FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly Period Ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to______________ Commission File No. 1-9318 FRANKLIN RESOURCES, INC. (Exact name of registrant as specified in its charter) Delaware 13-2670991 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) One Franklin Parkway, San Mateo, CA 94403 (Address of Principal Executive Offices) (Zip Code) (650) 312-2000 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding: 261,386,285 shares, common stock, par value $.10 per share at January 31, 2002. - --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED FINANCIAL STATEMENTS <TABLE> <CAPTION> FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF INCOME UNAUDITED Three months ended December 31 (in thousands, except per share data) 2001 2000 - ------------------------------------------------------------------------------------------------- <S> <C> <C> OPERATING REVENUES: Investment management fees $356,798 $345,785 Underwriting and distribution fees 192,007 164,362 Shareholder servicing fees 47,341 48,222 Other, net 22,061 5,705 - ------------------------------------------------------------------------------------------------- TOTAL OPERATING REVENUES 618,207 564,074 - ------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Underwriting and distribution 172,267 145,684 Compensation and benefits 160,143 141,859 Information systems, technology and occupancy 74,594 57,528 Advertising and promotion 26,425 22,126 Amortization of deferred sales commissions 16,743 18,236 Amortization of intangible assets 4,375 9,909 Other 20,795 19,754 - ------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 475,342 415,096 - ------------------------------------------------------------------------------------------------- Operating income 142,865 148,978 OTHER INCOME/(EXPENSES): Investment and other income 18,329 49,956 Interest expense (3,168) (2,270) - ------------------------------------------------------------------------------------------------- Other income, net 15,161 47,686 - ------------------------------------------------------------------------------------------------- Income before taxes on income 158,026 196,664 Taxes on income 39,507 47,199 - ------------------------------------------------------------------------------------------------- NET INCOME $118,519 $149,465 - ------------------------------------------------------------------------------------------------- Earnings per share: Basic and diluted $0.45 $0.61 Dividends per share $0.070 $0.065 The accompanying notes are an integral part of these consolidated financial statements. </TABLE> 2 - --------------------------------------------------------------------------------
<TABLE> <CAPTION> FRANKLIN RESOURCES, INC. CONSOLIDATED BALANCE SHEETS UNAUDITED DECEMBER 31 SEPTEMBER 30 (in thousands) 2001 2001 - ------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS: Current assets: Cash and cash equivalents $718,170 $497,241 Receivables: Sponsored investment products 242,666 233,086 Other 53,520 63,079 Investment securities, available-for-sale 1,103,176 1,027,975 Prepaid expenses and other 100,830 108,895 - --------------------------------------------------------------------------------------------- Total current assets 2,218,362 1,930,276 - --------------------------------------------------------------------------------------------- Banking/finance assets: Cash and cash equivalents 70,158 71,736 Loans receivable, net 349,043 555,314 Investment securities, available-for-sale 551,387 484,280 Other 14,127 117,914 - --------------------------------------------------------------------------------------------- Total banking/finance assets 984,715 1,229,244 - --------------------------------------------------------------------------------------------- Other assets: Deferred sales commissions 119,716 104,082 Property and equipment, net 435,275 449,626 Intangible assets, net 697,440 702,198 Goodwill 1,287,005 1,286,622 Receivable from banking/finance group 60,854 307,214 Other 286,236 256,388 - --------------------------------------------------------------------------------------------- Total other assets 2,886,526 3,106,130 - --------------------------------------------------------------------------------------------- TOTAL ASSETS $6,089,603 $6,265,650 ============================================================================================= The accompanying notes are an integral part of these consolidated financial statements. </TABLE> 3 - --------------------------------------------------------------------------------
<TABLE> <CAPTION> FRANKLIN RESOURCES, INC. CONSOLIDATED BALANCE SHEETS UNAUDITED DECEMBER 31 SEPTEMBER 30 (in thousands except share data) 2001 2001 - --------------------------------------------------------------------------------------------------- <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Compensation and benefits 144,601 221,672 Current maturities of long-term debt 8,275 8,361 Accounts payable and accrued expenses 130,463 127,918 Commissions 84,002 83,518 Income taxes 14,421 11,925 Other 3,921 4,039 - --------------------------------------------------------------------------------------------- Total current liabilities 385,683 457,433 - --------------------------------------------------------------------------------------------- Banking/finance liabilities: Payable to Parent 60,854 307,214 Deposits 695,241 723,608 Other 79,956 39,839 - --------------------------------------------------------------------------------------------- Total banking/finance liabilities 836,051 1,070,661 - --------------------------------------------------------------------------------------------- Other liabilities: Long-term debt 583,793 566,013 Other 191,959 193,647 - --------------------------------------------------------------------------------------------- Total other liabilities 775,752 759,660 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- Total liabilities 1,997,486 2,287,754 - --------------------------------------------------------------------------------------------- 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; 261,341,550 and 260,797,545 shares issued and outstanding, for December and September, respectively 26,134 26,080 Capital in excess of par value 675,932 657,878 Retained earnings 3,443,156 3,342,979 Accumulated other comprehensive loss (53,105) (49,041) - --------------------------------------------------------------------------------------------- Total stockholders' equity 4,092,117 3,977,896 - --------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,089,603 $6,265,650 ============================================================================================= The accompanying notes are an integral part of these consolidated financial statements. </TABLE> 4 - --------------------------------------------------------------------------------
<TABLE> <CAPTION> FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED THREE MONTHS ENDED DECEMBER 31 (in thousands) 2001 2000 - ------------------------------------------------------------------------------------------- <S> <C> <C> Net income $118,519 $149,465 Adjustments to reconcile net income to net cash Provided by operating activities: Decrease in receivables, prepaid expenses and other 107,148 19,726 Advances of deferred sales commissions (34,616) (20,098) Increase in other current liabilities 44,536 12,025 Increase in income taxes payable 2,495 10,303 Increase in commissions payable 484 10,705 Decrease in accrued compensation and benefits (54,533) (82,809) Depreciation and amortization 45,399 50,333 Gains on disposition of assets (3,387) (31,572) - ------------------------------------------------------------------------------------------- Net cash provided by operating activities 226,045 118,078 - ------------------------------------------------------------------------------------------- Purchase of investments (688,946) (44,183) Liquidation of investments 541,013 439,418 Purchase of banking/finance investments (30,389) (5,939) Liquidation of banking/finance investments 7,825 3,269 Proceeds from securitization of loans receivable 299,980 - Net origination of loans receivable (94,983) (31,440) Addition of property and equipment (9,656) (18,055) Acquisition of subsidiaries, net of cash acquired - (94,483) - ------------------------------------------------------------------------------------------- Net cash provided by investing activities 24,844 248,587 - ------------------------------------------------------------------------------------------- (Decrease)/ increase in bank deposits (28,367) 658 Exercise of common stock options 2,904 1,020 Dividends paid on common stock (16,891) (14,623) Purchase of stock (7,688) (7,906) Issuance of debt 20,157 60,533 Payments on debt (1,653) (68,607) - ------------------------------------------------------------------------------------------- Net cash used in financing activities (31,538) (28,925) - ------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 219,351 337,740 Cash and cash equivalents, beginning of period 568,977 746,005 - ------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $788,328 $1,083,745 - ------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION: Value of common stock issued, principally restricted stock $23,752 $23,811 The accompanying notes are an integral part of these consolidated financial statements. </TABLE> 5 - --------------------------------------------------------------------------------
FRANKLIN RESOURCES, INC. Notes to Consolidated Financial Statements December 31, 2001 (Unaudited) 1. Basis of Presentation --------------------- We have prepared these unaudited interim financial statements of Franklin Resources, Inc. and its consolidated subsidiaries (the "Company") in accordance with the instructions to Form 10-Q and pursuant to the rules and regulations of the Securities and Exchange Commission. We have condensed or omitted certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles pursuant to such rules and regulations. In our opinion, all appropriate adjustments necessary for a fair statement of the results of operations have been made for the periods shown. All adjustments are of a normal recurring nature. You should read these financial statements in conjunction with our audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2001. 2. Debt ---- In May 2001, we received approximately $490 million in net proceeds upon the closing of the sale of $877 million principal amount at maturity of zero-coupon convertible senior notes due 2031 (the "Convertible Notes"). At December 31, 2001, the amount included in long-term debt in respect of the Convertible Notes was $501 million in principal and $6 million of accrued interest. The Convertible Notes, which were offered to qualified institutional buyers only, carry a yield to maturity of 1.875% per annum, with an initial conversion premium of 43%. Each of the $1,000 (principal amount at maturity) Convertible Notes is convertible into 9.3604 shares of our common stock. We may redeem the Convertible Notes for cash on or after May 11, 2006 at their accreted value. We may be required to repurchase the Convertible Notes at their accreted value, at the option of the holders, on May 11 of 2003, 2004, 2006, 2011, 2016, 2021 and 2026. In this event, we may choose to pay the purchase price for such repurchases in cash or shares of our common stock. We did not have any commercial paper outstanding or medium term notes issued at December 31, 2001. 3. Comprehensive Income -------------------- The following table shows comprehensive income for the three months ended December 31, 2001 and 2000. (in thousands) 2001 2000 ------------------------------------------------------------------------ Net income $118,519 $149,465 Change in net unrealized gain (loss) on available-for-sale securities, net of tax 2,571 (35,730) ------------------------------------------------------------------------ Foreign currency translation adjustment (6,635) (4,060) ------------------------------------------------------------------------ Comprehensive income $114,455 $109,675 ======================================================================== 6 - --------------------------------------------------------------------------------
4. Segment Information ------------------- We have two operating segments: investment management and banking/finance. The investment management segment derives substantially all of its revenues and net income from providing investment advisory, fund administration, distribution and related services to our sponsored investment products. The banking/finance segment offers consumer lending and selected retail-banking services to high net-worth individuals and corporations. Financial information for our two operating segments for the quarters ended December 31, 2001 and 2000 is presented in the table below. Operating revenues of the banking/finance segment are reported net of interest expense and provision for loan losses. <TABLE> <CAPTION> Income Assets before Operating (in thousands) taxes revenues ------------------------------------------------------------------------------------ <S> <C> <C> <C> As of and for the quarter ended December 31, 2001 Investment management $5,104,888 $142,681 $598,959 Banking/finance 984,715 15,345 19,248 ------------------------------------------------------------------------------------ Company totals $6,089,603 $158,026 $618,207 ==================================================================================== As of and for the quarter ended December 31, 2000 Investment management $3,753,206 $195,143 $557,360 Banking/finance 339,171 1,521 6,714 ------------------------------------------------------------------------------------ Company totals $4,092,377 $196,664 $564,074 ==================================================================================== </TABLE> 5. Earnings per Share ------------------ Earnings per share were computed as follows: <TABLE> Three months ended December 31 (in thousands except per share amounts) 2001 2000 ------------------------------------------------------------------------------------ <S> <C> <C> Net income $118,519 $149,465 ==================================================================================== Weighted-average shares outstanding - basic 260,981 243,708 Incremental shares from assumed conversions 655 701 ------------------------------------------------------------------------------------ Weighted-average shares outstanding - diluted 261,636 244,409 ==================================================================================== Earnings per share: Basic and diluted $0.45 $0.61 </TABLE> 7 - --------------------------------------------------------------------------------
6. Securitization of Loans Receivable ---------------------------------- In December 2001, we sold auto loans receivable with a net book value of $306.3 million to a securitization trust. The gross sale proceeds of this securitization were $319.7 million and we recorded a pre-tax gain of $13.4 million on the transaction. Significant assumptions used in determining the gain were an excess cash flow discount rate of 12% and a cumulative credit loss rate of 3.76%. 7. Commitments and Contingencies ----------------------------- Under an operating lease for our global corporate headquarters in San Mateo, California, we are contingently liable for approximately $145 million in residual guarantees, representing approximately 85% of the total construction costs of $170 million. The lease is classified as an operating lease as the net present value of the minimum lease payments, including the residual guarantee estimate, was less than 90% of the fair value of the leased property at the inception of the lease. In February 2001, we signed an agreement with IBM under which IBM assumed management of our data center and distributed server operations. Under the terms of the agreement, we may terminate the agreement any time after March 2004. If we were to terminate the agreement, we would incur a termination charge. The maximum termination charge payable depends on service levels prior to our termination of the agreement, and the amount of costs IBM would incur in winding down the services. Based on December 31, 2001 service levels, this termination fee would approximate $37.4 million. We do not consider it likely that we will incur this cost. Under the terms of the agreement, we also must pay IBM a transition charge of approximately $2.7 million in March 2003. We lease office space and equipment under long-term operating leases. Future minimum lease payments under non-cancelable leases are not material. At December 31, 2001, the banking/finance operating segment had commitments to extend credit aggregating $252.2 million, principally under its credit card lines, and standby letters of credit totaling $10.2 million, which are secured by marketable securities. We are involved in various claims and legal proceedings that are considered normal in our business. While it is not feasible to predict or determine the final outcome of these proceedings, we do not believe that they should have a material adverse effect on our financial position, results of operations or liquidity. 8. Banking Regulatory Ratios ------------------------- Following the acquisition of Fiduciary Trust Company International ("Fiduciary") in April 2001, we became a bank holding company and a financial holding company subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory 8 - --------------------------------------------------------------------------------
accounting practices. Our capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations) and of Tier 1 capital to average assets (as defined in the regulations). We believe that, as of December 31, 2001, we exceed the capital adequacy requirements listed below. <TABLE> Three months Minimum for To be well ended capital capitalized December 31, adequacy under prompt (in thousands) 2001 purposes corrective action ---------------------------------------- --------------- -------------- --------------- <S> <C> <C> <C> Total Capital $2,071,789 N/A N/A Tier 1 Capital $2,062,748 N/A N/A Tier 1 Capital (to average assets) 50% 3% 5% Tier 1 Capital (to risk-weighted assets) 84% 4% 6% Total Capital (to risk-weighted assets) 84% 8% 10% </TABLE> 9. Adoption of New Accounting Standards ------------------------------------ Effective October 1, 2001, we adopted Statement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 applies to all goodwill and identified intangible assets acquired in a business combination. Under the new standard, all goodwill and indefinite-lived intangible assets, including that acquired before initial application of the standard, will not be amortized but will be tested for impairment at least annually. Accordingly, effective October 1, 2001, we ceased amortization on goodwill and indefinite-lived assets, which resulted in an amortization expense reduction of approximately $12.5 million ($9.4 million net of tax) and a $0.04 increase in basic and diluted earnings per share. Our goodwill and intangible assets are primarily attributable to our investment management operating segment. Indefinite-lived intangible assets represent the value of management contracts related to our mutual funds and other investment products. At December 31, 2001 we had not recorded any impairment of our goodwill and indefinite-lived assets. In accordance with the new pronouncement, we are currently reviewing our goodwill and intangible assets for impairment. This process will be completed by March 31, 2002. 9 - --------------------------------------------------------------------------------
The following table reflects our results adjusted as though we had adopted SFAS 142 on October 1, 2000. <TABLE> <CAPTION> Three months ended December 31 (in thousands except per share amounts) 2001 2000 ------------------------------------------------------------------------------------ <S> <C> <C> Net income as reported $118,519 $149,465 Goodwill amortization - 5,732 Indefinite-lived intangibles amortization - 3,288 Tax effect at effective tax rate - (2,165) Net income as adjusted $118,519 $156,320 Basic and diluted earnings per share as reported $0.45 $0.61 Basic and diluted earnings per share as adjusted $0.45 $0.64 </TABLE> Intangible assets at December 31, 2001 were as follows: <TABLE> <CAPTION> Gross Carrying Accumulated Net Carrying (in thousands) Amount amortization Amount -------------------------------------------------------------------------------------- <S> <C> <C> <C> Amortized intangible assets: Customer base $232,191 $(11,783) $220,408 Other 31,545 (17,440) 14,105 ---------------------------------------------------- 263,736 (29,223) 234,513 Non-amortized intangible assets: Management contracts 462,927 - 462,927 ------------------------------------------------- Intangible Assets, net $726,663 $(29,223) $697,440 </TABLE> Substantially all of the intangible assets relate to the investment management operating segment. Estimated amortization expense for each of the 5 succeeding fiscal years is as follows: (in thousands) Amount ----------------------------------------------------------------- Fiscal year ended September 30: 2002 $17,109 2003 16,951 2004 16,951 2005 16,951 2006 16,951 10 - --------------------------------------------------------------------------------
On October 1, 2001, we also adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement addresses financial accounting and reporting for the impairment or disposal of long- lived assets and broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. The impact of SFAS 144 on our reported operating results, financial position and existing financial statement disclosure was not material. ITEM 2. 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. You should review 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 management and related services to retail mutual funds, institutional and high net-worth and separate accounts, and other investment products. This is our primary business activity and operating segment. Our sponsored investment products include a broad range of domestic and global/international equity, hybrid, fixed-income and money market mutual funds, as well as other investment products that meet a wide variety of specific 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 our subsidiary entities and our sponsored investment products or our clients. These arrangements could change in the future. Our secondary business activity and operating segment is banking/finance. Our banking/finance group offers selected retail-banking services to high net-worth individuals and corporations and consumer lending. 11 - --------------------------------------------------------------------------------
<TABLE> <CAPTION> ASSETS UNDER MANAGEMENT December 31 December 31 (in billions) 2001 2000 - ------------------------------------------------------------------------------------------ <S> <C> <C> Equity: Global/international $89.4 $96.4 Domestic (U.S.) 51.7 50.0 - ------------------------------------------------------------------------------------------ Total equity 141.1 146.4 - ------------------------------------------------------------------------------------------ Hybrid 38.6 10.1 Fixed-income: Tax-free 48.3 45.0 Taxable Domestic 25.1 16.2 Global/international 7.4 3.7 - ------------------------------------------------------------------------------------------ Total fixed-income 80.8 64.9 - ------------------------------------------------------------------------------------------ Money 5.8 5.5 - ------------------------------------------------------------------------------------------ Total $266.3 $226.9 ========================================================================================== Simple monthly average for the three-month period (1) $256.4 $226.5 ========================================================================================== (1) Investment management fees from approximately 45% of our assets under management at December 31, 2001 are calculated using a daily average. </TABLE> Our assets under management at December 31, 2001 were $266.3 billion, 17% higher than they were a year ago. Simple monthly average assets during the quarter ended December 31, 2001 increased 13% this quarter over the same period a year ago. The change in the absolute level and simple monthly average assets under management was mainly due to the addition of Fiduciary assets under management acquired in April 2001, offset by market depreciation year over year. The following table shows the relative composition of assets under management. <TABLE> <CAPTION> As of December 31, 2001 2000 - ------------------------------------------------------------------------------------------- <S> <C> <C> Percentage of total assets under management Equity 53% 65% Fixed-income 30% 29% Hybrid 15% 4% Money 2% 2% - ------------------------------------------------------------------------------------------- Total 100% 100% </TABLE> The change in the composition of assets under management resulted from the inclusion of the Fiduciary assets under management throughout the period ended December 2001 and the market depreciation in equity assets. Approximately 64% of Fiduciary's assets under management were classified as hybrid assets at the time of acquisition in April 2001. This change in mix had the additional effect of lowering our effective fee rate on assets managed as a greater percentage of 12 - --------------------------------------------------------------------------------
assets under management are in the fixed-income and hybrid categories which generally carry a lower management fee than equity assets. The change in our assets under management was as follows. <TABLE> <CAPTION> Three months ended December 31, Percent (in billions) 2001 2000 Change - ----------------------------------------------------------------------------------------- <S> <C> <C> <C> Beginning assets under management $246.4 $229.9 7% Sales 18.9 12.7 49% Reinvested dividends 2.6 5.4 (52)% Redemptions (15.5) (15.5) 0% Acquisitions - 3.7 (100)% Appreciation/ (depreciation) 13.9 (9.3) N/A - ----------------------------------------------------------------------------------------- Ending assets under management $266.3 $226.9 17% </TABLE> The acquisitions of Bissett and Associates Investment Management Ltd. ("Bissett") in October 2000 and Fiduciary in April 2001 increased our assets under management by $3.7 and $45.8 billion, respectively. For the quarter ended December 31, 2001, sales and reinvested dividends exceeded redemptions ("net inflows") complex-wide by $6.0 billion, compared to net inflows of $2.6 billion in the same period last year. Market appreciation of $13.9 billion in the quarter ended December 31, 2001 occurred within the Domestic and Global/international equity markets. The chart below summarizes changes in assets by product class. 13 - --------------------------------------------------------------------------------
<TABLE> <CAPTION> Three months ended December 31 Percent (in billions) 2001 2000 Change - --------------------------------------------------------------------------------------- <S> <C> <C> <C> GLOBAL/INTERNATIONAL EQUITY Beginning assets under management $80.2 $97.6 (18)% Sales 7.2 3.7 95% Reinvested dividends 0.8 2.9 (72)% Redemptions (6.9) (6.7) 3% Acquisitions - 2.2 (100)% Appreciation/ (depreciation) 8.1 (3.3) N/A - --------------------------------------------------------------------------------------- Ending assets under management 89.4 96.4 (7)% DOMESTIC EQUITY Beginning assets under management 44.5 53.9 (17)% Sales 3.4 3.4 0% Reinvested dividends 1.1 1.7 (35)% Redemptions (2.2) (2.3) (4)% Acquisitions - - - Appreciation/ (depreciation) 4.9 (6.7) N/A - --------------------------------------------------------------------------------------- Ending assets under management 51.7 50.0 3% HYBRID Beginning assets under management 36.1 9.3 288% Sales 1.2 0.2 500% Reinvested dividends 0.1 0.2 (50)% Redemptions (0.5) (0.4) 25% Acquisitions - 1.1 - Appreciation/ (depreciation) 1.7 (0.3) N/A - --------------------------------------------------------------------------------------- Ending assets under management 38.6 10.1 282% TAX-FREE INCOME Beginning assets under management 48.4 44.0 10% Sales 1.6 0.9 78% Reinvested dividends 0.3 0.3 0% Redemptions (1.2) (1.2) 0% Acquisitions - - - (Depreciation)/ appreciation (0.8) 1.0 N/A - --------------------------------------------------------------------------------------- Ending assets under management 48.3 45.0 7% TAXABLE FIXED INCOME Beginning assets under management 31.6 19.8 60% Sales 2.6 1.5 73% Reinvested dividends 0.2 0.2 0% Redemptions (2.0) (1.3) 54% Acquisitions - 0.4 (100)% Appreciation/ (depreciation) 0.1 (0.7) N/A - --------------------------------------------------------------------------------------- Ending assets under management 32.5 19.9 63% MONEY Beginning assets under management 5.6 5.3 6% Sales 2.9 3.0 (3)% Reinvested dividends 0.1 0.1 0% Redemptions (2.7) (3.6) (25)% Acquisitions - - - (Depreciation)/ appreciation (0.1) 0.7 N/A - --------------------------------------------------------------------------------------- Ending assets under management $5.8 $5.5 5% - --------------------------------------------------------------------------------------- TOTAL ENDING ASSETS UNDER MANAGEMENT $266.3 $226.9 17% - --------------------------------------------------------------------------------------- </TABLE> 14 - --------------------------------------------------------------------------------
RESULTS OF OPERATIONS Three months ended December 31 Percent 2001 2000 Change - -------------------------------------------------------------------------------- Net income (in millions) $118.5 $149.5 (21)% Earnings per share Basic and diluted $0.45 $0.61 (26)% Operating margin 23% 26% - EBITDA margin (1) 30% 38% - - -------------------------------------------------------------------------------- (1) EBITDA margin is earnings before interest, taxes on income, depreciation and the amortization of intangibles (not including amortization of deferred sales commissions) divided by total revenues. Net income during the quarter ended December 31, 2001 decreased 21% compared to the same quarter last year. This was due to slightly lower operating income, with higher operating revenues this quarter being offset by compensation and benefit cost increases related to the Fiduciary acquisition and retention bonuses, increased underwriting and distribution expenses from increased sales activity, higher information systems, technology and occupancy expenses, and increased advertising and promotion activity. The majority of the decline in net income is attributable to a decline in other income. We recognized investment portfolio and real estate gains of approximately $28 million in the period ended December 31, 2000. OPERATING REVENUE Three months ended December 31 Percent (in millions) 2001 2000 Change - -------------------------------------------------------------------------------- Investment management fees $356.8 $345.8 3% Underwriting and distribution fees 192.0 164.4 17% Shareholder servicing fees 47.3 48.2 (2)% Other, net 22.1 5.7 288% - -------------------------------------------------------------------------------- Total operating revenues $618.2 $564.1 10% - -------------------------------------------------------------------------------- SUMMARY Total operating revenues for the quarter ended December 31, 2001 increased 10% over the same period last year. The acquisition of Fiduciary in April 2001 provided higher investment management fees from higher average assets under management, despite lower effective fee rates resulting from the change in the mix of assets under management. In addition, the Company benefited from increased banking/finance segment revenues included in other, net resulting from the net gain related to the auto loan securitization completed in December 2001. Underwriting and distribution fees increased following improved sales performance and higher assets under management. INVESTMENT MANAGEMENT FEES Investment management fees, accounting for 58% of our operating revenues in the quarter ended December 31, 2001, include both investment advisory and business management fees. These fees are generally calculated under contractual arrangements with our sponsored investment products, 15 - --------------------------------------------------------------------------------
institutional and high net-worth clients as a percentage of the market value of assets under management. Annual rates vary by investment objective and type of services provided. In return for these fees, we provide a combination of investment advisory, administrative and other management services based on the needs of our clients. Investment management fees for the quarter ended December 31, 2001 increased 3% over the same period last year, primarily due to the Fiduciary acquisition and net sales (including dividend re-investments), which increased the simple monthly average assets under management. This increase was partially offset by a shift in our asset mix toward fixed-income and hybrid investment products and market depreciation experienced year over year. This shift in asset mix led to a decrease in our effective investment management fee rate (investment management fees divided by simple monthly average assets under management). The effective investment management fee rate declined to 0.56% compared to 0.61% in the same period last year. UNDERWRITING AND DISTRIBUTION FEES Underwriting commissions are earned from the sale of certain classes of sponsored investment products that have a sales commission paid at the time of purchase. Sales at reduced or zero commissions are offered on certain classes of shares and for sales to shareholders or intermediaries that exceed specified minimum amounts. Thus, as the mix of sales change, so will our commission revenue. Distribution fees are paid by our sponsored investment products in return for sales, marketing and distribution efforts on their behalf. While other contractual arrangements exist in other locations, in the United States, distribution fees include 12b-1 plan fees, which are subject to maximum pay-out levels based upon a percentage of the assets in each fund. A significant portion of underwriting commissions and distribution fees are paid to the brokers and other intermediaries who sell our sponsored investment products to the investing public on our behalf. See the description of underwriting and distribution expenses below. Overall, underwriting and distribution fees for the quarter ended December 31, 2001 increased 17% over the same period last year. Commission revenues increased 45% over the same period last year primarily due to a 49% increase in product sales. Distribution fees increased 5% over the same period last year resulting from the change in asset mix across regional jurisdictions. SHAREHOLDER SERVICING FEES Shareholder servicing fees are generally fixed charges per shareholder account that vary with the particular type of fund and the service being rendered. In certain instances, some sponsored investment products are charged these fees based on the level of assets under management. Fees are received as compensation for providing transfer agency services which include providing customer statements, transaction processing, customer service and tax reporting. In the U.S., transfer agency services agreements provide that closed accounts in a given calendar year remain billable through the second quarter of the following calendar year at a reduced rate. In Canada, the agreements provide that accounts closed in the previous calendar year remain billable for four months after the end of the calendar year. Accordingly, the level of fees will vary with the split of total billable accounts between open and closed accounts, the period in which closed accounts are no longer billable, and the growth in new accounts. Shareholder servicing fees decreased 2% primarily as a result of a decrease in the total number of billable accounts. 16 - --------------------------------------------------------------------------------
OTHER, NET Other, net consists primarily of revenues from the banking/finance operating segment and custody services related to Fiduciary. Revenues from the banking/finance operating segment include operating revenues, consisting primarily of interest income on loans, servicing income, and investment income on banking/finance investment securities, which are offset by interest expense, and the provision for anticipated loan losses. Other, net for the quarter ended December 31, 2001 increased 288% over the same period last year. This increase was principally due to the net impact of the recognition of a gain of $13.4 million resulting from the sale of a portion of our auto loan portfolio in December 2001, the increase resulting from the addition of the Fiduciary banking and custody activities from the date of acquisition to those of the Company, offset by an increase in the allowance for loan losses of our banking/finance operating segment. OPERATING EXPENSES Three months ended December 31 Percent (in millions) 2001 2000 Change ------------------------------------------------------------------------------- Underwriting and distribution $172.3 $145.7 18% Compensation and benefits 160.1 141.9 13% Information systems, technology and 74.6 57.5 30% occupancy Advertising and promotion 26.4 22.1 19% Amortization of deferred sales 16.7 18.2 (8)% commissions Amortization of intangible assets 4.4 9.9 (56)% Other 20.8 19.8 5% ------------------------------------------------------------------------------- Total operating expenses $475.3 $415.1 15% =============================================================================== SUMMARY Operating expenses for the quarter ended December 31, 2001 increased 15% over the same period last year. This increase was primarily caused by the addition of the operating costs and retention bonus expense of Fiduciary, increased information systems, technology and occupancy, underwriting and distribution expenses, offset by decreased amortization of intangible assets and deferred sales commission expense. UNDERWRITING AND DISTRIBUTION Underwriting and distribution includes sales commissions and distribution fees paid to brokers and other third parties for selling, distributing and providing ongoing services to investors in our sponsored investment products. During the quarter ended December 31, 2001, underwriting and distribution expense increased 18% over the same period last year consistent with the increase in underwriting and distribution revenues. 17 - --------------------------------------------------------------------------------
COMPENSATION AND BENEFITS Compensation and benefits for the quarter ended December 31, 2001 increased 13% over the same period last year. This increase was primarily due to the addition of Fiduciary employees during the year and related retention bonuses. The increase was partially offset by the decision made by management during the quarter to reduce employee salaries from 5 to 10%. Merit salary awards are normally given annually in October and are based upon the performance of the individual employee, market conditions and position description. We decided not to provide merit increases to employees in October 2001. Management will review this decision in April 2002. The number of employees at December 31, 2001 was approximately 6,600 as compared to the approximately 6,300 at the same time last year. Without the addition of Fiduciary staff, the employee headcount would have decreased from the prior year by approximately 400. In order to hire and retain our key employees, we are committed to keeping our salaries and benefit packages competitive, which means that the level of compensation and benefits may increase more quickly or decrease more slowly than our revenues at certain points in our growth cycle. INFORMATION SYSTEMS, TECHNOLOGY AND OCCUPANCY Information systems, technology and occupancy costs for the quarter ended December 31, 2001 increased 30% compared to the same period last year. This increase was primarily due to the charges and costs in connection with IBM's assumption of the management of our data center and distributed server operations, the added technology and occupancy costs of the Fiduciary acquisition, and the increase in amortization expense related to our capitalized expenditures on technology initiatives. During the past year, we embarked on a number of hardware upgrades, purchased, developed and installed new software applications, re-engineered our technology infrastructure and global network architecture, replaced or upgraded older versions of software applications, and developed and implemented e-business strategies to improve our service levels, work environment and productivity. The extent of the work declined from the previous year as we slowed down a number of initiatives and delayed the start of other technology projects. Details of capitalized information systems and technology costs were as follows: <TABLE> <CAPTION> Three months ended December 31 (in thousands) 2001 2000 - ------------------------------------------------------------------------------------------- <S> <C> <C> Net book value at beginning of period $162,857 $156,895 Additions during period, net of disposals and other adjustments 7,526 14,840 Net assets acquired through acquisitions - 782 Amortization during period (19,062) (17,291) - ------------------------------------------------------------------------------------------- Net book value at end of period $151,321 $155,226 </TABLE> ADVERTISING AND PROMOTION Advertising and promotion for the quarter ended December 31, 2001 increased 19% compared to the same period last year. This increase resulted primarily from increased promotion and advertising activity to assist in educating the sales channels and the investing public about the strong relative investment performance of our sponsored investment products during the latter half of fiscal 2001 and in the current year. 18 - --------------------------------------------------------------------------------
AMORTIZATION OF DEFERRED SALES COMMISSIONS Amortization of deferred sales commissions decreased 8% compared to the same period last year. This decrease was principally a result of the change in sales mix and absolute sales of class B and C share products. Certain fund classes, namely class B and C, are sold without a front-end sales charge to shareholders, while, at the same time, our distribution subsidiaries pay a commission to selling brokers and other intermediaries. Similarly, class A shares are sold without a front-end sales charge to shareholders when certain minimum investment criteria are met, yet our U.S. distribution subsidiaries pay a commission on the sale. We defer and amortize this up front commission over a 1 to 8 year period. Thus, as the balance of the deferred sales commission asset changes on our balance sheet, so does the amortization expense. We have also arranged to finance certain deferred commission assets ("DCA") arising from our U.S., Canadian and European operations through Lightning Finance Company Limited ("LFL"), a company in which we have an ownership interest. As a result of the arrangement with LFL, Canadian and European DCA are no longer recorded in our financial statements. Generally, U.S. DCA sold to LFL under the U.S. agreement are retained in our financial statements until resold by LFL, which occurs at least once annually. AMORTIZATION OF INTANGIBLE ASSETS Amortization of intangible assets decreased 56% compared to the same period last year. This decrease was due to the adoption of Statement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets" on October 1, 2001. Under the new accounting standard we ceased to amortize goodwill and indefinite- lived intangible assets. This resulted in a reduction in amortization expense of approximately $9 million for the quarter ended December 31, 2001, as compared to the quarter ended December 31, 2000. OTHER INCOME (EXPENSE) Investment and other income is comprised primarily of dividends from investments in our sponsored mutual funds, interest income from investments in bonds and government securities, realized gains and losses on investments, foreign currency exchange gains and losses, and other miscellaneous income including the gain or loss on disposal of property. Other income (expense) for the quarter ended December 31, 2001 decreased 68% compared to the same period last year. During the quarter ended December 31, 2000, we recognized additional net realized gains of approximately $19.6 million from the sale of certain sponsored investment products held by the Company for investment. In addition, realized gains of $8.2 million were included in other income related to the $32.9 million gain on the sale of our headquarters building in San Mateo, which was recognized over 12-month leaseback period through June 2001. TAXES ON INCOME Our effective income tax rate for the quarter ended December 31, 2001 increased to 25% compared to 24% in the same period last year consistent with increased revenues generated in the U.S. 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. 19 - --------------------------------------------------------------------------------
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At December 31, 2001, we had $788.3 million in cash and cash equivalents, as compared to $569.0 million at September 30, 2001. Liquid assets, which consist of cash and cash equivalents, investments available-for-sale and current receivables increased to $2,739.1 million at December 31, 2001 from $2,377.4 million at September 30, 2001. At December 31, 2001, approximately $850 million was available to us under unused commercial paper and medium-term note programs. In addition, in fiscal 2001 we filed a shelf registration statement with the Securities and Exchange Commission permitting the issuance of debt and equity securities of up to $300 million. Our revolving credit facilities at December 31, 2001 totaled $500 million, of which, $200 million was under a 364-day facility. The remaining $300 million facility will expire in May 2003. We also have $350 million available in uncommitted bank lines under the Federal Reserve Funds system. Cash provided by operating activities was $226 million in the quarter ended December 31, 2001 compared to $118.1 million in the same period last year. This increase was due mainly to a decrease in our banking/finance operating segment receivables and other assets following a similar increase in those assets in the quarter ended September 30, 2001. Net cash provided by investing activities during the current quarter included $182.4 million from the banking/finance segment offset by the use of $147.9 million for the purchase of investments, net of sales. Net cash used in financing activities during the current period was $31.5 million. Outstanding debt increased to $592.1 million at December 31, 2001 compared to $574.4 million at September 30, 2001. Debt consists primarily of the Convertible Notes. The Convertible Notes carry a yield to maturity of 1.875% per annum to maturity. Other short-term and long-term debt totaling $85.1 million is principally related to the financing of our Class B and C shares sales. Long-term debt has various maturity dates through fiscal 2006 and thereafter. We have arranged with LFL for non-recourse financing of sales commissions advanced on sales of our B and C shares globally. The sales commissions that we have financed through LFL during the quarter ended December 31, 2001 approximated $29.4 million. We expect that the principal uses of cash will be to increase assets under management through expansion of our business, make strategic acquisitions, fund property and equipment acquisitions, pay operating expenses of the business, enhance our technology infrastructure, improve our business processes, pay shareholder dividends, repay and service debt, and acquire shares of the Company. We expect to finance future increases in investment in our banking/finance activities through operating cash flows, debt, increased deposit base, or through the securitization of a portion of the receivables from consumer lending activities. We believe that our existing liquid assets, together with the expected continuing cash flow from operations, our borrowing capacity under current credit facilities, our ability to issue debt or equity securities and our sales commission financing arrangement will be sufficient to meet our present and reasonably foreseeable operating cash needs. 20 - --------------------------------------------------------------------------------
RISK FACTORS WE FACE STRONG COMPETITION FROM NUMEROUS AND SOMETIMES LARGER COMPANIES. We compete with numerous investment management companies, stock brokerage and investment banking firms, insurance companies, banks, savings and loan associations and other financial institutions. Continuing consolidation in the financial services industry has created stronger competitors with greater financial resources and broader distribution channels than our own. Additionally, competing securities dealers whom we rely upon to distribute our mutual funds also sell their own proprietary funds and investment products, which could limit the distribution of our investment products. To the extent that existing or potential customers, including securities dealers, decide to invest in or distribute the products of our competitors, the sales of our products as well as our market share, revenues and net income could decline. CHANGES IN THE DISTRIBUTION CHANNELS ON WHICH WE DEPEND COULD REDUCE OUR REVENUES AND HINDER OUR GROWTH. We derive nearly all of our fund sales through broker/dealers and other similar investment advisors. Increasing competition for these distribution channels has caused our distribution costs to rise and could cause further increases in the future. Higher distribution costs lower our net revenues and earnings. Additionally, if one of the major financial advisors who distribute our products were to cease their operations, it could have a significant adverse impact on our revenues and earnings. Moreover, our failure to maintain strong business relationships with these advisors would impair our ability to distribute and sell our products, which would have a negative effect on our level of assets under management, related revenues and overall business and financial condition. WE HAVE BECOME SUBJECT TO AN INCREASED RISK OF ASSET VOLATILITY FROM CHANGES IN THE GLOBAL EQUITY MARKETS. We have become subject to an increased risk of asset volatility from changes in the domestic and global equity markets due to the recent terrorist attacks. Declines in these markets have caused in the past, and would cause in the future, a decline in our revenue and income. THE LEVELS OF OUR ASSETS UNDER MANAGEMENT, WHICH IN TURN IMPACT REVENUES, ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS. Global economic conditions, changes in the equity market place, interest rates, inflation rates, the yield curve and other factors that are difficult to predict affect the mix, market values, and levels of our assets under management. Changing market conditions may cause a shift in our asset mix towards fixed-income products and a related decline in our revenue and income, since we derive higher fee revenues and income from equity assets than from fixed-income products we manage. Similarly, our securitized consumer receivables business is subject to marketplace fluctuation. WE FACE RISKS ASSOCIATED WITH CONDUCTING OPERATIONS IN NUMEROUS FOREIGN COUNTRIES. We sell mutual funds and offer investment advisory and related services in many different regulatory jurisdictions around the world, and intend to continue to expand our operations internationally. Regulators in these jurisdictions could change their policies or laws in a manner that might restrict or otherwise impede our ability to distribute or register investment products in their respective markets. OUR INABILITY TO MEET CASH NEEDS COULD HAVE A NEGATIVE EFFECT ON OUR FINANCIAL CONDITION AND BUSINESS OPERATIONS. Our ability to meet anticipated cash needs depends upon factors including our asset value, our creditworthiness as perceived by lenders and the market value of our stock. Similarly, our ability to securitize and hedge future loan portfolios and credit card receivables, and to obtain continued financing for class B shares, is also subject to the market's perception of those assets, finance rates offered by competitors, and the general market for private debt. If we are unable to obtain these funds and financing, we may be forced to incur unanticipated costs or revise our business plans. 21 - --------------------------------------------------------------------------------
WE FACE COMPETITION IN HIRING AND RETAINING QUALIFIED EMPLOYEES. Our continued success will depend upon our ability to attract and retain qualified personnel. If we are not able to attract and retain qualified employees, our overall business condition and revenues could suffer. OUR EMERGING MARKET PORTFOLIOS AND RELATED REVENUES ARE VULNERABLE TO MARKET-SPECIFIC POLITICAL AND ECONOMIC RISKS. Our emerging market portfolios and revenues derived from managing these portfolios are subject to significant risks of loss from political and diplomatic developments, currency fluctuations, social instability, changes in governmental polices, expropriation, nationalization, asset confiscation and changes in legislation related to foreign ownership. Foreign trading markets, particularly in some emerging market countries are often smaller, less liquid, less regulated and significantly more volatile than the U.S. and other established markets. DIVERSE AND STRONG COMPETITION LIMITS THE INTEREST RATES THAT WE CAN CHARGE ON CONSUMER LOANS. We compete with many types of institutions for consumer loans, which can provide loans at significantly below-market interest rates in connection with automobile sales. Our inability to compete effectively against these companies or to maintain our relationships with the various automobile dealers through whom we offer consumer loans could limit the growth of our consumer loan business. Economic and credit market downturns could reduce the ability of our customers to repay loans, which could cause our consumer loan portfolio losses to increase. THE SEPTEMBER 11, 2001 WORLD TRADE CENTER TRAGEDY MAY ADVERSELY AFFECT OUR ABILITY TO ACHIEVE THE BENEFITS WE EXPECT FROM THE RECENT ACQUISITION OF FIDUCIARY. The September 11, 2001 tragedy at the World Trade Center resulted in the destruction of our Fiduciary headquarters, loss of 87 of our employees, additional operating expenses to re-establish and relocate our operations, and asset write-offs, all of which could adversely affect or delay our ability to achieve the anticipated benefits from the acquisition. Overcoming this tragedy and achieving the anticipated benefits of the acquisition will depend on close collaboration between management and key personnel of the two companies in a timely and efficient manner. THE FIDUCIARY ACQUISITION COULD ADVERSELY AFFECT OUR COMBINED FINANCIAL RESULTS OR THE MARKET PRICE OF OUR COMMON STOCK. If the benefits of the acquisition over time do not exceed the costs associated with the acquisition, including any dilution to our shareholders resulting from the issuance of shares in connection with the acquisition, our financial results, including earnings per share, could be adversely affected. WE ARE SUBJECT TO FEDERAL RESERVE BOARD REGULATION. Upon completion of our acquisition of Fiduciary, we became a bank holding company and a financial holding company subject to the supervision and regulation of the Federal Reserve Board under the Bank Holding Company Act of 1956. The Federal Reserve Board may impose limitations, restrictions, or prohibitions on our activities if the Federal Reserve Board believes that we do not have the appropriate financial and managerial resources to commence or conduct an activity or make an acquisition, and the Federal Reserve Board may take actions as appropriate to enforce applicable federal law. TECHNOLOGY AND OPERATING RISK COULD CONSTRAIN OUR OPERATIONS. We are highly dependent on the integrity of our technology, operating systems and premises. Although we have in place certain disaster recovery plans, we may experience system delays and interruptions as a result of natural disasters, power failures, acts of war, and third party failures, which could negatively impact our operations. 22 - --------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, our financial position is subject to market risk: the potential loss due to changes in the value of investments resulting from fluctuations in interest rates, foreign exchange and/or equity prices. Management is responsible for managing this risk. We have also established a Risk Management Committee to provide a framework to assist management to identify assess and manage market and other risks. We are exposed to changes in interest rates primarily in our debt transactions and portfolio debt holdings available for sale, which are carried at fair value. As of December 31, 2001, a significant percentage of our outstanding debt is at fixed interest rates. In our banking/finance segment, we monitor the net interest rate margin and the average maturity of interest earning assets and funding sources. In addition, we have considered the potential impact of the effect on the banking/finance segment, our outstanding debt and portfolio debt holdings, individually and collectively, of a 100 basis point (1%) movement in market interest rates. We do not expect this change would have a material impact on our operating revenues or results of operations in either scenario. We operate primarily in the United States, but also provide services and earn revenues in Canada, the Bahamas, Europe, Asia, South America, Africa and Australia. The majority of these revenues and associated expenses, however, are denominated in U.S. dollars. Therefore, our exposure to foreign currency fluctuations in our revenues and expenses is not material at this time. This situation may change in the future as our business continues to grow outside the United States. We are exposed to equity price fluctuations as investments available for sale are carried at fair value. To mitigate this risk, we maintain a diversified investment portfolio. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material developments in the litigation previously reported in our Form 10-K for the period ended September 30, 2001 as filed with the Securities and Exchange Commission on December 26, 2001. We are involved from time to time in litigation relating to claims arising in the normal course of business. Management is of the opinion that the ultimate resolution of such claims will not materially affect our business or financial position. 23 - --------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of the report: Exhibit 3(i)(a) Registrant's Certificate of Incorporation, as filed November 28, 1969, incorporated by reference to Exhibit (3)(i) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (the "1994 Annual Report") Exhibit 3(i)(b) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed March 1, 1985, incorporated by reference to Exhibit (3)(ii) to the 1994 Annual Report Exhibit 3(i)(c) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed April 1, 1987, incorporated by reference to Exhibit (3)(iii) to the 1994 Annual Report Exhibit 3(i)(d) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed February 2, 1994, incorporated by reference to Exhibit (3)(iv) to the 1994 Annual Report Exhibit (3)(ii) Registrant's By-Laws incorporated by reference to Exhibit 3(ii) to the Company's Form 10-K for the fiscal year ended September 30, 1999 Exhibit 4.1 Indenture between Franklin Resources, Inc. and The Bank of New York dated May 11, 2001 incorporated by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-3, filed on August 6, 2001 Exhibit 4.2 Registration Rights Agreement between Franklin Resources, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") dated May 11, 2001 incorporated by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-3, filed on August 6, 2001 Exhibit 12 Computations of ratios of earnings to fixed charges (b) Reports on Form 8-K: (i) Form 8-K filed on October 25, 2001 reporting under Item 5 "Other Events" an earnings press release, dated October 25, 2001, and including said press release as an Exhibit under Item 7 "Financial Statements and Exhibits." 24 - --------------------------------------------------------------------------------
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRANKLIN RESOURCES, INC. ------------------------ Registrant. Date: February 13, 2002 /s/ Martin L. Flanagan ---------------------- MARTIN L. FLANAGAN President, Member-Office of the President, Chief Financial Officer and Chief Operating Officer 25 - --------------------------------------------------------------------------------