign-based funds and other U.S.
and international private and institutional accounts. Approximately $22.9
billion of these assets are held in private accounts. The investment objectives
of these accounts vary but are primarily equity-oriented. Approximately $20.9
billion of these assets are held in international-based funds whose investment
objectives vary but are primarily international and global equity-oriented; and
$4.1 billion is in U.S.-registered funds in various investment vehicles. Amounts
invested by our institutional clients across product types, including mutual
funds, trusts, and private accounts, were $41.6 billion at September 30, 1999.
From time to time, as business reasons, market conditions or investor demand
warrant, Franklin Templeton introduces new funds, merges existing funds, or
liquidates existing funds. The following chart shows our U.S.-registered mutual
funds and dedicated insurance product funds as of September 30, 1999. The
categories used in this chart are more precise than the broad investment
objective categories used in "MD&A "and in our "Consolidated Financial
Statements." The following chart is categorized using the ICI definitions.
17
FRANKLIN TEMPLETON FUNDS - U.S.-REGISTERED OPEN-END
- -------------------------------------------- -----------------------------------------------------------------
NO. OF NO. OF
CATEGORY INVESTMENT OBJECTIVE MUTUAL INSURANCE
(and approximate assets under management, FUNDS PRODUCT
in billions) FUNDS
- -------------------------------------------- ------------------------------------------- ------- ------------
I. EQUITY FUNDS($91.8)
- -------------------------------------------- ------------------------------------------- ------- ------------
A. Capital Appreciation Funds($16.6) Seek capital appreciation;
dividends are not a primary consideration.
- -------------------------------------------- ------------------------------------------- ------- ------------
1. Aggressive Growth Funds Invest primarily in common stocks of small 3 2
growth companies.
- -------------------------------------------- ------------------------------------------- ------- ------------
2. Growth Funds Invest primarily in common stocks of 8 4
well-established companies.
- -------------------------------------------- ------------------------------------------- -------- ------------
3. Sector Funds Invest primarily in common stocks of 7 3
companies in related fields.
- -------------------------------------------- ------------------------------------------- -------- ------------
B. World Equity Funds ($55.1) Invest primarily in stocks of foreign
companies.
- -------------------------------------------- ------------------------------------------- -------- ------------
1. Emerging Market Funds Invest primarily in companies based 2 2
in developing regions of the world.
- -------------------------------------------- ------------------------------------------- -------- ------------
2. Global Equity Funds Invest primarily in equity securities 8 3
traded worldwide, including those of
U.S. companies.
- -------------------------------------------- ------------------------------------------- -------- ------------
3. International Equity Funds Must invest in equity securities of 4 3
companies located outside the U.S. and
cannot invest in U.S. company stocks.
- -------------------------------------------- ------------------------------------------- -------- ------------
4. Regional Equity Funds Invest in companies based in a specific 4 1
part of the world.
- -------------------------------------------- ------------------------------------------- -------- ------------
18
C. Total Return Funds($20.1) Seek a combination of current income
and capital appreciation.
- -------------------------------------------- ------------------------------------------- -------- ------------
1. Growth and Income Funds Invest primarily in common stocks of 7 4
established companies with the
potential for growth and a consistent
record of dividend payments.
- -------------------------------------------- ------------------------------------------- -------- ------------
II. HYBRID FUNDS ($9.6) May invest in a mix of equity,
fixed-income securities and derivative
instruments.
- -------------------------------------------- ------------------------------------------- -------- ------------
A. Asset Allocation Funds ($0.7) Invest in various asset classes
including, but not limited to, equities, 3 2
fixed-income securities and money market
instruments. They seek high total return
by maintaining precise weightings
in asset classes.
- -------------------------------------------- ------------------------------------------- -------- ------------
B. Flexible Portfolio Funds ($0.1) Invest in common stocks, bonds and
other debt securities, and money market 1
securities to provide high total return.
These funds may invest up to 100 percent
in any one type of security and may easily
change weightings depending upon market
conditions.
- -------------------------------------------- ------------------------------------------- -------- ------------
C. Income-mixed Funds ($8.1) Invest in a variety of income-producing
securities, including equities and 1 1
fixed-income securities. These funds
seek a high level of current income
without regard to capital appreciation.
- -------------------------------------------- ------------------------------------------- -------- ------------
III. TAXABLE BOND FUNDS($15.6)
- -------------------------------------------- ------------------------------------------- -------- ------------
A. Corporate Bond Funds ($1.4) Seek current income by investing in
high-quality debt securities issued
by U.S. corporations.
- -------------------------------------------- ------------------------------------------- -------- ------------
1. Corporate Bond Funds: Invest two-thirds or more of their 1
General portfolios in U.S. corporate bonds
with no restrictions on average maturity.
- -------------------------------------------- ------------------------------------------- -------- ------------
B. High Yield Funds($3.8) Invest two-thirds or more of their
portfolios in lower rated U.S. corporate 1 1
bonds (Baa or lower by Moody's and BBB
or lower by Standard and Poor's
rating services).
- -------------------------------------------- ------------------------------------------- -------- ------------
19
C. World Bond Funds($0.5) Invest in debt securities offered by
foreign companies and governments.
They seek the highest level of
current income available worldwide.
- -------------------------------------------- ------------------------------------------- -------- ------------
1. Global Bonds Funds: General Invest in worldwide debt securities
with no stated average maturity or an 2 1
average maturity of five years or more.
These funds may invest up to 25% of
assets in companies located in the U.S.
- -------------------------------------------- ------------------------------------------- -------- -------------
2. Global Bond Funds: Invest in debt securities worldwide 2
Short Term with an average maturity of one to five
years. These funds may invest up to
25% of assets in companies located
in the U.S.
- -------------------------------------------- ------------------------------------------- -------- -------------
3. Other World Bonds Funds Such as international bond and emerging 2
market debt funds, invest in foreign
government and corporate debt instruments.
-------------------------------------------- ------------------------------------------- -------- -------------
D. Government Bond Funds($9.3) Invest in U.S. Government bonds of
varying maturities. They seek high
current income.
- -------------------------------------------- ------------------------------------------- -------- -------------
1. Government Bond Funds: Invest two-thirds or more of their
Intermediate Term portfolios in U.S. Government securities 1
with an average maturity of five to
ten years. Securities utilized by
investment managers may change with
market conditions.
- -------------------------------------------- ------------------------------------------- -------- -------------
2. Government Bond Funds: Invest two-thirds or more of their
Short Term portfolios in U.S. Government securities 1
with an average maturity of one to
five years. Securities utilized by
investment managers may change with
market conditions.
- -------------------------------------------- ------------------------------------------- -------- -------------
20
3. Mortgage-backed Funds Invest two-thirds or more of their 3
portfolios in pooled mortgage-backed
securities.
- -------------------------------------------- ------------------------------------------- ------- -------------
E. Strategic Income Funds($0.6) Invest in a combination of U.S. 2 5
fixed-income securities to provide
a high level current income.
- -------------------------------------------- ------------------------------------------- ------- -------------
IV. TAX-FREE BOND FUNDS ($48.2)
- -------------------------------------------- ------------------------------------------- ------- -------------
A. State Municipal Bond Funds Invest primarily in municipal bonds
($32.8) issued by a particular state. These
funds seek high after-tax income for
residents of individual states.
- -------------------------------------------- ------------------------------------------- ------- -------------
1. State Municipal Bond Funds: Invest primarily in the single-state
general municipal bonds with an average
maturity of greater than five years
or no specific stated maturity.
The income from these funds is 31
largely exempt from federal as well
as state income tax for residents
of the state.
- -------------------------------------------- ------------------------------------------- ------- -------------
B. National Municipal Bond Funds Invest primarily in the bonds of
($15.4) various municipal issuers in the U.S.
These funds seek high current
income free from federal tax.
- -------------------------------------------- ------------------------------------------- ------- -------------
1. National Municipal Bond Funds: Invest primarily in municipal bonds 4
general with an average maturity of more than
five years or no specific stated maturity.
- -------------------------------------------- ------------------------------------------- ------- -------------
V. MONEY MARKET FUNDS
($5.0)
- -------------------------------------------- ------------------------------------------- ------- -------------
A. Taxable Money Market Funds Invest in short-term, high-grade money
($4.0) market securities and must have
average maturity of 90 days or less.
These funds seek the highest level of
income consistent with preservation
of capital (i.e. maintaining a stable
share price).
- -------------------------------------------- ------------------------------------------- -------- -------------
21
1. Taxable Money Market Funds: Invest primarily in U.S. Treasury 2
government obligations and other financial
instruments issued or guaranteed by
the U.S. Government, its agencies or
its instrumentalities.
- -------------------------------------------- ------------------------------------------- -------- -------------
2. Taxable Money Market Invest in a variety of money market 5 1
Funds: non-government instruments, including certificates
of deposit from large banks, commercial
paper and bankers' acceptances.
- -------------------------------------------- ------------------------------------------- -------- -------------
B. Tax Exempt Money Market Funds ($1.0) Invest in short-term municipal
securities and must have average
maturities of 90 days or less. These
funds seek the highest level of
income - free from federal and, in
some cases, state and local taxes -
consistent with preservation of capital.
- -------------------------------------------- ------------------------------------------- -------- -------------
1. National Tax-Exempt Money Invest primarily in short-term 1
Market Funds securities of various U.S. municipal
issuers.
- -------------------------------------------- ------------------------------------------- -------- -------------
2. State Tax-Exempt Money Market Funds Invest primarily in short-term 2
securities of municipal issuers in
a single state to achieve the
highest level of tax-free income
for residents of that state.
- -------------------------------------------- ------------------------------------------- -------- -------------
22
II. Banking/Finance Operations
- -------------------------------
Franklin Templeton's second operating segment is banking/finance, through which
we offer consumer banking services, insured deposits, dealer auto loans and
credit cards. A more detailed analysis of the financial effects of loan losses
and delinquency rates in Franklin Templeton's consumer lending and dealer auto
loan business, as well as the funding of this activity, is contained in the
"MD&A-Operating Revenues." These activities are carried out by the subsidiaries
described below.
Franklin Bank, a subsidiary of Franklin Templeton, had total assets of $76.3
million as of September 30, 1999, and 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 FRI, a "non-banking company"
prior to CEBA, to remain exempt from the Bank Holding Company Act under the
"grandfathering" provisions of CEBA. The bank has an application pending before
the Office of Thrift Supervision to convert its California state banking charter
to a Federal thrift charter which, if approved, will eliminate the applicability
of CEBA and, accordingly, CEBA imposed restrictions on bank activities such as
the prohibition on making commercial loans.
Franklin Capital Corporation ("FCC") is a subsidiary of Franklin Templeton
formed to expand Franklin Templeton'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 and is a trust company licensed by the California Department of
Financial Institutions. FCC has in the past acquired credit card receivables
from Franklin Bank. As of September 30, 1999, FCC's total assets included $81.1
million of gross automobile contracts and $39.5 million of gross credit card
receivables. During fiscal 1999, FCC securitized approximately $106.2 million of
auto loan receivables. FCC continues to service $164.8 million of receivables
that have been securitized to date. See Note 4 of Notes to the Financial
Statements.
Our securitized consumer receivables business is subject to marketplace
fluctuation and competes with businesses with significantly larger portfolios.
Auto loan and credit card portfolio losses can be influenced significantly by
trends in the economy and credit markets which reduce borrowers' ability to
repay loans.
23
III. Regulatory Considerations
- -------------------------------
Virtually all aspects of Franklin Templeton's businesses are subject to various
foreign, and U.S. federal and state, laws and regulations. As discussed above,
Franklin Templeton and a number of our subsidiaries are registered with various
foreign, and U.S. federal and state, governmental agencies. These supervisory
agencies have broad administrative powers, including the power to limit or
restrict Franklin Templeton from carrying on our business if we fail 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 Franklin Templeton's (or a subsidiary's) ability to engage in business
for specified periods of time, revoking the investment adviser or broker/dealer
registrations, or similar foreign registrations, as well as censures and fines.
Franklin Templeton'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. Franklin Templeton's
officers, directors and employees may from time to time own securities which are
also held by the funds. Franklin Templeton's internal policies with respect to
individual investments by certain employees, including officers and directors
who are employed by Franklin Templeton, require prior clearance and reporting of
most transactions and restrict certain transactions to address the possibility
of conflicts of interest.
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, our assets under management and
revenues might be adversely affected. Changes in regulations affecting free
movement of international currencies might also adversely affect Franklin
Templeton.
Franklin Templeton, including certain of our subsidiaries, is subject to
increased scrutiny and a substantially-increased volume of compliance reporting
related to our plan, activities and the associated costs related to the Year
2000, as discussed in more detail in "MD&A-Year 2000."
24
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 Franklin Templeton 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.
IV. Competition
- ----------------
The financial services industry is highly competitive and has increasingly
become a global industry. There are over 7,500 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 Franklin Templeton's international
presence and varied product mix, it is difficult to assess our market position
relative to other investment managers on a worldwide basis, but Franklin
Templeton believes that we are one of the more widely diversified investment
managers in the United States. Franklin Templeton believes that our equity and
fixed-income asset mix coupled with our global presence will serve our
competitive needs well over the long term. Franklin Templeton continues to focus
on service to customers, performance of investment products and extensive
marketing activities with our strong broker/dealer and other financial
institution distribution network.
Franklin Templeton faces strong competition from numerous stock brokerage and
investment banking firms, insurance companies, banks, savings and loan
associations and other financial institutions which also offer a wide range of
financial services. In recent years, there has been a trend of consolidation in
the financial services industry, resulting in stronger competitors with greater
financial resources than Franklin Templeton.
Although we rely on intermediaries to sell and distribute Franklin Templeton
fund shares, many of these intermediaries also have mutual funds under their own
names that compete directly with our products. The banking industry also
continues to expand its sponsorship of proprietary funds. These intermediaries
could decide to limit or restrict the sale of our fund shares, which could lower
our future sales and cause our revenues to decline. Franklin Templeton has and
continues to pursue sales relationships with all types of intermediaries to
broaden our distribution network. We are currently expanding our Internet
e-business to compete with the rapidly developing and evolving capabilities
being offered with this technology. It is not currently possible to predict the
effect of the Internet on Franklin Templeton or on the financial services
industry overall.
25
As investor interest in the mutual fund industry has increased, competitive
pressures have increased on sales charges of broker/dealer distributed funds.
Franklin Templeton 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. Franklin
Templeton has experienced increased demand for payments to its distribution
channels and anticipates that this trend will continue.
We believe that we are well positioned to deal with changes in marketing trends
as a result of our already extensive advertising activities and broad based
marketplace recognition. Franklin Templeton does significant advertising and
conducts sales promotions through various media sources to promote brand
recognition. We advertise in major national financial publications, as well as
on radio and television to promote brand name recognition and to assist its
distribution network. Such activities included purchasing network and cable
programming, sponsorship of sporting events, such as the "Franklin Templeton
Shark Shoot-Out", sponsorship of The Nightly Business Report on public
television, and extensive newspaper and magazine advertising.
Diverse and strong competition affects the banking/finance segment of our
business as well, and limits the interest rates that we can charge on consumer
loans. We compete with many types of institutions for consumer loans, including
the finance subsidiaries of large automobile manufacturers.
V. Company History
- --------------------
In October 1992, Franklin Templeton acquired substantially all of the assets and
liabilities of the investment adviser to the Templeton, Galbraith & Hansberger
Ltd. financial services business. This acquisition added the Templeton family of
funds to our company.
In November 1996, Franklin Templeton acquired certain assets and liabilities of
Heine Securities Corporation, which provided investment management services to
various accounts and investment companies, including Mutual Series Fund Inc.,
now known as Franklin Mutual Series Fund Inc. ("Mutual Series"). Subsequent to
the Mutual acquisition, Franklin Templeton has managed Mutual Series on a
unified basis with its other business operations.
26
The purchase price paid at the closing of the Mutual acquisition was funded
through a combination of 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 FRI common
stock. The purchase price included the deposit into escrow of $150 million to be
invested in shares of Mutual Series. The escrow money 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.
VI. Company Background Information
- ------------------------------------
Franklin Templeton's principal executive and administrative offices are at 777
Mariners Island Boulevard, San Mateo, California 94404. As of September 30,
1999, Franklin Templeton employed approximately 6,700 employees on a worldwide
basis. We also utilize independent contractors as necessary and employ
additional temporary help to meet unusual requirements.
Management believes that its relations with its employees are good. However, we
face continued competition in hiring and retaining qualified employees. The
competition from other companies to hire qualified employees has increased,
particularly in certain geographic locations where the majority of our workforce
is employed and where unemployment rates are at historically low levels.
As of September 30, 1999, substantially all of the shares of the various
directly and indirectly owned subsidiary companies were owned directly by FRI or
subsidiaries thereof, except with respect to a limited number of foreign
entities and limited minority ownership of certain other companies. As of
December 1, 1999, Charles B. Johnson, Rupert H. Johnson, Jr. and R. Martin
Wiskemann beneficially owned approximately 18.85%, 15.27% and 9.09%,
respectively, of the outstanding common stock of Franklin Templeton.
VII. Financial Information about Industry Segments
- ---------------------------------------------------
Information on Franklin Templeton'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.
27
Item 2. Properties
General Description
- -------------------
As of September 30, 1999, Franklin Templeton leased offices and facilities in
ten (10) locations in the immediate vicinity of its principal executive and
administrative offices located at 777 Mariners Island Boulevard, San Mateo,
California. In addition, Franklin Templeton 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 space in office buildings in
Argentina, China and Singapore. Certain properties of Franklin Templeton were
under construction during fiscal 1999 as described below. Since Franklin
Templeton 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.
Franklin Templeton or its subsidiaries also lease office space in Florida, New
York, and Utah and in Australia, Brazil, Canada, China, England, France,
Germany, Holland, Hong Kong, India, Italy, Japan, Korea, Luxembourg, Poland,
Russia, Scotland, South Africa, Spain, Switzerland, Taiwan, and Turkey.
28
I. Leased Properties
- ---------------------
As of September 30, 1999, Franklin Templeton leased properties at the locations
set forth below:
Approximate Approximate Current Expiration
Location Square Footage Base Monthly Rental Date
777 Mariners Island Boulevard
San Mateo, CA 94404 (a) 176,000 $435,000 September 2009
1147 & 1149 Chess Drive
Foster City, CA 94404 90,000 $85,000 June 2000
500 East Broward Boulevard
Ft. Lauderdale, FL 33394 125,000 $229,000 December 2000
555 Airport Boulevard
Burlingame, CA 94,000 $222,000 June 2006
1800 Gateway Drive
San Mateo, CA 94404 70,000 $207,000 August 2002
1810 Gateway Drive
San Mateo, CA 94404 52,000 $124,000 June 2000
1950 Elkhorn Court (b)
San Mateo, CA 94403 37,000 $46,000 July 2001
901 & 951 Mariners Island Between March
Boulevard, San Mateo, CA 94404 36,000 $79,000 1999 & April 2000
2000 Alameda de las Pulgas
San Mateo, CA 94403 36,000 $118,000 February 2005
51 JFK Parkway
Short Hills, NJ 27,000 $79,000 May 2005
1850 Gateway Drive (c)
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 Locations 274,000 -- --
(a) Franklin Templeton owns an undivided 60% interest in this property.
(b) Franklin Templeton terminated the 1950 Elkhorn Court lease on
December 1,1999.
(c) Franklin Templeton terminated the 1850 Gateway lease on December 15, 1999.
29
II. Owned Properties
- ---------------------
In Rancho Cordova, California, Franklin Templeton owns five (5) office buildings
totaling approximately 424,000 square feet, a data center/warehouse facility of
approximately 162,000 square feet and a warehouse building of approximately
69,000 square feet.
In St. Petersburg, Florida, Franklin Templeton owns five (5) office buildings
totaling approximately 370,00 square feet, as well as an approximate 117,000
square foot facility devoted to a computer data center, training, warehouse and
mailing operations in St. Petersburg, Florida. During November 1998, Franklin
Templeton began construction of another office building in St. Petersburg and
plans to occupy this building in June 2000.
Franklin Templeton 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. Franklin Templeton 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.
Franklin Templeton is a tenant-in-common with a 60% undivided interest in the
property occupied by Franklin Templeton at 777 Mariners Island Boulevard, San
Mateo, California. The tenancy-in-common 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, 1999 was $23.0 million.
III. New Corporate Headquarters
- ---------------------------------
In June 1999, Franklin Templeton acquired approximately 32 acres of undeveloped
land ("Bay Meadows") located in San Mateo, California for a total purchase price
of $21.6 million. In connection with this purchase, Franklin Templeton deposited
with the seller and the City of San Mateo $22 million representing an estimate
of our share of certain off-site improvements. A final reconciliation of the
actual amount due to the seller will be made after the improvements have been
completed.
Also in June 1999, Franklin Templeton entered into a five-year operating lease
agreement in connection with the construction of the new corporate headquarters
to be located on a portion of Bay Meadows, which Franklin Templeton has ground
leased to a special purpose lessor trust. The total cost of the corporate
headquarters covered by this lease agreement is limited to $170 million. The
lease provides for a substantial residual value guarantee (approximately 85% of
the total cost) by Franklin Templeton which is due on termination of the lease.
The lease includes renewal options that can be exercised at the end of the
initial lease period, and purchase options that can be exercised prior to the
expiration of the lease term. Upon termination of the lease, we can either
exercise our purchase option, or the property can be sold to a third party.
Franklin Templeton's interest in the portion of the Bay Meadows property covered
by this lease (including our interest as owner of the fee interest in the land)
is collateral for our obligations under the lease agreement, including our
obligations to pay the residual value guaranty. Franklin Resources, Inc. has
provided a guaranty of the obligations of the subsidiary that signed the lease
agreement, in a manner substantially similar to the guaranty for our
revolving line of credit agreements.
30
Item 3. Legal Proceedings
We have previously reported three complaints 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 FRI 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; FRI; and Templeton Worldwide, Inc., a direct
wholly-owned FRI 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.
FRI and the other defendants moved to dismiss all three 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.
On December 6, 1999, the court ruled on the defendants' motions to dismiss the
complaints in the Roumell and the Wetta cases. The court granted defendants'
motions in part and denied them in part. Specifically, the court dismissed both
complaints but gave the plaintiffs permission to amend the complaints in certain
particulars, if the plaintiffs elect to do so. In making these rulings, the
court chiefly addressed the issue of the plaintiffs' legal standing to assert
certain claims against certain defendants and did not uphold or reject the merit
of any count in either complaint. If the plaintiffs do decide to amend the
complaints and to pursue these lawsuits, the defendants will have the option of
moving again to dismiss the complaints to challenge their legal sufficiency on
the merits of the claims. Management believes these lawsuits are without merit
and intends to defend the actions vigorously.
Other than as stated above, there have been no material developments in this
litigation during the past fiscal year.
31
Franklin Templeton is involved from time to time in litigation relating to
claims arising in the normal course of business. Management is of the opinion
that the ultimate resolution of such claims will not materially affect Franklin
Templeton's business or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information About Franklin Templeton's Common Stock
- ---------------------------------------------------
FRI'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, 1999, the closing price of FRI's
common stock on the NYSE was $30.5625 per share. At December 3, 1999, there were
approximately 5,100 shareholders of record. Based on nominee solicitation, we
believe that there are approximately 31,400 beneficial shareholders whose shares
are held in street name.
The following table sets forth the high and low sales prices for FRI's common
stock from the NYSE Composite Tape. The first quarter fiscal 1998 sales prices
have been adjusted retroactively to reflect the 1998 two-for-one stock split.
See Note 1 of Notes to Financial Statements.
1999 Fiscal Year 1998 Fiscal Year
Quarter High Low High Low
- ------------------------------------------------------------------------------
October-December 45 5/8 26 1/2 51 7/8 39 3/4
January-March 38 3/8 27 57 1/4 38
April-June 45 27 1/8 57 7/8 47 9/16
July-September 43 7/16 29 3/4 54 7/8 25 3/4
Franklin Templeton declared dividends of $0.22 per share in fiscal 1999 and
$0.20 per share in fiscal 1998. Franklin Templeton expects to continue paying
dividends on a quarterly basis to common stockholders depending upon earnings
and other relevant factors.
32
Item 6. Selected Financial Data
FINANCIAL HIGHLIGHTS
in millions, except assets under
management and per share amounts
AS OF AND FOR THE
YEARS ENDED SEPTEMBER 30, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Operating revenues $2,262.5 $2,577.3 $2,163.3 $1,519.5 $1,253.3
Net income 426.7 500.5 434.1 314.7 268.9
FINANCIAL DATA
Total assets 3,666.8 3,480.0 3,095.2 2,374.2 2,244.7
Long-term debt 294.3 494.5 493.2 399.5 382.4
Stockholders' equity 2,657.0 2,280.8 1,854.2 1,400.6 1,161.0
Operating cash flow 584.5 693.7 428.5 359.6 296.5
ASSETS UNDER MANAGEMENT
in billions 218.1 208.6 226.0 151.6 130.8
PER COMMON SHARE
Earnings
Basic 1.69 1.98 1.72 1.30 1.10
Diluted 1.69 1.98 1.71 1.25 1.07
Cash dividends 0.22 0.20 0.17 0.15 0.13
Book value 10.59 9.06 7.36 5.82 4.78
33
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In this section, we discuss our results of operations and our financial
condition. We also make some statements relating to the future which are called
"forward-looking" statements. Although we do our best to make clear and accurate
forward-looking statements, the actual results and outcomes could be
significantly different from those that we discuss in this document. For this
reason, you should not rely too heavily on these forward-looking statements. We
encourage you to look at the "Risk Factors" section below, where we discuss
these statements in more detail.
GENERAL
The majority of our operating revenues, operating expenses and net income are
derived from providing investment advisory and related services to retail mutual
funds, institutional and private accounts, and other investment products. This
is our primary business activity and operating segment. The mutual funds and
other products that we advise, collectively called our sponsored investment
products, are sold to the public via three brand names:
- - Franklin
- - Templeton
- - Mutual Series
Our sponsored investment products include a broad range of domestic and
global/international equity, fixed-income and money market mutual funds, as well
as other investment products that meet a wide variety of investment needs of
individuals and institutions.
The level of our revenues is largely dependent upon the level and relative
composition of assets under management. To a lesser degree, our revenues are
also dependent on the level of mutual fund sales and the number of mutual fund
shareholder accounts. The fees charged for our services are based on contracts
between ourselves and our sponsored investment products or our clients. These
arrangements could change in the future.
Our secondary business activity and operating segment is banking/finance. Our
banking/finance group offers consumer lending and selected retail banking
services to individuals.
34
Franklin Templeton operates primarily in the United States, but we also provide
services and earn revenues in Canada, the Bahamas, Europe and Asia/Pacific. Most
of these revenues and associated expenses, however, are denominated in U.S.
dollars. Therefore, our exposure to foreign currency fluctuations in our
revenues and expenses is not significant. This situation may change in the
future as our business grows outside the United States.
At September 30, 1999, we employed approximately 6,700 people in over 25
countries, serving customers on six different continents.
ASSETS UNDER MANAGEMENT
in billions
1999 1998
AS OF SEPTEMBER 30, 1999 1998 1997 VS 1998 VS 1997
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN TEMPLETON GROUP:
EQUITY
Global/international $96.8 $84.8 $107.3 14% (21)%
Domestic (U.S.) 37.6 37.6 38.5 - (2)
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY 134.4 122.4 145.8 10 (16)
HYBRID FUNDS 10.2 11.2 11.5 (9) (3)
FIXED-INCOME
Tax-free 48.2 50.5 45.8 (5) 10
Taxable
(Domestic)
(primarily U.S. Government) 15.8 16.0 15.3 (1) 5
Global/international 3.9 3.7 3.9 5 (5)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME 67.9 70.2 65.0 (3) 8
MONEY FUNDS 5.6 4.8 3.7 17 30
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $218.1 $208.6 $226.0 5 (8)
- ----------------------------------------------------------------------------------------------------------------------------
Monthly average for the year $219.8 $226.9 $192.0 (3)% 18%
35
Our assets under management at the end of our fiscal year were $218.1 billion,
5% higher than they were at the end of last year. However, the monthly average
value of these assets during 1999 was $219.8 billion as compared to $226.9
billion in 1998, a 3% drop. The change in the monthly average assets under
management is more indicative of investment management fee revenues than the
increase in year-end assets.
During 1999, our sponsored investment products experienced overall net cash
outflows in contrast to the net cash inflows experienced in 1998 and 1997. In
1999, this trend was offset to some extent by market appreciation of these
assets. In 1998, market depreciation, principally in the fourth quarter, was
offset by net cash inflows.
RESULTS OF OPERATIONS
The table below presents the highlights of our operations for the last three
years.
in millions except per share amounts
1999 1998
1999 1998 1997 VS 1998 VS 1997
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $426.7 $500.5 $434.1 (15)% 15%
EARNINGS PER SHARE
Basic $1.69 $1.98 $1.72 (15) 15
Diluted $1.69 $1.98 $1.71 (15) 16
Without restructuring charge $1.86 $1.98 $1.71 (6)% 16%
OPERATING MARGIN
As reported 24% 25% 27% - -
Without restructuring charge 26% 25% 27% - -
EBITDA MARGIN(1)
As reported 30% 30% 32%
Without restructuring charge 33% 30% 32%
(1) EBITDA margin is earnings before interest, taxes on income, depreciation and
the amortization of intangibles divided by total revenues.
Net income and diluted earnings per share for 1999 decreased by 15%, principally
as a result of decreased investment management fee revenues and a restructuring
charge recognized in 1999. 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.
The table below presents the percentage change in each category between 1998 and
1999 and between 1997 and 1998.
36
OPERATING REVENUES
1999 1998 AS A PERCENTAGE OF TOTAL REVENUES
VS 1998 VS 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Investment management fees (5)% 17% 59% 55% 55%
Underwriting and distribution fees (27) 19 32 38 38
Shareholder servicing fees 15 29 8 6 6
Other, net (13) 93 1 1 1
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUES (12)% 19% 100% 100% 100%
- ----------------------------------------------------------------------------------------------------------------------------
SUMMARY
In 1999, domestic and international equity markets were volatile. Investment
management fees and underwriting and distribution fees fell as the average value
of our assets and sales volumes decreased from 1998 levels, particularly in our
sponsored equity funds. In 1998, all categories of revenues increased from the
previous year's levels as a result of increases in the average values of assets,
sales and shareholder accounts.
INVESTMENT MANAGEMENT FEES
Investment management fees, the largest component of our operating revenues
include both investment advisory and fund administration fees. These fees are
generally calculated under fixed-fee arrangements as a percentage of the value
of assets under management. Annual rates vary and generally decline as the
average net assets of the portfolios exceed certain threshold levels. In return
for these fees, we provide investment advisory and administrative services.
There have been no significant changes in these fee structures for the funds and
accounts that we manage in the years under review.
37
Investment management fees decreased 5% in fiscal 1999, primarily due to 3%
lower average assets under management. In 1999, revenues fell faster than
average assets due to a 2% shift in our asset mix towards lower-fee fixed-income
products. Consistent with this trend, the effective investment management fee
rate (investment management fees divided by average assets under management)
decreased in 1999 to 0.61% compared to 0.62% in 1998. Future changes in the
composition of assets under management will likely affect our effective
investment management fee rate. In fiscal 1998, an 18% increase in average
assets under management led to a 17% increase in investment management fees.
UNDERWRITING AND DISTRIBUTION FEES
Underwriting commissions are earned from the sale of certain classes of mutual
funds that have a front-end sales commission. Distribution fees are paid by our
sponsored mutual funds in return for sales and marketing efforts on their
behalf. Distribution fees include 12b-1 plan fees which are subject to maximum
pay-out levels, based upon a percentage of the assets in each fund. A
significant portion of underwriting commissions and distribution fees are paid
to the brokers and other intermediaries who sell funds to the public on our
behalf. See the description of underwriting and distribution expenses below.
Underwriting and distribution fees decreased 27% in 1999. Underwriting
commissions decreased as a result of a 26% drop in gross mutual fund sales from
1998 levels. Distribution fees also decreased as a result of the 3% decrease in
average assets under management. Underwriting and distribution fees increased in
1998 due to the increased value of average assets under management and increased
mutual fund sales in 1998 over 1997 levels.
SHAREHOLDER SERVICING FEES
Shareholder servicing fees are generally fixed charges per shareholder account
that vary with the particular type of fund and the service being rendered. Fees
are received for each shareholder account as compensation for providing transfer
agency services which include providing customer statements, transaction
processing, customer service and tax reporting. In accordance with current
agreements with the funds, closed accounts in a given calendar year remain
billable through the second quarter of the following calendar year at a reduced
rate.
In 1999, shareholder servicing fees increased 15% over 1998 as a result of a 2.0
million (24%) increase in average billable shareholder accounts, a substantial
portion of which were closed accounts, and an increase in the per account
charge. Shareholder servicing fees increased 29% in 1998 compared to 1997. This
increase was primarily the result of an increase in billable shareholder
accounts.
38
OTHER, NET
Other, net consists primarily of revenues from the banking/finance operating
segment:
- - Operating revenues, consisting primarily of interest and servicing income
- - Interest expense, and
- - Provision for loan losses
Other, net decreased 13% in 1999 primarily due to an increase in the provision
for loan losses. Charge-offs as a percentage of average loans outstanding
increased in 1999 over 1998. Also, loan balances increased $21.1 million at
September 30, 1999, compared to September 30, 1998. In addition, during 1998, a
portion of the reserves related to auto loans was released because of improved
loss experience over 1997.
We have considered the potential impact of the effect on the banking/finance
segment of a 100 basis point (1%) movement in market interest rates and we do
not expect it would have a material impact on our operating revenues or results
of operations.
OPERATING EXPENSES
1999 1998 AS A PERCENTAGE OF TOTAL EXPENSES
VS 1998 VS 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Underwriting and distribution (26)% 18% 36% 43% 45%
Compensation and benefits (7) 24 30 29 28
Information systems, technology
and occupancy 17 34 12 9 9
Advertising and promotion (16) 30 6 7 6
Amortization of deferred
sales commissions (9) 77 6 5 4
Amortization of intangible assets 1 8 2 2 2
Other (14) 5 5 5 6
Restructuring charges - - 3 - -
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES (11)% 23% 100% 100% 100%
- ----------------------------------------------------------------------------------------------------------------------------
39
Underwriting and distribution includes sales commissions and distribution fees
paid to brokers and other third parties for selling and distributing our funds
to the public. During 1999, underwriting and distribution expenses decreased
26%, consistent with the trend in underwriting and distribution revenues. During
1998, underwriting and distribution expenses increased 18%, consistent with the
trend in revenues.
Compensation and benefits decreased 7% in 1999, primarily due to decreased
temporary labor costs and employee overtime. We also have reduced the number of
full-time employees throughout 1999. In January 1999, we announced that we were
eliminating 560 positions, primarily as a result of efficiencies gained from
conversion to one domestic transfer agency system. Through employee attrition
and turnover the number of employees decreased a further 1,400 by September 30,
1999 from the previous year. In 1998, compensation and benefits increased 24%
over the prior year, reflecting an increase in the number of full-time employees
and in temporary labor costs. In order to be able to hire and retain our key
employees in the current labor market, we are committed to keeping our salaries
and benefit packages competitive, which may mean that the level of compensation
and benefits will increase more quickly than inflation.
Information systems, technology and occupancy costs increased 17% in 1999 and
34% in 1998. During the past three years, we have started major systems
implementations - including the conversion to one transfer agency from three,
our Year 2000 project and euro preparations, and we have upgraded our network,
desktop and Internet environments. We are also developing e-business strategies
to meet the needs of our distribution network and our mutual fund shareholders.
We expect that such major systems undertakings will continue to have an impact
on our operating results through fiscal 2000 and beyond.
Advertising and promotion expenses decreased 16% in 1999 and increased 30% in
1998. In 1999, we reduced expenditures on media advertising and reduced other
promotional activities in line with our general cost-saving efforts.
Amortization of deferred sales commissions decreased 9% in 1999 and increased
77% in 1998. Certain fund classes are sold without a front-end sales charge to
shareholders, while, at the same time, we pay a commission to selling brokers
and others. We expect to recover the payments in distribution revenues and
contingent deferred sales charges over periods of up to a maximum of eight years
following the sale. Accordingly, the payments are capitalized and amortized over
periods not exceeding eight years. In the second quarter of 1999, our sponsored
Canadian funds arranged for financing of these sales commissions directly with a
third party. The amortization of deferred sales decreased in 1999 as a result of
decreased sales of these products and as a result of the third-party financing
of Canadian sales. In 1998, these amounts increased as a result of increased
sales.
40
During 1999, we recognized pretax restructuring charges of $58.4 million (or
$0.17 per diluted share after tax). These charges were related to a plan
initiated by management in the first quarter of fiscal 1999. See Note 14 to the
financial statements. We do not expect to incur any additional charges with
respect to the plan during fiscal 2000.
Of the $58.4 million total restructuring charge, approximately 85% was utilized
during 1999. The anticipated lost revenues associated with discontinued products
are not expected to have a material impact on ongoing results of operations.
At the completion of these restructuring efforts, our annual operating expenses
are expected to decrease approximately $150 million from peak levels in fiscal
1998. These expectations may be affected by changes in the business environment
in future years, but in the nine months since we announced the restructuring
plan, we have realized over $90 million reduction in controllable expenses from
peak periods in 1998. A substantial portion of the savings came from decreased
employee, occupancy and associated other costs as a result of the reduction in
the workforce discussed above. For the year ended September 30, 1999, the
savings recognized from the restructuring plan have been partially offset by
increased information system and technology costs as we continue to invest in
our business.
OTHER INCOME (EXPENSE)
Investment and other income is made up primarily of:
- - dividends from investments in our sponsored mutual funds, and
- - interest income from investments in bonds and government securities.
It also includes realized gains and losses from the sale of investment
securities, realized foreign exchange gains and losses and other miscellaneous
income. See Note 9 to the financial statements.
In 1999, higher interest income was offset by lower dividend income and reduced
realized gains from the sale of investments. Investment income increased 14% in
1998 primarily as the result of the investment of increased operating cash flows
in interest-earning accounts and securities.
Interest expense decreased 7% in 1999 due to a reduction in debt used to finance
our investment management operating segment. During 1999, average debt used to
finance consumer auto loans also decreased resulting in lower interest expense
for the banking/finance group. (See Other, net revenues above). 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.
41
TAXES ON INCOME
Our effective income tax rate for fiscal 1999 remained relatively stable on an
annual basis at 26%, the same rate as in 1998. The effective tax rate will
continue to be reflective of the relative contributions of foreign earnings that
are subject to reduced tax rates and that are not currently included in U.S.
taxable income.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, we had $819.2 million in cash and cash equivalents, as
compared to $556.0 million at September 30, 1998. Liquid assets, which consist
of cash and cash equivalents, investments available-for-sale and current
receivables increased to $1,490.1 million at September 30, 1999 from $1,278.6
million at September 30, 1998. At September 30, 1999, approximately $662.4
million was available to Franklin Templeton under unused commercial paper and
medium-term note programs. Revolving credit facilities at September 30, 1999
aggregated $525 million of which $225 million was under a 364-day facility. The
remaining $300 million facility will expire in May 2003.
Cash provided by operating activities decreased to $584.5 million in 1999, from
$693.7 million in 1998. This decline was due mainly to lower net income in the
current fiscal year. During the year ended September 30, 1999, we generated net
cash of $27.3 million from investing activities. Net liquidation of investments
generated $177.3 million and we purchased $131.1 million fixed assets, net of
disposals and invested $18.9 million, net in our banking/finance segment. The
$18.9 million invested was made up of $132.0 million in net new loans
originated, partially offset by $106.4 million received in the May 1999
securitization of auto loans and $6.7 million received from the net sale of
investments. Net cash used in financing activities during the year was $348.6
million, compared to $101.9 million in 1998. We repaid $201.8 million of debt,
net of new borrowings, purchased 2.1 million shares of our common stock for
$64.3 million, paid $54.3 million in dividends to stockholders, repaid $29.6
million of deposits of the banking/finance group and received $1.5 million from
the exercise of stock options.
Outstanding debt declined to $403.2 million at September 30, 1999, compared to
$612.4 million at September 30, 1998. Debt primarily consisted of fixed-interest
medium-term notes and commercial paper that carried interest at variable rates.
As described in Note 8 to the financial statements, we participate in the
financial derivatives markets solely to manage our exposure to variable
interest-rate fluctuations on a portion of commercial paper. Our overall
weighted average interest rate on outstanding commercial paper and medium-term
notes was 6.2% at both September 30, 1999 and September 30, 1998. Through our
interest-rate swap agreements and medium-term note program, we have fixed the
rates of interest we pay on 81% of our outstanding debt.
42
During September 1999, we entered into a series of agreements to finance the
construction of a new corporate headquarters on a 32-acre site in San Mateo,
California. An owner-lessor trust has been set up to finance the construction
and lease the completed facility to Franklin Templeton. The agreements are not
expected to impact our cash flows or financial condition materially during the
initial five-year lease period.
During 1999, Franklin Templeton also arranged for third-party, non-recourse
financing of sales commissions on its B shares. At September 30, 1999, the
amounts financed by us under this arrangement are not material.
Management expects that the principal future needs for cash will be to advance
sales commissions, fund increased property and equipment acquisitions including
information systems and technology, pay stockholder dividends and service debt.
Management believes that existing liquid assets, together with the expected
continuing cash flow from operations, our borrowing capacity under current
credit facilities and our ability to issue stock will be sufficient to meet our
present and reasonably foreseeable future cash needs. The banking/finance
segment's cash needs are expected to be met from existing cash flows or from
additional securitizations of loans receivable.
YEAR 2000 READINESS DISCLOSURE
BACKGROUND.
Before work commenced on what is commonly known as the Year 2000 problem, many
of the world's computer systems recorded years in a two-digit format. Without
remediation, such computer systems might have been unable to recognize,
interpret or use dates in and beyond the year 1999 correctly. Because a
significant number of key transactions for most 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
short time frames within which computer systems must receive and process data to
complete securities transactions increases the potential impact of the Year 2000
problem for the financial services industry.
Year 2000 Readiness. All of our mission-critical systems and important
non-mission critical systems have now been "certified" as Year 2000 compliant as
described below and are operating in production. We will focus our efforts
through year-end on updating verification of third-party readiness, reviewing,
refining and testing our contingency plans, including detailed year-end
cross-over plans and additional integrated testing of certain systems.
Certification and Testing Process. Our Year 2000 certification process included
assessment, remediation and a number of prescribed tests either established by
Franklin Templeton and/or the vendor of the system. Although Franklin Templeton
believes that its systems are ready and will function correctly in the Year
2000, no testing procedures can absolutely guarantee that a system which has
been "certified" as Year 2000 compliant will be free of difficulties associated
with the Year 2000.
43
Industry Testing. During 1999, Franklin Templeton successfully participated in
several industry-wide tests: the Securities Industry Association's "Street Wide
Testing" held over five weekends in March and April; testing of major real-time
market data services in May; and six days of testing interfaces with major
broker/dealers in July. These tests included simulated Year 2000 securities
transactions and market data feeds, and involved the major North American
securities exchanges, securities clearing organizations, financial information
services, market data services, major banks, brokerages and investment advisory
and investment management companies in the United States.
Third Parties and Year 2000. Franklin Templeton's operating segments are heavily
dependent upon a complex worldwide network of information technology systems,
some of which are owned and managed by third parties. Some of these third-party
systems are Franklin Templeton's mission-critical systems. These third-party
systems include data feeds, trading systems, securities transfer agent
operations and stock market links. There were a number of third-party systems
that we could not test ourselves and for these systems we relied upon vendor
representations, the results of point-to-point testing, or test scripts supplied
by the vendor. Franklin Templeton has contacted all of its major external
suppliers of goods and services to assess their compliance efforts and our
exposure in the event that third-party compliance efforts fail. In addition,
certain of these third parties assisted us with modifying and testing our
systems, and participated in "Street Wide Testing" with Franklin Templeton and
with one another. To date, no major third-party supplier has informed us that it
would not be Year 2000 compliant or Year 2000 ready by the millennium date, nor
has our testing with third parties revealed any significant non-compliance
issues. Communication with third parties will continue as we proceed with our
Year 2000 project, and into the Year 2000 to monitor system functions. However,
no testing or inquiries with respect to third-party systems can absolutely
guaranty that problems related to the Year 2000 will not occur.
Contingency Planning. Extensive preparation efforts cannot guarantee a total
absence of Year 2000 problems. Therefore, we continue to develop, exercise, and
integrate comprehensive worldwide contingency plans. All of Franklin Templeton's
worldwide contingency plans have been formulated and tested; we expect to
refine, change and update our contingency plans through the rollover date. In
addition to technical systems matters, the contingency planning process
considered operational issues such as an increased volume of shareholder
requests, cash flow matters related to purchase or redemption volumes, market
adjustments and other areas of potential disruptions.
44
As part of the effort to create a smooth transition to the Year 2000, Franklin
Templeton formed a worldwide Year 2000 cross-over team with representatives from
each major business function. This team will staff command centers around the
world from December 31 through the end of the first week of January 2000. During
the cross-over weekend, personnel will be at key command centers 24 hours a day,
beginning with the first rollovers to the Year 2000 in Australia, Hong Kong and
Singapore until the final rollover at Franklin Templeton's headquarters in
California.
Due to the complexity and magnitude of our business processes there are, in
certain cases, limited or no alternatives to some of our mission-critical
systems or public utilities. It is not possible to predict which internal or
external systems or utilities may be affected worldwide, or the exact nature of
all problems that might occur. While redundant systems and multi-day back-up
power sources are in place at Franklin Templeton's main data centers to address
communication or power interruptions, if telephone systems or public utilities
fail in multiple locations or if mission-critical systems of Franklin Templeton
or third parties fail, there could be a material adverse impact upon our
business, financial condition and results of operations. This is especially true
if such outages or failures were to extend for a period of many days.
Cost Estimates. The total estimated costs through March 2000 associated with the
Year 2000 project are expected to be between $50 million and $60 million,
including an unallocated amount for unanticipated costs. These estimated costs
are mainly internal and third-party labor costs which are expensed as incurred.
The total amount expended on the project through September 30, 1999 was
approximately $42.5 million. Franklin Templeton's estimate of the total costs to
complete the Year 2000 project will continue to be refined in future periods.
Liquidity. Franklin Templeton believes that its liquid assets, together with
existing credit facilities, will be sufficient to meet any corporate needs
related to Year 2000 problems. However, in the event of a worldwide liquidity
crisis or broad-based market panic, no financial organization can absolutely
assure that it or its managed portfolios would not be impacted. Franklin
Templeton also has arranged a $750 million short-term special line of credit for
certain of its domestic sponsored retail mutual funds to assist in meeting
liquidity requirements that could arise out of Year 2000 concerns.
Non-IT Systems. All of our non-information technology ("non-IT") systems have
been certified as being Year 2000 ready, either by internal verification or by
third-party representations, for Franklin Templeton's domestic properties and
foreign properties over 5,500 square feet. Like other companies, Franklin
Templeton is dependent upon certain non-IT systems such as third-party long
distance telephone and data lines, and public utility electrical power. We do
not expect to experience any material effects related to the Year 2000
compliance of non-IT systems unless there are widespread national or
international telephone and data line, or general public utility problems,
beyond our control.
45
Specific Risks Associated with the Year 2000. Franklin Templeton's ability to
manage Year 2000 issues is subject to uncertainties beyond our control that
could cause actual results to differ materially from what has been discussed
above. Franklin Templeton could become subject to legal claims in the event of
any Year 2000 problem in our business operations. In addition, we are subject to
regulation by various domestic and international authorities which could impose
sanctions or fines or cause us to cease certain operations in the event our
systems are not Year 2000 compliant. If there is a general disruption in
securities or capital markets, or if investors withdraw funds because they are
concerned about Year 2000 issues, this could create global liquidity issues that
could have a material adverse effect upon Franklin Templeton's business,
financial condition and results of operations. These types of disruptions could
occur regardless of the existence or severity of Year 2000 problems, as a result
of overreaction or market panic in response to even minor Year 2000 problems or
false reports of Year 2000 problems.
If there are Year 2000 system interruptions or failures of important third
parties, such as securities transfer agents, stock exchanges, data providers or
other organizations such as those mentioned above under "Third Parties and Year
2000," this could have a material adverse effect on our business, financial
condition and results of operations. Although certain third parties may
represent that their systems are Year 2000 ready, there can be no assurance that
their systems are in fact Year 2000 compliant or that they have provided
complete and accurate information to Franklin Templeton.
Factors that could influence the impact of the Year 2000 problem also include
the success of Franklin Templeton in identifying systems and programs that are
affected. Other factors 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; our success in correcting our internal
systems and the success of Franklin Templeton's external partners and suppliers
in addressing their respective Year 2000 problems.
46
RISK FACTORS
"FORWARD-LOOKING STATEMENTS." When used in this Annual Report, words or phrases
about the future such as "expected to," "will continue," "anticipates,"
"estimates," or similar expressions are "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995. Statements about key
employee compensation; financing construction of our new corporate headquarters;
our future cash needs and the expected sources of future cash inflows; estimates
about our Year 2000 plan, including cost projections, statements about possible
effects of the Year 2000 problem and contingency plans are also "forward-looking
statements." These types of statements are subject to certain risks and
uncertainties, such as the factors described in "Specific Risks Associated with
the Year 2000" above and the risk factors outlined below. These risks and
uncertainties could cause our current expectations and predictions in the
forward-looking statements to be wrong. Forward-looking statements are our best
prediction at the time that they are made, and you should not rely on them.
Rather, you should read the forward-looking statements in conjunction with the
risk disclosures in this Annual Report. If a circumstance occurs that causes any
of our forward-looking statements to be inaccurate, Franklin Templeton does not
have an obligation to publicly release the change to our expectations, or to
make any revision to the forward-looking statements.
FRANKLIN TEMPLETON FACES STRONG COMPETITION FROM NUMEROUS AND SOMETIMES LARGER
COMPANIES. We compete with numerous stock brokerage and investment banking
firms, insurance companies, banks, online and Internet investment sites, savings
and loan associations and other financial institutions. These companies also
offer financial services and other investment alternatives. In recent years,
there has been a trend of consolidation in the mutual fund industry, resulting
in stronger competitors with greater financial resources than Franklin
Templeton. There has also been a trend toward online Internet financial
services. We are currently expanding our Internet e-business, but there can be
no assurance that our e-business will compete effectively with other
alternatives available to investors. To the extent that existing customers stop
investing with us and instead invest with our competitors, or if potential
customers decide to invest with other companies instead, this could cause our
market share, revenues and net income to decline.
COMPETING SECURITIES DEALERS AND BANKS COULD RESTRICT SALES OF OUR FUNDS.
Although we rely on securities dealers to sell and distribute Franklin,
Templeton and Mutual Series fund shares, many of those securities dealers also
have mutual funds under their own names that compete directly with our products.
The banking industry also continues to expand its sponsorship of proprietary
funds. These firms or banks could decide to limit or restrict the sale of our
fund shares, which could lower our future sales and cause our revenues to
decline.
47
WE CURRENTLY RELY UPON OUR DISTRIBUTION CHANNELS. Franklin Templeton derives
nearly all of its income from sales made by broker/dealers and other similar
investment advisors, and we are heavily dependent upon these distribution
channels. However, there is increasing competition to get into these channels,
which has caused our distribution costs to rise and could cause further
increases in the future. Higher distribution costs lower our net revenues and
earnings. If one of these major financial advisors had to cease operations, even
for a few days, due to Year 2000 problems or for other reasons, it could have a
significant adverse impact on our revenues and earnings. Similarly, Franklin
Templeton relies upon these business relationships and there is no guarantee
that good relations can be maintained. If we cannot effectively compete,
distribute and sell our products, this would have a negative effect on our level
of assets under management, related revenues and overall business and financial
condition.
NEW SHARE CLASSES BRING IN LOWER REVENUES AND HAVE REDUCED OPERATING MARGINS.
Franklin Templeton receives no or reduced sales charges at the time of an
initial investment in B shares and C shares but still must pay the related
dealer commission. In addition, due to industry competition, the dealer
commissions that we pay on these types of shares are now higher than in the past
and may increase in the future. This could potentially have a negative effect on
our liquidity and operating margins.
IF OUR ASSET MIX SHIFTS TO PREDOMINANTLY FIXED-INCOME, OUR REVENUES WOULD
DECLINE. We derive higher fee revenues and income from the equity assets that we
manage. A shift in our asset mix towards fixed-income products has caused in the
past, and would cause in the future, a decline in our income and revenue.
WE HAVE BECOME SUBJECT TO AN INCREASED RISK OF ASSET VOLATILITY FROM CHANGES IN
THE GLOBAL EQUITY MARKETS. As Franklin Templeton's asset mix has shifted since
1992 from predominantly fixed-income to a majority of equity assets, we have
become subject to an increased risk of asset volatility from changes in global
equity markets. Declines in these markets have caused in the past, and would
cause in the future, a decline in our income and revenue.
GLOBAL ECONOMIC CONDITIONS, INTEREST RATES, INFLATION RATES AND OTHER FACTORS
WHICH ARE DIFFICULT TO PREDICT AFFECT THE MIX, MARKET VALUES, AND LEVELS OF OUR
ASSETS UNDER MANAGEMENT. Fluctuations in interest rates and in the yield curve
will affect the value of fixed-income assets under management as well as the
flow of monies to and from fixed-income funds. In turn, this affects our
revenues from those funds. In addition, changes in the equity marketplace may
significantly affect the level of our assets under management. The factors above
often operate inversely on equity funds and fixed-income funds, making it
difficult to predict the net effect of any particular set of conditions.
48
GENERAL ECONOMIC AND SECURITIES MARKETS FLUCTUATIONS AFFECT OUR BUSINESS.
Adverse general securities market conditions, currency fluctuations,
governmental regulations and recessionary global economic conditions could lower
Franklin Templeton's mutual fund share sales and other financial services
products sales.
AN INABILITY TO MEET CASH NEEDS COULD HAVE A NEGATIVE EFFECT ON OUR FINANCIAL
CONDITION AND BUSINESS OPERATIONS. Franklin Templeton's ability to meet
anticipated cash needs depends upon factors including our asset value, our
creditworthiness as perceived by lenders and the market value of our stock.
Similarly, our ability to securitize future portfolios of auto loan and credit
card receivables would also be affected by the market's perception of those
portfolios, finance rates offered by competitors, and the general market for
private debt.
WE FACE INCREASED COMPETITION IN HIRING AND RETAINING QUALIFIED EMPLOYEES. Our
continued success will depend upon our ability to attract and retain qualified
personnel. The competition from other companies to hire these kinds of employees
has increased, particularly in certain geographic locations where the majority
of our workforce is employed. We may be forced to offer compensation and
benefits to these employees at a level that exceeds inflation. With historically
low unemployment in the United States, qualified personnel are now moving
between firms and starting their own companies with greater frequency. If
Franklin Templeton is not able to attract and retain these employees, our
overall business condition and revenues could suffer.
OUR EMERGING MARKET PORTFOLIOS AND RELATED REVENUES ARE SUBJECT TO INCREASED
RISKS. These portfolios and our revenues derived from managing these portfolios
are subject to significant risks of loss from political and diplomatic
developments, currency fluctuations, social instability, changes in governmental
polices, expropriation, nationalization, asset confiscation and changes in
legislation related to foreign ownership. Foreign trading markets, particularly
in some emerging market countries are often smaller, less liquid, less regulated
and significantly more volatile.
OUR SECURITIZED CONSUMER RECEIVABLES BUSINESS IS SUBJECT TO MARKETPLACE
FLUCTUATION AND COMPETES WITH BUSINESSES WITH SIGNIFICANTLY LARGER PORTFOLIOS.
Auto loan and credit card portfolio losses can be influenced significantly by
trends in the economy and credit markets which reduce borrowers' ability to
repay loans.
DIVERSE AND STRONG COMPETITION LIMITS THE INTEREST RATES THAT WE CAN CHARGE ON
CONSUMER LOANS. We compete with many types of institutions for consumer loans,
including the finance subsidiaries of large automobile manufacturers. Some of
these competitors can provide loans at significantly below market interest rates
in connection with automobile sales. We rely on our relationships with various
automobile dealers and there is no guarantee that we can maintain relationships
with these dealers.
49
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the financial position of Franklin Templeton
is subjected to a variety of risks, including market risk associated with
interest rate movements. Franklin Templeton is exposed to changes in interest
rates primarily in its debt transactions. Through its interest-rate swap
agreements and its medium-term note program Franklin Templeton has effectively
fixed the rate of interest it pays on 81% of its debt outstanding at September
30, 1999. As a result, Franklin Templeton does not believe that the effect of
reasonably possible near-term changes in interest rates on Franklin Templeton's
financial position, results of operations or cash flow would be material.
We have considered the potential impact of the effect on the banking/finance
segment of a 100 basis point (1%) movement in market interest rates and we do
not expect it would have a material impact on our operating revenues or results
of operations.
Item 8. Financial Statements and Supplementary Data
Index of Consolidated Financial Statements for the years ended September 30,
1999, 1998, and 1997.
CONTENTS
Consolidated Financial Statements of Franklin Resources, Inc.:
Page
Consolidated Statements of Income
for the years ended September 30, 1999, 1998, and 1997
Consolidated Balance Sheets
as of September 30, 1999 and 1998
Consolidated Statements of Stockholders' Equity and Comprehensive Income
as of and for the years ended September 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows
for the years ended September 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Report of Independent Accountants
All schedules have been omitted as the information is provided in the financial
statements or in related notes thereto or is not required to be filed as the
information is not applicable.
50
CONSOLIDATED STATEMENTS OF INCOME
in thousands
except per share data
FOR THE YEARS ENDED SEPTEMBER 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Investment management fees $1,340,612 $1,413,273 $1,203,923
Underwriting and distribution fees 718,871 982,647 823,677
Shareholder servicing fees 184,948 160,560 124,905
Other, net 18,066 20,792 10,770
- ----------------------------------------------------------------------------------------------------------
Total operating revenues 2,262,497 2,577,272 2,163,275
OPERATING EXPENSES
Underwriting and distribution 620,047 841,706 712,328
Compensation and benefits 515,137 553,085 447,169
Information systems, technology and occupancy 212,495 181,665 135,391
Advertising and promotion 105,935 125,925 96,552
Amortization of deferred sales commissions 95,948 105,405 59,468
Amortization of intangible assets 37,220 36,857 34,294
Other 78,152 90,533 86,613
Restructuring charges 58,455 - -
- ----------------------------------------------------------------------------------------------------------
Total operating expenses 1,723,389 1,935,176 1,571,815
Operating income 539,108 642,096 591,460
OTHER INCOME (EXPENSE)
Investment and other income 55,934 56,723 49,586
Interest expense (20,958) (22,535) (25,333)
- -----------------------------------------------------------------------------------------------------------
Other income, net 34,976 34,188 24,253
Income before taxes on income 574,084 676,284 615,713
Taxes on income 147,373 175,834 181,650
- ----------------------------------------------------------------------------------------------------------
NET INCOME $426,711 $500,450 $434,063
- ----------------------------------------------------------------------------------------------------------
Earnings per Share
Basic $1.69 $1.98 $1.72
Diluted $1.69 $1.98 $1.71
The accompanying notes are an integral part of these consolidated financial
statements.
51
CONSOLIDATED BALANCE SHEETS
in thousands
AS OF SEPTEMBER 30, 1999 1998
- ----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $811,300 $537,188
Receivables
Sponsored investment products 225,132 204,826
Other 33,178 25,773
Investment securities, available-for-sale 392,022 470,065
Prepaid expenses and other 24,257 22,137
- ----------------------------------------------------------------------------------------------------------
Total current assets 1,485,889 1,259,989
BANKING/FINANCE ASSETS
Cash and cash equivalents 7,944 18,855
Loans receivable, net 186,185 165,074
Investment securities, available-for-sale 20,484 21,847
Other 3,165 4,991
- ----------------------------------------------------------------------------------------------------------
Total banking/finance assets 217,778 210,767
OTHER ASSETS
Deferred sales commissions 103,289 123,508
Property and equipment, net 416,395 349,229
Intangible assets, net 1,202,777 1,253,713
Receivable from banking/finance group 107,148 87,282
Other 133,514 195,561
- ----------------------------------------------------------------------------------------------------------
Total other assets 1,963,123 2,009,293
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $3,666,790 $3,480,049
- ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
52
CONSOLIDATED BALANCE SHEETS
in thousands
AS OF SEPTEMBER 30, 1999 1998
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
CURRENT LIABILITIES
Compensation and benefits $162,842 $156,253
Current maturities of long-term debt 108,985 117,956
Accounts payable and accrued expenses 80,966 76,433
Commissions 61,971 53,174
Income taxes 57,968 67,319
Other 13,758 6,258
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 486,490 477,393
BANKING/FINANCE LIABILITIES
Payable to Parent 107,148 87,282
Deposits 58,216 87,781
Other 11,042 3,018
- ----------------------------------------------------------------------------------------------------------
Total banking/finance liabilities 176,406 178,081
OTHER LIABILITIES
Long-term debt 294,260 494,459
Other 52,640 49,349
- ----------------------------------------------------------------------------------------------------------
Total other liabilities 346,900 543,808
Total liabilities 1,009,796 1,199,282
- ----------------------------------------------------------------------------------------------------------
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; 251,006,541 and 251,741,578 shares
issued and outstanding for 1999 and 1998, respectively 25,101 25,174
Capital in excess of par value 69,631 93,033
Retained earnings 2,566,048 2,194,835
Other (3,532) (4,230)
Accumulated other comprehensive income (254) (28,045)
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,656,994 2,280,767
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,666,790 $3,480,049
- ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
53
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
in thousands
AS OF AND FOR THE YEARS ENDED SHARES CAPITAL IN EXCESS
SEPTEMBER 30, 1999, 1998 AND 1997 COMMON STOCK TREASURY STOCK COMMON STOCK TREASURY STOCK OF PAR VALUE
BALANCE OCTOBER 1, 1996 82,265 (1,993) $8,226 $(90,301) $101,226
Net income
Other Comprehensive Income:
Net unrealized gains on investments
Currency translation adjustments
Total comprehensive income
Issuance of stock for Heine acquisition 1,100 43,287 22,300
Exercise and purchase of option rights
related to subordinated debentures, net 1,796 565 180 31,065 (47,914)
Issuance of 3-for-2 stock split 42,028 4,203
Purchase of treasury stock (313) (19,135)
Cash dividends on common stock
Issuance of restricted shares, net 96 352 10 19,455 14,360
Other 46 89 4 4,559 1,235
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 1997 126,231 (200) 12,623 (11,070) 91,207
Net income
Other Comprehensive Income:
Net unrealized losses on investments
Currency translation adjustments
Market value of interest rate swaps
Total comprehensive income
Retirement of stock (205) 205 (20) 12,600 (12,580)
Issuance of 2-for-1 stock split 126,357 12,636
Purchase of stock (1,279) (31) (129) (2,941) (39,522)
Cash dividends on common stock
Issuance of restricted shares, net 397 (3) 40 (116) 37,773
Other 241 29 24 1,527 16,155
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 1998 251,742 - 25,174 - 93,033
Net income
Other Comprehensive Income:
Net unrealized gains on investments
Currency translation adjustments
Total comprehensive income
Purchase of stock (2,064) (206) (64,128)
Cash dividends on common stock
Issuance of restricted shares, net 1,036 104 30,560
Employee stock plan (ESIP) shares 299 30 9,002
Other (6) (1) 1,164
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 1999 251,007 - $25,101 - $69,631
54
TOTAL TOTAL
AS OF AND FOR THE YEARS ENDED RETAINED ACCUMULATED OTHER STOCKHOLDERS' COMPREHENSIVE
SEPTEMBER 30, 1999, 1998 AND 1997 EARNINGS OTHER COMPREHENSIVE INCOME EQUITY INCOME
BALANCE OCTOBER 1, 1996 $1,370,513 $(866) $11,793 $1,400,591
Net income 434,063 434,063 $434,063
Other Comprehensive Income:
Net unrealized gains on investments 3,219 3,219 3,219
Currency translation adjustments (5,192) (5,192) (5,192)
--------
Total comprehensive income $432,090
Issuance of stock for Heine acquisition 65,587
Exercise and purchase of option rights
related to subordinated debentures, net (16,669)
Issuance of 3-for-2 stock split (4,203) -
Purchase of treasury stock (19,135)
Cash dividends on common stock (42,837) (42,837)
Issuance of restricted shares, net (5,029) 28,796
Other 5,798
- --------------------------------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 1997 1,757,536 (5,895) 9,820 1,854,221
Net income 500,450 500,450 $500,450
Other Comprehensive Income:
Net unrealized losses on investments (17,647) (17,647) (17,647)
Currency translation adjustments (14,580) (14,580) (14,580)
Market value of interest rate swaps (5,638) (5,638) (5,638)
--------
Total comprehensive income $462,585
Retirement of stock -
Issuance of 2-for-1 stock split (12,636) -
Purchase of stock (42,592)
Cash dividends on common stock (50,515) (50,515)
Issuance of restricted shares, net 1,665 39,362
Other 17,706
- ------------------------------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 1998 2,194,835 (4,230) (28,045) 2,280,767
Net income 426,711 426,711 $426,711
Other Comprehensive Income:
Net unrealized gains on investments 24,061 24,061 24,061
Currency translation adjustments 3,730 3,730 3,730
--------
Total comprehensive income $454,502
Purchase of stock (64,334)
Cash dividends on common stock (55,498) (55,498)
Issuance of restricted shares, net 698 31,362
Employee stock plan (ESIP) shares 9,032
Other 1,163
- ------------------------------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 1999 $2,566,048 $(3,532) $(254) $2,656,994
The accompanying notes are an integral part of these consolidated financial
statements.
55
CONSOLIDATED STATEMENTS OF CASH FLOWS
in thousands
FOR THE YEARS ENDED SEPTEMBER 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
NET INCOME $426,711 $500,450 $434,063
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Increase in receivables, prepaid expenses and other (55,039) (15,711) (106,024)
Advances of deferred sales commissions (75,729) (109,376) (154,689)
Increase in other current liabilities 25,676 54,031 22,370
(Decrease) increase in income taxes payable (9,351) 35,411 4,235
Increase in commissions payable 8,797 7,049 18,058
Increase in accrued compensation and benefits 34,822 37,728 102,171
Depreciation and amortization 200,014 191,374 123,908
Restructuring charge - asset write-down 28,965 - -
Gains on disposition of assets (399) (7,293) (15,563)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 584,467 693,663 428,529
Purchase of investments (731,798) (494,495) (110,019)
Liquidation of investments 909,110 88,310 98,826
Purchase of banking/finance investments (24,891) (23,863) (27,120)
Liquidation of banking/finance investments 31,557 26,277 28,376
Proceeds from securitization of loans receivable 106,375 131,362 -
Net (originations) collections of loans receivable (131,979) 5,930 50,215
Purchase of property and equipment (135,168) (162,181) (82,973)
Proceeds from sale of property 4,083 14,517 -
Acquisition of assets and liabilities of Heine
Securities Corporation - (64,333) (550,742)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 27,289 (478,476) (593,437)
Decrease in bank deposits (29,566) (10,623) (32,814)
Exercise of common stock options 1,456 2,891 1,878
Dividends paid on common stock (54,279) (49,274) (40,387)
Purchase of stock (64,334) (42,592) (19,135)
Issuance of debt 64,140 168,927 416,410
Payments on debt (265,972) (171,214) (128,807)
Purchase of option rights from subordinated
debenture holders - - (91,685)
- -----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (348,555) (101,885) 105,460
Increase (decrease) in cash and cash equivalents 263,201 113,302 (59,448)
Cash and cash equivalents, beginning of year 556,043 442,741 502,189
- ----------------------------------------------------------------------------------------------------------
56
Cash and cash equivalents, end of year $819,244 $556,043 $442,741
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest, including banking/finance group interest $30,361 $40,801 $42,154
Income taxes $163,425 $104,306 $172,906
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Value of common stock issued for Heine
Securities Corporation - - $65,587
Value of common stock issued for redemption
of debentures - - $75,015
Value of common stock issued in other transactions,
principally restricted stock $30,664 $37,697 $31,954
The accompanying notes are an integral part of these consolidated financial
statements.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Franklin Resources, Inc. and its consolidated subsidiaries ("Franklin
Templeton") 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 and
private accounts and other investment products (our "sponsored investment
products"). We operate primarily in the United States but also in Canada, the
Bahamas, Europe and Asia/Pacific under various rules and regulations set forth
by the Securities and Exchange Commission, individual state agencies and foreign
governments. Services to our sponsored investment products are provided under
contracts that set forth the fees to be charged for these services. The majority
of these contracts are subject to periodic review and approval by each fund's
Board of Directors/Trustees and shareholders. Currently, no fund's revenues
represent more than 10% of total revenues. Our revenues are largely dependent on
the total value and composition of assets under management, which include
domestic and global/international equity and debt portfolios. Accordingly,
fluctuations in financial markets and in the composition of assets under
management impact our revenues and operating results.
BASIS OF PRESENTATION. The consolidated financial statements are prepared in
accordance with generally accepted accounting principles that require us to
estimate certain amounts. Actual amounts may differ from these estimates.
Certain 1997 and 1998 amounts have been reclassified to conform to 1999
presentation.
The consolidated financial statements include the accounts of Franklin
Resources, Inc. and its majority-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated except the intercompany payable
from the banking/finance group to the parent to fund auto and credit card loans.
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.
58
INVESTMENT SECURITIES, AVAILABLE-FOR-SALE are carried at fair value. Fair values
for investments in our sponsored investment products are based on the last
reported net asset value. Fair values for other investments are based on the
last reported price on the exchange on which they are traded. Realized gains and
losses are included in investment income currently based on specific
identification. Unrealized gains and losses are recorded net of tax as part of
Accumulated other comprehensive income until realized.
DERIVATIVES. Franklin Templeton does not hold or issue derivative financial
instruments for trading purposes. We enter into interest-rate swap agreements to
reduce variable interest-rate exposure with respect to our commercial paper.
Under these contracts Franklin Templeton 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. Interest-rate swaps are carried at an estimate of their termination
costs.
Unrealized gains and losses on these instruments are recorded net of tax as a
part of Accumulated other comprehensive income. These unrealized gains and
losses would be recognized only on early termination of the agreements. We have
not, and do 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. If interest had been recorded using the interest
method, revenues would not be materially different from those presented.
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. Securitized loans and the associated
allowance for loan losses are excluded from the balance sheet and the associated
interest revenues and provision for loan losses are excluded from our results of
operations. A loan is charged to the allowance for loan losses when it is deemed
to be uncollectible, taking into consideration the value of the collateral, the
financial condition of the borrower and other factors. Recoveries on loans
previously charged off as uncollectible are credited to the allowance for loan
losses.
59
DEFERRED SALES COMMISSIONS. Sales commissions paid to brokers and other
investment advisors in connection with the sale of shares of the Franklin
Templeton mutual funds sold without a front-end sales charge are capitalized and
amortized over periods not exceeding eight years - the periods in which we
estimate that they will be recovered from distribution plan payments 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 our acquisition 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 five to
40 years. We have evaluated the potential impairment of our 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 carrying
values and determined that there is no impairment. At some future period, if
such evaluations indicate that the carrying value of these assets cannot be
recovered using this test, 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 shares of our sponsored
investment products are recorded on the trade date.
ADVERTISING AND PROMOTION. Costs of advertising and promotion are expensed as
incurred.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of foreign subsidiaries are
translated at current exchange rates as of the end of the accounting period, and
related revenues and expenses are translated at average exchange rates in effect
during the period. Net exchange gains and losses resulting from translation are
excluded from income and are recorded as part of Accumulated other comprehensive
income. Foreign currency transaction gains and losses are reflected in income
currently.
STOCK SPLITS. All common shares and per share amounts have been adjusted to give
retroactive effect to a three-for-two stock split in January 1997 and a
two-for-one stock split in January 1998.
60
DIVIDENDS. During the years ended September 30, 1999, 1998 and 1997, Franklin
Templeton declared dividends to common stockholders of $0.22, $0.20 and $0.17
per share, respectively.
STOCK-BASED COMPENSATION. As allowed under the provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), we have elected to apply Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for our 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 we may
elect to make in connection with the Employee Stock Investment Plan over the
18-month holding period and for the full cost of restricted stock grants in the
year that they are earned.
COMPREHENSIVE INCOME. Effective October 1, 1998, we adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"). FAS 130 establishes the disclosure requirements for reporting
comprehensive income in an entity's financial statements. Total comprehensive
income includes net income, unrealized gains and losses on available-for-sale
securities, interest-rate swaps and foreign currency translation adjustments.
These amounts were formerly reported as "Other" within Stockholders' equity and
are now reported under "Accumulated other comprehensive income." Items relating
to movements in Franklin Templeton stock, such as deferred compensation in the
form of common stock, remain in "Other" within Stockholders' equity. There was
no impact on previously reported net income arising from the adoption of FAS
130.
The changes in net unrealized gains (losses) on investments include
reclassification adjustments relating to the net realized gains on investment
sales of $0.1 million, $6.1 million and $14.9 million during 1999, 1998 and
1997. The tax effect of the change in unrealized gains (losses) on investments
was $4.8 million, $(8.4) million and $3.2 million during 1999, 1998 and 1997.
61
EARNINGS PER SHARE
Earnings per share were computed as follows:
in thousands except per share amounts
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
NET INCOME $426,711 $500,450 $434,063
- ----------------------------------------------------------------------------------------------------------
Weighted-average shares outstanding - basic 252,122 252,723 251,881
Incremental shares from assumed conversions 635 218 1,585
- ----------------------------------------------------------------------------------------------------------
Weighted-average shares outstanding - diluted 252,757 252,941 253,466
- ----------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $1.69 $1.98 $1.72
Diluted $1.69 $1.98 $1.71
NOTE 2 - ACQUISITION
On November 1, 1996, Franklin Templeton acquired the assets and liabilities of
Heine Securities Corporation. The transaction had a base purchase price of
approximately $616 million, $551 million in cash and 3.3 million shares of
common stock (after the effects of the stock splits in January 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 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
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 our financial condition or results of operations.
62
NOTE 3 - INVESTMENT SECURITIES
Investment securities, available-for-sale at September 30, 1999 and 1998,
consisted of the following:
in thousands
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------
1999
Sponsored investment products $160,159 $25,630 $(4,083) $181,706
Debt (primarily U.S. Government) 227,168 2 (496) 226,674
Equities 3,113 1,034 (21) 4,126
- ----------------------------------------------------------------------------------------------------------
TOTAL $390,440 $26,666 $(4,600) $412,506
- ----------------------------------------------------------------------------------------------------------
in thousands
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------
1998
Sponsored investment products $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
- ----------------------------------------------------------------------------------------------------------
TOTAL $496,212 $8,597 $(12,897) $491,912
- ----------------------------------------------------------------------------------------------------------
At September 30, 1999 substantially all of our debt securities mature within one
year.
63
NOTE 4 - BANKING/FINANCE GROUP LOANS AND ALLOWANCE FOR LOAN LOSSES
The banking/finance segment's loans receivable primarily consist of auto loan
and credit card receivables from individuals that are collectively described
below as installment loans. Changes in these loans and in the associated
allowance for loan losses during 1999 and 1998 are shown in the following
tables.
in thousands
1999 1999
BEGINNING CHARGE- LOANS ENDING
BALANCE ADDITIONS PAYDOWNS OFFS RECOVERIES SECURITIZED BALANCE
- ---------------------------------------------------------------------------------------------------------------------------
Installment loans $167,455 $194,626 $(58,823) $(4,793) $1,520 $(110,214) $189,771
Allowance for loan losses (2,381) (5,271) - 4,793 (1,520) 793 (3,586)
- ----------------------------------------------------------------------------------------------------------------------------
Loans receivable, net $165,074 $189,355 $(58,823) - - $(109,421) $186,185
- ----------------------------------------------------------------------------------------------------------------------------
in thousands
1998 1998
BEGINNING CHARGE- LOANS ENDING
BALANCE ADDITIONS PAYDOWNS OFFS RECOVERIES SECURITIZED BALANCE
- ---------------------------------------------------------------------------------------------------------------------------
Installment loans $304,748 $128,912 $(125,736) $(6,856) $2,241 $(135,854) $167,455
Allowance for loan losses (8,560) (15) - 6,856 (2,241) 1,579 (2,381)
- ----------------------------------------------------------------------------------------------------------------------------
Loans receivable, net $296,188 $128,897 $(125,736) - - $(134,275) $165,074
- ---------------------------------------------------------------------------------------------------------------------------
For the years ended September 30, 1999, 1998 and 1997, the interest expense of
the banking/finance segment included in other operating revenues, net was $9.7
million, $17.8 million and $21.2 million, respectively.
64
The following table presents delinquency and loss information for fiscal 1999,
1998 and 1997.
in thousands
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Charge-offs as a percentage of average loans 2.1% 1.7% 2.2%
Installment loans, 90 days or more delinquent $785 $2,188 $3,023
In May 1999 and September 1998, the banking/finance segment sold portions of its
auto loans receivable to securitization trusts. The table below shows the
assumptions that were used to calculate the gain on sale and the details of the
transactions.
in millions
MAY 1999 SEPTEMBER 1998
- ------------------------------------------------------------------------------------------
Proceeds $106.4 $131.4
Book value of loans sold $109.4 $134.3
Gain on sale $1.2 -
Discount rate 12% 12%
Cumulative credit loss rate 3.44% 2.02%
65
NOTE 5 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at September 30, 1999 and
1998:
in thousands
USEFUL LIVES
IN YEARS 1999 1998
- ----------------------------------------------------------------------------------------------------------
Furniture and equipment 3-5 $343,798 $301,857
Premises and leasehold improvements 5-35 196,440 155,206
Land - 64,078 24,811
- ----------------------------------------------------------------------------------------------------------
604,316 481,874
Less: Accumulated depreciation and amortization (187,921) (132,645)
- ----------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET $416,395 $349,229
- ----------------------------------------------------------------------------------------------------------
NOTE 6 - INTANGIBLE ASSETS
The following is a summary of intangible assets at September 30, 1999 and 1998:
in thousands
AMORTIZATION
PERIOD IN YEARS 1999 1998
- ----------------------------------------------------------------------------------------------------------
Goodwill 40 $842,178 $842,206
Management contracts 40 510,490 524,962
Other intangibles 5-15 31,546 31,546
- ----------------------------------------------------------------------------------------------------------
1,384,214 1,398,714
Less: Accumulated amortization (181,437) (145,001)
- -----------------------------------------------------------------------------------------------------------
INTANGIBLE ASSETS, NET $1,202,777 $1,253,713
- ----------------------------------------------------------------------------------------------------------
During 1999, management contracts previously valued at $13.7 million, net of
accumulated amortization, related to an offshore non-retail product were written
off in connection with the termination of management contracts as part of the
restructuring plan described in Note 14.
66
NOTE 7 - SEGMENT INFORMATION
During the year ended September 30, 1999, Franklin Templeton adopted Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 requires us to present
segment information based on the way that we organize our business for making
operating decisions and assessing performance.
We have two operating segments; investment management and banking/finance. The
investment management segment derives substantially all of its revenues and net
income from providing investment advisory, fund administration, distribution and
related services to our sponsored investment products. The banking/finance
segment offers consumer lending and selected retail banking services to
individuals.
Financial information for our two operating segments for the years ending
September 30, 1999, 1998 and 1997 is presented in the table below. Operating
revenues of the banking/finance segment are reported net of interest expense.
in thousands
INCOME BEFORE OPERATING INTEREST
ASSETS TAXES REVENUES EXPENSE
- ----------------------------------------------------------------------------------------------------------
1999
Investment management $3,449,012 $570,120 $2,246,767 $20,958
Banking/finance 217,778 3,964 15,730 n/a
- ----------------------------------------------------------------------------------------------------------
COMPANY TOTALS $3,666,790 $574,084 $2,262,497 $20,958
1998
Investment management $3,269,282 $671,632 $2,558,449 $22,535
Banking/finance 210,767 4,652 18,823 n/a
- ----------------------------------------------------------------------------------------------------------
COMPANY TOTALS $3,480,049 $676,284 $2,577,272 $22,535
1997
Investment management $2,763,164 $620,815 $2,153,527 $25,333
Banking/finance 332,036 (5,102) 9,748 n/a
- ----------------------------------------------------------------------------------------------------------
COMPANY TOTALS $3,095,200 $615,713 $2,163,275 $25,333
67
The investment management segment incurs substantially all of our depreciation
and amortization costs and expenditures on long-lived assets.
We conduct 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.
Information is summarized below:
in thousands
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
OPERATING REVENUES:
United States $1,591,093 $1,814,458 $1,665,076
Canada 233,013 228,834 170,659
Bahamas 281,437 305,612 253,398
Europe 122,744 135,026 87,346
Asia/Pacific 144,657 159,391 177,588
Eliminations (110,447) (66,049) (190,792)
- -----------------------------------------------------------------------------------------------------------
TOTAL $2,262,497 $2,577,272 $2,163,275
- ----------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET:
United States $356,050 $288,733 $175,960
Canada 5,890 5,216 3,513
Bahamas 8,723 9,070 9,517
Europe 7,478 8,784 5,604
Asia/Pacific 38,254 37,426 46,630
- ----------------------------------------------------------------------------------------------------------
TOTAL $416,395 $349,229 $241,224
- ----------------------------------------------------------------------------------------------------------
68
NOTE 8 - DEBT
Debt at September 30, 1999 and 1998 was as follows:
in thousands
1999 WEIGHTED
AVERAGE INTEREST RATE 1999 1998
- ----------------------------------------------------------------------------------------------------------
Commercial paper 5.26% $186,842 $357,210
Medium-term notes 6.26% 160,000 210,000
Other - 56,403 45,205
- ----------------------------------------------------------------------------------------------------------
$403,245 $612,415
Less current maturities 108,985 117,956
- ----------------------------------------------------------------------------------------------------------
LONG-TERM DEBT $294,260 $494,459
As of September 30, 1999, maturities of long-term debt are as follows:
in thousands
2000 $191,532
2001 71,570
2002 11,570
2003 11,570
2004 2,673
Thereafter 5,345
- -----------------------------------------------------
LONG-TERM DEBT $294,260
69
Franklin Templeton has a revolving credit agreement with a group of commercial
banks that will allow us, at our option, to refinance commercial paper
borrowings through May 2003. In accordance with our intention and ability to
refinance these obligations on a long-term basis, all of our commercial paper
borrowings at September 30, 1999 was 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. We were in compliance with all covenants as of September 30, 1999. At
September 30, 1999, amounts available for issuance under the commercial paper
program were $312.4 million.
At September 30, 1999, Franklin Templeton held interest-rate swap agreements
maturing through October 2000, which effectively fixed interest rates on $130
million of commercial paper. Our primary objective of holding these swap
agreements is to hedge volatility in interest rates on our 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.
During 1999, $50 million of medium-term notes at an average interest rate of
6.03% were retired at maturity. Notes totaling $50 million were issued during
1998. Interest rates range from 5.96% to 6.56% on outstanding notes at September
30, 1999. These notes mature at various times from December 1999 through March
2001. At September 30, 1999, amounts available for issuance under our
medium-term notes program were $350 million.
70
NOTE 9 - INVESTMENT INCOME
in thousands
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Dividends $12,473 $16,540 $14,141
Interest 40,845 29,969 16,105
Realized gains, net 2,323 8,271 15,563
Foreign exchange (losses) gains, net (1,924) (978) 2,245
Other 2,217 2,921 1,532
- ----------------------------------------------------------------------------------------------------------
INVESTMENT INCOME $55,934 $56,723 $49,586
- ----------------------------------------------------------------------------------------------------------
Substantially all of Franklin Templeton's dividend income was generated by
investments in our sponsored investment products.
NOTE 10 - TAXES ON INCOME
Taxes on income for the years ended September 30, 1999, 1998 and 1997 were as
follows:
in thousands
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Current
Federal $91,141 $87,148 $122,361
State 24,797 30,903 33,874
Foreign 45,193 45,797 26,637
Deferred (benefit) expense (13,758) 11,986 (1,222)
- ----------------------------------------------------------------------------------------------------------
TOTAL PROVISION $147,373 $175,834 $181,650
- ----------------------------------------------------------------------------------------------------------
Included in income before taxes was $356.9 million, $387.5 million and $358.9
million, of foreign income for the years ended September 30, 1999, 1998 and
1997, respectively.
71
The major components of the net deferred tax liability/asset as of September 30,
1999 and 1998 were as follows:
in thousands
1999 1998
- ----------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS
State taxes $4,400 $5,471
Loan loss reserves 1,864 1,376
Deferred compensation 6,926 5,246
Restricted stock compensation plan 40,766 38,877
Net operating loss carryforwards 45,336 40,408
Other 19,478 13,352
- ----------------------------------------------------------------------------------------------------------
Total deferred tax assets 118,770 104,730
Valuation allowance for net operating loss carryforwards (45,336) (40,408)
- ----------------------------------------------------------------------------------------------------------
Deferred tax assets, net of valuation allowance 73,434 64,322
- ----------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
Investments 3,768 3,917
Depreciation on fixed assets 13,591 13,261
Prepaid expenses 9,031 16,333
Amortization of goodwill 28,597 20,850
Deferred commissions 8,152 12,014
Other 3,151 6,976
- ----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 66,290 73,351
- ----------------------------------------------------------------------------------------------------------
Net deferred tax asset (liability) $7,144 $(9,029)
- ----------------------------------------------------------------------------------------------------------
72
At September 30, 1999, there were approximately $54 million of foreign net
operating loss carryforwards, approximately $32 million of which expire between
2000 and 2007 with the remaining carryforwards having an indefinite life. In
addition, there are approximately $474 million in state net operating loss
carryforwards that expire between 2008 and 2019. 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.
We have made no provision for U.S. taxes on $1,142 million of cumulative
undistributed earnings of foreign subsidiaries as those earnings are intended to
be reinvested for an indefinite period of time. Determination of the potential
amount of unrecognized deferred U.S. income tax liability related to such
reinvested income is not practicable because of the numerous assumptions
associated with this hypothetical calculation; however, foreign tax credits
would be available to reduce some portion of this amount.
The following is a reconciliation between the amount of tax expense at the
federal statutory rate and taxes on income as reflected in operations for the
years ended September 30, 1999, 1998 and 1997:
in thousands
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
U.S. federal statutory rate 35% 35% 35%
Federal taxes at statutory rate $200,929 $236,699 $215,500
State taxes, net of federal tax effect 15,819 20,973 21,099
Foreign earnings subject to reduced tax rates
for which no U.S. tax is provided (83,954) (78,826) (69,973)
Other 14,579 (3,012) 15,024
- ----------------------------------------------------------------------------------------------------------
Actual tax provision $147,373 $175,834 $181,650
Effective tax rate 26% 26% 30%
73
NOTE 11 - COMMITMENTS AND CONTINGENCIES
We lease office space and equipment under long-term operating leases expiring at
various dates through fiscal year 2017. Lease expense aggregated $38.7 million,
$37.2 million and $27.6 million for the fiscal years ended September 30,
1999, 1998 and 1997, respectively. Future minimum lease payments under
non-cancelable operating leases are not material.
We have entered into an operating lease for the construction of our new
corporate headquarters in San Mateo, California. In connection with this lease,
we are contingently liable under residual guarantees, for approximately $145
million, representing 85% of the estimated total construction costs of $170
million.
At September 30, 1999, the banking/finance segment had commitments to extend
credit aggregating $271 million, principally under its credit card lines.
We are involved in various claims and legal proceedings that are considered
normal in our business. While it is not feasible to predict or determine the
final outcome of these proceedings, we do not believe that they should result in
a materially adverse effect on our financial position, results of operations or
liquidity.
NOTE 12 - EMPLOYEE STOCK AWARD AND OPTION PLANS
Franklin Templeton sponsors two universal stock plans and an Annual Incentive
Compensation Plan ("AICP"). Under the terms of these plans, eligible employees
may receive cash and stock awards. Under the terms of the AICP, restricted stock
awards are based on our pretax profits. The universal stock plans provide for
the issuance of up to 16 million shares of the common stock for various
stock-related awards, including those related to the AICP. As of September 30,
1999, we had approximately 8.5 million shares remaining available for grant
under the universal stock plans, including those related to the AICP. In
addition to the annual award of stock under the plans, we may award options and
other forms of stock-based compensation to certain employees. Currently, only
restricted stock and stock options have been granted. The Compensation Committee
of the Board of Directors determines the terms and conditions of awards under
the plans. Total compensation cost recognized for stock-based compensation
during 1999, 1998 and 1997 was $37.9 million, $30.3 million and $42.2 million,
respectively.
74
Information regarding stock options is as follows:
shares in thousands
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 193 $29.32 333 $15.21 564 $10.71
Granted 1,243 31.39 73 47.16 78 22.15
Exercised/cancelled (121) 21.24 (213) 13.25 (309) 8.75
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 1,315 $32.02 193 $29.32 333 $15.21
Exercisable, end of year 117 $34.44 119 $23.65 140 $14.13
Range of exercise prices at September 30, 1999 - $22.15 to $47.16.
Weighted-average remaining contractual life - four years.
Had compensation costs for our stock option plans and our Employee Stock
Investment Plan (See Note 13) been determined based upon fair values at the
grant dates in accordance with the provisions of FAS 123, Franklin Templeton's
net income and earnings per share would have been reduced to the proforma
amounts indicated below.
FOR THE YEARS ENDED SEPTEMBER 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Net income (in millions)
As reported $426.7 $500.5 $434.1
Proforma $422.5 $499.1 $433.9
- ----------------------------------------------------------------------------------------------------------
Basic earnings per share
As reported $1.69 $1.98 $1.72
Proforma $1.67 $1.97 $1.72
- ----------------------------------------------------------------------------------------------------------
Diluted earnings per share
As reported $1.69 $1.98 $1.71
Proforma $1.67 $1.97 $1.71
- ----------------------------------------------------------------------------------------------------------
75
The weighted average fair value of options granted during 1999, 1998 and 1997
estimated on the date of grant using Black-Scholes option-pricing model was
$11.33, $12.08 and $5.89, respectively. The fair value of options granted in all
periods was determined using the following assumptions: dividend yield of
approximately 1% for all years; expected volatility of 36% for 1999, 27% for
1998 and 29% for 1997; risk-free interest rate of 5% for 1999, 6% for 1998 and
1997; and an expected life ranging from six months to eight years.
NOTE 13 - EMPLOYEE STOCK INVESTMENT PLAN
We have a qualified, non-compensatory Employee Stock Investment Plan ("ESIP")
which allows participants who meet certain eligibility criteria to purchase
shares of our common stock at 90% of 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. Franklin Templeton's
stockholders approved four million shares of common stock for issuance under the
ESIP. At September 30, 1999, approximately 386,000 shares had been purchased
under the ESIP at a weighted average price of $32.26.
In connection with the ESIP, we may provide matching grants to participants in
the ESIP of whole or partial shares of common stock. While reserving the right
to change such determination, we have initially indicated that we will provide
one half-share for each share held by a participant for a minimum period of 18
months.
NOTE 14 - RESTRUCTURING
In December 1998, we adopted a restructuring plan estimated to cost
approximately $58 million and designed to reduce costs, improve service levels
and reprioritize our business activities. Approximately 85% of the total
estimated charges were utilized during 1999 and the remaining $8.8 million is
expected to be utilized during fiscal 2000. Approximately $18.8 million of the
amounts utilized represented cash payments. The remaining balance of $8.8
million is included in accounts payable and accrued expenses.
76
The following table shows the component parts and utilization of the
restructuring liability:
in millions
RESTRUCTURING ADDITIONAL RESTRUCTURING BALANCE AT
LIABILITY LIABILITY LIABILITY SEPTEMBER 30,
AT DEC-98 JAN-99 UTILIZED 1999
- ---------------------------------------------------------------------------------------------------------------------------
Asset write-down $31.9 - $(29.1) $2.8
Employee severance and termination benefits - 12.3 (12.3) -
Lease termination charges and other 14.2 - (8.2) 6.0
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $46.1 $12.3 $(49.6) $8.8
- ---------------------------------------------------------------------------------------------------------------------------
Approximately $31.9 million, of the anticipated total restructuring charges was
for asset write-downs related to discontinued products. More specifically, these
charges were primarily for the write-off of intangible and other assets with
respect to the termination of investment management agreements related to
several offshore investment products and several domestic retail products. The
underlying assets of the products in question have been returned to investors.
The largest single write-down was for $13.7 million of intangible assets related
to an offshore non-retail product.
The other significant component, $12.3 million, of the estimated total
restructuring charges was for severance and termination benefits with respect to
efficiencies made possible by the conversion from three to one shareholder
servicing system. Approximately 560 positions, or 7% of our workforce at
December 31, 1998, were eliminated.
77
NOTE 15 - FAIR VALUES
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. The methods and assumptions used to
estimate fair values of our financial instruments are described below.
Due to the short-term nature and liquidity of the following items, the carrying
amounts in the consolidated balance sheets approximated fair value:
- - Cash and cash equivalents
- - Receivables
Investment securities, available-for-sale are carried at fair market value as
required by generally accepted accounting principles. See Note 1.
Loans receivable, net are valued using interest rates that consider the current
credit and interest rate risk inherent in the loans and the current economic and
lending conditions. The amounts in the consolidated balance sheets approximated
fair value.
Deposits of the banking/finance segment are valued using interest rates offered
by comparable institutions on deposits with similar remaining maturities. The
amounts in the consolidated balance sheets approximated fair value.
Liabilities under our interest-rate swap agreements are carried at their fair
value, which was $1.0 million as of September 30, 1999.
Debt is valued using publicly-traded debt with similar maturities, credit risk
and interest rates. The amounts in the consolidated balance sheet approximated
fair values.
78
NOTE 16 - QUARTERLY INFORMATION (UNAUDITED)
in thousands
QUARTER FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------------------------------------------
1999
Revenues $567,679 $554,071 $566,775 $573,972
Net income $68,492 $102,471 $123,307 $132,441
Common stock price per share:
High $45 5/8 $38 3/8 $45 $43 7/16
Low $26 1/2 $27 $27 1/8 $29 3/4
Earnings per share:
Basic $0.27 $0.41 $0.49 $0.53
Diluted $0.27 $0.41 $0.49 $0.52
- ----------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------
79
Franklin Templeton'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, 1999, the
closing price of our common stock on the NYSE was $30 9/16 per share. At
November 1, 1999, there were approximately 4,300 stockholders of record.
REPORT OF INDEPENDENT ACCOUNTANTS
October 20, 1999
To the Stockholders and Board of Directors of Franklin Resources, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and comprehensive income
and cash flows present fairly, in all material respects, the consolidated
financial position of Franklin Resources, Inc. and its subsidiaries at September
30, 1999 and 1998, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended September 30, 1999,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Francisco, California
80
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Executive Officers of Registrant
- ---------------------------------
The following information on the executive officers of Franklin Templeton,
including their principal occupations for the past five (5) years, is given as
of December 10, 1999.
Jennifer J. Bolt
Age 35
Vice President of FRI since June 1994; officer and/or director of other company
subsidiaries; employed by FRI in various other capacities for more than the past
five (5) years.
Harmon E. Burns
Age 54
Director Since 1991
Vice Chairman, Member - Office of the Chairman; formerly Executive Vice
President and director of the company for more than the past five (5)
years; officer and/or director of many other company subsidiaries; officer
and/or director or trustee of 52 of the investment companies in the Franklin
Templeton group of funds.
Martin L. Flanagan
AGE 39
President, Member - Office of the President; formerly Senior Vice President;
Chief Financial Officer of FRI since December 1995; officer and/or director of
many other company subsidiaries; officer, director and/or trustee of 52 of the
investment companies in the Franklin Templeton group of funds.
81
Deborah R. Gatzek
AGE 51
Senior Vice President of FRI since March 1990; General Counsel since January
1996; officer of many other company subsidiaries; officer of 53 of the
investment companies in the Franklin Templeton group of funds. Effective January
1, 2000, Ms. Gatzek will cease to be Senior Vice President and General Counsel
and will become a partner in the law firm of Stradley, Ronon, Stevens & Young,
LLP, counsel to the Franklin Templeton group of funds.
Donna S. Ikeda
AGE 43
Vice President of FRI since October 1993. Previously employed by FRI from 1982
to 1990 as Director of Human Resources.
Charles B. Johnson
AGE 66
DIRECTOR SINCE 1969
Chairman, Member - Office of the Chairman, Chief Executive Officer and director
of the company; officer and/or director of many other company subsidiaries;
officer and/or director or trustee of 49 of the investment companies in the
Franklin Templeton group of funds.
Charles E. Johnson
AGE 43
DIRECTOR SINCE 1993
President, Member - Office of the President; formerly Senior Vice President and
director of the company for more than the past five (5) years; officer and/or
director of many other company subsidiaries; officer and/or director or trustee
of 33 of the investment companies in the Franklin Templeton group of funds.
Gregory E. Johnson
AGE 38
President, Member - Office of the President; formerly Vice President of FRI for
more than the past five (5) years; officer of many other company subsidiaries
and of one investment company in the Franklin Templeton group of funds.
82
Rupert H. Johnson, Jr.
AGE 59
DIRECTOR SINCE 1969
Vice Chairman, Member - Office of the Chairman; formerly Executive Vice
President and director of the company for more than the past five (5) years;
officer and/or director of many other company subsidiaries; officer and/or
director or trustee of 52 of the investment companies in the Franklin Templeton
group of funds.
Allen J. Gula, Jr.
AGE 45
President, Member - Office of the President; Senior Vice President and Chief
Information Officer of FRI since September 1999; officer of two other company
subsidiaries since August 1999. Previously, Executive Vice President and Chief
Technology Officer of KeyCorp, a bank holding company, from October 1998 to
August 1999. Chairman and Chief Executive Officer of Key Services, a subsidiary
of KeyCorp, and Executive Vice President of KeyCorp from February 1994 to
October 1998.
Leslie M. Kratter
AGE 54
Vice President of FRI since March 1993 and Secretary since March 1998; officer
of many other company subsidiaries.
Kenneth A. Lewis
AGE 38
Vice President of FRI since September 1996 and Corporate Controller of FRI since
1995; officer of many other company subsidiaries. Prior to the Templeton
acquisition, employed by various Templeton entities since 1989.
William J. Lippman
Age 74
Senior Vice President of FRI since March 1990; officer and/or director or
trustee of other company subsidiaries and of six of the investment companies in
the Franklin Templeton 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
AGE 38
Vice President of FRI since June 1999; Treasurer of FRI and various
subsidiaries since September 1997; assistant treasurer of 52 of the
investment companies in the Franklin Templeton group of funds. Prior to
September 1997, employed as Vice President and Chief Financial Officer of
Templeton Management Limited. Employed by Franklin Templeton since 1989.
83
Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Peter M. Sacerdote,
a director of Franklin Resources, Inc., 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 "Principal
Holders of Voting Securities" and "Security Ownership of Management."
Item 13. Certain Relationships and Related Transactions
Incorporated by reference to the Proxy Statement section entitled "Proposal 1:
Election of Directors - Certain Relationships and Related Transactions."
84
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 Amended and Restated By-laws adopted December 10, 1999
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
85
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
86
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
87
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
88
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
89
10.39 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (ERISA), as amended, incorporated by
reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended September 30, 1998 (the "1998 Annual Report")
10.40 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (NON-ERISA), as amended, incorporated by
reference to Exhibit 10.40 to the 1998 Annual Report
10.41 Representative Variable Insurance Fund Participation Agreement among
Templeton Variable Products Series Fund or Franklin Valuemark Fund, Franklin
Templeton Distributors, Inc. and an insurance company incorporated by reference
from Exhibit 10.1 to the form 10-Q for the quarter ended December 31, 1998
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 July 22, 1999 was filed on July 22, 1999
attaching Registrant's press release dated July 22, 1999 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.
90
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 20, 1999 By /s/ Charles B. Johnson
Charles B. Johnson, Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Date: December 20, 1999 By /s/ Charles B. Johnson
Charles B. Johnson, Chairman, Chief
Executive Officer and Director
Date: December 20, 1999 By /s/ Harmon E. Burns
Harmon E. Burns, Vice Chairman and Director
Date: December 20, 1999 By /s/ Martin L. Flanagan
Martin L. Flanagan, President
and Chief Financial Officer
Date: December 20, 1999 By /s/ F. Warren Hellman
F. Warren Hellman, Director
Date: December 20, 1999 By /s/ Charles E. Johnson
Charles E. Johnson, President and Director
Date: December 20, 1999 By /s/ Rupert H. Johnson, Jr.
Rupert H. Johnson, Jr., Vice Chairman
and Director
Date: December 20, 1999 By /s/ Harry O. Kline
Harry O. Kline, Director
Date: December 20, 1999 By /s/ Kenneth A. Lewis
Kenneth A. Lewis, Vice President
and Corporate Controller
Date: December 20, 1999 By /s/ James A. McCarthy
James A. McCarthy, Director
Date: December 20, 1999 By /s/ Peter M. Sacerdote
Peter M. Sacerdote, Director
Date: December 20, 1999 By /s/ Louis E. Woodworth
Louis E. Woodworth, Director
91
EXHIBIT INDEX
Exhibit No.
(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 Amended and Restated By-laws adopted December 10, 1999
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
92
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
93
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
94
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
95
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, incorporated by
reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended September 30, 1998 (the "1998 Annual Report")
10.40 Representative Investment Management Agreement between Templeton
Investment Counsel, Inc. and Client (NON-ERISA), as amended, incorporated by
reference to Exhibit 10.40 to the 1998 Annual Report
10.41 Representative Variable Insurance Fund Fund Participation Agreement among
Templeton Variable Products Series Fund or Franklin Valuemark Funds (now
Franklin Templeton Variable Insurance Products Trust), Franklin Templeton
Distributors, Inc. and an insurance company, incorporated by reference from
Exhibit 10.1 to the Form 10-Q for the quarter ended December 31, 1998
96
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 July 22, 1999 was filed on July 22, 1999
attaching Registrant's press release dated July 22, 1999 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.
97