BEN

Business Context and Reporting Period

Company: Franklin Resources, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2003
Business Overview: The company operates primarily in two segments: Investment Management (providing advisory and distribution services for mutual funds and institutional accounts) and Banking/Finance (consumer lending and retail banking). The company manages assets under five brand names: Franklin, Templeton, Mutual Series, Fiduciary Trust, and Bissett.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased 2% for both the three and six months ended March 31, 2003, compared to the prior year. This was driven by a 5% and 3% decline in investment management fees, respectively, due to lower simple monthly average assets under management.
• Profitability: Net income decreased 9% for the quarter and 8% for the six-month period year-over-year. Operating income declined 6% for the quarter and 4% for the six months.
• Assets Under Management: AUM totaled $252.4 billion, an 8% decrease from the prior year, primarily due to market depreciation in equity assets. Net inflows were $2.5 billion for the quarter and $3.5 billion for the six months, lower than the prior year's inflows.
• Expense Management: Total operating expenses decreased 1% year-over-year. Notable reductions occurred in advertising and promotion (down 10% for six months) and information systems costs (down 3% for six months) due to cost control measures.
• Shareholder Servicing: Shareholder servicing fees increased 15% for the quarter and 8% for the six months, offsetting some revenue declines, due to revised fee agreements and the addition of billable accounts from the Pioneer acquisition.

Outlook, Risks, and Contingencies

• Convertible Notes Redemption: The company notified holders on April 9, 2003, that it would redeem $877 million principal amount of zero-coupon convertible senior notes due 2031 for cash at their accreted value (approximately $520.1 million) on May 11, 2003.
• New Debt Issuance: In April 2003, the company sold $420 million of five-year senior notes due 2008 at an interest rate of 3.7% to fund general corporate purposes, potentially including debt repayment.
• Stock Repurchases: The company purchased approximately 4.3 million shares of common stock for $136.8 million during the six months ended March 31, 2003. An additional 2.0 million shares were purchased in April 2003 for $68.6 million.
• Variable Interest Entities (VIEs): The company is evaluating the impact of new accounting standards (FIN 46) regarding the consolidation of VIEs, including a lessor trust for its corporate headquarters (potential exposure of $170 million) and collateralized debt obligation entities (potential exposure of $19.6 million).
• Guarantees: The company has a contingent liability of approximately $145 million related to a residual guarantee on its corporate headquarters lease and $107 million related to a CDO entity.
• Risk Factors: Key risks include strong competition, dependence on distribution channels, asset volatility from global equity markets, and regulatory changes in foreign jurisdictions.

Investor Verification Checklist

• Convertible Note Redemption: Verify the cash impact of the $520.1 million redemption of convertible notes scheduled for May 11, 2003.
• AUM Trends: Monitor the trend of Assets Under Management, which declined 8% year-over-year, and its direct correlation to investment management fee revenue.
• Debt Structure: Review the new $420 million senior note issuance and its effect on the company's leverage and interest expense profile.
• Accounting Changes: Assess the potential impact of FIN 46 on the balance sheet regarding the consolidation of the lessor trust and CDO entities.
• Stock Buybacks: Track the continued execution of the share repurchase program and its effect on earnings per share.