-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HzNaq0ox6pRS/VqPJNd4++MeeTTQRdYrnLvT+svAxR6Y5gdKe7VD/pIb4fxmuPFR 9FIrVoXWzbN2Kxod4u0eUQ== 0000038777-03-000269.txt : 20030512 0000038777-03-000269.hdr.sgml : 20030512 20030512131952 ACCESSION NUMBER: 0000038777-03-000269 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN RESOURCES INC CENTRAL INDEX KEY: 0000038777 STANDARD INDUSTRIAL CLASSIFICATION: INVESTMENT ADVICE [6282] IRS NUMBER: 132670991 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09318 FILM NUMBER: 03692250 BUSINESS ADDRESS: STREET 1: ONE FRANKLIN PARKWAY STREET 2: BUILDING 920 CITY: SAN MATEO STATE: CA ZIP: 94403 BUSINESS PHONE: 650-312-2000 MAIL ADDRESS: STREET 1: FRANKLIN RESOURCES INC STREET 2: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403 10-Q 1 form10q_2q03.txt QUARTERLY REPORT FOR THE PERIOD ENDED 3/31/03 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 March 31, 2003 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 ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as described in Rule 12b-2 of the Exchange Act). 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: 253,468,709 shares, common stock, par value $.10 per share at April 30, 2003. - -------------------------------------------------------------------------------- PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED FINANCIAL STATEMENTS
FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF INCOME UNAUDITED THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31 MARCH 31 (in thousands, except per share data) 2003 2002 2003 2002 - --------------------------------------------------------------------------------------------- OPERATING REVENUES: Investment management fees $347,897 $365,778 $699,309 $722,576 Underwriting and distribution fees 194,158 197,537 380,095 389,544 Shareholder servicing fees 55,315 48,024 103,366 95,365 Other, net 15,765 14,629 35,816 36,690 - --------------------------------------------------------------------------------------------- TOTAL OPERATING REVENUES 613,135 625,968 1,218,586 1,244,175 - --------------------------------------------------------------------------------------------- OPERATING EXPENSES: Underwriting and distribution 173,068 177,327 341,915 349,594 Compensation and benefits 160,809 159,764 319,927 319,907 Information systems, technology and occupancy 71,404 73,197 143,999 147,791 Advertising and promotion 24,226 25,481 46,870 51,906 Amortization of deferred sales commissions 17,040 17,047 33,085 33,790 Amortization of intangible assets 4,238 4,258 8,472 8,633 Other 22,644 20,875 45,157 41,670 - --------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 473,429 477,949 939,425 953,291 - --------------------------------------------------------------------------------------------- Operating income 139,706 148,019 279,161 290,884 OTHER INCOME/(EXPENSES): Investment and other income 15,558 14,782 27,861 33,111 Interest expense (3,037) (2,808) (6,069) (5,976) - --------------------------------------------------------------------------------------------- Other income, net 12,521 11,974 21,792 27,135 - --------------------------------------------------------------------------------------------- Income before taxes on income 152,227 159,993 300,953 318,019 Taxes on income 42,624 39,997 81,590 79,504 - --------------------------------------------------------------------------------------------- NET INCOME $109,603 $119,996 $219,363 $238,515 - --------------------------------------------------------------------------------------------- Earnings per share: Basic $0.43 $0.46 $0.85 $0.91 Diluted $0.43 $0.46 $0.85 $0.91 Dividends per share $0.075 $0.070 $0.150 $0.140 See accompanying notes to the consolidated financial statements.
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FRANKLIN RESOURCES, INC. CONSOLIDATED BALANCE SHEETS UNAUDITED MARCH 31 SEPTEMBER 30 (in thousands) 2003 2002 - ------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $701,020 $829,237 Receivables 286,594 292,325 Investment securities, available-for-sale 1,286,326 1,103,463 Prepaid expenses and other 95,559 97,783 - ------------------------------------------------------------------------------------------------ Total current assets 2,369,499 2,322,808 - ------------------------------------------------------------------------------------------------ Banking/finance assets: Cash and cash equivalents 123,866 151,367 Loans receivable, net 516,679 444,338 Investment securities, available-for-sale 474,194 449,629 Other 39,769 45,889 - ------------------------------------------------------------------------------------------------ Total banking/finance assets 1,154,508 1,091,223 - ------------------------------------------------------------------------------------------------ Non-current assets: Investments, other 258,346 263,927 Deferred sales commissions 162,670 130,617 Property and equipment, net 379,571 394,172 Intangible assets, net 690,479 697,246 Goodwill 1,327,582 1,321,939 Receivable from banking/finance group 183,200 100,705 Other 80,450 100,101 - ------------------------------------------------------------------------------------------------ Total non-current assets 3,082,298 3,008,707 - ------------------------------------------------------------------------------------------------ TOTAL ASSETs $6,606,305 $6,422,738 - ------------------------------------------------------------------------------------------------ See accompanying notes to the consolidated financial statements.
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FRANKLIN RESOURCES, INC. CONSOLIDATED BALANCE SHEETS UNAUDITED MARCH 31 SEPTEMBER 30 (in thousands except share data) 2003 2002 - ------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Compensation and benefits $171,848 $228,093 Current maturities of long-term debt 4,216 7,830 Accounts payable and accrued expenses 125,510 117,246 Commissions 81,408 81,033 Income taxes 14,166 12,510 Other 8,363 8,307 - ------------------------------------------------------------------------------------------------ Total current liabilities 405,511 455,019 - ------------------------------------------------------------------------------------------------ Banking/finance liabilities: Deposits 720,188 733,571 Payable to Parent 183,200 100,705 Other 59,769 49,660 - ------------------------------------------------------------------------------------------------ Total banking/finance liabilities 963,157 883,936 - ------------------------------------------------------------------------------------------------ Non-current liabilities: Long-term debt 636,086 595,148 Deferred taxes 187,466 175,176 Other 45,598 46,513 - ------------------------------------------------------------------------------------------------ Total non-current liabilities 869,150 816,837 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Total liabilities 2,237,818 2,155,792 - ------------------------------------------------------------------------------------------------ Commitments and contingencies (Note 10) 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; 25,546 25,856 255,463,878 and 258,555,285 shares issued and outstanding, for March and September Capital in excess of par value 504,810 598,196 Retained earnings 3,883,497 3,702,636 Accumulated other comprehensive loss (45,366) (59,742) - ------------------------------------------------------------------------------------------------ Total stockholders' equity 4,368,487 4,266,946 - ------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,606,305 $6,422,738 - ------------------------------------------------------------------------------------------------ See accompanying notes to the consolidated financial statements.
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FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED SIX MONTHS ENDED MARCH 31 (in thousands) 2003 2002 - ------------------------------------------------------------------------------------------------ NET INCOME $219,363 $238,515 Adjustments to reconcile net income to net cash provided by operating activities: Decrease in receivables, prepaid expenses and other 29,863 133,644 Net advances of deferred sales commissions (65,381) (76,118) Increase in other current liabilities 2,290 64,925 Increase in income taxes payable 1,656 7,468 Increase in commissions payable 374 2,249 Decrease in accrued compensation and benefits (27,870) (38,756) Depreciation and amortization 87,926 91,134 Losses/(gains) on disposal of assets 2,240 (5,433) - ------------------------------------------------------------------------------------------------ Net cash provided by operating activities 250,461 417,628 - ------------------------------------------------------------------------------------------------ Purchase of investments (1,114,217) (787,795) Liquidation of investments 897,620 981,974 Purchase of banking/finance investments (108,547) (84,780) Liquidation of banking/finance investments 168,596 143,115 Net proceeds from securitization of loans receivable 124,989 299,980 Net origination of loans receivable (198,589) (239,147) Additions of property and equipment (32,052) (27,992) Proceeds from sale of property 143 9,534 - ------------------------------------------------------------------------------------------------ Net cash (used in)/provided by investing activities (262,057) 294,889 - ------------------------------------------------------------------------------------------------ (Decrease)/increase in bank deposits (13,382) 72,362 Exercise of common stock options 729 12,010 Net put option premiums and settlements 2,862 895 Dividends paid on common stock (37,404) (35,129) Purchase of stock (133,322) (8,070) Increase in debt 42,686 43,799 Payments on debt (6,291) (4,146) - ------------------------------------------------------------------------------------------------ Net cash (used in)/provided by financing activities (144,122) 81,721 - ------------------------------------------------------------------------------------------------ (Decrease)/increase in cash and cash equivalents (155,718) 794,238 Cash and cash equivalents, beginning of period 980,604 622,775 - ------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of period $824,886 $1,417,013 - ------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION: Value of common stock issued, principally restricted stock $28,376 $28,151 See accompanying notes to the consolidated financial statements.
5 - -------------------------------------------------------------------------------- FRANKLIN RESOURCES, INC. Notes to Consolidated Financial Statements March 31, 2003 (Unaudited) 1. Basis of Presentation --------------------- We have prepared these unaudited interim financial statements of Franklin Resources, Inc. and its consolidated subsidiaries in accordance with the instructions to Form 10-Q and the rules and regulations of the Securities and Exchange Commission. Under these rules and regulations, we have shortened or omitted some information and footnote disclosures normally included in financial statements prepared under generally accepted accounting principles. We believe that we have made all adjustments necessary for a fair statement of the results of operations for the periods shown. All adjustments are normal and recurring. You should read these financial statements together with our audited financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2002. Certain amounts for the comparative prior year periods have been reclassified to conform to the financial presentation for and at the periods ended March 31, 2003. 2. Comprehensive Income -------------------- The following table shows comprehensive income for the three and six months ended March 31, 2003 and 2002. THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31 MARCH 31 (in thousands) 2003 2002 2003 2002 --------------------------------------------------------------------------------------------- Net income $109,603 $119,996 $219,363 $238,515 Net unrealized (loss)/gain on available-for-sale securities, net of tax (4,629) 3,610 3,155 6,181 Foreign currency translation adjustments 3,464 (2,217) 11,221 (8,852) --------------------------------------------------------------------------------------------- Comprehensive income $108,438 $121,389 $233,739 $235,844 ---------------------------------------------------------------------------------------------
6 - -------------------------------------------------------------------------------- 3. Earnings per Share ------------------ We computed earnings per share as follows:
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31 MARCH 31 (in thousands except per share amounts) 2003 2002 2003 2002 ---------------------------------------------------------------------------------------- Net income $109,603 $119,996 $219,363 $238,515 ---------------------------------------------------------------------------------------- Weighted-average shares outstanding - basic 257,023 261,596 257,315 261,284 Incremental shares from assumed conversions 631 515 603 697 ---------------------------------------------------------------------------------------- Weighted-average shares outstanding - diluted 257,654 262,111 257,918 261,981 ---------------------------------------------------------------------------------------- Earnings per share: Basic and diluted $0.43 $0.46 $0.85 $0.91 ----------------------------------------------------------------------------------------
4. Employee Stock Option and Investment Plans ------------------------------------------ Under our stock option plan, we may award options to some employees. In addition, we have a qualified, non-compensatory Employee Stock Investment Plan ("ESIP"), which allows participants who meet certain eligibility criteria to buy shares of common stock at 90% of their market value on defined dates. We account for these plans using the intrinsic value method under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, no compensation costs are recognized with respect to stock options granted that have an exercise price equal to the market value of the underlying stock at the date of grant, or with respect to shares issued under the ESIP. If we had determined compensation costs for our stock option plans and our ESIP based upon fair values at the grant dates in accordance with the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", our net income and earnings per share would have been reduced to the pro forma amounts indicated below. For pro forma purposes, the estimated fair value of options was calculated using the Black-Scholes option-pricing model and is amortized over the options' vesting periods. 7 - --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31 MARCH 31 (in thousands) 2003 2002 2003 2002 --------------------------------------------------------------------------------------- Net Income, as reported $109,603 $119,996 $219,363 $238,515 Less: additional stock-based compensation expense determined under the fair value method, net of tax 17,414 15,012 33,949 28,056 --------------------------------------------------------------------------------------- PRO FORMA NET INCOME $92,189 $104,984 $185,414 $210,459 --------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE As reported $0.43 $0.46 $0.85 $0.91 Pro forma $0.36 $0.40 $0.72 $0.81 DILUTED EARNINGS PER SHARE As reported $0.43 $0.46 $0.85 $0.91 Pro forma $0.36 $0.40 $0.72 $0.80 ---------------------------------------------------------------------------------------
5. Cash and Cash Equivalents ------------------------- Cash and cash equivalents at March 31, 2003 and September 30, 2002 consisted of the following: MARCH 31, SEPTEMBER 30, (in thousands) 2003 2002 ----------------------------------------------- -------------------- ------------------- Cash and due from banks $245,970 $224,214 Federal funds sold and securities purchased under agreements to resell 50,445 82,150 Other 528,471 674,240 ----------------------------------------------- -------------------- ------------------- Total $824,886 $980,604 ----------------------------------------------- -------------------- -------------------
Cash and cash equivalents - other includes money market mutual fund investments and U.S. Treasury bills. Federal Reserve Board regulations require reserve balances on deposits to be maintained with the Federal Reserve Banks by banking subsidiaries. The required reserve balance was $2.4 million as of March 31, 2003 and $5.3 million as of September 30, 2002. 6. Securitization of Loans Receivable ---------------------------------- From time to time, we enter into auto loan securitization transactions with qualified special purpose entities and record these transactions as sales. The following table shows details of auto loan securitization transactions for the three and six months ended March 31, 2003 and 2002: 8 - -------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31 MARCH 31 (in thousands) 2003 2002 2003 2002 --------------------------------------------------------------------------------------- Gross sale proceeds $- $- $131,620 $319,616 Net carrying amount of loans sold - - 126,104 306,260 --------------------------------------------------------------------------------------- Pre-tax gain $- $- $5,516 $13,356 ---------------------------------------------------------------------------------------
When we sell auto loans in a securitization transaction, we record an interest-only strip receivable. The interest-only strip receivable represents our contractual right to receive interest from the pool of securitized loans after the payment of required amounts to holders of the securities and certain other costs associated with the securitization. Gross sales proceeds include the fair value of the interest-only strips. We generally estimate fair value based on the present value of future expected cash flows. The key assumptions used in the present value calculations of our securitization transactions at the date of securitization were as follows: THREE MONTHS SIX MONTHS ENDED ENDED MARCH 31 MARCH 31 2003 2002 2003 2002 -------------------------------------------------------------------------------------- Excess cash flow discount rate (annual rate) - - 12% 12% Cumulative life loss rate - - 4.27% 3.75% Pre-payment speed assumption (average monthly rate) - - 1.76% 1.50% --------------------------------------------------------------------------------------
We determined these assumptions using data from comparable transactions, historical information and management's estimate. Interest-only strip receivables are generally restricted assets and subject to limited recourse provisions. We generally estimate the fair value of the interest-only strips at each period-end based on the present value of future expected cash flows, consistent with the methodology used at the date of securitization. The following shows the carrying value and the sensitivity of the interest-only strip receivables at March 31, 2003 and September 30, 2002 to adverse changes in the key economic assumptions used to measure fair value, which are hypothetical: 9 - -------------------------------------------------------------------------------- MARCH 31, SEPTEMBER 30, (in thousands) 2003 2002 --------------------------------------------------------------------------------------- Carrying amount/fair value of interest-only strips $27,146 $29,088 --------------------------------------------------- Excess cash flow discount rate (annual rate) 12% 12% -------------------------------------------- Impact on fair value of 10% adverse change $(388) $(400) Impact on fair value of 20% adverse change $(765) $(789) Cumulative life loss rate 3.95% 3.63% ------------------------- Impact on fair value of 10% adverse change $(1,827) $(1,787) Impact on fair value of 20% adverse change $(3,651) $(3,579) Pre-payment speed assumption (average monthly rate) 1.70% 1.73% -------------------------------------------------- Impact on fair value of 10% adverse change $(2,896) $(2,632) Impact on fair value of 20% adverse change $(5,461) $(5,155) ---------------------------------------------------------------------------------------
This sensitivity analysis shows the hypothetical effect of a change in the assumptions used to determine the fair value of the interest-only strip receivable. Actual future market conditions may differ materially and accordingly, this sensitivity analysis should not be considered our projections of future events or losses. With respect to retained servicing responsibilities relating to the securitization trusts, we receive annual servicing fees ranging from 1% to 2% of the loans securitized. We also receive the rights to future cash flows, if any, arising after the investors in the securitization trust have received their contracted return. The following is a summary of cash flows received from and paid to securitization trusts. THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31 MARCH 31 (in thousands) 2003 2002 2003 2002 --------------------------------------------------------------------------------------- Servicing fees received $2,696 $2,092 $5,069 $3,397 Other cash flows received 4,266 4,603 9,132 5,922 Purchase of loans from trusts 10,363 7,964 10,363 8,380 ---------------------------------------------------------------------------------------
Amounts payable to the trustee for servicing income collected on behalf of the trusts of $26.5 million at March 31, 2003 and $24.9 million at September 30, 2002 are included in other banking/finance liabilities. The securitized loan portfolio that we manage and the related delinquencies as of March 31, 2003 and September 30, 2002 were as follows: 10 - -------------------------------------------------------------------------------- March 31, September 30, (in thousands) 2003 2002 --------------------------------------------------------------------------------------- Securitized loans held by securitization trusts $521,560 $530,896 Delinquencies 10,991 9,317 ---------------------------------------------------------------------------------------
Net charge-offs on the securitized loan portfolio were $3.0 million and $1.6 million during the three months ended March 31, 2003 and 2002 and $6.0 million and $2.7 million during the six months ended March 31, 2003 and 2002. 7. Intangible Assets and Goodwill ------------------------------ Intangible assets at March 31, 2003 and September 30, 2002 were as follows: GROSS CARRYING ACCUMULATED NET CARRYING (in thousands) AMOUNT AMORTIZATION AMOUNT --------------------------------------------------------------------------------------- AS OF MARCH 31, 2003 Amortized intangible assets: Customer base $232,321 $(31,182) $201,139 Other 31,546 (18,917) 12,629 --------------------------------------------------------------------------------------- 263,867 (50,099) 213,768 Non-amortized intangible assets: Management contracts 476,711 - 476,711 --------------------------------------------------------------------------------------- Total $740,578 $(50,099) $690,479 --------------------------------------------------------------------------------------- AS OF SEPTEMBER 30, 2002 Amortized intangible assets: Customer base $231,935 $(23,358) $208,577 Other 31,546 (18,181) 13,365 --------------------------------------------------------------------------------------- 263,481 (41,539) 221,942 Non-amortized intangible assets: Management contracts 475,304 - 475,304 --------------------------------------------------------------------------------------- Total $738,785 $(41,539) $697,246 ---------------------------------------------------------------------------------------
Estimated amortization expense for each of the next 5 fiscal years is as follows: FOR THE FISCAL YEARS ENDING (in thousands) SEPTEMBER 30, ---------------------------------------- ----------------------------- 2003 $16,959 2004 16,959 2005 16,959 2006 16,959 2007 16,959 ---------------------------------------- ----------------------------- 11 - -------------------------------------------------------------------------------- The change in the carrying value of goodwill was as follows: (in thousands) ---------------------------------------------------------------------- Goodwill as of September 30, 2002 $1,321,939 Foreign currency movements 5,643 ---------------------------------------------------------------------- Goodwill as of March 31, 2003 $1,327,582 ---------------------------------------------------------------------- We adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") on October 1, 2001. SFAS 142 addresses the initial recognition and measurement of intangible assets acquired outside a business combination and the recognition and measurement of goodwill and other intangible assets after acquisition. Under the new standard, all goodwill and indefinite-lived intangible assets, including those acquired before initial application of the standard, are not amortized but are tested for impairment at least annually. Accordingly, on October 1, 2001, we ceased to amortize goodwill and indefinite-lived assets. All of our goodwill and intangible assets relate 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. As of March 31, 2003, we completed the annual impairment testing of goodwill and indefinite-lived intangible assets under the guidance set out in SFAS 142 and we determined that there was no impairment in the value of goodwill and indefinite-lived assets recorded in our books and records as of October 1, 2002. 8. Segment Information ------------------- We have two operating segments: investment management and banking/finance. We based our operating segment selection process primarily on services offered. The investment management segment derives substantially all its revenues and net income from providing investment advisory, administration, distribution and related services to the Franklin, Templeton, Mutual Series, Fiduciary Trust and Bissett funds, and institutional, high net-worth and private accounts and other 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 three and six months ended March 31, 2003 and 2002 is presented in the table below. Operating revenues of the banking/finance segment are reported net of interest expense and provision for loan losses. 12 - -------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31 MARCH 31 (in thousands) 2003 2002 2003 2002 --------------------------------------------------------------------------------------- OPERATING REVENUES Investment management $600,787 $617,794 $1,190,082 $1,216,753 Banking/finance 12,348 8,174 28,504 27,422 --------------------------------------------------------------------------------------- Total $613,135 $625,968 $1,218,586 $1,244,175 --------------------------------------------------------------------------------------- INCOME BEFORE TAXES Investment management $146,777 $156,700 $285,712 $299,381 Banking/finance 5,450 3,293 15,241 18,638 --------------------------------------------------------------------------------------- Total $152,227 $159,993 $300,953 $318,019 ---------------------------------------------------------------------------------------
Operating segment assets were as follows: MARCH 31, SEPTEMBER 30, (in thousands) 2003 2002 --------------------------------------------------------------------------------------- Investment management $5,451,797 $5,331,515 Banking/finance 1,154,508 1,091,223 --------------------------------------------------------------------------------------- Total $6,606,305 $6,422,738 ---------------------------------------------------------------------------------------
Operating revenues of the banking/finance segment included above were as follows: THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31 MARCH 31 (in thousands) 2003 2002 2003 2002 ------------------------------------------------------------------------------------------ Interest and loan fees $8,101 $6,608 $15,964 $17,923 Interest and dividends on investment securities 5,852 4,112 10,862 9,507 ----------------------------------------------------------------------------------------- Total interest income 13,953 10,720 26,826 27,430 Interest on deposits (1,791) (2,340) (3,380) (5,077) Interest on short-term debt (110) (57) (198) (275) Interest expense - inter-segment (605) (1,341) (1,409) (3,486) ----------------------------------------------------------------------------------------- Total interest expense (2,506) (3,738) (4,987) (8,838) Net interest income 11,447 6,982 21,839 18,592 Other income 4,234 4,351 13,215 19,162 Provision for loan losses (3,333) (3,159) (6,550) (10,332) ----------------------------------------------------------------------------------------- Total operating revenues $12,348 $8,174 $28,504 $27,422 -----------------------------------------------------------------------------------------
Inter-segment interest payments from the banking/finance segment to the investment management segment are based on market rates prevailing at the inception of each loan. Inter-segment interest income and expense are not eliminated in our Consolidated Statements of Income. 13 - -------------------------------------------------------------------------------- 9. Debt ---- In May 2001, we received approximately $490 million in net proceeds from the sale of $877 million principal amount at maturity of zero-coupon convertible senior notes due 2031 (the "Convertible Notes"). At March 31, 2003, long-term debt included $501.0 million in principal and $18.0 million of accrued interest related to the Convertible Notes. The Convertible Notes, which were offered to qualified institutional buyers only, carry an interest rate of 1.875% per annum, with an initial conversion premium of 43%. Each of the $1,000 (principal amount at maturity) Convertible Notes is convertible into 9.3604 shares of our common stock. We may redeem the Convertible Notes for cash on or after May 11, 2006 at their accreted value. We may have 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 in cash or shares of our common stock. The amount of Convertible Notes that will be redeemed depends on, among other factors, the performance of our common stock. On April 9, 2003, we notified holders that we would redeem the Convertible Notes for cash at their accreted value on May 11, 2003. If we had to repurchase all of the Convertible Notes on this date, the total payment would be approximately $520.1 million. We did not have any commercial paper outstanding or medium term notes issued at March 31, 2003 and at September 30, 2002. See Note 13 for additional disclosures about subsequent events. 10. Commitments and Contingencies ----------------------------- GUARANTEES Under Financial Accounting Standards Board Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", we are required, on a prospective basis, to recognize in our financial statements a liability for the fair value of any guarantees issued or modified after December 31, 2002 as well as make additional disclosures about existing guarantees (see Note 14). The following are guarantees issued as of March 31, 2003. At March 31, 2003, there was no liability recognized in our consolidated balance sheet for guaranteed amounts as existing transactions as of this date were entered into before the effective date of the fair value provision of the interpretation. We lease our corporate headquarters in San Mateo, California from a lessor trust under an operating lease that expires in fiscal 2005, with additional renewal options for a further period of up to 10 years. In connection with this lease, we are contingently liable for approximately $145 million in residual guarantees, representing approximately 85% of the total construction costs of $170 million. We would become liable under the residual guarantee of $145 million if we were unable or unwilling to exercise our renewal option to extend the lease term or buy the corporate headquarter buildings, or if we were unable to arrange for the sale of the building for more than $145 million. We are also contingently liable to purchase the corporate headquarter buildings for an amount equal to the final construction costs of $170 million if an event of default occurs under the agreement. An event of default includes, but is not limited to, failure to make lease payments when due and failure to maintain required insurance. Management considers the possibility of default under the provisions of the agreement to be remote. The lease is treated as an operating 14 - -------------------------------------------------------------------------------- lease as none of the capitalization criteria under Statement of Financial Accounting Standards No. 13, "Accounting for Leases" was met at the inception of the lease. We provide investment management services to, and have made investments in, a number of collateralized debt obligation entities ("CDOs") that, using debt financing, invest in debt instruments. These entities subsequently issue notes and preferred shares to investors. As of March 31, 2003, in relation to one of these entities, and in the event that the CDO is terminated prior to the issuance of securities to investors, we have a contingent obligation in the maximum amount of approximately $107 million. In relation to the auto loan securitization transactions that we have entered into with a number of qualified special purpose entities, we are obligated to cover shortfalls in amounts due to the holders of the notes up to certain levels as specified under the related agreements. As of March 31, 2003, the maximum potential amount of future payments was $9.6 million. At March 31, 2003, our banking/finance operating segment had issued financial standby letters of credit totaling $9.7 million on which beneficiaries would be able to draw upon in the event of non-performance by our customers, primarily in relation to lease and lien obligations of these customers. These standby letters of credit were secured by marketable securities with a fair value of $20.3 million as of March 31, 2003 and commercial real estate and have various expiration dates through March 2004. From time to time, we sell put options giving the purchaser the right to sell shares of our common stock to us at a specified price upon exercise of the options on the designated expiration dates if certain conditions are met. These put options are treated as equity instruments and the related premium received is recorded in Stockholders' Equity as Capital in excess of par value. The likelihood that we will have to purchase our stock and the purchase price is contingent on the market value of our stock when the put option contract becomes exercisable. At March 31, 2003, there were 4.4 million put options outstanding with various expiration dates from May 2003 through January 2004. OTHER COMMITMENTS AND CONTINGENCIES In February 2001, we signed an agreement to outsource management of our data center and distributed server operations. Under the agreement, we may end the agreement any time beginning on March 1, 2004 by incurring a termination charge. The maximum termination charge payable depends on the termination date, the service levels before our termination of the agreement, and costs incurred to wind down the services. Based on March 31, 2003 service levels, the termination fee payable on March 1, 2004 would approximate $37.2 million and would decrease on each one-year anniversary for the following three years. 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. At March 31, 2003, our banking/finance operating segment had commitments to extend credit aggregating $292.7 million, mainly under credit card lines. We lease office space and equipment under long-term operating leases. Future minimum lease payments under non-cancelable leases are not material. 15 - -------------------------------------------------------------------------------- 11. Transactions with Variable Interest Entities -------------------------------------------- Variable interest entities ("VIEs") consist of corporations, trusts, partnerships and other entities where the equity investment holders have not contributed sufficient capital to finance the activities of the VIEs or the equity investment holders do not have defined rights and obligations normally associated with equity investments (see Note 14). At March 31, 2003, we were engaged in financial transactions with the following VIEs. LESSOR TRUST. We lease our corporate headquarters in San Mateo, California from a lessor trust under an operating lease as described in Note 10. Our maximum exposure arising from this arrangement is approximately $170 million at March 31, 2003. At this time, we believe that it is probable that we will have to consolidate the lessor trust in our annual financial statements as of September 30, 2003. COLLATERALIZED DEBT OBLIGATION ENTITIES. We provide investment management services to, and have made investments in, a number of CDOs as described in Note 10. Our equity ownership interest in the CDOs is currently not sufficient to meet consolidation requirements and they are reported at fair value. We earn investment management fees, including subordinated management fees in some cases, for managing the CDOs, as well as incentive fees that are contingent on certain performance conditions. At March 31, 2003, the combined market value of assets in these CDOs was approximately $1.7 billion, and our maximum exposure to loss as a result of these investments was approximately $19.6 million. At this time, we believe that it is reasonably possible that we will have to either make additional disclosures about or consolidate one or more of these entities in our annual financial statements as of September 30, 2003. 12. Banking Regulatory Ratios ------------------------- Following the acquisition of Fiduciary Trust Company International 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. We must meet specific capital adequacy guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require us to maintain a minimum Tier 1 capital and Tier 1 leverage ratio (as defined in the regulations), as well as minimum Tier 1 and Total risk-based capital ratios (as defined in the regulations). Based on our calculations as of March 31, 2003, we exceeded the capital adequacy requirements applicable to us as listed below. 16 - -------------------------------------------------------------------------------- THREE MONTHS ENDED MINIMUM FOR OUR CAPITAL (in thousands) MARCH 31, 2003 ADEQUACY PURPOSES ------------------------------------- --------------------- --------------------------- Tier 1 capital $2,244,324 N/A Total risk-based capital $2,255,816 N/A Tier 1 leverage ratio 47% 4% Tier 1 risk-based capital ratio 65% 4% Total risk-based capital ratio 66% 8% ------------------------------------- --------------------- ---------------------------
13. Subsequent Events ----------------- In April 2003, we completed the sale of five-year senior notes due April 15, 2008 and totaling $420 million. The senior notes, which were offered to qualified institutional buyers only, carry an interest rate of 3.7%. During April 2003, we purchased approximately 2.0 million shares of our common stock at a cost of approximately $68.6 million. 14. New Accounting Standards ------------------------ In November 2002, Financial Accounting Standards Board Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"), was issued. FIN 45 addresses financial accounting and reporting for companies that issue certain guarantees. Under FIN 45, a company must recognize a liability at fair value for all guarantees entered into or modified after December 31, 2002, even when the likelihood of making any payments under the guarantee is remote. FIN 45 also requires enhanced disclosures for guarantees existing at December 31, 2002. The adoption of FIN 45 did not have a material effect on our consolidated operating results and financial position. See Note 10 for additional disclosures. In December 2002, Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure" ("SFAS 148"), was issued. SFAS 148 amends Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition to the fair value method of accounting for stock-based compensation when companies elect to expense stock options at fair value at the time of grant. SFAS 148 also requires additional interim disclosure for all companies with stock-based employee compensation. As we adopted the intrinsic value method described in APB Opinion No. 25, "Accounting for Stock Issued to Employees", the transition provision of SFAS 148 will not apply to us. The disclosure requirements are effective for interim periods starting after December 15, 2002. The adoption of SFAS 148 did not have a material effect on our consolidated operating results and financial position and we have provided the necessary disclosures in Note 4. In January 2003, Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), was issued. FIN 46 addresses reporting and disclosure requirements for VIEs. It defines a VIE as a corporation, trust, partnership or other entity where the equity investment holders have not contributed sufficient capital to finance the activities of 17 - -------------------------------------------------------------------------------- the VIE or the equity investment holders do not have defined rights and obligations normally associated with an equity investment. FIN 46 requires consolidation of a VIE by the enterprise that has the majority of the risks and rewards of ownership, referred to as the primary beneficiary. It also requires additional disclosures for an enterprise that holds a significant variable interest in a VIE, but is not the primary beneficiary. The consolidation and disclosure provisions of FIN 46 are effective immediately for VIEs created after January 31, 2003, and for interim or annual reporting periods beginning after June 15, 2003 for VIEs created before February 1, 2003. FIN 46 also requires interim disclosures in all financial statements issued after January 31, 2003, regardless of the date on which the VIE was created, if it reasonably possible that an enterprise will consolidate or disclose information about a VIE when FIN 46 becomes effective. We are currently evaluating the impact that the adoption of FIN 46 will have on our results of operations and financial condition. See Note 11 for interim disclosures under FIN 46. 18 - -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS In addition to historical information, we also make some statements relating to the future, which are called "forward-looking" statements. These forward-looking statements involve a number of risks, uncertainties and other important factors that could cause our actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward-looking statements. Forward-looking statements are our best prediction at the time they are made, and for this reason, you should not rely too heavily on them and review the "Risk Factors" section set forth below and in our recent filings with the U.S. Securities and Exchange Commission, which describes these risks, uncertainties and other important factors in more detail. GENERAL We derive the majority of our operating revenues, operating expenses and net income from providing investment advisory and related services to retail mutual funds, institutional, high net-worth, private accounts and other investment products. This is our main business activity and operating segment. The mutual funds and other products that we advise, collectively called our sponsored investment products, are distributed to the public globally via five distinct names: * Franklin * Templeton * Mutual Series * Fiduciary Trust * Bissett Our sponsored investment products include a broad range of domestic and global/international equity, balanced/hybrid, fixed-income and money market mutual funds, as well as other investment products that meet a wide variety of specific investment needs of individuals and institutions. The level of our revenues depends largely on the level and relative mix of assets under management. To a lesser degree, our revenues also depend on the level of mutual fund sales and the number of mutual fund shareholder accounts. The fees charged for our services are based on contracts with our sponsored investment products or our clients. These arrangements could change in the future. Our secondary business and operating segment is banking/finance. Our banking/finance group offers consumer lending and selected retail-banking services to high net-worth individuals, foundations and institutions. 19 - --------------------------------------------------------------------------------
RESULTS OF OPERATIONS THREE MONTHS ENDED SIX MONTHS ENDED (in millions except per share MARCH 31 PERCENT MARCH 31 PERCENT amounts) 2003 2002 CHANGE 2003 2002 CHANGE - ----------------------------------------------------------------------------------------------- NET INCOME $109.6 $120.0 (9%) $219.4 $238.5 (8%) EARNINGS PER COMMON SHARE Basic and diluted $0.43 $0.46 (7%) $0.85 $0.91 (7%) OPERATING MARGIN 23% 24% - 23% 23% - - -----------------------------------------------------------------------------------------------
Net income decreased 9% and 8% during the three and six months ended March 31, 2003 compared to the same periods last year. These decreases were mainly due to lower investment management fees consistent with a decline in simple monthly average assets under management, partially offset by higher shareholder servicing fees mainly due to an increase in billable shareholder accounts.
ASSETS UNDER MANAGEMENT March 31 March 31 (in billions) 2003 2002 - ----------------------------------------------------------------------------------------------- Equity: Global/international $75.7 $93.9 Domestic (U.S.) 42.7 53.2 - ----------------------------------------------------------------------------------------------- Total equity 118.4 147.1 - ----------------------------------------------------------------------------------------------- Balanced/hybrid 37.4 40.8 Fixed-income: Tax-free 52.3 48.7 Taxable Domestic 29.4 24.6 Global/international 9.4 7.7 - ----------------------------------------------------------------------------------------------- Total fixed-income 91.1 81.0 - ----------------------------------------------------------------------------------------------- Money market 5.5 5.6 - ----------------------------------------------------------------------------------------------- Total $252.4 $274.5 - ----------------------------------------------------------------------------------------------- Simple monthly average for the three-month period (1) $255.1 $267.9 Simple monthly average for the six-month period (1) $254.6 $261.6 - ----------------------------------------------------------------------------------------------- (1) Investment management fees from approximately 50% of our assets under management at March 31, 2003 are calculated using a daily average.
Our assets under management at March 31, 2003 were $252.4 billion, 8% lower than they were a year ago, mainly due to market depreciation in the latter half of fiscal 2002 and in the quarter ended March 31, 2003. Simple monthly average assets decreased 5% and 3% during the three and six months ended March 31, 2003 over the same periods a year ago. The simple monthly average mix of assets under management is shown below. 20 - --------------------------------------------------------------------------------
SIX MONTHS ENDED MARCH 31 2003 2002 - ----------------------------------------------------------------------------------------------- PERCENTAGE OF TOTAL ASSETS UNDER MANAGEMENT Equity 48% 52% Fixed-income 35% 31% Balanced/hybrid 15% 15% Money market 2% 2% - ----------------------------------------------------------------------------------------------- Simple monthly average for the six-month period 100% 100% - -----------------------------------------------------------------------------------------------
The change in the composition of assets under management resulted from market depreciation in equity assets in the latter half of fiscal 2002 and in the quarter ended March 31, 2003. This shift in asset mix led to slight decrease in our effective investment management fee rate (investment management fees divided by simple monthly average assets under management). For the six months ended March 31, 2003, the effective investment management fee rate declined slightly to 0.549% as compared to 0.552% over the same period last year. Assets under management by shareholder location were as follows: AS OF MARCH 31, (in billions) 2003 2002 - ------------------------------------------------------------------------ ----------- ---------- United States $211.5 $232.1 Canada 16.9 22.0 Europe 10.6 10.8 Asia/Pacific and other 13.4 9.6 - ------------------------------------------------------------------------ ----------- ---------- Total $252.4 $274.5 - ------------------------------------------------------------------------ ----------- ----------
Components of the change in our assets under management were as follows: THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31 PERCENT MARCH 31 PERCENT (in billions) 2003 2002 CHANGE 2003 2002 CHANGE - ---------------------------------------------------------------------------------------------- Beginning assets under management $257.7 $266.3 (3%) $247.8 $246.4 1% Sales 17.6 18.8 (6%) 34.8 37.7 (8%) Reinvested distributions 0.6 0.5 20% 2.0 3.1 (35%) Redemptions (15.1) (14.3) 6% (31.3) (29.8) 5% Distributions (1.1) (1.1) - (3.2) (4.8) (33%) (Depreciation)/appreciation (7.3) 4.3 N/A 2.3 21.9 (89%) - ---------------------------------------------------------------------------------------------- Ending assets under management $252.4 $274.5 (8%) $252.4 $274.5 (8%) - ----------------------------------------------------------------------------------------------
For the three and six months ended March 31, 2003, sales exceeded redemptions complex-wide ("net inflows") by $2.5 billion and $3.5 billion, compared to inflows of $4.5 billion and $7.9 billion in the same periods last year. Market appreciation of $2.3 billion in the six months ended March 31, 2003 related mainly to our fixed-income category. 21 - --------------------------------------------------------------------------------
OPERATING REVENUES THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31 PERCENT MARCH 31 PERCENT (in millions) 2003 2002 CHANGE 2003 2002 CHANGE - --------------------------------------------------------------------------------------------- Investment management fees $347.8 $365.8 (5%) $699.3 $722.6 (3%) Underwriting and distribution fees 194.2 197.6 (2%) 380.1 389.5 (2%) Shareholder servicing fees 55.3 48.0 15% 103.4 95.4 8% Other, net 15.8 14.6 8% 35.8 36.7 (2%) - --------------------------------------------------------------------------------------------- Total operating revenues $613.1 $626.0 (2%) $1,218.6 $1,244.2 (2%) - ---------------------------------------------------------------------------------------------
SUMMARY Total operating revenues decreased 2% for both the three and six months ended March 31, 2003 compared to the same periods last year primarily due to lower investment management related to a decline in simple monthly average assets under management, and lower underwriting and distribution fees resulting from lower sales. The decreases were partly offset by higher shareholder service fees. INVESTMENT MANAGEMENT FEES Investment management fees account for 57% of our operating revenues in the quarter ended March 31, 2003. These fees are generally calculated under contractual arrangements with our sponsored investment products as a percentage of the market value of assets under management. Annual rates vary by investment objective and type of services provided. In return for these fees, we provide a combination of investment advisory, administrative and other management services. Investment management fees decreased 5% and 3% during the three and six months ended March 31, 2003 over the same periods last year consistent with the 5% and 3% decrease in simple monthly average assets under management over the same periods. UNDERWRITING AND DISTRIBUTION FEES We earn underwriting fees from the sale of some classes of sponsored investment products on which investors pay a sales commission at the time of purchase. Sales at reduced or zero commissions are offered on some classes of shares and for sales to shareholders or intermediaries that exceed specified minimum amounts. Therefore, underwriting fees will change with the overall level of gross sales and the relative mix of sales between different share classes. Our sponsored investment products pay distribution fees in return for sales, marketing and distribution efforts on their behalf. While other contractual arrangements exist in international jurisdictions, in the United States, distribution fees include 12b-1 fees. These fees are subject to maximum payout levels based on a percentage of the assets in each fund. We pay a significant portion of underwriting and distribution fees to the financial advisors and other intermediaries who sell our sponsored investment products to the public on our behalf. See the description of underwriting and distribution expenses below. Underwriting and distribution fees decreased 2% during both the three and six months ended March 31, 2003 over the same periods last year. During the three and six months ended March 31, 2003, 22 - -------------------------------------------------------------------------------- commission revenues decreased 7% and 5% over the same periods last year mainly due to a 6% and 8% decrease in product sales. Distribution fees increased 2% during the three months ended March 31, 2003 and decreased 1% during the six months ended March 31, 2003 over same periods last year. The overall decline during the six months ended March 31, 2003 over the same period in the prior year was related to a 3% decline in simple monthly average assets under management over the same period. SHAREHOLDER SERVICING FEES Shareholder servicing fees are generally fixed charges per shareholder account that vary with the particular type of fund and the service being rendered. In some instances, sponsored investment products are charged these fees based on the level of assets under management. We receive fees as compensation for providing transfer agency services, which include providing customer statements, transaction processing, customer service and tax reporting. In the United States, transfer agency service agreements provide that accounts closed in a calendar year remain billable through the second quarter of the following calendar year at a reduced rate. In Canada, such agreements provide that accounts closed in the calendar year remain billable for four months after the end of the calendar year. Accordingly, the level of fees will vary with the growth in new accounts and the level of closed accounts that remain billable. Shareholder servicing fees increased 15% and 8% during the three and six months ended March 31, 2003 over the same periods last year. The increase reflects an increase in billable shareholder accounts due to revised shareholder service fee agreements effective on January 1, 2003 and 0.7 million shareholder accounts added in the acquisition of Pioneer ITI AMC Limited ("Pioneer"), in July 2002. Prior to January 2003, the U.S. transfer agent did not assess a fee for certain partially serviced shareholder accounts. As of March 31, 2003, billable accounts included approximately 3.9 million additional partial service accounts now billable under the revised U.S. shareholder agreements. This increase in billable accounts was partially offset by lower rates on closed accounts under the new agreements. OTHER, NET Other, net consists mainly of revenues from the banking/finance operating segment as well as income from custody services. Revenues from the banking/finance operating segment include interest income on loans, servicing income, and investment income on banking/finance investment securities, which are offset by interest expense and the provision for anticipated loan losses. Other, net increased 8% during the three months ended March 31, 2003 over the same period last year. This increase was mainly due higher interest on auto loans and a decline in interest expense. Other, net decreased 2% during the six months ended March 31, 2003 from the same period last year consistent with a decrease in realized gains from auto loan securitizations to $5.5 million in the six months ended March 31, 2003 from $13.4 million during the same period in the prior year, partially offset by a decline in interest expense. 23 - --------------------------------------------------------------------------------
OPERATING EXPENSES THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31 PERCENT MARCH 31 PERCENT (in millions) 2003 2002 CHANGE 2003 2002 CHANGE - --------------------------------------------------------------------------------------------- Underwriting and distribution $173.1 $177.3 (2%) $341.9 $349.6 (2%) Compensation and benefits 160.8 159.8 1% 319.9 320.0 - Information systems, technology and occupancy 71.4 73.2 (2%) 144.0 147.8 (3%) Advertising and promotion 24.2 25.5 (5%) 46.9 51.9 (10%) Amortization of deferred sales commissions 17.0 17.0 - 33.1 33.8 (2%) Amortization of intangible assets 4.2 4.2 - 8.5 8.6 (1%) Other 22.7 20.9 9% 45.1 41.6 8% - --------------------------------------------------------------------------------------------- Total operating expenses $473.4 $477.9 (1%) $939.4 $953.3 (1%) - ---------------------------------------------------------------------------------------------
SUMMARY Operating expenses decreased 1% during both the three and six months ended March 31, 2003 over the same periods last year. This decrease was primarily due to a decrease in underwriting and distribution, information systems, technology and occupancy and advertising and promotion expenses, partially offset by an increase in other expenses. 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. Underwriting and distribution expense decreased 2% during both the three and six months ended March 31, 2003 over the same periods last year consistent with the decrease in underwriting and distribution revenues. COMPENSATION AND BENEFITS Compensation and benefits expense increased 1% during the three months ended March 31, 2003 and remained constant during the six months ended March 31, 2003 over the same periods last year. Although our compensation structure has remained relatively constant as compared to the prior year, we have experienced increases in employee insurance and other benefits costs in the current fiscal year. We employed approximately 6,600 at March 31, 2003 as compared to about 6,400 at the same time last year. Our acquisition of Pioneer, in July 2002, added approximately 180 employees. In order to hire and retain 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. INFORMATION SYSTEMS, TECHNOLOGY AND OCCUPANCY Information systems, technology and occupancy costs decreased 2% and 3% during the three and six months ended March 31, 2003 over the same periods last year. While continuing work on new technology initiatives and investment in our technology infrastructure, expenditures have declined from 24 - -------------------------------------------------------------------------------- the prior year as we slowed down a number of initiatives and delayed the start of other technology projects given the current economic slowdown and our focus on cost control and management. Details of capitalized information systems and technology costs were as follows: THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31 MARCH 31 (in thousands) 2003 2002 2003 2002 - ----------------------------------------------------------------------------------------------- Net book value at beginning of period $110,045 $151,321 $121,486 $162,857 Additions during period, net of disposals and other adjustments 8,414 14,906 15,331 22,432 Amortization during period (18,365) (19,361) (36,723) (38,423) - ----------------------------------------------------------------------------------------------- Net book value at end of period $100,094 $146,866 $100,094 $146,866 - -----------------------------------------------------------------------------------------------
ADVERTISING AND PROMOTION Advertising and promotion expense decreased 5% and 10% during the three and six months ended March 31, 2003 over the same periods last year. During the three and six months ended March 2002, we incurred increased promotion expense to assist in educating the sales channels and the investing public about the strong relative investment performance of our sponsored investment products. We are committed to invest in advertising and promotion in response to changing business conditions, which means that the level of advertising and promotion expenditures may increase more rapidly or decrease more slowly than our revenues. AMORTIZATION OF DEFERRED SALES COMMISSIONS Certain fund share classes, including class B, are sold without a front-end sales charge to shareholders, while at the same time, our distribution subsidiaries pay a commission on the sale. In the United States, class A shares are sold without a front-end sales charge to shareholders when minimum investment criteria are met while our U.S. distribution subsidiary pays a commission on these sales. Class C shares are sold with a front-end sales charge that is lower than the commission paid by the U.S. distributor. We defer and amortize all up-front commissions paid by our distribution subsidiaries. We have arranged to finance some of these 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. In the United States, LFL has entered into a financing agreement with our U.S. distribution subsidiary and we maintain a continuing interest in the assets until resold by LFL. As a result, we retain DCA sold to LFL under the U.S. agreement in our financial statements and amortize them over an 8-year period or until resold by LFL in a securitization, which generally occurs at least once annually. LFL did not sell any U.S. DCA in securitization transactions in either the 6 months ended March 31, 2003 or the 6 months ended March 31, 2002. In contrast to the U.S. arrangement, LFL has entered into direct agreements with the Canadian and European sponsored investment products, and, as a result, we do not record DCA from these sources in our financial statements. Amortization of deferred sales commissions remained constant and decreased 2% during the three and six months ended March 31, 2003 over the same periods last year. 25 - -------------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Other income (expense) includes investment and other income and interest expense. Investment and other income is comprised mainly of the following: * dividends from investments * interest income from investments in government securities and other fixed-income investments * realized gains and losses on investments * foreign currency exchange gains and losses * miscellaneous income, including gain or loss on disposal of property. Other income (expense) increased 5% during the three months ended March 31, 2003 over the same period last year. Other income (expense) decreased 20% during the six months ended March 31, 2003 over the same period last year due to lower realized investment gains and interest income, partially offset by higher foreign exchange gains from our non-U.S. operations. TAXES ON INCOME As a multi-national corporation, we provide investment management services to a wide range of international investment products, often managed from locations outside the United States. Some of these jurisdictions have lower tax rates than the United States. The mix of income (mainly investment management fees) subject to these lower rates, when aggregated with income originating in the United States, produces a lower overall effective tax rate than existing U.S. Federal and state tax rates. Our effective income tax rate in the quarter ended March 31, 2003 increased to 28% compared to 25% in the same period last year. The effective tax rate will continue to reflect the relative contributions of foreign earnings that are subject to reduced tax rates and that are not currently included in U.S. taxable income, as well as other factors. MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At March 31, 2003, we had $824.9 million in cash and cash equivalents, as compared to $980.6 million at September 30, 2002. Cash and cash equivalents include cash, U.S. Treasury bills and other debt instruments with original maturities of three months or less and other highly liquid investments that are readily convertible into cash, including money market funds. The mix of short-term instruments and, in particular, the maturity schedules of some debt instruments, affect the level reported in cash and cash equivalents and in investment securities, available-for-sale in any given period. Liquid assets, which consist of cash and cash equivalents, investments available-for-sale and current receivables increased to $2,872.0 million at March 31, 2003 from $2,826.0 million at September 30, 2002. Outstanding debt increased to $640.3 million at March 31, 2003 compared to $603.0 million at September 30, 2002. As of March 31, 2003, outstanding debt consists of $519.0 million in principal and accrued interest related to outstanding convertible notes that we issued in May 2001 and $121.3 million of other long-term debt. As of September 30, 2002, outstanding debt included $514.2 million related to the convertible notes and $88.8 million of other long-term debt. Other long-term debt consists mainly of deferred commission liability recognized in relation to the U.S. DCA financed by LFL that has not yet been sold by LFL in a securitization transaction. The increase in outstanding debt from September 30, 2002 is due to U.S. DCA financed by LFL and the accretion of interest on the convertible notes. 26 - -------------------------------------------------------------------------------- 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 have 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 in cash or shares of our common stock. The amount of convertible notes that will be redeemed depends on, among other factors, the performance of our common stock. Redemption of the convertible notes may require us to obtain alternative financing, which may increase future interest expense. On April 9, 2003 we notified holders that we would redeem the convertible notes for cash at their accreted value on May 11, 2003. If we had to repurchase all of the convertible notes on this date, the total payment would be approximately $520.1 million. As of March 31, 2003, we had $500 million of commercial paper, $350 million of medium term notes and $300 million of debt and equity securities available to be issued under shelf registration statements filed with the Securities and Exchange Commission. Our committed revolving credit facilities at March 31, 2003 totaled $420 million, of which, $210 million was under a 364-day facility. The remaining $210 million facility is under a five-year facility that will expire in June 2007. As of March 31, 2003, our Fiduciary subsidiary had $350 million available in uncommitted bank lines under the Federal Reserve Funds system. On April 3, 2003, we amended the $350 million medium term note shelf registration filed with the Securities and Exchange Commission to permit the issuance of an additional $70 million in medium term notes. On April 8, 2003, we completed the sale of $420 million in five-year senior notes due April 15, 2008. The senior notes, which were offered to qualified institutional buyers only, carry an interest rate of 3.7%. We expect to use the net proceeds from the offering for general corporate purposes, which may include repayment of existing debt. Our ability to access the capital markets in a timely manner depends on a number of factors including our credit rating, the condition of the global economy, investors' willingness to purchase our securities, interest rates, credit spreads and the valuation levels of equity markets. In extreme circumstances, we might not be able to access this liquidity readily. 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 three and six months ended March 31, 2003 were approximately $36.2 million and $68.3 million compared to $36.0 and $65.4 million over the same periods last year. LFL's ability to access credit facilities and the securitization market will directly affect our existing financing arrangements. Our banking/finance operating segment periodically enters into auto loan securitization transactions with qualified special purpose entities, which then issue asset-backed securities to private investors. The outstanding loan balances held by these special purpose entities were $521.6 million as of March 31, 2003 and $530.9 million as of September 30, 2002. Our ability to access the securitization market will directly affect our plans to finance the auto loan portfolio in the future. At March 31, 2003, the banking/finance operating segment had commitments to extend credit aggregating $292.7 million, mainly under its credit card lines, and had issued financial standby letters of credit totaling $9.7 million that expire through March 2004. The standby letters of credit are secured by marketable securities and commercial real estate. During the three and six months ended March 2003, we purchased approximately 2.7 million and 4.3 million shares of our common stock at a cost of $90.5 million and $136.8 million, including 1 million 27 - -------------------------------------------------------------------------------- shares repurchased under put option contracts. In January 2003, we increased the number of shares of our common stock authorized for purchase by 10 million shares. During April 2003, we purchased 2.0 million shares of our common stock at a cost of approximately $68.6 million. During the quarter ended March 2003, we sold put options giving the purchaser the right to sell 1.4 million shares of our common stock to us at a specified price upon exercise of the options on the designated expiration dates if certain conditions are met. At March 31, 2003, there were 4.4 million put options outstanding with various expiration dates from May 2003 through January 2004. We expect that the main uses of cash will be to: * expand our core business * make strategic acquisitions * acquire shares of our common stock * fund property and equipment purchases * pay operating expenses of the business * enhance our technology infrastructure * improve our business processes * pay shareholder dividends * repay and service debt. We believe that we can meet our present and reasonably foreseeable operating cash needs and future commitments through the following: * our existing liquid assets * the continuing cash flow from operations * our borrowing capacity under current credit facilities * our ability to issue debt or equity securities * our mutual fund sales commission financing arrangement. In particular, we expect to finance future 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. CRITICAL ACCOUNTING POLICIES Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and assumptions that impact our financial position and results of operations. These estimates and assumptions are affected by our application of accounting policies. Below we describe certain critical accounting policies that we believe are important to understanding our results of operations and financial position. In addition, please refer to Note 1 to the financial statements contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2002 for further discussion of our accounting policies. Estimates, by their nature, are based on judgment and available information. Differences between actual results and these estimates could have a material impact on our financial statements. 28 - -------------------------------------------------------------------------------- INTANGIBLE ASSETS AND GOODWILL Intangible assets and goodwill as of March 31, 2003 were as follows: (in thousands) NET CARRYING AMOUNT - ------------------------------------------------------- ------------------------ Goodwill $1,327,582 Intangible assets - definite-lived 213,768 Intangible assets - indefinite-lived 476,711 - ------------------------------------------------------- ------------------------ Total $2,018,061 - ------------------------------------------------------- ------------------------ Under Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", we are required to test the fair value of goodwill and indefinite-lived intangibles for impairment at least once a year. As of March 31, 2003, we completed our annual impairment test of goodwill and indefinite-lived intangible assets and we determined that there was no impairment to the goodwill and indefinite-lived assets recorded in our books and records as of October 1, 2002. While we believe that our testing was appropriate, it involved the use of estimates and assumptions. We are also required to consider if any impairment has occurred to definite-lived intangible assets. Based on our review and evaluation, we do not believe any impairment has occurred. INCOME TAXES As a multinational corporation, we operate in various locations outside the United States. We have not made a provision for U.S. taxes on the cumulative undistributed earnings of foreign subsidiaries as those earnings are intended to be reinvested for an indefinite period of time. These earnings approximated $2.1 billion at March 31, 2003. Changes to our policy of reinvesting foreign earnings may have a significant effect on our financial condition and results of operation. VALUATION OF INVESTMENTS We record substantially all investments in our financial statements at fair value or amounts that approximate fair value. Where available, we use prices from independent sources such as listed market prices or broker or dealer price quotations. For investments in illiquid and privately held securities that do not have readily determinable fair values, we estimate the value of the securities based upon available information. However, even where the value of a security is derived from an independent market price or broker or dealer quote, some assumptions may be required to determine the fair value. For example, we generally assume that the size of positions in securities that we hold would not be large enough to affect the quoted price of the securities when sold, and that any such sale would happen in an orderly manner. However, these assumptions may be incorrect and the actual value realized on sale could differ from the current carrying value. We evaluate our investments for other-than-temporary decline in value on a periodic basis. This may exist when the fair value of an investment security has been below the current value for an extended period of time. As most of our investments are carried at fair value, if an other-than-temporary decline in value is determined to exist, the unrealized investment loss recorded net of tax in accumulated other comprehensive income is realized as a charge to net income, in the period in which the other-than-temporary decline in value is determined. During fiscal 2002, we recognized $60.1 million for an other-than-temporary decline in the value of certain investments. While we believe that we have accurately 29 - -------------------------------------------------------------------------------- estimated the amount of other-than-temporary decline in value in our portfolio, different assumptions could result in changes to the recorded amounts in our financial statements. LOSS CONTINGENCIES We are involved in various lawsuits and claims encountered in the normal course of business. When such a matter arises and periodically thereafter, we consult with our legal counsel and evaluate the merits of the claim based on the facts available at that time. In management's opinion, an adequate accrual has been made as of March 31, 2003 to provide for any losses that may arise from these matters. VARIABLE INTEREST ENTITIES In the United States, the Financial Accounting Standards Board ("FASB") has recently issued Interpretation No. 46 "Consolidation of Variable Interest Entities" (see Note 14 to the financial statements). This interpretation requires consolidation of a variable interest entity ("VIE") by the enterprise that has the majority of the risks and rewards of ownership, referred to as the primary beneficiary. It also requires additional disclosures for an enterprise that holds a significant variable interest in a VIE, but is not the primary beneficiary. We are currently evaluating the impact of this interpretation on our investments in existence as of January 31, 2003. This evaluation requires us to make certain assumptions and estimates in calculating the extent of our interest in such entities, which may impact our treatment of a lessor trust and certain collateralized debt obligation entities described below. LESSOR TRUST. We lease our corporate headquarters in San Mateo, California from a lessor trust under an operating lease that expires in fiscal 2005, with additional renewal options for a further period of up to 10 years (see Note 11 to the financial statements). At this time, we believe that it is probable that we will have to consolidate the lessor trust in our annual financial statements as of September 30, 2003. COLLATERALIZED DEBT OBLIGATION ENTITIES. We provide investment management services to, and have made investments in, a number of collateralized debt obligation entities (see Note 11 to the financial statements). At this time, we believe that it is reasonably possible that we will have to either make additional disclosures about or consolidate one or more of these entities in our annual financial statements as of September 30, 2003. 30 - -------------------------------------------------------------------------------- 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 financial and equity markets due to the continuing threat of terrorism and the recent reports of accounting irregularities at certain public companies. 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 generally derive higher fee revenues and income from equity assets than from fixed-income products we manage. Similarly, our securitized consumer receivables business is subject to marketplace fluctuation. WE FACE RISKS ASSOCIATED WITH CONDUCTING OPERATIONS IN NUMEROUS FOREIGN COUNTRIES. We sell mutual funds and offer investment advisory and related services in many different regulatory jurisdictions around the world, and intend to continue to expand our operations internationally. Regulators in these jurisdictions could change their policies or laws in a manner that might restrict or otherwise impede our ability to distribute or register investment products in their respective markets. OUR ABILITY TO SUCCESSFULLY INTEGRATE THE WIDELY VARIED SEGMENTS OF OUR BUSINESS CAN BE IMPEDED BY SYSTEMS AND OTHER TECHNOLOGICAL LIMITATIONS. Our continued success in effectively managing and growing our business globally depends on our ability to integrate the varied accounting, financial and operational systems of our international business with that of our domestic business. 31 - -------------------------------------------------------------------------------- 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 and C shares, is also subject to the market's perception of those assets, finance rates offered by competitors, and the general market for private debt. If we are unable to obtain these funds and financing, we may be forced to incur unanticipated costs or revise our business plans. 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 or in some cases zero interest rates. Our inability to compete effectively against these companies or to maintain our relationships with the various automobile dealers through whom we offer consumer loans could limit the growth of our consumer loan business. Economic and credit market downturns could reduce the ability of our customers to repay loans, which could cause our consumer loan portfolio losses to increase. THE SEPTEMBER 11, 2001 WORLD TRADE CENTER TRAGEDY MAY ADVERSELY AFFECT OUR ABILITY TO ACHIEVE THE BENEFITS WE EXPECT FROM THE ACQUISITION OF FIDUCIARY TRUST COMPANY INTERNATIONAL. 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. Our insurance coverage may not cover all losses on claims for property, damage, extra expenses and business interruptions arising out of the destruction of the World Trade Center. For the next several years, insurance costs are likely to increase materially and we may not be able to obtain the same types or amounts of coverage. WE ARE SUBJECT TO FEDERAL RESERVE BOARD REGULATION. Upon completion of our acquisition of Fiduciary in April 2001, we became a bank holding company and a financial holding company subject to the supervision and regulation of the Federal Reserve Board. We are subject to the restrictions, limitations, or prohibitions of the Bank Holding Company Act of 1956 and the Gramm-Leach Bliley Act. The Federal Reserve Board may impose additional limitations or restrictions on our activities, including 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. The Federal Reserve Board may also 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. 32 - -------------------------------------------------------------------------------- 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 adverse changes in interest rates, foreign exchange and/or equity prices. Management is responsible for managing this risk. Our Enterprise Risk Management Committee is responsible for providing a framework to assist management to identify, assess and manage market and other risks. We are exposed to changes in interest rates mainly through our debt transactions and portfolio debt holdings available-for-sale, which are carried at fair value in our financial statements. As of March 31, 2003, a significant percentage of our outstanding debt is at fixed interest rates. In our banking/finance operating segment, we monitor the net interest rate margin and the average maturity of interest earning assets, as well as funding sources. In addition, as of March 31, 2003, we have considered the potential impact of the effect on the banking/finance operating 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 are also exposed to equity price fluctuations through securities we hold that are carried at fair value. To mitigate this risk, we maintain a diversified investment portfolio. We operate mainly in the United States, but also provide services and earn revenues in Canada, the Bahamas, Europe, Asia, South America, Africa and Australia. A significant portion 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. ITEM 4. CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Quarterly Report on Form 10-Q, the Company has carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's principal executive officer and the Company's principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on such evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective. (b) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Quarterly Report on Form 10-Q. 33 - -------------------------------------------------------------------------------- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material developments in the litigation previously reported in our Quarterly Report on Form 10-Q for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on February 13, 2003. We are involved from time to time in litigation relating to claims arising in the normal course of business. Management is of the opinion that the ultimate resolution of such claims will not materially affect our business or financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Stockholders of Franklin Resources, Inc. was held at 10:00 a.m., Pacific Standard Time, on January 30, 2003 at the principal offices of the Company located at One Franklin Parkway, San Mateo, California. The three proposals presented at the meeting were: 1. The election of eleven (11) directors to hold office until the next Annual Meeting of Stockholders or until their successors are elected and shall qualify. 2. The ratification of the appointment of PricewaterhouseCoopers LLP as the Company's independent accountants for the fiscal year ending September 30, 2003. 3. The approval of the adoption of the 2002 Universal Stock Incentive Plan. (b) Each of the eleven nominees for director was elected and received the number of votes set forth below: Name Votes For Votes Withheld ---- --------- -------------- Harmon E. Burns 208,811,524 3,179,372 Charles Crocker 208,850,777 3,140,119 Robert D. Joffe 208,799,419 3,191,477 Charles B. Johnson 207,748,540 4,242,356 Rupert H. Johnson, Jr. 208,812,563 3,178,333 Thomas H. Kean 208,773,239 3,217,657 James A. McCarthy 203,680,603 8,310,293 Chutta Ratnathicam 207,831,590 4,159,306 Peter A. Sacerdote 203,522,289 8,468,607 Anne M. Tatlock 208,681,169 3,309,727 Louis E. Woodworth 203,668,229 8,322,667 (c) The ratification of the appointment of PricewaterhouseCoopers LLP as the Company's independent accountants for the fiscal year ending September 30, 2003, was approved by a vote of 200,588,811 shares in favor, 9,973,248 shares against, and 1,428,837 shares abstaining. (d) The approval of the adoption of the 2002 Universal Stock Incentive Plan was approved by a vote of 190,683,381 shares in favor, 19,516,716 shares against, and 1,790,799 shares abstaining. 34 - -------------------------------------------------------------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: see Exhibit Index on page 41 to page 42. (b) Reports on Form 8-K: (i) Form 8-K filed on January 23, 2003 reporting under Item 5 "Other Events" an earnings press release, dated January 23, 2003, and including said press release as an Exhibit under Item 7 "Financial Statements and Exhibits" 35 - -------------------------------------------------------------------------------- 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: May 12, 2003 By: /s/ Martin L. Flanagan ---------------------- Martin L. Flanagan President and Chief Financial Officer 36 - -------------------------------------------------------------------------------- CERTIFICATIONS I, Charles B. Johnson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Franklin Resources, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 37 - -------------------------------------------------------------------------------- 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 /s/ Charles B. Johnson ---------------------- Charles B. Johnson Chief Executive Officer 38 - -------------------------------------------------------------------------------- I, Martin L. Flanagan, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Franklin Resources, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 39 - -------------------------------------------------------------------------------- 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 /s/ Martin L. Flanagan ---------------------- Martin L. Flanagan Chief Financial Officer 40 - -------------------------------------------------------------------------------- EXHIBIT INDEX 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 Amended and Restated By-Laws incorporated by reference to Exhibit 3(ii) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2002 Exhibit 4.1 Indenture between Franklin Resources, Inc. and The Chase Manhattan Bank (formerly Chemical Bank), as trustee, dated as of May 19, 1994, incorporated by reference to the Company's Registration Statement on Form S-3, filed on April 14, 1994 Exhibit 4.2 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 4.3 Form of Liquid Yield Option Note due 2031 (Zero Coupon- Senior) (included in Exhibit 4.2 hereto) Exhibit 4.4 Registration Rights Agreement between Franklin Resources, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") dated May 11, 2001, incorporated by reference to the Registrant's Registration Statement on Form S-3, filed on August 6, 2001 Exhibit 4.5 Form of 3.7% Senior Notes due 2008 Exhibit 10.69 Amendment to the Managed Operations Service Agreement dated February 6, 2001, June 10, 2002 and February 3, 2003 between Franklin Templeton Companies, LLC and International Business Machines Corporation Exhibit 10.70 Representative Form of Franklin Templeton Investor Services, LLC Transfer Agent and Shareholder Services Agreement Exhibit 12 Computations of ratios of earnings to fixed charges 41 - -------------------------------------------------------------------------------- Exhibit 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 42 - -------------------------------------------------------------------------------- EX-4 3 exh_4-5.txt EXHIBIT 4.5 EXHIBIT 4.5 ----------- THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY (AS DEFINED IN THE INDENTURE) OR A NOMINEE THEREOF. THIS GLOBAL SECURITY IS EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND, UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR SECURITIES IN DEFINITIVE FORM, THIS GLOBAL SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY, OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY, OR BY THE DEPOSITORY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITORY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITORY. UNLESS THE SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY (AS DEFINED BELOW) OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. NO. 1 $420,000,000 CUSIP No. 354613 AD 3 FRANKLIN RESOURCES, INC. 3.700% Senior Notes due 2008 Franklin Resources, Inc., a Delaware corporation (hereinafter called the "Company", which term includes any successor corporation under the Indenture referred to below), for value received, hereby promises to pay to Cede & Co., or registered assigns, the principal sum of Four Hundred Twenty Million Dollars ($420,000,000.00) on April 15, 2008, and to pay interest thereon from April 8, 2003 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semiannually on April 15 and October 15 in each year, commencing October 15, 2003, at the rate of 3.700% per annum, until the principal hereof is paid or made available for payment, and (to the extent that the payment of such interest shall be legally enforceable) at the rate of 3.700% per annum on any overdue principal and premium and on any overdue installment of interest from the dates such amounts are due until they are paid or made available for payment and such interest shall be payable on demand. Interest on this Security shall be computed on the basis of a 360-day year of twelve 30-day months. If any Interest Payment Date or the maturity date falls on a day that is not a Business Day, the required payment shall be made on the next Business Day as if it were made on the date such payment was due and no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date or the maturity date, as the case may be, to such next Business Day. The interest so payable and punctually paid or duly provided for on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such interest, which shall be April 1 or October 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest which is payable but not punctually paid or duly provided for on any Interest Payment Date shall forthwith cease to be payable to the registered Holder hereof on the relevant regular record date by virtue of having been such holder, and may be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a subsequent special record date (which shall be at least 10 days before the payment date) for the payment of such defaulted interest to be fixed by the Company, notice whereof shall be given to the Holders of Securities (defined below) of this series not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in such Indenture. Payment of the principal of and interest on this Security will be made at the office or agency of the Company maintained for that purpose in The Borough of Manhattan, The City of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that, at the option of the Company, interest may be paid by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register; provided, further, that payment to DTC or any successor depository may be made by wire transfer to the account designated by DTC or such successor depository in writing. This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities"), issued and to be issued in one or more series under an Indenture, dated as of May 19, 1994, as supplemented on October 9, 1996 (herein called, together with all indentures supplemental thereto, the "Indenture"), between the Company and JPMorgan Chase Bank, as Trustee (herein called the "Trustee," which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof, initially limited (subject to exceptions provided in the Indenture) to the aggregate principal amount specified in the Officers' Certificate dated April 8, 2003 establishing the terms of the Securities pursuant to the Indenture. 2 If an Event of Default with respect to the Securities shall occur and be continuing, the principal of the Securities may be declared due and payable in the manner and with the effect provided in the Indenture. For purposes of the Securities, the definition of "Material Subsidiary" in the Indenture shall be replaced in its entirety as follows: "Material Subsidiary" means (a) Franklin Advisers, Inc., (b) Franklin/Templeton Distributors, Inc., (c) Franklin Templeton Investor Services, LLC, (d) Templeton Global Advisors Limited, (e) Templeton Investment Counsel, LLC, (f) Franklin Mutual Advisers, LLC, (g) Fiduciary Trust Company International, (h) any other Subsidiary which owns, directly or indirectly, any of the capital stock of any of the companies listed in (a) through (g) above or any successor entity and (i) any other Subsidiary with which any of the companies listed in (a) through (g) above or any successor entity is merged or consolidated or which acquires or succeeds to a significant portion of the business, properties or assets of any of the companies listed in (a) through (g) above or any successor entity. The Securities may not be redeemed prior to the Stated Maturity. The Securities are not subject to any sinking fund. The Indenture contains provisions permitting, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series issued under the Indenture at any time by the Company and the Trustee with the written consent of the Holders of not less than a majority in aggregate principal amount of the Securities at the time Outstanding of each series affected thereby. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities of any series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Securities issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Security, at the times, place and rate, and in the coin or currency, herein and in the Indenture prescribed. As provided in the Indenture and subject to certain limitations set forth therein and in this Security, the transfer of this Security may be registered on the Security Register upon surrender of this Security for registration of transfer at the office or agency of the Company maintained for that purpose in any place where the principal of and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form 3 satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or by the Holder's attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities are issuable only in registered form without coupons in the denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations set forth in the Indenture, and in this Security, the Securities are exchangeable for a like aggregate principal amount of Securities of this series in different authorized denominations, as requested by the Holders surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith, other than in certain cases provided in the Indenture. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. This Security shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made or instruments entered into and, in each case, performed in said State. All terms used in this Security without definition that are defined in the Indenture shall have the meanings assigned to them in the Indenture. [Remainder of Page Intentionally Left Blank] 4 Unless the Certificate of Authentication hereon has been executed by or on behalf of the Trustee under the Indenture by the manual signature of one of its authorized officers, this Security shall not be entitled to any benefits under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated: April 8, 2003 FRANKLIN RESOURCES, INC. [SEAL] By:__________________________________ By:__________________________________ CERTIFICATE OF AUTHENTICATION This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. Dated: April 8, 2003 JPMORGAN CHASE BANK, as Trustee By:__________________________________ as an Authorized Officer 5 EX-10 4 exh_10-69.txt EXHIBIT 10.69 EXHIBIT 10.69 ------------- AMENDMENT 1 TO THE MANAGED OPERATIONS SERVICES AGREEMENT - -------------------------------------------------------------------------------- Franklin Templeton Companies, LLC, a Delaware Limited Liability Company, having a place of business at One Franklin Parkway, San Mateo, CA. 94403 ("Franklin") and International Business Machines Corporation, having place of business at Route 100, Somers, New York, 10589 ("IBM") (collectively referred to herein as the "Parties"), agree that the following terms and conditions (the "Amendment") amend and supplement the Managed Operations Services Agreement, dated February 6, 2001, between Franklin and IBM (the "Agreement"). This Amendment adds Fiduciary Trust Company International ("Fiduciary"), an Affiliate of Franklin, as a recipient of the Services. The affected and changed sections and Schedules of the Agreement are as indicated below. Unless modified herein, all other terms and conditions defined in the Agreement shall apply and have the same meaning when used in this Amendment. In the event of any inconsistency between the terms of the Agreement and the terms of this Amendment, the terms of this Amendment shall prevail. All terms and conditions of the Agreement not otherwise specifically amended or supplemented herein remain unchanged and in full force and effect. The Term of this Amendment will begin as of the date it is executed by the Parties (the "Fiduciary Effective Date") or upon commencement of any Services provided hereunder, whichever is first, and will run concurrently with the Agreement. Termination provisions of the Agreement apply to this Amendment. REVISED AND AMENDED DOCUMENTS: I. THE AGREEMENT: - ---------------------- 1. ADD THE FOLLOWING AS SECTION 1.aaa. (DEFINITIONS): -------------------------------------------------- "Fiduciary Commencement Date means the date upon which the Services for Fiduciary commence, which shall be July 17, 2001 unless otherwise specified herein or in a Schedule hereto." 2. SECTION 1.qq. IS HEREBY MODIFIED AS FOLLOWS: -------------------------------------------- "Services" means those services performed by IBM as described in the Agreement, Schedules and Supplements thereto. 3. ADD THE FOLLOWING SENTENCES TO SECTION 3.e. (PROJECT EXECUTIVE): ---------------------------------------------------------------- "IBM shall also appoint a Data Center Site Manager for the Fiduciary Data Center, who shall serve as the manager for all Services provided by IBM at the Fiduciary Data Center from the date Services commence at such Data Center. The Fiduciary Data Center Site Manager shall be considered a Protected Employee until IBM has completed its consolidation obligations relative to the Fiduciary Data Center, pursuant to Supplement E-1 of Schedule E." 4. ADD THE FOLLOWING SENTENCE TO SECTION 8.d. (REQUIRED CONSENTS): --------------------------------------------------------------- "Franklin shall cause to be secured, any consents relating to Fiduciary In-Scope Software and In-Scope Equipment, and shall be responsible for payment of all fees associated with obtaining such consents, if any." IBM/FRANKLIN CONFIDENTIAL Page 1 of 4 Final Amendment 1 IBM Initials /s/ BR Franklin Initials /s/ AG ------ ------ 5. ADD THE FOLLOWING AS SECTION 10.a.(vi)(DESIGNATION OF PROTECTED EMPLOYEES): --------------------------------------------------------------------------- "the Data Center Site Manager for the Fiduciary Data Center shall be considered a Protected Employee only until IBM has completed its consolidation obligations pursuant to Supplement E-1 of Schedule E." 6. SECTION 24.a. IS HEREBY MODIFIED AS FOLLOWS: -------------------------------------------- "IBM shall indemnify, hold harmless and defend Franklin, its Affiliates and its and their directors, officers, employees and agents, at IBM's expense, against any claim by a third party against Franklin, its Affiliates and its and their directors, officers, employees and agents:" 7. ADD THE FOLLOWING AS SECTION 24.a.viii.: ---------------------------------------- " arising from IBM's use of any third party software provided to IBM by Franklin or Franklin Affiliates, to the extent such claim results from a breach by IBM of any provisions of the applicable third party license agreement." 8. SECTION 24.b. IS HEREBY MODIFIED AS FOLLOWS: -------------------------------------------- "Franklin shall indemnify, hold harmless and defend IBM, its Affiliates and its and their directors, officers, employees and agents, at Franklin's expense, against any claim by a third party against IBM, its Affiliates and its and their directors, officers, employees and agents:" 9. ADD THE FOLLOWING AS SECTION 24.b.vii.: --------------------------------------- "arising as a result of Franklin's failure to obtain any consent which Franklin is obligated to provide to IBM under this Agreement." 10. SECTION 27.f. IS HEREBY MODIFIED AS FOLLOWS: -------------------------------------------- Compliance with Laws. The parties shall comply with all applicable Federal, State and local laws, regulations, guidelines and ordinances as they relate to this Agreement and the Services, including but not limited to the following: i. SECURITY PROVISIONS FOR COMPLIANCE WITH GRAMM LEACH BLILEY ACT - ------------------------------------------------------------------- 1. Any storage of any "nonpublic personal information" of Fiduciary's customers (whether in any IBM system, file server, file folder or premises) shall be deemed Fiduciary Confidential Information (as such term is defined in Section 26 of the Agreement (the "NDA") and shall be subject to the provisions of the NDA. Despite the provisions of the NDA, IBM shall keep such "nonpublic personal information" confidential in perpetuity until such time that it becomes "publicly available information." The terms "nonpublic personal information" and "publicly available information" shall have the meanings set forth in 12 CFR 332. IBM agrees that, unless otherwise required by law, only those persons contemplated by Section 26.a. of the Agreement can gain access to Fiduciary Confidential Information. 2. During the term of this Agreement, upon reasonable notice by Fiduciary and during normal business hours, IBM will allow Fiduciary access to its premises to monitor IBM's compliance with the foregoing, to the extent reasonably necessary, provided such monitoring does not adversely affect IBM's ability to conduct its business. Fiduciary may hire an independent auditor to conduct such audit on its behalf, provided that such auditor first agrees in writing to be bound to obligations of confidentiality at least as stringent as those set forth in the NDA. Upon IBM/FRANKLIN CONFIDENTIAL Page 2 of 4 Final Amendment 1 IBM Initials /s/ BR Franklin Initials /s/ AG ------ ------ request, IBM will provide Fiduciary with a copy of IBM's most recent SAS 70 report for the service delivery center(s) where IBM will process or store Fiduciary Confidential Information. It is understood that IBM may redact from the SAS 70 reports confidential information pertaining to other IBM customers. ii PROVISION FOR COMPLIANCE WITH NEW YORK STATE BANKING BOARD SUPERVISORY PROCEDURE G101 AND THE BANK SERVICE CORPORATION ACT. ---------------------------------------------------- In the event that data processing for Fiduciary is ever conducted at an IBM facility, IBM agrees that, to the extent required by law, Fiduciary's state and federal bank regulators (and their authorized representatives) shall have the right to examine all records and material, use the equipment and interview IBM employees to the extent necessary to protect the interests of depositors, creditors or shareholder(s) of Fiduciary; provided such regulators first agree in writing to be bound to obligations of confidentiality at least as stringent as those set forth in the NDA. iii. ALL INSTITUTIONS LETTER: VACATION POLICY FROM THE SUPERINTENDENT OF BANKS OF THE STATE OF NEW YORK DATED AUGUST 22,1996 (THE "GUIDELINE"). ---------------------------------------------------------------- The Parties shall comply with the Guideline. Franklin/Fiduciary shall make a reasonable effort to obtain or grant an exception for IBM employees, in a manner consistent with the Guideline 0. 11. DELETE IN ITS ENTIRETY THE SENTENCE ON PAGE 34 WHICH READS: "Executed by the duly authorized representatives of the parties as of the dates corresponding with their signatures below." II. THE SCHEDULES - ------------------ SCHEDULE A: Supplement A-1 is added, which describes the duties and responsibilities of the Parties regarding the steady state Services that are unique to Fiduciary. SCHEDULE B: Supplement B-1 is added, which describes the duties and responsibilities of the Parties related to the Service Levels that are unique to Fiduciary. SCHEDULE C: Supplement C-1 is added, which describes the charges provisions that are unique to Fiduciary. Supplement C-1 includes Exhibit C-1-1, which lists the unique rates applicable to Fiduciary. SCHEDULE D: Change the title of Section 6.0 to read "Transition Plan Content." Supplement D-1 is added, which describes the activities that Fiduciary and IBM will perform during the transition period that are unique to Fiduciary. SCHEDULE E: Supplement E-1 is added, which describes the Projects that are unique to Fiduciary. SCHEDULE F: Supplement F-1 is added, which lists the Fiduciary Software. SCHEDULE G: Supplement G-1 is added, which lists the Fiduciary Machines. SCHEDULE H: Supplement H-1 is added, which describes the responsibilities of the Parties that are unique to the Fiduciary network. SCHEDULE I: Supplement I-1 is added, which lists the Fiduciary facilities at which the Services will be provided. IBM/FRANKLIN CONFIDENTIAL Page 3 of 4 Final Amendment 1 IBM Initials /s/ BR Franklin Initials /s/ AG ------ ------ SCHEDULE J: Supplement J-1 is added, which lists the Fiduciary contracts assumed by IBM under the Agreement. SCHEDULE K: Supplement K-1 is added, which describes responsibilities of the Parties with respect to the Fiduciary Affected Employees and Hired Employees. SCHEDULE L: Supplement L-1 is added, which describes the Acquired Assets. SCHEDULE M: Supplement M-1 is added, which describes the Business Recovery Services that IBM shall provide to Fiduciary. SCHEDULE N: Supplement N-1 is added, which describes the standard reports that IBM shall provide which are applicable and unique to Fiduciary. THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THIS AMENDMENT, UNDERSTAND IT, AND AGREE TO BE BOUND BY ITS TERMS AND CONDITIONS. FURTHER, THE PARTIES AGREE THAT THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES RELATING TO THIS SUBJECT SHALL CONSIST OF 1) THIS AMENDMENT, 2) THE SCHEDULES, AND 3) THE AGREEMENT, DATED FEBRUARY 6, 2001. Franklin's approval of this Amendment shall be considered acceptance by Franklin of IBM's provision of the Services to Fiduciary for the corresponding charges specified in Supplement 1 to Schedule C. THIS STATEMENT OF THE AMENDMENT SUPERSEDES ALL PROPOSALS OR OTHER PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER DESCRIBED IN THIS AMENDMENT. Accepted by: Accepted by: International Business Machines Franklin Templeton Companies, LLC. Corporation By: /s/ Bruce Ross By: /s/ Allen J. Gula, Jr. ____________________ ______________________ Authorized Signature Authorized Signature BRUCE ROSS Date July 2, 2001 ALLEN J. GULA, JR. Date July 2, 2001 - ---------- ------------ ----------------- ------------ Name (Type or Print) Name (Type or Print) BM/FRANKLIN CONFIDENTIAL Page 4 of 4 Final Amendment 1 IBM Initials /s/ BR Franklin Initials /s/ AG ------ ------ - -------------------------------------------------------------------------------- AGREEMENT BETWEEN FRANKLIN AND IBM - -------------------------------------------------------------------------------- SUPPLEMENT A-1 TO SCHEDULE A FIDUCIARY SERVICES AND SUPPORT RESPONSIBILITIES I. INTRODUCTION This Supplement A-1 to Schedule A describes the duties and responsibilities of IBM and Fiduciary related to IBM's provision of steady state Services for Fiduciary. For purposes of this Supplement A-1, unless specifically amended or deleted by reference herein, the responsibilities of IBM and Franklin as stated in Schedule A shall apply but instead shall mean the responsibilities of IBM and Fiduciary. II. DEFINITIONS The following terms have the meanings set forth below when used in this Supplement A-1 (and in the base Agreement and other Schedules). Capitalized terms not defined in this Section II have the meanings set forth in the Agreement or other Schedules. 1. AD HOC PRINTING - Printing of customers' statements on demand between the hours of 8AM and 8PM Eastern Standard Time. IBM will use diligent efforts to perform printing outside of these hours on a per request basis as requested by Fiduciary. IBM will notify Franklin if the number of such requests materially impacts IBM's ability to perform the Services within the current charges. If such is the case IBM and Franklin will meet to discuss and implement a plan to correct this problem. If such problem is not corrected in a reasonable period of time, IBM and Franklin agree to negotiate in good faith to amend this Agreement to provide for an equitable adjustment to the charges. III. SERVICE HOURS IBM will provide onsite support at 2 World Trade Center 24 hours/day, 6 days/week (Sundays are subject to On-Call support) until such as time the DEC machines have been sunset and server relocation is complete. For the remainder of the Term, onsite support will be supplied on an On-Call basis. On-Call means that IBM will use diligent efforts to: i) return pager calls within thirty (30) minutes of receipt of such calls, and ii) if required, provide an on-site presence within three (3) hours of the identification of the need of an on-site presence. IV. DOCUMENTATION a. IBM is responsible for: 5. migrating Fiduciary documents to and maintaining the electronic, web-accessible document repository through which Franklin may authorize IBM to provide Franklin employees with access to read, download and print documents relating to activities which could reasonably be expected to affect business operations, including but not limited to Project Change Requests ("PCR's"), project plans and schedules and the Procedures Manual; and b. Franklin will: 3. assist IBM in the migration of Fiduciary documents to the electronic document repository. IBM/Franklin Confidential Page 1 of 4 Final Supplement A-1 to Schedule A (Fiduciary Trust) IBM Initials /s/ BR Franklin Initials /s/ AG ------ ------ V. DESCRIPTION OF SERVICES AND SUPPORT ACTIVITIES 2.0 SYSTEMS ENGINEERING IBM will provide systems engineering support for the Midrange and Intel server environments, as described in Schedule A. DELETE SECTION 2.a.7. DELETE SECTION 2.b.3. 4.0 SYSTEMS OPERATIONS 4.1 GENERAL DESCRIPTION OF SYSTEMS OPERATIONS Using the IBM Management Environment, IBM will provide remote operational services for the Machines which are located at the Fiduciary Data Center(s) and are specified in Supplement G-1 to Schedule G. a. IBM will: 10. provide maintenance services on the IBM In-Scope Hardware listed in Supplement G-1 to Schedule G and the IBM Systems Software listed in Supplement F-1 to Schedule F, and manage the maintenance services provided under Franklin's contracts for the OEM server hardware listed in Supplement G-1 to Schedule G and the OEM Systems Software listed in Supplement F-1 to Schedule F until refresh; 11. provide maintenance services on the refreshed OEM In-Scope Hardware listed in Supplement G-1to Schedule G and the refreshed OEM Midrange and Distributed Systems Software listed in Supplement F-1 to Schedule F after refresh; 4.3 MIDRANGE AND INTEL SYSTEMS OPERATIONS a. IBM will: 3. operate the Lotus Notes applications in accordance with the Procedures Manual. b. Franklin will: 2. provide on-site Midrange and Intel server support for any Other Fiduciary sites; DELETE SECTION 5.2 6.0 SYSTEMS AND TECHNICAL SUPPORT b. Franklin will: 3. retain financial responsibility for obtaining licenses to all third party Application Software and third party System Software, upgrades and PTFs. 8.0 DATA BASE MANAGEMENT SERVICES a. Application and Data Modification IBM will: 1. collaborate with Franklin on investigation and analysis of related issues Franklin will: 1. be responsible for resolution of data and Application related issues. 2. develop and test the required scripts. 3. notify IBM of intended modifications as part of Change Management and Problem Management Process. 4. modify application or database data and enforce data Integrity and data quality. IBM/Franklin Confidential Page 2 of 4 Final Supplement A-1 to Schedule A (Fiduciary Trust) IBM Initials /s/ BR Franklin Initials /s/ AG ------ ------ b. MODIFICATIONS TO THE SERVER/ DATABASE CONFIGURATION IBM will: 1. collaborate with Franklin regarding investigation and analysis. 2. approve all modifications to the database configurations and parameters as part of Change Management and Problem Management. Franklin will: 1. be responsible for solution and implementation of all Database configuration changes. 2. notify IBM of the result of changes. c. DATABASE PERFORMANCE TUNING: IBM will: 1. collaborate with Franklin regarding investigation and analysis. 2. approve intended performance-tuning modifications to the database as part of Change. Management and Problem Management process. 3. IBM shall monitor the database from the system perspective. Franklin will: 1. develop required scripts. 2. prepare the tuning plan. 3. modify the database objects (tables, indexes, portions, views, etc) and notify IBM of status. 4. Franklin will monitor the databases from a DBA perspective. d. SOFTWARE UPGRADES AND PATCH INSTALLATIONS: IBM will: 1. run the modified system. 2. support Franklin during upgrade process. 3. IBM shall monitor the database from the system perspective. Franklin will: 1. test Software upgrades and patches in the development and test environments. 2. notify Application development of the completion status. 3. be responsible for software upgrades and patch installations. 4. Franklin will monitor the databases from DBA perspective Joint Responsibilities: 1. IBM and Franklin will approve any software upgrades and patch installations through formal Change Management and Problem Management process. 2. IBM and Franklin will create a detailed plan of software upgrade in the production environment based on the test results. e. [INTENTIONALLY LEFT BLANK] f. ESTABLISH TEMPORARY ID'S FOR FRANKLIN DBA'S: IBM will: 1. establish temporary ID's with adequate access rights to allow all required DBA production level work. These ID's would be temporarily assigned to the Franklin while performing their work in the production environment. Once finished, the access would be deleted. Appropriate procedures will be established for the assignment and required documentation as part of approved Change Management and Problem Management process. IBM/Franklin Confidential Page 3 of 4 Final Supplement A-1 to Schedule A (Fiduciary Trust) IBM Initials /s/ BR Franklin Initials /s/ AG ------ ------ 2. use the standard tools mutually agreed upon for monitoring system and database alerts. Franklin will: 1. contact IBM operations for access to the production environment. 10. OUTPUT SERVICES a. IBM will: 4. operate the Xerox printers or comparable printers identified in Supplement G-1 to Schedule G as attached to the Solamar system for Ad Hoc Printing. 5. operate the printers directly attached to the Midrange Machines and the Intel Servers located at the Prime Site until December 31, 2001 for Fiduciary. .. DELETE SECTION 10.a.9. DELETE SECTION 10.b.8. 14.0 SECURITY MANAGEMENT The Parties acknowledge that there are issues and differences of opinion regarding the intent and scope of Section 14.0, Security Management, as currently set forth in Schedule A of the Agreement. Each Party agrees to negotiate in good faith to reach a mutually agreeable solution to such issues. IBM acknowledges that Franklin/Fiduciary retains ultimate authority regarding Franklin/Fiduciary Security Management and controls. 15.0 BUSINESS RECOVERY SERVICES Business Recovery Services are as set forth in Supplement M-1 to Schedule M. IBM/Franklin Confidential Page 4 of 4 Final Supplement A-1 to Schedule A (Fiduciary Trust) IBM Initials /s/ BR Franklin Initials /s/ AG ------ ------ AMENDMENT NUMBER 2 TO THE MANAGED OPERATIONS SERVICES AGREEMENT - -------------------------------------------------------------------------------- This Amendment Number 2 to the Managed Operations Services Agreement (this "Amendment"), is made by and between Franklin Templeton Companies, LLC, a Delaware Limited Liability Company, having a place of business at One Franklin Parkway, San Mateo, CA, 94403 ("Franklin") and International Business Machines Corporation, having place of business at Route 100, Somers, NY, 10589 ("IBM") (collectively referred to herein as the "Parties"). This Amendment is entered into on this 10th day of June, 2002 (the "Amendment 2 Effective Date"). This Amendment amends the Managed Operations Services Agreement, dated February 6, 2001, between Franklin and IBM as modified or amended prior to the date hereof including any schedules, supplements, exhibits and attachments thereto (the "Agreement"). Capitalized terms used but not defined herein shall have their respective meanings as defined in the Agreement. In the event of any inconsistency between the terms of the Agreement and the terms of this Amendment, the terms of this Amendment shall prevail. All terms and conditions of the Agreement not specifically amended or supplemented herein, shall remain unchanged and in full force and effect. The Term of this Amendment will begin as of the Amendment 2 Effective Date and will run concurrently with the Agreement. This Amendment modifies the Agreement for purposes of clarification and change in scope of work. Additionally, this Amendment documents the agreed to changes, which were precipitated by the destruction of the World Trade Center, and the Fiduciary Trust Company International Data Center, which was located therein. The affected and changed sections and Schedules of the Agreement are as indicated below. I. THE AGREEMENT: -------------- A) PAGE 1, 1st PARAGRAPH IS HEREBY AMENDED AS FOLLOWS: Change the Franklin address to read: One Franklin Parkway, San Mateo, CA, 94403 B) SECTION 3.F. (PROCEDURES MANUAL) IS HEREBY AMENDED AS FOLLOWS: Franklin's Senior Director of Global Systems Support shall also have the authority to approve of and sign off on the Procedures Manual subject to the terms of the Agreement. C) SECTION 8.H. (EQUIPMENT CURRENCY) IS HEREBY AMENDED AS FOLLOWS: Delete the second sentence and insert the following text and table: "Unless otherwise agreed to by the Parties, IBM shall subsequently refresh the In-Scope Equipment, including the Fiduciary In-Scope Equipment according to Table 8.h.1. below. To avoid all Fiduciary In-Scope Equipment being refreshed at one time, the Parties shall negotiate in good faith using commercially acceptable standards, to determine an appropriate schedule by which to execute an Initial Refresh of the Fiduciary In-Scope Equipment. Additionally, the Parties agree to negotiate in good faith to resolve any DASD refresh schedule mismatches, which may exist due to partial platforms or lack of backward compatibility. Such resolution may be by acceleration or slowdown of the DASD refresh cycle." IBM/FRANKLIN CONFIDENTIAL Page 1 of 11 Amendment 2 v2-FINAL.doc Amendment Number 2 TABLE 8.h.1. -------------------------------------------- --------------- EQUIPMENT TYPE REFRESH CYCLE -------------------------------------------- --------------- Mainframe 60 months -------------------------------------------- --------------- Servers with greater than 8 CPU's 60 months (Described in Schedule C, Section 6.1b.1.) -------------------------------------------- --------------- UNIX Servers with 8 or fewer CPU's 48 months (Described in Schedule C, Section 5.3a.1.(b)) -------------------------------------------- --------------- Intel Servers with 8 or fewer CPU's 36 months (Described in Schedule C, 5.3b2.) -------------------------------------------- --------------- DASD 48 months -------------------------------------------- --------------- All other In-Scope Equipment 42 months -------------------------------------------- --------------- D) SECTION 27.K. (Notice) is hereby amended as follows: Change the Franklin address to read: One Franklin Parkway, San Mateo, CA, 94403 II. THE SCHEDULES: -------------- A) SCHEDULE A (SERVICES AND SUPPORT RESPONSIBILITIES) IS HEREBY AMENDED AS FOLLOWS: ---------------------------------------------------------------------- (1) ARTICLE V - DESCRIPTION OF SERVICES AND SUPPORT ACTIVITIES: --------------------------------------------------------------- Article V, Section 8.0 is deleted in its entirety and replaced with the following Sections 8.0 through 8.5. - -------------------------------------------------------------------------------- 8.0 DATA BASE MANAGEMENT SERVICES 8.1 APPLICATION AND DATA MODIFICATION a. IBM will: 1. collaborate with Franklin on investigation and analysis of Application Software and data modification related issues. b. Franklin will: 1. be responsible for resolution of data and Application Software related issues; 2. develop and test the required scripts; 3. notify IBM of intended modifications as part of Change Management and Problem Management process; and 4. modify application or database data and enforce data integrity and data quality. 8.2 MODIFICATIONS TO THE SERVER/DATABASE CONFIGURATION a. IBM will: 1. collaborate with Franklin regarding investigation and analysis; and 2. approve all modifications to the database configurations and parameters as part of Change Management and Problem Management. b. Franklin will: 1. be responsible for solution and implementation of all database configuration changes IBM/FRANKLIN CONFIDENTIAL Page 2 of 11 Amendment 2 v2-FINAL.doc Amendment Number 2 2. be responsible to define database backup strategy and solution 3. install backup tools, create backup scripts and utilities; and 4. notify IBM of the result of changes. 8.3 DATABASE PERFORMANCE TUNING a. IBM will: 1. collaborate with Franklin regarding investigation and analysis; 2. approve intended performance-tuning modifications to the database as part of Change Management and Problem Management process; and 3. monitor the database from the system perspective. b. Franklin will: 1. develop required scripts; 2. prepare the tuning plan; 3. modify the database objects (tables, indexes, portions, views, etc) and notify IBM of status; and 4. monitor the databases from a database administration ("DBA") perspective. 8.4 SOFTWARE UPGRADES AND PATCH INSTALLATIONS a. IBM will: 1. Run the modified system; 2. Support Franklin during the upgrade process; and 3. monitor the database from the system perspective. b. Franklin will: 1. test In-Scope Software upgrades and patches in the development and test environments; 2. notify Application Software development of the completion status; 3. be responsible for software upgrades and patch installations; and 4. monitor the databases from DBA perspective c. Joint Responsibilities: 1. IBM and Franklin will approve any In-Scope Software upgrades and patch installations through formal Change Management and Problem Management process; and 2. IBM and Franklin will create a detailed plan of In-Scope Software upgrades in the production environment based on the test results. 8.5 ESTABLISH TEMPORARY USER ID'S FOR FRANKLIN DATABASE ADMINISTRATORS: a. IBM will: 1. establish temporary ID's with adequate access rights to allow all required DBA production level work. These ID's will be temporarily assigned to Franklin DBA's working in the production environment. Once finished, the access will be deleted. Appropriate procedures will be established for the assignment and required documentation as part of the approved Change Management and Problem Management process; and 2. use the standard tools mutually agreed upon for monitoring system and database alerts. b. Franklin will: 1. contact IBM operations for access to the production environment. IBM/FRANKLIN CONFIDENTIAL Page 3 of 11 Amendment 2 v2-FINAL.doc Amendment Number 2 (2) ARTICLE V - DESCRIPTION OF SERVICES AND SUPPORT ACTIVITIES -------------------------------------------------------------- Article V, Section 14 is deleted in its entirety and replaced with the following Sections 14.0 through 14.4. - -------------------------------------------------------------------------------- 14.0 SECURITY MANAGEMENT The responsibilities of IBM and Franklin for each security area/task are indicated in the following responsibilities matrices. "Perform" shall mean to have responsibility to execute. "Assist" shall mean to provide reasonable support to the Performing Party.
============================================================================= 14.1 GENERAL RESPONSIBILITIES IBM FRANKLIN ============================================================================= 1a. Provide an interface for day-to-day security Perform management ============================================================================= 1b. Provide an interface for day-to-day security Perform management ============================================================================= 2. Provide IBM with Franklin audit history (both internal and external) and most recent security standards and practices, including updates as they Perform occur ============================================================================= 3a. Review security policies and procedures for effectiveness and recommend improvements in Perform conjunction with Franklin ============================================================================= 3b. Review security policies and procedures for effectiveness and recommend improvements in Perform conjunction with IBM ============================================================================= 4. Communicate the security procedures to Franklin users that are affected by this service, such as login procedures, password use, use of antivirus programs Assist Perform and security for data and equipment ============================================================================= 5. Review amendments made to Franklin security policies and standards and advise Franklin whether or not such changes can be implemented and if Perform Assist implemented, will be considered a New Service ============================================================================= 6. During the Transition Period develop the detailed Perform Assist "Information Security Controls" document ============================================================================= 7. Maintain the "Information Security Controls" Perform document ============================================================================= 8. During the Transition Period perform a review of system accesses for all employees transferring to IBM to confirm that same access is required and advise IBM Assist Perform of any change. ============================================================================= 9. Notify IBM of changes Franklin plans to make to its Perform security policies and standards before implementation. =============================================================================
============================================================================= 14.2 PHYSICAL SECURITY IBM FRANKLIN ============================================================================= 1. Provide physical security controls at Franklin Perform facilities ============================================================================= 2. Provide physical security controls at IBM facilities Perform ============================================================================= 3a. Restrict access to all data processing areas at Franklin facilities, for which IBM has security Assist Perform responsibility to authorized personnel only. ============================================================================= 3b. Restrict access to all data processing areas at IBM facilities, for which IBM has security responsibility to authorized personnel only. Perform =============================================================================
IBM/FRANKLIN CONFIDENTIAL Page 4 of 11 Amendment 2 v2-FINAL.doc Amendment Number 2
============================================================================= 14.2 PHYSICAL SECURITY IBM FRANKLIN ============================================================================= 4. Conduct periodic reviews of the data processing areas for which IBM has security responsibility including reviews of access logs for unusual Perform Assist occurrences and perform follow-up activities in accordance with the procedures specified in this document ============================================================================= 5. Protect LAN Servers and infrastructure devices as defined in Schedule G at Franklin facilities and Perform provide access to authorized personnel ============================================================================= 6. Protect LAN Servers and infrastructure devices at Perform IBM facilities to authorized personnel only ============================================================================= 7. Implement controls which protect printed output Perform from unauthorized access while under IBM's control ============================================================================= 8a. Provide secure storage for portable storage media Perform at under IBM's control (tape drives and backup media) Franklin ============================================================================= 8b. Provide secure storage for portable storage media Perform under IBM's control (tape drives and backup media) at IBM ============================================================================= 9. During the Transition Period, with the assistance of Franklin, perform a baseline inventory of all portable storage media (e.g. Tapes, disks) for which Perform Assist IBM has security responsibility ============================================================================= 10. Perform an annual audit/reconciliation of tape under IBM's control and promptly notify Franklin and Perform IBM management when errors are detected ============================================================================= 11. Resolve discrepancies discovered during the annual Perform tape audit and inform Franklin of the resolution ============================================================================= 12. Implement controls and provide effective Perform elimination of residual information on removable storage media before disposal or reuse outside of Franklin =============================================================================
============================================================================== 14.3 LOGICAL ACCESS CONTROL IBM FRANKLIN ============================================================================== 1. Install, maintain and upgrade new or existing data access control software as deemed necessary by IBM to provide the Service. This is viewed as a product support role, i.e. software maintenance for RACF. This does NOT Perform Assist include the creation or maintenance of security rules in RACF. ============================================================================== 2. Implement the functions and features of the access control software that will satisfy Franklin security Assist Perform practices as defined in this document ============================================================================== 3. Implement the security system values and features of the supported operating systems that will satisfy Franklin security practices as defined in this Perform Assist document for data security ============================================================================== 4. Identify the protection requirements for operating Assist Perform system resources ============================================================================== 5. Implement the protection requirements for operating system resources via the access control software, with all changes being scheduled through the Change Control Perform Process ============================================================================== 6. Define and provide to IBM: a. Data classification and control criteria, b. Data protection and handling requirements, and c. Data encryption requirements Perform ==============================================================================
IBM/FRANKLIN CONFIDENTIAL Page 5 of 11 Amendment 2 v2-FINAL.doc Amendment Number 2
============================================================================== 14.3 LOGICAL ACCESS CONTROL IBM FRANKLIN ============================================================================== 7. Define and implement the protection requirements Perform for application resources via the access control software ============================================================================== 8. Define and implement the protection requirements Perform for End User data via the access control software ============================================================================== 9a. Provide encryption products (i.e., hardware and/or software) as defined in "Information Security Perform Controls" document as defined in Section 14.1 herein ============================================================================== 9b. Support/implement encryption products (i.e., Perform Assist hardware and/or software) as defined in this document ============================================================================== 10. Maintain security for and distribute encryption Perform keys ============================================================================== 11. During the Transition Period, perform a baseline inventory of access ID's for the systems - per Assist Perform schedule G ============================================================================== 12. Establish, change, deactivate and remove logon IDs and associated access authorities for Franklin Perform employees ============================================================================== 13. Establish, change, deactivate and remove logon IDs Assist Perform and associated access authorities for IBM employees ============================================================================== 14. Review and verify annually the system logon IDs for Franklin personnel (i.e., reverification) and delete the IDs of those individuals who no longer have a business need and/or are no longer authorized by Perform management to access the system ============================================================================== 15. Annually perform a continued business need (reverification) review of all IBM logon ID's supporting the service, and notify Franklin to remove Perform Assist access for those which are no longer authorized by management ============================================================================== 16. Establish the process criteria for resetting user's passwords and disclosing them to authorized Assist Perform personnel ============================================================================== 17. Reset IBM logon ID passwords and disclose Assist Perform passwords to authorized personnel ============================================================================== 18. Reset Franklin logon ID passwords and disclose Perform passwords to authorized personnel ============================================================================== 19a. Review, approve and grant requests for privileged Assist Perform user authorities ============================================================================== 19b. Review and approve requests for privileged user Assist Perform authorities ============================================================================== 20. Periodically review privileged user authorities and remove those for which management authorization no Assist Perform longer exists ============================================================================== 21. Control and be responsible for the Security Officer/Administrator user profiles on all systems (e.g., NT-Admin, Unix-Root, AIX-Root, RACF-Special, Perform AS400-QSECOFR). Develop Process for immediate access for IBM ============================================================================== 22. Implement and maintain security controls for those subsystems and applications which do not use the Perform access control software for their security ============================================================================== 23a. Schedule through the Change Control Process, security/integrity fixes that must be applied to the Perform in-scope systems ============================================================================== 23b. Schedule through the Change Control Process, Perform security/integrity fixes that must be applied to the in-scope systems ============================================================================== 24. Periodically perform system security health checks
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============================================================================== 14.3 LOGICAL ACCESS CONTROL IBM FRANKLIN ============================================================================== a. Access control settings, b. Authorized privileged users, c. Operating system resources protection, and d. Installation and operation of virus control programs on the appropriate platforms. Assist Perform ============================================================================== 25. Capture and maintain audit records for a mutually agreed retention period, and provide record retention reports to the Franklin Project Executive upon Perform reasonable request, platform specific logging. ============================================================================== 26. Promptly inform Franklin of any security issues of Perform which IBM is aware and suggest possible remedial action ============================================================================== 27. Promptly acknowledge receipt of security exposures notified to Franklin by IBM and inform IBM of Franklin acceptance or rejection of IBM's recommended remedial Perform action or other remedial action Franklin implements ============================================================================== 28. Take appropriate corrective action to remedy Assist Perform security violations notified to Franklin by IBM ==============================================================================
============================================================================== 14.4 NETWORK INFRASTRUCTURE SECURITY (IN ADDITION TO IBM FRANKLIN LOGICAL ACCESS ABOVE) ============================================================================== 1. Control the Network Operating System (NOS) security Perform /administrative user id's, which run on any LAN or WAN. ============================================================================== 2a. Provide virus avoidance, detection, and Perform elimination software for servers ============================================================================== 2b. Maintain virus avoidance, detection, and Perform elimination software for servers ============================================================================== 3. Identify and implement protection requirements for Perform resources residing on End User Machines ============================================================================== 4. Keep virus avoidance signature files current for Perform End User Machines ============================================================================== 5. Perform self audits of all diskettes and End User Perform Machines potentially affected by a virus ============================================================================== 6. Respond to virus attacks and initiate corrective Perform at Perform at action to eliminate detected viruses - see process for server end user immediate access for IBM. level level ==============================================================================
B) SCHEDULE B (SERVICE LEVELS) IS HEREBY AMENDED AS FOLLOWS: --------------------------------------------------------- Except for "Supplement B-1 to Schedule B", "Schedule B" is deleted in its entirety and replaced with "Revision 1 to Schedule B" which is attached hereto. "Supplement B-1 to Schedule B" shall remain in full effect except as modified by this Amendment. C) SCHEDULE C (CHARGES) IS HEREBY AMENDED AS FOLLOWS: -------------------------------------------------- "Schedule C" including "Supplement C-1 to Schedule C" is deleted in its entirety and replaced with "Revision 1 to Schedule C" which is attached hereto. D) SCHEDULE E (PROJECTS) IS HEREBY AMENDED AS FOLLOWS: --------------------------------------------------- 1. EXHIBIT E-1 IBM/FRANKLIN CONFIDENTIAL Page 7 of 11 Amendment 2 v2-FINAL.doc Amendment Number 2 The following rows are modified as follows:
------------------------------------------------------------------------------------- AUTOMATION / ENTERPRISE SYSTEMS MANAGEMENT ------------------------------------- ----------------------------------------------- Automation - Event Monitoring and IBM will implement the blueprint developed Mgmt (above) beginning January 1, 2003. This includes continuing to utilize the current BMC Patrol monitors, and putting Tivoli monitoring technology across the remaining platforms, potentially replacing, over time, the BMC deployed monitors subject to Franklin approval. ------------------------------------- ----------------------------------------------- Help Desk Interfaces If the Parties execute a mutually agreeable Statement of Work ("SOW"), IBM will allow Franklin access to eESM, an IBM service-offering platform that supports Help Desk management. This solution will be planned and an SOW will be developed by a team made up of IBM personnel and Franklin personnel within 90 days from the Amendment 2 Effective Date. If after 90 days an agreement is not met, Franklin will continue to use Remedy and IBM will be relieved of it's obligation to build an XML bridge between Remedy and TSD. In the event that the Parties do execute an SOW for eESM service as described herein, IBM will provide all necessary licenses, maintenance, upgrades and training for the provision of the eESM service in accordance with the SOW and IBM shall be responsible for installation, porting, developing interfaces on IBM systems, and operation of the eESM solution. In the event that the Parties do execute an SOW for eESM service as described herein, Franklin shall be responsible for any out of pocket costs and/or expenses related to Franklin personnel and any application software changes (including interface changes to Franklin systems), which may arise. This eESM solution will replace the bridge between Remedy and TSD. ------------------------------------- ----------------------------------------------- SYSTEMS MANAGEMENT CONTROLS ------------------------------------- ----------------------------------------------- Change Management If the Parties execute a mutually agreeable Statement of Work ("SOW"), IBM will allow Franklin access to eESM, an IBM service-offering platform that supports Change Management. This solution will be planned and an SOW will be developed by a team made up of IBM personnel and Franklin personnel within 90 days from the Amendment 2 Effective Date. If after 90 days an agreement is not met, Franklin will continue to use Remedy and IBM will be relieved of it's obligation to build an XML bridge between Remedy and TSD. In the event that the Parties do execute an SOW for eESM service as described herein, IBM will provide all necessary licenses, maintenance, upgrades and training for the provision of the eESM service in accordance with the SOW and IBM shall be responsible for installation, porting, developing interfaces on IBM systems, and operation of the eESM solution. In the event that the Parties do
IBM/FRANKLIN CONFIDENTIAL Page 8 of 11 Amendment 2 v2-FINAL.doc Amendment Number 2
execute an SOW for eESM service as described herein, Franklin shall be responsible for any out of pocket costs and/or expenses related to Franklin personnel and any application software changes (including interface changes to Franklin systems), which may arise. This eESM solution will replace the bridge between Remedy and TSD. ------------------------------------- ----------------------------------------------- Problem Management IBM will implement and maintain a problem management process, building upon the problem management process definition work currently being undertaken by Franklin. If the Parties execute a mutually agreeable Statement of Work ("SOW"), IBM will allow Franklin access to eESM, an IBM service-offering platform that supports Problem Management. This solution will be planned and an SOW will be developed by a team made up of IBM personnel and Franklin personnel within 90 days from the Amendment 2 Effective Date. If after 90 days an agreement is not met, Franklin will continue to use Remedy and IBM will be relieved of it's obligation to build an XML bridge between Remedy and TSD. In the event that the Parties do execute an SOW for eESM service as described herein, IBM will provide all necessary licenses, maintenance, upgrades and training for the provision of the eESM service in accordance with the SOW and IBM shall be responsible for installation, porting, developing interfaces on IBM systems, and operation of the eESM solution. In the event that the Parties do execute an SOW for eESM service as described herein, Franklin shall be responsible for any out of pocket costs and/or expenses related to Franklin personnel and any application software changes (including interface changes to Franklin systems), which may arise. This eESM solution will replace the bridge between Remedy and TSD. ------------------------------------- -----------------------------------------------
Add the following row under Automation / Enterprise Systems Management to read: ------------------------------------- ----------------------------------------------- Consolidation of the Franklin The Parties will address any mismatch, which Environment may exist between the Baselines and the Franklin data processing environment as follows, excluding DASD. IBM and Franklin will each appoint qualified personnel to a Project team which will review the Franklin environment with the goal of consolidating functions and machines, eliminating requirements, and modifying processes in order to bring Franklin's data processing environment in line with the Baselines. This Project team will determine and implement a plan by September 30, 2002 to address the data processing environment and Baseline mismatches, where they occur. To the extent that the Project team determines that Franklin's requirements are not accurately reflected
IBM/FRANKLIN CONFIDENTIAL Page 9 of 11 Amendment 2 v2-FINAL.doc Amendment Number 2
by the Baselines, the parties may agree to (1) use ARCs and RRCs or (2) modify the Baselines in accordance with the Planned Change methodology (Section 7.0 of Schedule C to the Agreement). ------------------------------------- -----------------------------------------------
E) SCHEDULE H (NETWORK SERVICES) IS HEREBY AMENDED AS FOLLOWS: 1. SECTION 3.0- IVR NETWORKING RESPONSIBILITIES: Insert the following sentence under 3.0 IVR Networking Responsibilities: The Services described in this Section 3.0 IVR Networking Responsibilities will be provided only in the event that Franklin elects to receive such Services by providing thirty days written notice to IBM. F) SCHEDULE M (BUSINESS RECOVERY SERVICES) IS HEREBY AMENDED AS FOLLOWS: On September 20, 2001, the Parties executed Change Authorization #1F0001. "Revision 1 to Exhibit M-2, Supplement Number BL65803", amends, replaces and restates both "Exhibit M-2, Supplement Number BL65803" and Change Authorization # 1F0001 to reflect the change made to Exhibit M-2, Supplement Number BL65803 by Change Authorization #1F0001. G) THE FOLLOWING IS HEREBY ADDED TO SCHEDULE M (BUSINESS RECOVERY SERVICES): ---------------------------------------------------------------------- 1. The Parties acknowledge and agree, that due to the destruction of the Fiduciary Data Center located at the World Trade Center in New York, the scope and coverage of Business Recovery Services provided by IBM pursuant to the Agreement may change. The Parties agree to negotiate in good faith, modifications to the scope and coverage of Business Recovery Services within the four months following the Amendment 2 Effective Date. 2. The Parties acknowledge and agree that except as expressly set forth in this Amendment or the Agreement, there shall be no Recovery Daily Usage Charges to support the Critical Applications. IBM support and hardware which may be provided to support out of scope applications shall be subject to commercially reasonable rates. H) THE FOLLOWING IS HEREBY ADDED TO SECTION 7.3 (A) OF SCHEDULE M (BUSINESS RECOVERY SERVICES): ---------------------------------------------------------------------- The Parties acknowledge and agree that a Disaster, as defined in the Agreement, may mean either a Full Site Disaster or a Partial Site Disaster. A Full Site Disaster shall mean an event requiring the recovery of all, or a substantial portion of all, of the applications or platforms to a Disaster Recovery Center. A Partial Site Disaster shall mean an event requiring the recovery of one or more but not all or substantially all of the applications or platforms to a Disaster Recovery Center. Franklin shall notify IBM within a commercially reasonable time of its Disaster Declaration whether there has been a Full Site Disaster or a Partial Site Disaster. IBM/FRANKLIN CONFIDENTIAL Page 10 of 11 Amendment 2 v2-FINAL.doc Amendment Number 2 III. THE SUPPLEMENTS --------------- A) SUPPLEMENT A-1: --------------- 1. Section III: Change "2 World Trade Center" to "600 5th Avenue, New York, NY". B) SUPPLEMENT H-1: --------------- 1. Section 1.0: Change "2 World Trade Center, New York City, NY" to "600 5th Avenue, New York, NY". 2. Section 2.0,a.,4.: Change "World Trade Center" to "600 5th Avenue, New York, NY". C) SUPPLEMENT I-1: --------------- 1. Section 1.0: Change "2 World Trade Center, 97th Floor New York City, NY" to "600 5th Avenue, New York, NY". THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THIS AMENDMENT, UNDERSTAND IT, AND AGREE TO BE BOUND BY ITS TERMS AND CONDITIONS. FURTHER, THE PARTIES AGREE THAT THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES RELATING TO THIS SUBJECT SHALL CONSIST OF 1) THIS AMENDMENT, 2) THE SCHEDULES AND SUPPLEMENTS TO THE SCHEDULES, AND 3) THE AGREEMENT, DATED FEBRUARY 6, 2001, AS PREVIOUSLY AMENDED. Franklin's approval of this Amendment shall be considered acceptance by Franklin of IBM's provision of the Services for the corresponding charges specified in THE aGREEMENT, AS AMENDED. THIS STATEMENT OF THE AMENDMENT SUPERSEDES ALL PROPOSALS OR OTHER PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER DESCRIBED IN THIS AMENDMENT. Accepted by: Accepted by: INTERNATIONAL BUSINESS MACHINES FRANKLIN TEMPLETON COMPANIES, LLC CORPORATION By: /s/ Eric R. Ray By: /s/ Leslie M. Kratter --------------- --------------------- Authorized Signature Authorized Signature ERIC R. RAY Date 6/17/02 LESLIE M. KRATTER Date June 10, 2002 - ----------- ------- ----------------- ------------- Name (Type or Print) Name (Type or Print) IBM/FRANKLIN CONFIDENTIAL Page 11 of 11 Amendment 2 v2-FINAL.doc Amendment Number 2 Amendment Number 3 to the Managed Operations Services Agreement - -------------------------------------------------------------------------------- This Amendment Number 3 to the Managed Operations Services Agreement (this "Amendment"), is made by and between Franklin Templeton Companies, LLC, a Delaware Limited Liability Company, having a place of business at One Franklin Parkway, San Mateo, CA, 94403 ("Franklin") and International Business Machines Corporation, having place of business at Route 100, Somers, NY, 10589 ("IBM") (collectively referred to herein as the "Parties"). This Amendment is entered into on this 3rd day of February, 2003 (the "Amendment 3 Effective Date"). This Amendment amends the Managed Operations Services Agreement, dated February 6, 2001, between Franklin and IBM as modified or amended prior to the date hereof including any schedules, supplements, exhibits and attachments thereto (the "Agreement"). Capitalized terms used but not defined herein shall have their respective meanings as defined in the Agreement. In the event of any inconsistency between the terms of the Agreement and the terms of this Amendment, the terms of this Amendment shall prevail. All terms and conditions of the Agreement not specifically amended or supplemented herein, shall remain unchanged and in full force and effect. The Term of this Amendment will begin as of the Amendment 3 Effective Date and will run concurrently with Schedule M (Business Recovery Services) of the Agreement. This Amendment modifies the Agreement such that, IBM shall provide move install and support services as described herein for the equipment as specifically set forth in Attachment 1 hereto, including but not limited to a mainframe, FEP, terminal controllers, tape controllers, and ATL/VTS (the "Amendment 3 Equipment"). Attachment "1" attached hereto is made part of this Amendment by this reference. I. DESCRIPTION OF SERVICES: Under this Amendment, the Amendment 3 Equipment is to be moved, installed and kept in a state of readiness by IBM for test Events and Disaster recovery events at the IBM Boulder Recovery Center (the "Recovery Center") as described in Schedule M. The Amendment 3 Equipment will be provided by Franklin and includes the mainframe, FEP, terminal controllers, and tape controller, which are located at the Franklin Rancho Cordova Facility prior to this Amendment, and the ATL/VTS, which is located at the Franklin St. Petersburg Facility prior to this Amendment. The Amendment 3 Equipment will be packed, shipped, installed, and supported by IBM at building 9 in the Recovery Center as described in this Amendment. Service Levels as described in Revision 1 to Schedule B and the Baselines specified in Revision 1 to Schedule C do not apply to the Amendment 3 Equipment. Services under this Amendment shall begin within ten (10) business days of the Amendment 3 Effective Date. The move and installation of the Amendment 3 Equipment is estimated to conclude sixty (60) days from the commencement of Services. IBM/FRANKLIN CONFIDENTIAL Page 1 of 6 IBM Amendment 3 FINAL.doc 1. PROJECT MANAGERS: The persons listed below shall be Project Managers pursuant to this Amendment. IBM's Project Manager(s) shall be responsible for performing the following tasks: Oversee the IBM resources allocated to this Amendment, communicate the status of the work being done by IBM under this Amendment to Franklin, oversee the work being performed under this Amendment for consistency with this Amendment, and any other obligations set out in the Agreement. * IBM Project Manager: Nick Dancer * Franklin Project Manager: Bonita Gohler 2. DEFINITIONS (a) "Amendment 3 Equipment" means the dedicated mainframe configuration as specified in Attachment 1 and includes the mainframe, FEP, terminal controllers, tape controller, and ATL/VTS. (b) "ATL/VTS" means automated tape library/virtual tape storage device. (c) "FEP" means front end processor. (d) "IPL" means initial program load. 3. ASSUMPTIONS AND DEPENDENCIES (a) IBM shall maintain system code, applications, and database data on EMC DASD which will be co-resident with other Franklin equipment at the Recovery Center and kept up to date by IBM with Franklin's production data center located in Rancho Cordova, CA via a SRDF process to meet the RTO/RPO requirements as specified in the Agreement. However, the EMC DASD and SRDF solution are not in scope of this Amendment and will be handled separately. If, for any reason, Franklin decides not to implement SRDF technology, the mainframe will continue to be kept at a ready state pending any Disaster declaration. (b) The Amendment 3 Equipment as listed in Attachment 1 is accurate and will be validated prior to shipment by Franklin. Franklin shall reconfirm the accuracy of Attachment 1 during installation by IBM. 4. IBM RESPONSIBILITIES IBM will: I. MOVE AND INSTALL THE AMENDMENT 3 EQUIPMENT AS FOLLOWS: (a) pack the Amendment 3 Equipment to be moved to the Recovery Center; (b) insure the Amendment 3 Equipment during the move to the Recovery Center; (c) ship the Amendment 3 Equipment to the Recovery Center; (d) install the Amendment 3 Equipment in the Recovery Center; (e) connect the mainframe system to the Franklin network environment in the Recovery Center; IBM/FRANKLIN CONFIDENTIAL Page 2 of 6 IBM Amendment 3 FINAL.doc (f) design, implement and maintain the front end processor (FEP) and local network in the Recovery Center, including routers, switches, cabling, fiber connections, and SONET access facilities to carrier points of presence; and (g) perform the following installation tests to certify the completion of the successful installation and notify Franklin of the successful installation: (1) an IPL on the mainframe from data on the connected DASD; (2) a restore on the ATL/VTS of any file from a tape produced at Rancho Cordova and a backup from any file created on the Recovery Center mainframe; and (3) a line test to any one of the existing Franklin partner connections on the FEP. II. PROVIDE SUPPORT SERVICES FOR AMENDMENT 3 EQUIPMENT AS FOLLOWS: (a) maintain the Amendment 3 Equipment in a production-ready state (available for IPL) for maintenance, test Events and Disaster Events, but only perform IPLs during scheduled maintenance, test Events or declared Disaster Events; (b) support test Events and Disaster Events in a manner consistent with Schedule M; (c) for scheduled test Events and for Disaster Events, the mainframe will be initialized with the current system code, application and data images; (d) coordinate maintenance of the system (i.e. contact maintenance vendors when maintenance is required and assist with logistics at the Recovery Center); and (e) assist Franklin and Franklin's telecom carriers to prepare for and effect network changes required to support test Events and Disaster Events. 5. FRANKLIN RESPONSIBILITIES Franklin will: (a) provide all information that is reasonably necessary and available for IBM to provide the Services set forth hereunder; (b) assign a part time Project Manager to work with IBM; (c) take financial responsibility for and provide all necessary software (including, but not limited to: operating system, utilities, middleware, applications, and database management system) and the Amendment 3 Equipment required to provide the Services, including leases, license fees, refresh, upgrade fees and maintenance fees. Franklin shall determine when and if refresh and/or upgrades shall occur; (d) provide the maintenance agreement for the mainframe, FEP, and ATL/VTS configurations; (e) provide IBM with authorization to contact maintenance vendors and coordinate maintenance with Franklin's consent and provide maintenance assistance; (f) assist with the coordination of vendors; (g) work with Franklin's telecom carriers, with IBM assistance, to prepare for and effect network changes required to support test Events and Disaster Events; (h) formally acknowledge in writing the successful installation of all Amendment 3 Equipment upon completion of the installation tests as outlined in Section I(4)(I)(g)(1-3) herein; IBM/FRANKLIN CONFIDENTIAL Page 3 of 6 IBM Amendment 3 FINAL.doc (i) provide all equipment reasonably necessary in order to provide the Services set forth herein, including the Amendment 3 Equipment, and upgrades and associated maintenance therefore. Franklin shall determine when and if upgrades shall be used. 6. MOVE AND INSTALLATION COMPLETION CRITERIA IBM will have fulfilled its Move and Installation obligations when the one-time set-up tasks as set forth in Section I(4)(I) herein have been completed and notification has been provided to Franklin of the successful installation of the Amendment 3 Equipment as described in Section I(4)(I)(g) and Franklin has formally acknowledged in writing that the Move and Installation has occurred. - -------------------------------------------------------------------------------- II. CHARGES 1. SERVICE CHARGES (a) One-Time Fee: : There shall be a one time fee for the Services rendered hereunder in the amount of $94,492 USD. This Fee shall be invoiced upon the Amendment 3 Effective Date. (b) On-going Support Services Charges: Once the Move and Installation Completion Criteria is met, IBM shall provide ongoing Support Services as described herein at the Charges specified in Table II.1 below, which are hereby added to the ASC specified in Revision 1 to Schedule C. Additionally, at the time the Move and Installation Completion Criteria is met, the BR ASC specified in Exhibit C-1 is reduced by the Charges specified in the following Table II.1 due to the removal of Supplement Number BL65805. Charges will be prorated for any partial month:
TABLE II.1 - -------------------------------------------------------------------------------------------------------- Ongoing Support Charges (Monthly Charges) - ----------------------- ------------- ------------ ------------ ----------- -------------- ------------- Contract Year 2003 2004 2005 2006 2007 2008 (Jan and Feb only) - ----------------------- ------------- ------------ ------------ ----------- -------------- ------------- ADDITION to SO 21,446 21,437 21,439 21,462 21,462 23,917 ASC per Month - ----------------------- ------------- ------------ ------------ ----------- -------------- ------------- REDUCTION to BR 14,613 14,613 14,613 14,613 14,613 14,613 ASC per Month - ----------------------- ------------- ------------ ------------ ----------- -------------- -------------
2. AMENDMENT 3 TERMINATION CHARGE Franklin may terminate the Services described in this Amendment for convenience by providing thirty (30) days written notice to IBM and paying the Amendment 3 Termination Charge specified in Table II.2 below (the "Amendment 3 Termination Charge"). Should Franklin terminate the Agreement for convenience, the Amendment 3 Termination Charge will be added to the Termination Charges specified in Revision 1 to Schedule C. Termination of the Amendment will not reinstate Supplement Number BL65805, however, in the event that this Amendment is terminated by Franklin and Supplement Number BL65805 is subsequently terminated, the Reduction to BR ASC per month as set forth above in Table II.1 shall survive the termination of this Amendment and be applicable to the BR ASC Charges specified in the Agreement. At the time of termination or expiration of the Term, Franklin shall be responsible for the packaging and shipping of the Amendment 3 Equipment within thirty (30) days. IBM/FRANKLIN CONFIDENTIAL Page 4 of 6 IBM Amendment 3 FINAL.doc
TABLE II.2 - ---------------------- ------------ ------------- ------------ ------------ ------------- ------------- Calendar Year: 2003 2004 2005 2006 2007 2008 (Jan and Feb only) - ---------------------- ------------ ------------- ------------ ------------ ------------- ------------- Amendment 3 57,992 44,865 30,429 28,408 16,461 5,634 Termination Charge: - ---------------------- ------------ ------------- ------------ ------------ ------------- -------------
3. TRAVEL AND LIVING EXPENSES Until such time as the Move and Installation Completion Criteria is met, Franklin is responsible for actual and reasonable Travel and Living Expenses incurred by IBM personnel when non-local travel is required to provide the Services described in this Amendment. Franklin will not be responsible for Travel and Living Expenses incurred by IBM personnel in excess of ten percent (10%) of the One Time Fee set forth in this Amendment unless Franklin provides prior written authorization. After the Move and Installation Completion Criteria is met, no Travel and Living expenses will be reimbursed without Franklin's written authorization. - -------------------------------------------------------------------------------- III. SCHEDULE M (BR SERVICES) IS HEREBY AMENDED AS FOLLOWS: At such time as the Move and Installation Completion Criteria is met, Supplement Number BL65805 in Exhibit M-2 is deleted in its entirety. - -------------------------------------------------------------------------------- IBM/FRANKLIN CONFIDENTIAL Page 5 of 6 IBM Amendment 3 FINAL.doc IV. SIGNATURES AND ACKNOWLEDGEMENT THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THIS AMENDMENT, UNDERSTAND IT, AND AGREE TO BE BOUND BY ITS TERMS AND CONDITIONS. FURTHER, THE PARTIES AGREE THAT THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES RELATING TO THIS SUBJECT SHALL CONSIST OF 1) THIS AMENDMENT, 2) THE SCHEDULES AND SUPPLEMENTS TO THE SCHEDULES, AND 3) THE AGREEMENT, DATED FEBRUARY 6, 2001, AS PREVIOUSLY AMENDED. FRANKLIN'S APPROVAL OF THIS AMENDMENT SHALL BE CONSIDERED ACCEPTANCE BY FRANKLIN OF IBM'S PROVISION OF THE SERVICES FOR THE CORRESPONDING CHARGES SPECIFIED IN THE AGREEMENT, AS AMENDED. THIS STATEMENT OF THE AMENDMENT SUPERSEDES ALL PROPOSALS OR OTHER PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER DESCRIBED IN THIS AMENDMENT. Accepted by: Accepted by: INTERNATIONAL BUSINESS MACHINES FRANKLIN TEMPLETON COMPANIES, LLC CORPORATION By: /s/ Melody Gayeski By: /s/ Jennifer J. Bolt -------------------- -------------------- Authorized Signature Authorized Signature MELODY GAYESKI Date 2/3/03 JENNIFER J. BOLT Date 2/3/03 - -------------- ------ ---------------- ------ Name (Type or Print) Name (Type or Print) IBM/FRANKLIN CONFIDENTIAL Page 6 of 6 IBM Amendment 3 FINAL.doc EX-10 5 exh_10-70.txt EXHIBIT 10.70 EXHIBIT 10.70 ------------- FRANKLIN TEMPLETON INVESTOR SERVICES, LLC TRANSFER AGENT AND SHAREHOLDER SERVICES AGREEMENT Investment Company: [NAME OF TRUST OR CORPORATION] Date: The parties to this Agreement are the Investment Company named above ("Investment Company"), an open-end investment company registered as such under the Investment Company Act of 1940 ("1940 Act"), on behalf of each class of shares of each series of the Investment Company which now exists or may hereafter be created (individually, a "Fund" and collectively, the "Funds") and FRANKLIN TEMPLETON INVESTOR SERVICES, LLC ("FTIS"), a registered transfer agent formerly known as Franklin Administrative Services, Inc. This Agreement supersedes prior Shareholder Services Agreements between the parties, as stated below in section 16(d). WITNESSETH: ---------- That, for and in consideration of the mutual promises hereinafter set forth, the Investment Company and FTIS agree as follows: 1. DEFINITIONS. Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings: (a) "Articles" shall mean the Articles of Incorporation, Declaration of Trust or Agreement of Limited Partnership, as appropriate, of the Investment Company as the same may be amended from time to time; (b) "Authorized Person" shall be deemed to include any person, whether or not such person is an officer or employee of the Investment Company, duly authorized to give Oral Instructions or Written Instructions on behalf of the Investment Company, as indicated in a resolution of the Investment Company's Board which was valid at the time of this Agreement, or as indicated in a certificate furnished to FTIS pursuant to Section 4(c) hereof; (c) "Board" shall mean the Investment Company's Board of Directors, Board of Trustees or Managing General Partners, as appropriate; (d) "Custodian" shall mean a custodian and any sub-custodian of securities and other property which the Investment Company may from time to time deposit, or cause to be deposited or held under the name or account of such custodian pursuant to the Custody Agreement; (e) "Oral Instructions" shall mean instructions (including without limitation instructions received by telephone, facsimile, electronic mail or other electronic mail), other than written instructions, actually received by FTIS from a person reasonably believed by FTIS to be an Authorized Person; (f) "Shares" shall mean shares of each class of capital stock, beneficial interest or limited partnership interest, as appropriate, of each series of the Investment Company; and (g) "Written Instructions" shall mean a written communication signed by a person reasonably believed by FTIS to be an Authorized Person and actually received by FTIS. 2. APPOINTMENT OF FTIS. The Investment Company hereby appoints FTIS as transfer agent for Shares of the Investment Company, as service agent in connection with dividend and distribution functions, and as shareholder servicing agent for the Investment Company, and FTIS accepts such appointment and agrees to perform the following duties. 3. COMPENSATION. (a) PAYMENT TO FTIS: (i) Compensation for Servicing: The Investment Company will compensate FTIS for the performance of its obligations hereunder in accordance with the fees set forth in the written schedule of fees annexed hereto as Schedule A and incorporated herein. FTIS will bill the Investment Company as soon as practicable after the end of each calendar month, in accordance with Schedule A. The Investment Company will promptly pay to FTIS the amount of such billing. (ii) Reimbursement for Out-of-Pocket Expenses: The Investment Company will reimburse FTIS for out-of-pocket disbursements paid to third parties by FTIS in the performance of its obligations hereunder including, but not limited to, the items specified in the written schedule of out-of-pocket expenses paid to third parties annexed hereto as Schedule B and incorporated herein. Unspecified out-of-pocket expenses shall be limited to those out-of-pocket expenses reasonably incurred by FTIS in the performance of its obligations hereunder, subject to approval by the Board. Reimbursement by the Investment Company for out-of-pocket disbursements paid by FTIS in any month shall be made as soon as practicable after the receipt of an itemized bill from FTIS. (b) BENEFICIAL OWNER SERVICING FEES TO THIRD PARTIES: Subject to the limitation set forth in paragraph (d) below, the Investment Company will reimburse FTIS for servicing fee payments ("Beneficial Owner Servicing Fees") made by FTIS on the Investment Company's behalf to institutions that: (i) maintain a master account with a Fund in the institution's name ("Omnibus Account") on behalf of numerous beneficial owners of Omnibus Account assets; or 2 (ii) maintain a master account with a Fund in the institution's name on behalf of an employer sponsored retirement plan (a "Plan Account") and provide, directly or indirectly under separate contract with the retirement plan, participant level accounting for each plan participant with a beneficial ownership in Plan Account assets. Each beneficial owner with an interest in Fund shares held in an Omnibus Account and each plan participant with an interest in Fund shares held in a Plan Account is referred to in this Agreement as a "Beneficial Owner". (c) NETWORKED ACCOUNT SERVICING FEES TO THIRD PARTIES: Subject to the limitation set forth in paragraph (d) below, the Investment Company will reimburse FTIS for servicing fee payments ("Networked Account Servicing Fees") made by FTIS on the Investment Company's behalf to an institution for each Fund account (a "Networked Account") maintained by FTIS in which servicing is shared with that institution by the exchange of account data through the National Securities Clearing Corporation (NSCC) networking system. (d) MAXIMUM REIMBURSEMENT AMOUNT FOR BENEFICIAL OWNER SERVICING FEES AND NETWORKED ACCOUNT SERVICING FEES. The Investment Company authorizes FTIS to negotiate Beneficial Owner Servicing Fees and Networked Account Servicing Fees on the Investment Company's behalf and shall reimburse FTIS for those fees negotiated and paid up to the "Maximum Reimbursement Amount". The Maximum Reimbursement Amount for each fiscal year of the Investment Company, calculated on the basis of all Omnibus Accounts and all Networking Accounts open during that fiscal year, shall equal the total amount (including out-of-pocket expenses) that would otherwise have been payable by the Investment Company to FTIS under the terms of this Agreement if (i) all Beneficial Owners for which Beneficial Owner Servicing fees were paid had been Fund shareholders of record; and (ii) all Networked Accounts for which Networked Account Servicing Fees were paid had been Full Service Accounts (as defined in Schedule A). (e) COMPENSATION ADJUSTMENTS. Any compensation agreed to hereunder may be adjusted from time to time by mutual agreement by attaching revised Schedules A or B to this Agreement. 4. DOCUMENTS. In connection with the appointment of FTIS, the Investment Company shall, within a reasonable period of time for FTIS to prepare to perform its duties hereunder, deliver to FTIS the following documents: (a) If applicable, specimens of the certificates for the Shares; (b) All account application forms and other documents relating to Shareholder accounts or to any plan, program or service offered by the Investment Company; (c) A certificate identifying the Authorized Persons and specimen signatures of Authorized Persons who will sign Written Instructions; and 3 (d) All documents and papers necessary under the laws of the Investment Company's state of domicile, under the Investment Company's Articles, and as may be required for the due performance of FTIS's duties under this Agreement or for the due performance of additional duties as may from time to time be agreed upon between the Investment Company and FTIS. 5. DUTIES OF THE TRANSFER AGENT. FTIS shall be responsible for administering and/or performing transfer agent functions; for acting as service agent in connection with dividend and distribution functions; and for performing shareholder account and administrative agent functions in connection with the issuance, transfer, exchange, redemption or repurchase (including coordination with the Custodian) of Shares. FTIS shall be bound to follow its usual and customary operating standards and procedures, as they may be amended from time to time, and each current prospectus and Statement of Additional Information (hereafter, collectively, the "prospectus") of the Investment Company. Without limiting the generality of the foregoing, FTIS agrees to perform the specific duties listed on Schedule C. The duties to be performed by FTIS shall not include the engagement, supervision or compensation of any service providers, or any registrations or fees of any kind, which are required by the laws of any foreign country in which the Fund may choose to invest portfolio assets or sell Shares. 6. (a) DISTRIBUTIONS PAYABLE IN SHARES. In the event that the Board of the Investment Company shall declare a distribution payable in Shares, the Investment Company shall deliver to FTIS written notice of such declaration signed on behalf of the Investment Company by an officer thereof, upon which FTIS shall be entitled to rely for all purposes, certifying (i) the number of Shares involved, and (ii) that all appropriate action has been taken to effect such distribution. (b) DISTRIBUTIONS PAYABLE IN CASH; REDEMPTION PAYMENTS. In the event that the Board of the Investment Company shall declare a distribution payable in cash, the Investment Company shall deliver to FTIS written notice of such declaration signed on behalf of the Investment Company by an officer thereof, upon which FTIS shall be entitled to rely for all purposes, certifying (i) the amount per share to be distributed, (ii) the record and payment dates for the distribution, and (iii) that all appropriate action has been taken to effect such distribution. Once the amount and validity of any dividend or redemption payments to shareholders have been determined, the Investment Company shall transfer the payment amounts from the Investment Company's accounts to an account or accounts held in the name of FTIS, as paying agent for the shareholders, in accordance with any applicable laws or regulations, and FTIS shall promptly cause payments to be made to the shareholders. 7. RECORDKEEPING AND OTHER INFORMATION. FTIS shall create, maintain and preserve all necessary records in accordance with all applicable laws, rules and regulations. Such records are the property of the Investment Company, and FTIS will promptly surrender them to the Investment Company upon request or upon termination of this Agreement. In the event of such a request or termination, FTIS shall be entitled to make and retain copies of all records 4 surrendered, and to be reimbursed by the Investment Company for reasonable expenses actually incurred in making such copies. FTIS will take reasonable actions to maintain the confidentiality of the Investment Company's records, which may nevertheless be disclosed to the extent required by law or by this Agreement, or to the extent permitted by the Investment Company. 8. OTHER DUTIES. In addition, FTIS shall perform such other duties and functions, and shall be paid such amounts therefor, as may from time to time be agreed upon in writing between the Investment Company and FTIS. Such other duties and functions shall be reflected in a written amendment to Schedule C, and the compensation for such other duties and functions shall be reflected in a written amendment to Schedule A. 9. RELIANCE BY TRANSFER AGENT; INSTRUCTIONS. (a) FTIS will be protected in acting upon Written or Oral Instructions reasonably believed to have been executed or orally communicated by an Authorized Person and will not be held to have any notice of any change of authority of any person until receipt of a Written Instruction thereof from an officer of the Investment Company. FTIS will also be protected in processing Share certificates which it reasonably believes to bear the proper manual or facsimile signatures of the officers of the Investment Company and the proper countersignature of FTIS. (b) At any time FTIS may apply to any Authorized Person of the Investment Company for Written Instructions, or may seek advice at the Investment Company's expense from legal counsel for the Investment Company, with respect to any matter arising in connection with this Agreement. FTIS shall not be liable for any action taken or not taken or suffered by it in good faith in accordance with such Written Instructions or in accordance with the opinion of counsel for the Investment Company. Written Instructions requested by FTIS will be provided by the Investment Company within a reasonable period of time. 10. ACTS OF GOD, ETC. FTIS will not be liable or responsible for delays or errors by reason of circumstances beyond its control, including acts of civil or military authority, national emergencies, labor difficulties, fire, mechanical breakdown beyond its control, earthquake, flood or catastrophe, acts of God, insurrection, war, riots or failure beyond its control of transportation, communication or power supply. 11. DUTY OF CARE AND INDEMNIFICATION. FTIS will indemnify the Investment Company against and hold it harmless from any and all losses, claims, damages, liabilities or expenses (including reasonable counsel fees and expenses) resulting from any claim, demand, action or suit resulting from willful misfeasance, bad faith or gross negligence on the part of FTIS, and arising out of, or in connection with, its duties hereunder. However, FTIS shall have no liability for or obligation to indemnify the Investment Company against any losses, claims, damages, liabilities or expenses (including reasonable counsel fees and expenses) incurred by the Investment Company as a result of: (i) any action taken in accordance with Written or Oral Instructions; (ii) any action taken in accordance with written or oral advice reasonably believed 5 by FTIS to have been given by counsel for the Investment Company; (iii) any action taken as a result of any error or omission in any record (including but not limited to magnetic tapes, computer printouts, hard copies and microfilm copies) delivered, or caused to be delivered, by the Investment Company to FTIS in connection with this Agreement; or (iv) any action taken in accordance with shareholder instructions which meet the standards described in the Investment Company's current prospectus, including without limitation oral instructions which meet the standards described in the section of the prospectus dealing with telephone transactions, so long as FTIS believes such instructions to be genuine. The obligations of the parties hereto under this Section shall survive the termination of this Agreement. 12. TERM AND TERMINATION. (a) This Agreement shall be effective as of the date first written above, shall continue through December 31, 2003, and thereafter shall continue automatically for successive annual periods ending on December 31 of each year, provided such continuance is specifically approved at least annually by the Investment Company's Board. (b) Either party hereto may terminate this Agreement by giving to the other party a notice in writing specifying the date of such termination, which shall be not less than 60 days after the date of receipt of such notice. Upon such termination, FTIS will (i) deliver to such successor a certified list of shareholders of the Investment Company (with names and addresses) and an historical record of the account of each Shareholder and the status thereof; (ii) surrender all other relevant records in accordance with section 7 of this Agreement, above, and (iii) cooperate in the transfer of such duties and responsibilities, including provisions for assistance from FTIS's personnel in the establishment of books, records and other data by such successor or successors. FTIS shall be entitled to charge the Investment Company a reasonable fee for services rendered and expenses actually incurred in performing its duties under this paragraph. 13. AMENDMENT. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties. 14. SUBCONTRACTING. The Investment Company agrees that FTIS may, in its discretion, subcontract for all or any portion of the services described under this Agreement or the Schedules hereto; provided that the appointment of any such agent shall not relieve FTIS of its responsibilities hereunder. 15. DATA PROCESSING SYSTEM, PROGRAM AND INFORMATION (a) The Investment Company shall not, solely by virtue of this Agreement, obtain any rights, title and interest in and to the computer systems and programs, including all related documentation, employed by FTIS in connection with rendering services hereunder; provided however, that the records prepared, maintained and preserved by FTIS pursuant to this Agreement shall be the property of the Investment Company. 6 (b) Any modifications, changes and improvements in the automatic data processing system (the "System") or in the manner in which the services are rendered shall be made or provided as follows, and provided further that modifications for which the Investment Company will be required to bear any expenses shall be made only as set forth herein. (i) FTIS shall, at no expense to the Investment Company, make any revisions in the System necessary to (1) perform the services which it has contracted to perform and (2) create and maintain the records which it has contracted to create and maintain hereunder or (3) enhance or update the System to the extent and in the manner necessary to maintain said System. However, if specific reprogramming, coding or other changes are necessary in the records of the Investment Company or in its shareholder accounts in order to complete a system revision, the costs for completing work specific to the Investment Company shall be subject to a subsequent agreement between the parties. The System is at all times to be competitive with that which is generally available to the mutual fund industry from transfer agents. (ii) To the extent that the System is modified to comply with changes in the accounting or record-keeping rules applicable to mutual funds, the Investment Company agrees to pay a reasonable pro rata portion of the costs of the design, revision and programming of the System; provided, however, that if the Investment Company's pro rata portion exceeds $1,000 per 12 month period, the Investment Company's obligation to pay a reasonable pro rata portion shall be conditioned upon FTIS's having obtained prior Written Instructions from the Investment Company for any charge. The determination that such modifications or revisions are necessary, and that the System as so modified produces records which comply with the record-keeping requirements, as amended, shall be by mutual agreement; provided, however, that upon written request by the Investment Company, FTIS will provide the Investment Company with a written opinion of counsel to FTIS to the effect that the modifications were required by changes in the applicable laws or regulations and that the System, as modified, complies with the laws or regulations as amended. Upon completion of the changes FTIS shall render a statement to the Investment Company, in reasonably detailed form, identifying the nature of the revisions, the services, expenses and costs, and the basis for determining the Investment Company's reasonable pro rata portion. Any determination by FTIS of the Investment Company's pro rata portion based upon the ratio of the number of shareholder accounts of the Investment Company to the total number of shareholder accounts of all clients for which FTIS provides comparable services shall conclusively be presumed to be reasonable unless the nature of the change to the System relates to certain types of shareholder accounts, in which case the pro rata portion will be determined on a mutually agreeable basis. (iii) If system improvements are requested by the Investment Company and are not otherwise required under this subsection 15(b), FTIS shall be entitled to request a reasonable fee before agreeing to make the improvements and shall be entitled to refuse to make any requested improvements which FTIS reasonably believes to be incompatible with its systems providing services to other funds. 16. MISCELLANEOUS. 7 (a) Any notice or other instrument authorized or required by this Agreement to be given in writing to the Investment Company or FTIS shall be sufficiently given if addressed to that party and received by it at its office at the place described in the Investment Company's most recent registration statement or at such other place as it may from time to time designate in writing. (b) This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by either party without the written consent of the other party. (c) This Agreement shall be construed in accordance with the laws of the State of California applicable to contracts between California residents which are to be performed primarily within California. (d) This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original; but such counterparts shall, together, constitute only one instrument. This Agreement supersedes all prior Shareholder Services Agreements between the parties, and supersedes all prior agreements between the parties relating to the subject matters of this Agreement to the extent they are inconsistent with this Agreement. (e) The captions of this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. (f) It is understood and expressly stipulated that neither the holders of Shares of the Investment Company nor any member of the Board, officer, agent or employee of the Investment Company shall be personally liable hereunder, nor shall any resort be had to other private property for the satisfaction of any claim or obligation hereunder, but the Investment Company only shall be liable. 8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective corporate officers thereunder duly authorized as of the day and year first above written. [NAME OF TRUST OR CORP] FRANKLIN TEMPLETON INVESTOR SERVICES, LLC BY: _________________________ _________________________ NAME: Murray L. Simpson Basil K. Fox TITLE: Secretary President 9 EX-12 6 exh_12.txt EXHIBIT 12 ----------
COMPUTATIONS OF RATIOS OF EARNINGS TO FIXED CHARGES THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31 MARCH 31 (dollars in thousands) 2003 2002 2003 2002 - ----------------------------------------------------------------------------------------------- Income before taxes $152,227 $159,993 $300,953 $318,019 Add fixed charges: Interest expense-excluding interest on deposits 3,711 3,608 7,587 9,675 Interest expense-deposits 1,573 2,440 3,380 5,194 Interest factor on rent 3,942 4,639 6,557 9,933 - ----------------------------------------------------------------------------------------------- Total fixed charges 9,226 10,687 17,524 24,802 - ----------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- Earnings before fixed charges and taxes on income $161,453 $170,680 $318,477 $342,821 - ----------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges -including interest on deposits 17.5 16.0 18.2 13.8 Ratio of earnings to fixed charges -excluding interest on deposits 20.9 20.4 22.3 17.2 - ----------------------------------------------------------------------------------------------- Fixed charges for these purposes consist of all interest expense and one-third of rental expenses (the approximate portion of rental expense representing interest).
EX-99 7 exh_99-1.txt EXHIBIT 99.1 EXHIBIT 99.1 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Charles B. Johnson, Chief Executive Officer of Franklin Resources, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The quarterly report on Form 10-Q of the Company for the quarterly period ended March 31, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 12, 2003 /s/ Charles B. Johnson ---------------------- Charles B. Johnson Chief Executive Officer EX-99 8 exh_99-2.txt EXHIBIT 99.2 EXHIBIT 99.2 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Martin L. Flanagan, Chief Financial Officer of Franklin Resources, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The quarterly report on Form 10-Q of the Company for the quarterly period ended March 31, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 12, 2003 /s/ Martin L. Flanagan ---------------------- Martin L. Flanagan Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----