-----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, R81LKJ15LYhieuXSw5GZ1/MZOOOn21XljrHJMAL7u3hHJuqFR4p8WCf/AgyjNzpX L7lvjPOyKyV+xDGyxWK0aQ== 0000038777-97-000384.txt : 19971223 0000038777-97-000384.hdr.sgml : 19971223 ACCESSION NUMBER: 0000038777-97-000384 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971222 SROS: NYSE SROS: PSE 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-K SEC ACT: SEC FILE NUMBER: 001-09318 FILM NUMBER: 97741782 BUSINESS ADDRESS: STREET 1: 777 MARINERS ISLAND BLVD STREET 2: 6TH FLOOR CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 4153126505 MAIL ADDRESS: STREET 1: FRANKLIN RESOURCES INC STREET 2: 901 MARINERS ISLAND BLVD 6TH FLOOR CITY: SAN MATEO STATE: CA ZIP: 94404 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1997 OR [ ] [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-9318 FRANKLIN RESOURCES, INC. (Exact name of registrant as specified in its charter) Delaware 13-2670991 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 777 Mariners Island Blvd., San Mateo, CA 94404 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including Area Code (650) 312-2000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par value $.10 per share New York Stock Exchange, Pacific Exchange and London Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) or the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. YES X NO ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing price of $95.375 on December 1, 1997 on the New York Stock Exchange was $6,373,105,617. Calculation of holdings by non-affiliates is based upon the assumption, for these purposes only, that executive officers, directors, nominees, Registrant's Profit Sharing Plan and persons holding 5% or more of Registrant's Common Stock are affiliates. Number of shares of the Registrant's common stock outstanding at December 1, 1997: 126,026,610. DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the registrant's proxy statement for its Annual Meeting of Stockholders to be held January 20, 1998, which was filed with the Commission on December 17, 1997, are incorporated by reference into Part III of this report. PART I Item 1. Business (a) GENERAL DEVELOPMENT OF BUSINESS Franklin Resources, Inc. ("FRI") and its predecessors have been engaged in the financial services business since 1947. FRI was organized in Delaware in November 1969. The term "Company" as used herein, unless the context otherwise requires, refers to Franklin Resources, Inc. and its consolidated subsidiaries. The Company's principal executive and administrative offices are at 777 Mariners Island Boulevard, San Mateo, California 94404. As of September 30, 1997, the Company employed over 6,400 employees on a worldwide basis, consisting of officers, investment management, distribution, administrative, sales and clerical support staff. The Company also employs additional temporary help as necessary to meet unusual requirements. Management believes that its relations with its employees are excellent. On October 30, 1992, the Company and certain of its direct and indirect subsidiaries consummated the acquisition (the "Templeton Acquisition") of substantially all of the assets and liabilities of Templeton, Galbraith & Hansberger Ltd., a corporation organized under the laws of the Cayman Islands and based in Nassau, Bahamas ("Old TGH"), which provided diversified investment management and related services on a worldwide basis directly and through subsidiaries to various U.S. open-end and closed-end investment companies as well as to a variety of international investment portfolios and to U.S. and international private and institutional accounts. Unless the context otherwise requires, references herein to "Templeton" are deemed to refer to the business operations acquired by the Company in connection with the Templeton Acquisition and "Templeton funds" or "Templeton Family of Funds" refers to related funds. Subsequent to the Templeton Acquisition, the Company has operated the Templeton businesses on a unified basis with its other business operations. In November 1993, the Company consummated an agreement to manage and advise the Huntington Funds of Pasadena, California, now called the Franklin Templeton Global Trust. This open-end investment company of several currency portfolio series includes the Franklin Templeton Global Currency Fund, the Franklin Templeton Hard Currency Fund and the Franklin Templeton High Income Currency Fund, which invests in high quality foreign equivalent money market instruments in various global currencies, as well as the Franklin Templeton German Government Bond Fund, which invests in German government bonds and equivalents. In November 1996, the Company through its wholly-owned subsidiary, Franklin Mutual Advisers, Inc. ("FMAI") acquired (the "Mutual Acquisition") certain assets and liabilities of Heine Securities Corporation ("Heine"), which provided investment management services to various accounts and investment companies, including Mutual Series Fund Inc., now known as Franklin Mutual Series Fund Inc. ("Mutual Series"). Mutual Series is an open-end investment company which, at the time of the Mutual Acquisition, had five (5) series funds. Subsequent to the Mutual Acquisition, the Company has managed Mutual Series on a unified basis with its other business. Unless the context otherwise requires, references herein to the "Mutual Funds" and the "Mutual Series" are deemed to refer to the business operations acquired by the Company in connection with the Mutual Acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operation" ("MD&A"). The purchase price paid at the closing of the Mutual Acquisition was funded through a combination of the Company's available cash, securities and the sale of commercial paper. The base purchase price consisted of $551 million in cash, including acquisition expenses, and the delivery of 1.1 million shares (the "Shares"), before the effect of the three-for-two stock dividend paid on January 15, 1997 (the "Stock Dividend"), of the Company's Common Stock. The purchase price included the deposit into escrow of $150 million to be invested in shares of Mutual Series, which shares are being released over a five (5) year period from the date of the acquisition, with a minimum $100 million retention for the full five (5) year period. In addition to the base purchase price, the transaction included a contingent payment ranging from $96.25 million to $192.5 million if certain agreed upon growth targets are met over the five (5) years following the closing. For a two-year period following the closing of the Mutual Acquisition, Heine and its chief executive officer, Michael F. Price must limit their ownership of the Company's common stock to no more than 4.9% and have also agreed to certain limitations on the transferability of the Shares for this same time period. In addition, the Shares must be voted in accordance with the recommendations of the Company's Board of Directors. The Company has also granted certain registration rights with respect to the Shares. Mr. Price and five (5) senior executives of Heine entered into employment agreements assumed by FMAI upon the consummation of the transaction. In November 1996, the holders of the option rights related to the Company's subordinated debentures (including entities affiliated with a director of the Company), which were issued in connection with the Templeton Acquisition, exercised their option rights to receive approximately 2.4 million shares of the Company's common stock in exchange for approximately $75 million of subordinated debentures. In December 1996, the holders of the subordinated debentures sold to the Company the remaining option rights representing an additional 2.4 million shares, and surrendered the remaining $75 million of debentures plus accrued interest for cash of approximately $170 million. This transaction was financed through the issuance of $100 million in medium-term notes and through cash on hand. See Note 8 of Notes to Consolidated Financial Statements elsewhere herein. FRI is principally a parent company primarily engaged, through various subsidiaries, in providing investment management, marketing, distribution, transfer agency and other administrative services to the open-end investment companies of the Franklin Templeton Group and to U.S. and international managed and institutional accounts. The Company also provides investment management and related services to a number of closed-end investment companies whose shares are traded on various major U.S. and some international stock exchanges. In addition, the Company provides investment management, marketing and distribution services to certain sponsored investment companies organized in the Grand Duchy of Luxembourg (hereinafter referred to as "SICAV Funds"), which are distributed in marketplaces outside of North America and to certain investment funds and portfolios in Canada (hereinafter referred to as "Canadian Funds") as well as to certain other international portfolios in the United Kingdom and elsewhere. The Franklin Templeton Group of Funds consists of forty-four (44) open-end investment companies with multiple portfolios. When used in this report, the term "Franklin Group of Funds" refers generally to the Franklin funds not acquired through either the Templeton or Mutual Acquisitions nor developed primarily as a result of such acquisitions. The Franklin Group of Funds, the Templeton Family of Funds, and the Mutual Series are hereinafter referred to individually as a "Fund" or collectively as the "Funds", the "Franklin Templeton funds", or the "Franklin Templeton Group of Funds". Unless specifically noted otherwise, as used in this report the terms the "Franklin Templeton funds" or the "Franklin Templeton Group" include the Mutual Series. The closed-end investment companies, the foreign based funds and the other U.S. and international managed and institutional accounts are collectively referred to as the "Other Assets". The Franklin Templeton Group of Funds along with the Other Assets are collectively referred to as the "Franklin Templeton Group". As of September 30, 1997, total assets under management in the Franklin Templeton Group were $226 billion, the make-up of which was approximately as follows: for the open-end investment companies in the Franklin Templeton Group (excluding variable annuities), $175.1 billion; and for all the Other Assets (including variable annuities), $50.9 billion. This makes the Franklin Templeton Group one of the largest investment management complexes in the United States. The mix of assets under management by a large financial services complex such as the Franklin Templeton Group can be segregated by type of assets, type of investment vehicle, type of investor or geographic location of assets. International and U.S. equity assets under management, whether held for growth potential, income potential or various combinations thereof by all types of investors, including institutional and separate accounts on a worldwide basis, were approximately $157.4 billion at September 30, 1997 and represent approximately 70% of total assets under management. Fixed-income assets (both long and short-term), including money market fund assets, held by all types of investors on a worldwide basis were approximately $68.6 billion and represented 30% of total assets under management at fiscal year end. Assets under management for institutional accounts, whether in institutional mutual funds, separate accounts or other types of investment products, were approximately $30.7 billion or 14% of total assets under management at fiscal year end and were primarily invested in global and international equities. Assets under management by U.S. based closed-end funds or equivalent foreign funds were $6.6 billion, or 2.9% of total assets, at September 30, 1997. The Company, through certain subsidiaries, also provides advisory services, variable annuity products, and sponsors and manages public and private real estate programs. Other subsidiaries offer consumer banking services, insured deposits, dealer auto loans, and credit cards. The Company also provides custodial, trustee and fiduciary services to individual retirement account ("IRA") and profit sharing or money purchase plans and to qualified retirement plans and private trusts. From time to time, the Company also participates in various investment management joint ventures. On a consolidated worldwide basis, the Company provides U.S. and international individual and institutional investors with a broad range of investment products and services designed to meet varying investment objectives, which affords its clients the opportunity to allocate their investment resources among various alternative investment products as changing worldwide economic and market conditions warrant. Subsidiaries-Investment Management, Administration, Distribution and Related Services The Company's principal line of business is providing investment management, administration, distribution and related services for the Franklin Templeton Group. This business is primarily conducted through the principal wholly-owned direct and indirect subsidiary companies described below. Revenues are generated primarily by subsidiaries that provide advisory and management services. Revenues are derived primarily from investment management fees calculated on a sliding scale fund-by-fund basis, which generally decline as the level of assets managed increases. Franklin Advisers, Inc. Franklin Advisers, Inc. ("Advisers") is a California corporation formed in 1985 and is based in San Mateo, California. Advisers is registered as an investment advisor with the Securities and Exchange Commission (the "SEC") under the Investment Advisers Act of 1940 (the "Advisers Act") and is also registered as an investment advisor in the State of California. Advisers provides investment advisory, portfolio management and administrative services under management agreements with most of the Funds in the Franklin Group of Funds. Advisers manages approximately $83.9 billion, representing approximately 37.1% of the Company's total assets under management, and generates approximately 17.4% of total Company revenues. Franklin Advisory Services, Inc. Franklin Advisory Services, Inc. ("FASI") is a Delaware corporation formed in 1996 and is based in Fort Lee, New Jersey. FASI is registered as an investment advisor with the SEC under the Advisers Act and is also registered as an investment advisor in the State of New Jersey. FASI provides investment advisory and portfolio management services under management agreements with certain funds in the Franklin Group of Funds. Templeton Global Advisors Limited. Templeton Global Advisors Limited ("TGAL") is a Bahamian corporation located in Nassau, Bahamas formed in connection with the Templeton Acquisition and is the successor company to Old TGH. TGAL is registered as an investment advisor with the SEC under the Advisers Act. TGAL provides investment management services under various agreements with certain of the Templeton funds and Other Assets. TGAL is the principal investment advisor to the Templeton funds and manages approximately $53.6 billion, representing approximately 23.7% of the Company's total assets under management. Franklin Investment Advisory Services, Inc. Franklin Investment Advisory Services, Inc. ("FIASI") is a Delaware corporation formed in 1996 and is based in Norwalk, Connecticut. FIASI is registered as an investment advisor with the SEC under the Advisers Act. Franklin Mutual Advisers, Inc. Franklin Mutual Advisers, Inc. ("FMAI") is a Delaware corporation formed in 1996 and is based in Short Hills, New Jersey. FMAI is registered as an investment advisor with the SEC under the Advisers Act and is also registered as an investment advisor in the States of Georgia, Texas and New Jersey. FMAI provides investment management and portfolio management services under various agreements with Mutual Series. FMAI is the investment manager to the Mutual Series funds and manages approximately $24.8 billion, representing approximately 11% of the Company's total assets under management. Franklin Templeton Services, Inc. Franklin Templeton Services, Inc. ("FTSI") is a Delaware corporation formed in 1996 and is based in San Mateo, California. FTSI provides business management services, including fund accounting, securities pricing, trading, compliance and other related administrative activities under various management agreements to most of the U.S. Franklin Templeton Funds. Templeton Investment Counsel, Inc. Templeton Investment Counsel, Inc. ("TICI") is a Florida corporation formed in October 1979. Based in Ft. Lauderdale, Florida, TICI is the principal investment advisor to the majority of the Franklin Templeton managed and institutional accounts, excluding Mutual Series. In addition, it provides investment advisory portfolio management services to certain of the Templeton funds and subadvisory services to certain of the Franklin funds. TICI manages approximately $23.5 billion, representing 10.4% of the Company's total assets under management. Templeton Asset Management Ltd. Templeton Asset Management Ltd. ("Templeton Singapore") is a corporation organized under the laws of and based in Singapore. It is registered as the foreign equivalent of an investment advisor in Singapore with the Monetary Authority of Singapore and is also registered with the SEC under the Advisers Act. A representative office of Templeton Singapore is registered as the foreign equivalent of an investment advisor in Hong Kong. Templeton Singapore provides investment advisory and related services to certain Templeton funds and portfolios. Templeton Singapore is principally an investment advisor to emerging market equity portfolios. Templeton/Franklin Investment Services (Asia) Limited Templeton/Franklin Investment Services (Asia) Limited is a corporation organized under the laws of, and is based in, Hong Kong. It was formed in late 1993 to distribute and service the Company's financial products in Asia. Templeton Management Limited Templeton Management Limited is a Canadian corporation formed in October 1982, and is registered in Canada as the foreign equivalent of an investment advisor and a mutual fund dealer with the Ontario Securities Commission. It provides investment advisory, portfolio management, distribution and administrative services under various management agreements with the Canadian Funds and with private and institutional accounts. Franklin/Templeton Distributors, Inc. Franklin/Templeton Distributors, Inc. ("Distributors") is a New York corporation formed in 1947. It is registered with the SEC as a broker-dealer and as an investment advisor and is a member of the National Association of Securities Dealers, Inc. (the "NASD"). As the principal underwriter of the shares of most of the Franklin and Templeton funds, it earns underwriting commissions on the distribution of shares of the Funds. Templeton/Franklin Investment Services, Inc. Templeton/Franklin Investment Services, Inc. ("TFIS") is a Delaware corporation formed in October 1987 and is registered with the SEC as a broker-dealer and an investment advisor. Its principal business activities include: (i) through its Templeton Portfolio Advisory division, serving as a sponsor of a comprehensive fee (wrap account) program, in which it provides investment advisory and broker-dealer services, as well as serving as investment adviser in other broker-dealer wrap account programs and directly as an adviser for separate accounts; and (ii) serving as a direct marketing broker-dealer for institutional investors in Franklin Templeton Group of Funds. Franklin/Templeton Investor Services, Inc. Franklin/Templeton Investor Services, Inc. ("FTIS") is a California corporation formed in 1981 which provides shareholder record keeping services and acts as transfer agent and dividend-paying agent for the Franklin and Templeton funds. FTIS is registered with the SEC as a transfer agent under the Securities Exchange Act of 1934 (the "Exchange Act"). FTIS is compensated under an agreement with each Franklin and Templeton open-end mutual fund on the basis of a fixed annual fee per account, which varies with the Fund and the type of services being provided, and is reimbursed for out-of-pocket expenses. Other Templeton Investment Advisory, Distribution, Research and Related Subsidiaries are organized and/or located in California, Florida, Australia, the Bahamas, Brazil, France, Germany, India, Italy, Luxembourg, Poland, Russia, South Africa and the United Kingdom, and provide investment advisory and related services to other subsidiaries of the Company and to various U.S. and foreign portfolios and private and institutional accounts. In addition, the Company, through various Templeton subsidiaries, has opened or is in the process of opening branch offices or in some instances forming subsidiaries in various other international locations, including Argentina, China, Cyprus, Hungary, Japan, Korea, Mauritius, Russia, South Africa, and Vietnam. Franklin Templeton Trust Company Franklin Templeton Trust Company ("FTTC"), a California corporation formed in October 1983, is a trust company licensed by the California Superintendent of Banks. FTTC serves primarily as custodian for Individual Retirement Accounts and profit sharing or money purchase plans whose assets are invested in the Franklin and Templeton funds, and as trustee or fiduciary of private trusts and retirement plans. Templeton Funds Trust Company Templeton Funds Trust Company ("TFTC"), a Florida corporation formed in December 1985, is a trust company licensed by the Florida Office of the Comptroller. TFTC serves as trustee of commingled trusts for qualified retirement plans. Franklin Management, Inc. Franklin Management, Inc. ("FMI"), a California corporation organized in February 1978, is a registered investment advisor for private accounts. FMI also provides advisory services to third party broker-dealer wrap fee programs. Franklin Institutional Services Corporation Franklin Institutional Services Corporation ("FISCO") is a California corporation organized in August 1991. FISCO is a registered investment advisor and provides services for institutional accounts. Franklin Agency, Inc. Franklin Agency, Inc. ("Agency") is a California corporation organized in December 1971. Agency provides insurance agency services for the Franklin Valuemark annuity products. Templeton Funds Annuity Company Templeton Funds Annuity Company ("TFAC") is a Florida corporation formed in January 1984 which offers variable annuity products. TFAC is principally regulated by the Florida Department of Insurance and Florida's Treasurer. Templeton Worldwide, Inc. Templeton Worldwide, Inc. is a Delaware corporation organized in July 1992 as the parent holding company for all of the Templeton companies. Subsidiaries-Other Financial Services In addition to its principal business activity of providing investment management and related services, during all or portions of the fiscal year, the Company was also engaged in two (2) other lines of business in the financial services marketplace conducted through the subsidiaries described below: consumer lending services and the management of public and private real estate programs. Consumer Lending Services Franklin Bank (the "Bank"), a 98.2%-owned subsidiary of the Company, is a non-Federal Reserve member California State chartered bank. The Bank was formed in 1974 and was acquired by the Company in December 1985. The Bank, with total assets of $117.6 million as of September 30, 1997, provides consumer banking products and services such as credit cards, auto loans, deposit accounts and consumer loans. The Bank does not exercise its commercial lending powers in order to maintain its status as a "non-bank bank" pursuant to the provisions of the Competitive Equality Banking Act of 1987 ("CEBA") which permits the Company, a "non-banking company" prior to CEBA, to remain exempt from the Bank Holding Company Act under the "grandfathering" provisions of CEBA. Franklin Capital Corporation Franklin Capital Corporation ("FCC") is a Utah corporation formed in June 1993 to expand the Company's auto lending activities. FCC conducts its business primarily in the Western region of the United States and originates its loans through a network of auto dealerships representing a wide variety of makes and models. FCC offers several different loan programs to finance new and used vehicles. FCC also acquires credit card receivables from the Bank. As of September 30, 1997, FCC's total assets included $154.3 million of gross automobile contracts and $63.9 million of gross credit card receivables. Real Estate Subsidiaries The Company's real estate related line of business is conducted primarily through two (2) principal subsidiary corporations. Franklin Properties, Inc. ("FPI") is a real estate investment and management company organized in California in April 1988, which managed three (3) publicly traded real estate investment trusts, until May 7, 1996, at which time two (2) of the real estate investment trusts were merged into the third real estate investment trust, and renamed Franklin Select Realty Trust, Inc. Franklin Select Realty Trust, Inc. continues to be managed by FPI under an advisory agreement and is publicly traded on the American Stock Exchange. Property Resources, Inc. ("PRI"), a California corporation organized in April 1967 and acquired by the Company in December 1985, serves as general partner, property manager or advisor for certain other real estate investment programs. Investment Management The Franklin Templeton Group accommodates a variety of investment objectives, including, capital appreciation, growth and income, income, tax-free income and stability of principal. In seeking to achieve such objectives, each portfolio emphasizes different investment securities. Portfolios seeking income focus on taxable and tax-exempt money market instruments, tax-exempt municipal bonds, global fixed-income securities, fixed-income debt securities of corporations and of the United States government and its agencies and instrumentalities such as the Government National Mortgage Association ("GNMA" or "Ginnie Mae"), the Federal National Mortgage Association ("Fannie Mae"), and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). Portfolios that seek capital appreciation invest primarily in equity securities in a wide variety of international and U.S. markets, some seek broad national market exposure, while others focus on narrower sectors such as precious metals, health care, emerging technology, mid-cap companies, small-cap companies, real estate securities and utilities. Still others focus on investments in particular emerging market countries and regions. A majority of the assets managed are equity oriented. In addition to closed-end funds, many of which are described below, the Other Assets include portfolios managed for the world's largest corporations, endowments, charitable foundations, pension funds, wealthy individuals and other institutions. Investment management services for such portfolios focus on specific client objectives utilizing the various investment techniques offered by the Franklin Templeton Group. During the fiscal year ended September 30, 1997, except for the Company's money market funds, and funds specifically designed for institutional investors, whose shares are sold without a sales charge at all purchase levels, shares of the open-end funds in the Franklin Templeton Group of Funds generally were sold at their respective net asset value per share plus a sales charge, which varies depending upon the type of share, the individual fund and the amount purchased. In accordance with certain terms and conditions described in the prospectuses for such Funds, certain investors are eligible to purchase shares at net asset value or at reduced sales charges, and investors may generally exchange their shares of a fund at net asset value for shares of another fund in the Franklin Templeton Group when they believe such an investment decision is appropriate without the payment of additional sales charges. As of September 30, 1997, the net asset holdings of the five (5) largest funds in the Franklin Templeton Group (some of which are investment companies and some of which are series of other investment companies) were Templeton Foreign Fund ($17.0 billion), Franklin California Tax-Free Income Fund, Inc. ($14.6 billion), Templeton Growth Fund ($13.9 billion), Templeton World Fund ($9.6 billion) and the Franklin Custodian Funds-U.S. Government ($9.5 billion). At September 30, 1997, these five (5) mutual funds represented, in the aggregate, 28.5% of all assets under management in the Franklin Templeton Group. General Fund Description Set forth in the tables below is a brief description of the Funds and of the principal investments and investment strategies of such Funds or portfolios comprising most of the principal Funds or portfolios in the Franklin Templeton Group separated into twenty-three (23) different general categories as follows: (i) Franklin Funds Seeking Preservation of Capital and Income (ii) Franklin Funds Seeking Current Income (iii) Franklin Funds Seeking Tax-Free Income (iv) Franklin Funds Seeking Growth and Income (v) Franklin Funds Seeking Capital Growth (vi) Franklin Funds for Tax-Deferred Investments (Valuemark variable annuity) (vii) Franklin Closed-End Funds (viii) Franklin Funds for Institutional Investors (ix) Franklin Templeton International Currency Funds (x) Templeton Funds Seeking Preservation of Capital and Income (xi) Templeton Funds Seeking Capital Growth from Global Portfolios (xii) Templeton Funds Seeking Capital Growth from U.S. Portfolios (xiii) Templeton Funds Seeking High Current Income from Global Portfolios (xiv) Templeton Funds Seeking High Total Return from Global Portfolios (xv) Templeton Funds for Tax-Deferred Investments (xvi) Templeton Contractual Plans (xvii) Templeton SICAV Funds (xviii) Templeton Canadian Funds (xix) Templeton Closed-End Funds (xx) Templeton Funds for Institutional Investors (xxi) Representative Templeton International Portfolios (xxii) Mutual Series Funds (xxiii) Asset Allocation Funds Recent Fund Introductions and Changes The Mutual Series team, known for its value-driven approach to U.S. equity investing, joined the Franklin Templeton organization in November 1996. This addition brought four (4) established and one (1) newly created series to the Franklin Templeton Funds. A sixth series, Mutual Financial Services Fund, was added in August 1997. In December 1996, a new investment company, Franklin Templeton Fund Allocator Series, consisting of three (3) series that invest in a selected group of Franklin Templeton Funds, was introduced. The Franklin Discovery Biotechnology Fund was added to the Franklin Strategic Series in September 1997. During the fiscal year, four (4) funds were liquidated and two (2) Templeton funds were merged into two (2) Franklin funds. Effective January 2, 1997, twenty-five (25) Franklin Templeton funds offered a new class of shares, called Advisor Class Shares, available without a sales charge generally for employees and for large investments ($5 million or more). During fiscal 1997, seventy-six (76) Franklin Templeton funds offered multiple classes of shares in response to investor demand for varying load structures. Of these funds, forty-five (45) offered Class I and Class II shares, seven (7) offered Class I shares and Advisor Class Shares, and twenty-four (24) offered Class I, Class II and Advisor Class Shares (or the Mutual Series equivalent to Advisor Class Shares, called Z Class Shares). (i) Franklin Funds Seeking Preservation of Capital and Income Name of Fund Inception Principal Investments/Strategy Date Franklin California 09/03/85 Seeks double tax-free income (free Tax-Exempt Money Fund from federal and state personal income taxes) by investing in short-term California municipal securities. Franklin Federal Money 05/13/80 Seeks high current income by investing Fund in short-term instruments backed by U.S. government securities. Franklin Money Fund 05/01/76 Seeks capital preservation, liquidity and dividends by investing in short-term securities (money market instruments). Franklin New York 09/03/85 Seeks triple tax-free income (free Tax-Exempt Money Fund from federal, N.Y. state and N.Y. city taxes) by investing in short-term New York municipal securities. Franklin Tax-Exempt 02/18/82 Seeks income free from federal taxes Money Fund by investing in short-term municipal securities. Franklin Templeton Money 05/01/95 Seeks capital preservation, liquidity Fund II and dividends, by investing in short-term securities. Open only to shareholders exchanging out of Class II shares in other Franklin Templeton Funds. (ii) Franklin Funds Seeking Current Income Name of Fund Inception Principal Investments/Strategy Date Franklin Adjustable Rate 12/26/91 Seeks high current income and Securities Fund increased price stability by investing in Double A rated mortgage-backed securities: adjustable rate mortgages ("ARMs") created by private issuers as well as Ginnie Mae, Fannie Mae and Freddie Mac. Franklin Adjustable U.S. 10/20/87 Seeks income with lower volatility of Government Securities principal by investing in government Fund or government agency guaranteed adjustable rate mortgage-backed securities. Franklin Corporate 01/14/87 Seeks high after-tax income for Qualified Dividend Fund corporations by investing in preferred securities and by maximizing the amount of dividend income it receives that qualifies for the dividends-received deduction. Franklin Global 03/15/88 Seeks high current income by investing Government Income Fund primarily in fixed-income securities issued by both U.S. and foreign governments. Franklin Investment 01/14/87 Seeks high current income by investing Grade Income Fund in debt securities, most of which will be intermediate term investment grade issues and dividend paying common and preferred stocks. Franklin 04/15/87 Seeks income and relative stability of Short-Intermediate U.S. principal by investing in less Government Securities volatile, shorter term securities of Fund U.S. government securities carrying the full faith and credit guarantee of the U.S. government. Franklin Templeton 12/31/92 Seeks total return by investing in a German Government Bond managed portfolio of German government Fund bonds. Franklin's AGE High 12/31/69 Seeks high current income by investing Income Fund in high yielding lower rated corporate bonds. U.S. Government 05/31/70 Seeks high current income by investing Securities Series (a in a portfolio limited to securities series of Franklin that are obligations of the U.S. Custodian Funds, Inc.) government or its instrumentalities (Ginnie Mae securities). (iii) Franklin Funds Seeking Tax-Free Income Federal Tax-Free Funds Name of Fund Inception Principal Investments/Strategy Date Franklin Federal 09/21/92 Seeks high current income by investing Intermediate-Term in nationally diversified municipal Tax-Free Income Fund bonds with an average maturity of three (3) to ten (10) years. Franklin Federal 10/07/83 Seeks federal tax-free income by Tax-Free Income Fund investing in nationally diversified, investment quality municipal bonds. Franklin High Yield 03/18/86 Seeks federal tax-free income by Tax-Free Income Fund investing in nationally diversified, high yield, medium and lower rated municipal bonds. Franklin Insured 04/01/85 Seeks federal tax-free income by Tax-Free Income Fund investing in nationally diversified, insured municipal bonds. Franklin Puerto Rico 08/03/85 Seeks to provide a maximum level of Tax-Free Income Fund income exempt from federal income tax and the personal income taxes of the majority of the states by investing in municipal securities. For U.S. citizens and residents. State Tax-Free Funds The Company manages insured state tax-free funds, established from 1985 to 1996, in the states of Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New York and Ohio. The principal investments and strategy of these funds are the purchase of insured municipal bonds exempt from federal and specified state personal income taxes providing an investment vehicle for double tax-free income from long-term municipal securities. In addition, the Company manages twenty-seven (27) non-insured state tax-free income funds established from 1977 to 1996 providing double tax-free income from long-term municipal securities to residents of twenty-four (24) states. (iv) Franklin Funds Seeking Growth and Income Name of Inception Principal Investments/Strategy Fund Date Franklin Asset 12/05/51 Seeks total return by investing in Allocation Fund common stocks, investment grade corporate and U.S. government bonds, short-term money market instruments, securities of foreign issuers and real estate securities. Franklin Balance Sheet 04/02/90 Seeks high total return by investing Investment Fund in common and preferred stocks, secured or unsecured bonds, and commercial paper or notes, which have per-share current market values believed to be below their net asset or book values. Franklin Convertible 04/15/87 Seeks to maximize total return by Securities Fund investing in convertible bonds and convertible preferred stock. Franklin Equity Income 03/15/88 Seeks capital appreciation and high Fund current dividend income by investing in high yielding common stocks for greater price stability. Franklin Global 07/02/92 Seeks total return by investing in Utilities Fund equity and debt securities issued by foreign and U.S. utilities companies. Franklin MicroCap Value 12/12/95 Seeks high total return by investing Fund primarily in securities of companies with market capitalization under $100 million at the time of purchase and which are believed to be undervalued in the marketplace. Franklin Natural 06/05/95 Seeks high total return by investing Resources Fund primarily in stocks of companies that own, produce, refine, process and market natural resources. Franklin Rising 04/02/90 Seeks capital appreciation by Dividends Fund investing in stocks with consistent, substantial dividend increases for capital growth. Franklin Strategic 05/24/94 Seeks high current income and capital Income Fund appreciation, by investing in U.S. and foreign fixed-income securities. Franklin Value Fund 03/11/96 Seeks total return by investing in equity and debt securities of companies worldwide, which are believed to be undervalued in the marketplace. Income Series (a series 08/31/48 Seeks to maximize income by investing of Franklin Custodian in stocks and bonds, including foreign Funds, Inc.) and high yield, lower rated securities, selected with particular consideration for their income producing potential. Utilities Series (a 09/30/48 Seeks capital appreciation and current series of Franklin income by investing in utility Custodian Funds, Inc.) companies located in high growth areas. (v) Franklin Funds Seeking Capital Growth Name of Fund Inception Principal Investments/Strategy Date DynaTech Series (a 01/01/68 Seeks capital appreciation by series of Franklin investing in the volatile stocks of Custodian Funds, Inc.) companies engaged in dramatic break-through areas such as medicine, telecommunications and electronics or who have proprietary advantages in their field. Franklin Blue Chip Fund 05/28/96 Seeks capital appreciation by investing in securities of well-established, large capitalization companies ("blue chip companies") with a long record of revenue growth and profitability. Franklin California 10/30/91 Seeks capital appreciation by Growth Fund investing primarily in growth stocks or securities of companies headquartered in or conducting a majority of operations in California. Franklin Equity Fund 01/01/33 Seeks capital appreciation and current income by investing primarily in common stocks of seasoned companies with low prices in relation to earnings growth. Franklin Global Health 02/14/92 Seeks capital appreciation by Care Fund investing primarily in equity securities of health care companies worldwide with potential for above average growth. Franklin Gold Fund 05/19/69 Seeks capital appreciation and current income by investing in securities of companies engaged in mining, processing or dealing in gold or other precious metals. Franklin MidCap Growth 06/01/96 Seeks long-term capital growth by Fund investing in equity securities of medium capitalization companies believed to be positioned for rapid growth. Franklin Real Estate 01/03/94 Seeks to maximize total return by Securities Fund investing primarily in the equity securities of companies operating in the real estate industry. Franklin Small Cap 02/14/92 Seeks long-term capital growth by Growth Fund investing primarily in equity securities of small capitalization growth companies. Growth Series (a series 03/31/48 Seeks capital appreciation by of Franklin Custodian investing in well-known companies with Funds, Inc.) demonstrated growth characteristics. Franklin Biotechnology 09/15/97 Seeks capital appreciation by Discovery Fund investing in securities of biotechnology companies and discovery research firms located in the U.S. and other countries. (vi) Franklin Funds for Tax-Deferred Investments Franklin Valuemark Funds is an open-end management investment company currently consisting of twenty-three (23) separate series or portfolios which offer a wide range of investment objectives, strategies, and risks. Shares are currently sold only to separate accounts of the Allianz Life Insurance Company of North America and its affiliates to fund the benefits under variable life insurance policies and variable annuity contracts. Products presently offered include two (2) flexible premium deferred variable annuities ("Valuemark II" in New York and "Valuemark III" in all other states), an immediate variable annuity ("Valuemark Income Plus"), single premium variable life insurance ("Franklin Valuemark Life"), and flexible premium variable life insurance ("ValueLife"). The portfolios are managed by Advisers, Franklin Advisory Services, Inc., Franklin Mutual Advisers, Inc., TICI, TGAL, and Templeton Asia. The investment objectives and policies of most of the portfolios are similar to those of corresponding Franklin and Templeton funds, although differences in portfolio size, investments held, and insurance and expense related differences will cause the performance of the Valuemark portfolio to differ. (vii) Franklin Closed-End Funds Name of Fund Inception Principal Investments/Strategy Date Franklin Multi-Income 10/24/89 Seeks high current income by investing Trust (listed on the primarily in high yielding, NYSE) fixed-income corporate securities as well as dividend-paying stocks of companies engaged in the public utilities industry. Franklin Universal Trust 09/23/88 Seeks high current income by investing (listed on the NYSE) in fixed-income debt securities and dividend paying stocks and securities of precious metals and natural resources companies. Principal Maturity Trust 01/19/89 Seeks to return investors' original (listed on the NYSE) capital of $10 per share on or before May 31, 2001, while providing high monthly income by investing in mortgage-backed securities, zero coupon securities and high income producing debt securities. (viii) Franklin Funds for Institutional Investors Name of Fund Inception Principal Investments/Strategy Date Adjustable Rate 11/05/91 Seeks high current income by investing Securities Portfolio in mortgage-backed securities (ARMs). (sold only to other investment companies) Franklin Cash Reserves 07/01/94 Seeks high current income by investing Fund in U.S. and foreign short-term securities. Franklin Institutional 01/02/92 Seeks high current income by investing Adjustable Rate in a portfolio of mortgage-backed Securities Fund securities, pooled adjustable rate mortgage securities. Franklin Institutional 11/01/91 Seeks high current income and Adjustable U.S. increased price stability by investing Government Securities in a portfolio of adjustable U.S. Fund government or guaranteed agency mortgage-backed securities, (ARMs created by Ginnie Mae, Fannie Mae and Freddie Mac). Franklin Strategic 02/01/93 Seeks a high level of total return by Mortgage Portfolio investing primarily in mortgage-backed securities, pooled mortgages issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. Franklin U. S. 02/08/94 Seeks high current income consistent Government Agency Money with capital preservation and Market Fund liquidity by investing in short-term instruments backed by U.S. government securities. Franklin U.S. Government 01/19/88 Seeks high current income consistent Securities Money Market with capital preservation and Portfolio liquidity by investing in short-term instruments backed by U.S. government securities. Franklin U.S. Treasury 08/20/91 Seeks high current income consistent Money Market Portfolio with capital preservation and liquidity by investing in short-term U.S. Treasury obligations. Money Market Portfolio 07/17/85 Seeks high current income consistent with capital preservation and liquidity by investing all of its assets in money market instruments. The Money Market 07/28/92 Seeks high current income consistent Portfolio (sold only to with capital preservation and other investment liquidity by investing all of its companies) assets in money market instruments. The U.S. Government 07/28/92 Seeks high current income consistent Securities Money Market with capital preservation and Portfolio (sold only to liquidity by investing in short-term other investment instruments backed by U.S. government companies) securities. U.S. Government 05/20/91 Seeks high current income and Adjustable Rate Mortgage increased price stability by investing Portfolio (sold only to in mortgage-backed securities, (ARMs other investment created by Ginnie Mae, Fannie Mae and companies) Freddie Mac). (ix) Franklin Templeton International Currency Funds Name of Fund Inception Principal Investments/Strategy Date Franklin Templeton 06/30/86 Seeks to maximize total return, by Global Currency Fund investing in interest- earning money market instruments denominated in three (3) or more of sixteen (16) major world currencies. Franklin Templeton Hard 11/17/89 Seeks to protect against U.S. dollar Currency Fund depreciation by investing in high-quality money market instruments denominated in three (3) or more of the five (5) major currencies of lowest inflation countries and the Swiss Franc. Franklin Templeton High 11/17/89 Seeks current income higher than that Income Currency Fund of U.S. dollar money market instruments by investing in interest-bearing money market instruments denominated in Major and Non-Major Currencies. (x) Templeton Funds Seeking Preservation of Capital and Income Name of Fund Inception Principal Investments/Strategy Date Templeton Money Fund 10/2/87 Seeks current income, stability of Merged into principal and liquidity by investing Franklin in high quality money market Money Fund instruments with maturities not on 12/31/96 exceeding 397 days, consisting on primarily of short-term U.S. government securities, bank certificates of deposit, time deposits, bankers' acceptances, commercial paper and repurchase agreements. (xi) Templeton Funds Seeking Capital Growth from Global Portfolios Name of Fund Inception Principal Investments/Strategy Date Franklin Templeton Japan 07/28/94 Seeks long-term capital growth by Fund investing primarily in the equity securities of companies domiciled in Japan and traded in Japanese securities markets. Templeton Developing 10/17/91 Seeks long-term capital appreciation Markets Trust by investing primarily in equity securities of issuers in countries with developing markets. Templeton Foreign Fund 10/05/82 Seeks long-term capital growth by investing in stocks and debt obligations of companies and governments outside the United States. Templeton Foreign 09/20/91 Seeks long-term capital growth by Smaller Companies Fund investing in a diverse portfolio of equity securities that trade on markets in countries other than the United States. Templeton Global 03/14/94 Seeks long-term capital growth by Infrastructure Fund investing in securities of U.S. and foreign companies that are principally engaged in or related to the development, operation or rehabilitation of the physical and social infrastructures of various nations throughout the world. Templeton Global 02/28/90 Seeks long-term capital growth by Opportunities Trust investing in securities issued by companies and governments of any nation. Templeton Greater 05/08/95 Seeks long-term capital appreciation European Fund by investing primarily in equity securities of companies Western, Central and Eastern Europe and in Russia. Templeton Growth Fund 11/29/54 Seeks long-term capital growth by investing in stocks and bonds issued by companies and governments of any nation. Templeton Latin America 05/08/95 Seeks long-term capital appreciation Fund by investing primarily in equity securities and debt obligations of issuers in Latin American countries. Templeton Pacific Growth 09/20/91 Seeks long-term capital growth by Fund investing primarily in equity securities that trade on markets in the Pacific Rim. Templeton Global Real 09/18/89 Seeks long-term capital growth by Estate Fund investing in securities of U.S. and foreign companies engaged in or related to the real estate industry. Templeton Global Smaller 06/01/81 Seeks long-term capital growth by Companies Fund, Inc. investing in common and preferred stocks, rights and warrants of companies of various nations throughout the world. Templeton World Fund 01/17/78 Seeks long-term capital growth by investing in stocks and debt obligations of foreign and U.S. companies. (xii) Templeton Funds Seeking Capital Growth From U.S. Portfolios Name of Fund Inception Principal Investments/Strategy Date Templeton American 03/27/91 Seeks long-term total return by Trust, Inc. investing no less than 65% of assets in stocks and debt obligations of U.S. companies and the U.S. government. (xiii) Templeton Funds Seeking High Current Income from Global Portfolios Name of Fund Inception Principal Investments/Strategy Date Templeton Americas 06/27/94 Seeks high current income, with total Government Securities return as a secondary objective, by Fund investing primarily in debt securities issued or guaranteed by governments, government agencies, political subdivisions, and other government entities of countries located in North, South and Central America and the surrounding waters. Templeton Global Bond 09/24/86 Seeks current income by investing Fund (formerly Templeton primarily in debt securities, Income Fund) preferred stock, common stocks which pay dividends and income producing securities convertible into common stock of companies, governments and government agencies of various nations throughout the world. (xiv) Templeton Funds Seeking High Total Return from Global Portfolios Name of Fund Inception Principal Investments/Strategy Date Templeton Growth and 03/14/94 Seeks high total return by investing Income Fund (formerly primarily in equity and debt Templeton Global Rising securities of U.S. and foreign Dividends Fund) companies. (xv) Templeton Funds for Tax-Deferred Investments Name of Fund Inception Principal Investments/Strategy Date Templeton Asset 08/31/88 Seeks a high level of total return by Allocation Fund investing in stocks of companies in any nation, debt obligations of companies and governments of any nation, and in money market instruments. Templeton Bond Fund 08/31/88 Seeks high current income by investing primarily in debt securities of companies, governments and government agencies of various nations throughout the world, and in debt securities which are convertible into common stock of such companies. Templeton International 05/01/92 Seeks long-term capital growth by Fund investing in stocks and debt obligations of companies and governments outside the United States. Templeton Money Market 08/31/88 Seeks current income, stability of Fund principal and liquidity by investing in money market instruments with maturities not exceeding 397 days, consisting primarily of short-term U.S. government securities, certificates of deposit, time deposits, bankers' acceptances, commercial paper and repurchase agreements. Templeton Stock Fund 08/31/88 Seeks capital growth by investing primarily in common stocks issued by companies, large and small, in various nations throughout the world. Templeton Variable 02/16/88 Seeks long-term capital growth by Annuity Fund investing primarily in stocks and debt obligations of companies and governments of any nation, including the United States. Mutual Shares 05/01/97 Seeks capital appreciation by Investments Fund investing in U.S. equity securities trading at prices below their intrinsic values, in restructuring investments and in foreign equity and debt securities. Franklin Growth 05/01/97 Seeks capital appreciation by Investments Fund investing in equities and convertible securities issued by U.S. corporations, including stocks of small capitalization companies. Mutual Discovery 05/01/97 Seeks capital appreciation by Investments Fund investing in U.S. and foreign equity securities, including those of small capitalization companies, in restructuring investments and debt securities. (xvi) Templeton Contractual Plans Name of Fund Inception Principal Investments/Strategy Date Templeton Capital 03/01/91 Seeks long-term capital growth by Accumulator Fund, Inc. investing in stocks and debt obligations of companies and governments of any nation. (xvii) Templeton SICAV Funds Templeton Global Strategy (SICAV) Equity Funds (denominated in U.S. dollars unless otherwise noted) Name of Fund Inception Principal Investments/Strategy Date Templeton Deutschmark 04/26/91 Seeks long-term capital growth by Global Growth Fund investing mainly in shares of companies of any size found in any nation (denominated in Deutschmarks). Templeton Emerging 02/28/91 Seeks long-term capital growth by Markets Fund investing in the shares and debt obligations of corporations and governments of developing or emerging nations. Templeton European Fund 04/17/91 Seeks long-term capital growth by investing mainly in shares of companies of all sizes based in European countries (denominated in Swiss francs). Templeton Far East Fund 06/30/91 Seeks long-term capital growth by investing mainly in shares of companies of all sizes which are based in or which derive significant profits from the Far East. Templeton Global Growth 02/28/91 Seeks long-term capital growth by Fund investing primarily in the shares of companies of any size found in any nation. Templeton Pan American 02/28/91 Seeks long-term capital growth by Fund investing primarily in shares of companies of all sizes based in the North or South American continents. Templeton Smaller 07/08/91 Seeks long-term capital growth by Companies Fund investing primarily in shares of companies with a market capitalization of less than $1 billion found in any nation. Fixed Income Funds (denominated in U.S. Dollars unless otherwise noted) Name of Fund Inception Principal Investments/Strategy Date Templeton Deutschmark 02/28/91 Seeks to maximize total investment Global Bond Fund return by investing in a wide variety of fixed-interest securities, including those issued by supranational bodies such as The World Bank (denominated in Deutschmarks). Templeton Emerging 07/05/91 Seeks to maximize total investment Markets Fixed Income Fund return by investing primarily in dollar and non-dollar denominated debt obligations of emerging markets. Templeton Global Income 02/28/91 Seeks to maximize current income by Fund investing primarily in fixed-interest securities of governments and companies worldwide. Templeton Haven Fund 07/08/91 Seeks to maintain a stable share price by investing in short-term high quality transferable debt securities (denominated in Swiss francs). Templeton U.S. 02/28/91 Seeks security of capital and income Government Fund by investing in bonds issued by the U.S. government and its agencies. Templeton Worldwide Investments SICAV Growth Portfolio 08/21/89 Seeks long term capital growth by investing in all types of securities issued by companies or governments of any nation. Income Portfolio 08/21/89 Seeks high current income and relative stability of net asset value by investing in high quality money market instruments and debt securities with remaining maturities in excess of two (2) years. (xviii) Templeton Canadian Funds Non-Institutional Funds Name of Fund Inception Principal Investments/Strategy Date Templeton Balanced Fund 04/07/83 Seeks long-term capital appreciation by investing primarily in a combination of Canadian common and preferred shares, bonds, and debentures; managed to comply with eligibility requirements under Canadian law regarding retirement and other tax deferred plans. Templeton Canadian Asset 9/14/94 Seeks high level of total return by Allocation Fund investing primarily in Canadian shares, debt obligations and short-term instruments; managed to comply with eligibility requirements under Canadian law regarding retirement and other tax-deferred plans. Templeton Canadian Bond 01/02/90 Seeks high current income and capital Fund appreciation by investing primarily in publicly traded debt securities issued or guaranteed by Canadian governments or their agencies, or issued by Canadian municipalities or corporations. Templeton Canadian Stock 01/03/89 Seeks capital appreciation by Fund investing in a diversified portfolio of Canadian equity securities primarily managed to comply with eligibility requirements of the Canadian law regarding retirement and other tax deferred plans. Templeton Emerging 09/20/91 Seeks long-term capital appreciation Markets Fund by investing primarily in emerging country equity securities. Templeton Global 9/14/94 Seeks high level of total return by Balanced Fund investing in shares, debt obligations and short-term instruments of companies and governments of any nation, including Canada and the United States. Templeton Global Bond 06/07/88 Seeks high current income by investing Fund primarily in a portfolio of fixed income securities of issuers throughout the world. Templeton Global Smaller 01/03/89 Seeks capital appreciation by Companies Fund investing primarily in equity securities of emerging growth companies throughout the world. Templeton Growth Fund, 09/01/54 Seeks long-term capital growth by Ltd. investing in stock and debt obligations of companies and governments of any nation. Templeton International 09/14/94 Seeks high level of total return by Balanced Fund investing in shares, debt obligations and short-term instruments of companies and governments of any nation other than Canada and the United States. Templeton International 01/03/89 Seeks long-term total return by Stock Fund investing in shares and debt obligations of companies and governments outside of Canada and the United States. Templeton Treasury Bill 02/29/88 Seeks a high level of current income Fund consistent with preservation of capital and liquidity by investing in Canadian government or agency debt obligations and high quality short-term money market instruments. Funds for Institutional Investors Name of Fund Inception Principal Investments/Strategy Date Templeton Global Equity 07/06/90 Seeks long-term capital appreciation Trust (non-taxable) by investing in stocks and bonds issued by companies and governments of any nation. Templeton International 07/06/90 Seeks long-term capital appreciation Equity Trust by investing in stocks and bonds (non-taxable) issued by companies and governments outside of Canada and the United States. Templeton International 07/06/90 Seeks long-term total return by Stock Trust (taxable) investing in stocks and bonds issued by companies and governments outside of Canada and the United States. Closed-End Funds Name of Fund Inception Principal Investments/Strategy Date Templeton Emerging 06/21/94 Seeks long-term capital appreciation, Markets Appreciation by investing in equity securities and Fund (listed on the debt obligations of issuers in Toronto Stock Exchange emerging market countries. and Montreal Stock Exchange) (xix) Templeton Closed-End Funds Name of Fund Inception Principal Investments/Strategy Date Templeton China World 09/09/93 Seeks long-term capital appreciation, Fund, Inc. (listed on by investing primarily in equity the NYSE) securities of companies organized under the laws of or with a principal office in the People's Republic of China ("PRC"), Hong Kong or Taiwan collectively "Greater China", for which the principal trading market is in Greater China, and which derive at least 50% of their revenues from goods or services sold or produced in, or have at least 50% of their assets in, the PRC. Templeton Dragon Fund, 09/21/94 Seeks long-term capital appreciation Inc. (listed on the by investing at least 45% of its total NYSE and Osaka assets in the equity securities of Securities Exchange) companies (i) organized under the laws of, or with a principal office in, the PRC or Hong Kong, or the principal business activities of which are conducted in China or Hong Kong or for which the principal equity securities trading market is in China or Hong Kong, and (ii) that derive at least 50% of their revenues from goods or services sold or produced, or have at least 50% of their assets in China or Hong Kong. Templeton Emerging 04/29/94 Seeks capital appreciation by Markets Appreciation investing substantially all of its Fund, Inc. (listed on assets in a portfolio of equity the NYSE) securities and debt obligations of issuers in emerging market countries. Templeton Emerging 02/26/87 Seeks long-term capital appreciation Markets Fund, Inc. by investing primarily in emerging (listed on the NYSE and markets equity securities. Pacific Exchange "PE") Templeton Emerging 09/23/93 Seeks high current income, with a Markets Income Fund, secondary investment objective of Inc. (listed on the NYSE) capital appreciation, by investing primarily in a portfolio of high yielding debt obligations of sovereign or sovereign-related entities and private sector companies in emerging market countries. Templeton Global 11/22/88 Seeks high current income consistent Governments Income Trust with the preservation of capital (listed on the NYSE) achieved by investing at least 65% of its total assets in debt securities issued or guaranteed by governments, government agencies supranational entities, political subdivisions and other government entities of various nations throughout the world. Templeton Global Income 03/17/88 Seeks high current income, with a Fund, Inc. (listed on secondary investment objective of the NYSE and PE) capital appreciation, by investing primarily in a portfolio of fixed-income securities (including debt securities and preferred stock) of U.S. and foreign issuers. Templeton Global 05/23/90 Seeks high level of total return Utilities, Inc. (listed Merged into (income plus capital on the AMEX and the Franklin appreciation),without undue risk, by Midwest Stock Exchange) Global investing at least 65% of its total Utilities assets in equity and debt securities 03/29/96 issued by U.S. and foreign companies in the utility industries. Templeton Russia Fund, 06/15/95 Seeks long-term capital appreciation Inc. (listed on the by investing primarily in equity NYSE) securities of Russian companies. Templeton Vietnam 09/15/94 Seeks long-term capital appreciation Opportunities Fund, by investing in the equity securities Inc. (listed on the of Vietnam companies. NYSE) (xx) Templeton Funds for Institutional Investors Name of Fund Inception Principal Investments/Strategy Date Templeton Emerging 05/03/93 Seeks long-term capital growth by Markets Series investing in securities of issuers of countries having emerging markets. Templeton Foreign Equity 10/18/90 Seeks long-term capital growth by Series investing in stocks and debt obligations of companies and governments outside the United States. Templeton Growth Series 05/03/93 Seeks long-term capital growth by investing in stocks and debt obligations of companies and governments of any nation. Templeton Emerging Fixed 05/01/97 Sees long-term capital growth by Income Series investing in stocks and debt obligations of companies and governments of any nation, including developing nations. (xxi) Representative Templeton International Portfolios Name of Fund Inception Principal Investments/Strategy Date Asian Development Equity 01/22/88 Seeks to maximize overall long-term Fund return by investing, directly or indirectly, primarily in shares, convertible bonds, warrants, and other equity related securities of entities in the Asian developing countries. Templeton Asia Fund 11/14/89 Seeks to achieve long-term capital appreciation by investing primarily in equity securities of entities which either are listed on recognized exchanges in capital markets of the Asia/Oceania Region or which have their area of primary activity in those same capital markets. Templeton Emerging Asia 06/24/93 Seeks to achieve long-term capital Fund appreciation by investing primarily in equity securities of companies which are either listed on recognized exchanges in capital markets in emerging Asian countries or companies which have their primary activity in those same capital markets. Templeton Emerging 06/19/89 Seeks long term capital appreciation by Markets Investment Trust investing in companies operating or Plc. trading in emerging market countries. (Closed End) Templeton Global 08/29/88 Seeks to provide income by investing in Balanced Trust an internationally diversified portfolio of equities, fixed interest, and convertible stocks. (Unit Trust) Templeton Global Growth 08/29/88 Seeks to maximize total investment Trust return by investing in an internationally diversified portfolio of equity shares and convertible stocks. (Unit Trust) Templeton Global Income 07/13/88 Seeks to achieve high current income by Portfolio, Ltd. investing primarily in a portfolio of fixed income securities (including debt securities and preferred stock) of issuers throughout the world. Templeton Latin America 05/03/94 Seeks long-term capital growth by Investment Trust Plc. investing in companies listed on stock exchanges in Latin America or that have substantial trading interests in that region. (Closed End) Templeton Value Trust 06/08/89 Seeks maximum total investment return by investing in all geographic and economic sectors. Templeton/National Bank 04/06/93 Growth Portfolio - Seeks long term of Greece Trans-European capital growth by investing in stock Fund and debt securities of companies and governments primarily located in the European Economic Community. Income Portfolio - Seeks high current income and relative stability of principal by investing in debt securities of companies and governments located primarily in the European Economic Community. (xxii) Mutual Series Funds Name of Fund Inception Principal Investments/Strategy Date Value - Global Mutual European Fund (a 07/03/96 Seeks capital appreciation, which may series of Franklin occasionally be short-term, and income Mutual Series Funds Inc.) by investing in common and preferred stocks, as well as debt securities, including high yield, lower-rated securities, that the fund's investment manager believes are undervalued. The fund focuses primarily in European companies and may invest in small capitalization stock. Growth Mutual Discovery Fund (a 12/31/92 Seeks long-term capital appreciation by series of Franklin investing in common and preferred Mutual Series Funds Inc.) stock, including high yield, lower-rated securities of U.S. and foreign companies. Investments include securities of smaller cap companies. Growth and Income Mutual Beacon Fund (a 06/29/62 Seeks capital appreciation, which may series of Franklin occasionally be short-term, and income Mutual Series Funds Inc.) by investing in common and preferred stock, as well as debt securities, including high yield, lower-rated securities of U.S. and foreign companies that the fund's investment manager believes are undervalued. Mutual Financial 08/19/97 Seeks capital appreciation, which may Services Fund (a series occasionally be short-term, and income of Franklin Mutual by investing in common and preferred Series Funds Inc.) stock, as well as debt securities and securities convertible into common stocks (including convertible preferred and convertible debt securities) issued by companies in the financial services industry. Mutual Qualified Fund (a 09/26/80 Seeks capital appreciation, which may series of Franklin occasionally be short-term, and income Mutual Series Funds Inc.) by investing in common and preferred stock, as swell as debt securities, including high yield, lower-rated securities of U.S. and foreign companies that the fund's investment manager believes are undervalued. Mutual Shares Fund (a 07/01/49 Seeks capital appreciation, which may series of Franklin occasionally be short-term, and income Mutual Series Funds Inc.) by investing in common and preferred stock, as swell as debt securities, including high yield, lower-rated securities of U.S. and foreign companies that the fund's investment manager believes are undervalued. (xxiii) Asset Allocation Funds Name of Fund Inception Principal Investments/Strategy Date Franklin Templeton Fund Consist of three (3) series that seek Allocator Series the highest level of long-term total return that is consistent with an acceptable level of risk, achieved primarily through a professionally managed portfolio of mutual funds. Each series will seek to achieve its investment objective through active asset allocation implemented primarily with investments in a combination of Franklin Templeton mutual funds. Franklin Templeton 12/31/96 Seeks the highest level of long-term Conservative Target Fund total return that is consistent with a lower level of risk. Franklin Templeton 12/31/96 Seeks the highest level of long-term Moderate Target Fund total return that is consistent with a moderate level of risk. Franklin Templeton 12/31/96 Seeks the highest level of long-term Growth Target Fund total return that is consistent with a higher level of risk. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Information on the Company's operations in various geographic areas of the world and a breakout of business segment information is contained in Note 7 of Notes to Consolidated Financial Statements elsewhere herein. (c) NARRATIVE DESCRIPTION OF BUSINESS Investment Management and Administrative Services The Company, through its various subsidiaries described above, provides investment advisory, portfolio management, transfer agency, business management agent and administrative services to the Franklin Templeton Group. Such services are provided pursuant to agreements in effect with each of the U.S. registered Franklin Templeton Funds open- and closed-end investment companies. Comparable agreements are in effect with foreign registered Funds and with other managed accounts. The management agreements for the U.S. registered Franklin Templeton Funds continue in effect for successive annual periods, providing such continuance is specifically approved at least annually by a majority vote cast in person at a meeting of such Funds' Boards of Trustees or Directors called for that purpose, or by a vote of the holders of a majority of the Funds' outstanding voting securities. In either event, the continuance must be approved by a majority of such Funds' trustees or directors who are not parties to such agreement or interested persons of the Funds or the Company within the meaning of the Investment Company Act of 1940 (the "40 Act"). Trustees and directors of Funds' boards are hereinafter referred to as "directors". Foreign registered Funds have various termination rights and provisions. Each such agreement automatically terminates in the event of its "assignment" (as defined in the 40 Act) and either party may terminate the agreement without penalty after written notice ranging from thirty (30) to sixty (60) days. "Assignment" is defined in the 40 Act as including any direct or indirect transfer of a controlling block of voting stock. Control is defined as the power to exercise a controlling influence over the management or policies of a company. If there were to be a termination of a significant number of the management agreements between the Franklin Templeton Funds and the Company's subsidiaries or with respect to a significant portion of the Other Assets, such termination would have a material adverse impact upon the Company. To date, no management agreements of the Company or any of its subsidiaries with any of the Franklin Templeton Funds have been involuntarily terminated. Changes in the customer base of institutional investors occur on a regular basis. Since the Templeton Acquisition and the Mutual Acquisition to date, assets under management in the category of Other Assets set forth above have continued to grow. As of September 30, 1997, substantially all of the shares of the various directly and indirectly owned subsidiary companies were owned directly by the Company or subsidiaries thereof, except with respect to a limited number of foreign entities and limited minority ownership of certain other companies. As of December 1, 1997, Charles B. Johnson, Rupert H. Johnson, Jr. and R. Martin Wiskemann beneficially owned approximately 19.1%, 15.2% and 9.3%, respectively, of the outstanding voting common stock of the Company. Under the terms of the management agreements with the Franklin Templeton Funds, the various subsidiary companies described above generally supervise and implement such Funds' investment activities and provide the administrative services and facilities which are necessary to the operation of such Funds' business. Such subsidiary companies also conduct research and provide investment advisory services and, subject to and in accordance with any directions such Funds' boards may issue from time to time, such subsidiary companies determine which securities such Funds will purchase, hold or sell. In addition, such subsidiary companies take all steps necessary to implement such decisions, including the selection of brokers and dealers to execute transactions for such Funds, in accordance with detailed criteria set forth in the management agreement for such Funds and applicable law and practice. Similar services are rendered with respect to the Other Assets. Generally, the Company or a subsidiary provides and pays the salaries of personnel who serve as officers of the Franklin Templeton Funds, including the President and such other administrative personnel as are necessary to conduct such Funds' day-to-day business operations, including maintaining a Fund's portfolio records, answering shareholder inquiries, providing information, creating and publishing literature, compliance with securities regulations, maintaining accounting systems and controls, preparation of annual reports and other administrative activities. The Funds generally pay their own expenses such as legal and auditing fees, reporting and board and shareholder meeting costs, SEC and state registration and similar expenses. Generally, the Funds pay advisory companies a fee payable monthly based upon a Fund's net assets. Annual rates under the various investment management agreements range from .15% to a maximum of 2.00% and are generally reduced as net assets exceed various threshold levels. The investment management agreements permit advisory companies to act as an advisor to more than one Fund so long as such companies' ability to render services to each of such Funds is not impaired, and so long as purchases and sales appropriate for all such Funds are made on a proportionate or other equitable basis. Management of the Company and the directors of the Funds regularly review the Fund fee structures in light of Fund performance, the level and range of services provided, industry conditions and other relevant factors. Advisory fees are generally waived or voluntarily reduced when a new Fund is first established and then increased to contractual levels with the growth in net assets. The investment advisory services provided by such advisory companies include fundamental investment research and valuation analyses, encompassing original country, industry and company research, company visits and inspections, and the utilization of such sources as company public records and activities, management interviews, company prepared information, and other publicly available information, as well as analyses of suppliers, customers and competitors. In addition, research services provided by brokerage firms are used to support other research. In this regard, some brokerage business from the Funds is allocated in recognition of value-added research services received. Fixed-income research includes economic analysis, credit analysis and value analysis. The economic analysis function monitors and evaluates numerous factors that influence the supply and demand for credit on a worldwide basis. Credit analysts research the credit worthiness of debt issuers and their individual short-term and long-term debt issues. Yield spread differential analysis reviews the relative value of market sectors that represent buying and selling opportunities. Additional shareholder administrative services are provided by FTIS, which receives administrative fees from the Funds for providing shareholder record keeping services and for acting as transfer and dividend-paying agent for the Funds. As of September 30, 1997, such compensation was based upon an annual fee per shareholder account, ranging between $14.54 and $18.00, a pro-rated portion of which was paid monthly. Distribution and Marketing Distributors acts as the principal underwriter and distributor of shares of the open-end Franklin Templeton Funds. Pursuant to underwriting agreements with the Funds, Distributors generally pays the expenses of distribution of Fund shares. Although the Company does significant advertising and sales promotions through media sources, Fund shares are sold primarily through a large network of independent participating securities dealers. As of September 30, 1997, approximately 3,772 local, regional and national securities brokerage firms offered shares of the Franklin Templeton Funds for sale to the investing public. The Company has approximately sixty-five (65) "wholesalers" who interface with the broker-dealer community. Fund shares are offered to individual investors, qualified groups, trustees, IRA and profit sharing or money purchase plans, employee benefit plans, trust companies, bank trust departments and institutional investors. In addition, various management and advisory services, commingled and pooled accounts, wrap fee arrangements and various other private investment management services are offered to certain private and institutional investors. Broker-dealers are paid various fees for services in matching investors with Funds whose investment objectives match such investors' goals. Broker-dealers also assist in explaining the operations of the Funds, in servicing the account and in various other distribution services. Most of the U.S. based Franklin Templeton Funds have a multi-class share structure whereby Class I shares are sold with a maximum front-end sales charge which ranges from a low of 1.50% to a high of 5.75%. Reductions in the maximum sales charges may be available depending upon the amount invested and the type of investor. Class II shares, which were introduced during the 1995 fiscal year, have a hybrid, level load structure combining aspects of conventional front-end, back-end and level-load pricing. Class II shares are subject to an initial sales charge of 1% paid immediately by the investor. Also, in connection with the distribution of Class II shares, a principal distribution subsidiary of the Company has in the past paid, and may in the future pay, an additional 1% to the broker-dealer. However, Class II shares are generally subject to a 1% contingent deferred sales charge, charged to the investor and returned to the Company, on redemptions within eighteen (18) months of purchase. See "Risk Factors and Cautionary Statements". Class II shares are also subject to higher on-going Rule 12b-1 fees, as described below. The multi-class structure was adopted to provide investors greater payment alternatives in implementing their investment programs. The Company's money market and institutional funds are sold to investors without a sales charge. Most of the U.S. registered Franklin Templeton funds, with the exception of certain Franklin Templeton money market funds, have also adopted distribution plans (the "Plans") under Rule 12b-1 promulgated under the 40 Act ("Rule 12b-1"). The Plans are established for an initial term of one (1) year and, thereafter, must be approved annually by the Fund boards and by a majority of disinterested directors. All such Plans are subject to termination at any time by a majority vote of the disinterested directors or by the Funds' shareholders. The Plans permit the Funds to bear certain expenses relating to the distribution of their shares. Fees under the Plans for Class I shares range in amount from a low of .10% per annum of average daily net assets to a high of .50% while Class II share fees range between .65% to 1%. The implementation of the Plans provided for a lower fee on Class I shares acquired prior to the adoption of such Plans. Fees from the Plans are paid primarily to third party dealers who provide service to their shareholder accounts, as well as engage in distribution activities. Distributors may also receive reimbursement from the Funds for expenses involved in distributing the Funds, such as advertising, and reimbursement for a 1% payment to dealers on sales of Class II shares, subject to the Plans' limitations on amounts. As of September 30, 1997, there were approximately 7.4 million shareholder accounts in the worldwide Franklin Templeton Group of Funds. Revenues As shown in the Consolidated Financial Statements, the Company's revenues are derived primarily from its investment management activities. Total operating revenues are set forth in the table below. Revenues from investment management fees have comprised approximately 60%, 58% and 58% in 1997, 1996 and 1995, respectively, of total operating revenue for each of the three (3) fiscal years reported. Underwriting commissions, from gross sales and reinvestments of products subject to commissions contributed to revenues approximately 34%, 36% and 36% in 1997, 1996 and 1995 respectively. Shareholder servicing fees from mutual fund activities contributed 6%, 6% and 5% in 1997, 1996 and 1995 respectively. See "MD&A--Operating Revenues". Other Financial Services The Company's consumer lending, dealer auto loan and real estate businesses do not as yet contribute significantly to either the revenues or the net income of the Company. Franklin Bank's operations are limited by national banking laws and no immediate significant increase in revenues is anticipated. The real estate operations have incurred net losses since inception and the Company does not anticipate any immediate improvement in this line of business. The Company's dealer auto loan business required the infusion of significant working capital during fiscal 1996 and 1995, either in the form of inter-company loans or by contributions to the capital of FCC by the Company. During portions of that period, the Company experienced an increase in delinquency rates in such loans and, in response, expanded its auto loan collection efforts and tightened its underwriting policies. There was a significant reduction in gross charge-offs and delinquency rates during fiscal 1997. A more detailed analysis of the financial effects of loan losses and delinquency rates, as well as the funding of this activity, is contained in the "MD&A--Operating Revenues". Regulatory Considerations Virtually all aspects of the Company's businesses are subject to various foreign, federal and state laws and regulations. As discussed above, the Company and a number of its subsidiaries are registered with various foreign, federal and state governmental agencies. Foreign, federal and state laws and regulations grant such supervisory agencies broad administrative powers, including the power to limit or restrict the Company from carrying on its business if it fails to comply with such laws and regulations. In such event, the possible sanctions which may be imposed include the suspension of individual employees, limitations on the Company's (or a subsidiary's) engaging in business for specified periods of time, the revocation of the investment advisor or broker-dealer registrations of subsidiaries and censures and fines. The Company's officers, directors and employees may from time to time own securities which are also held by the Funds. The Company's internal policies with respect to individual investments by certain employees, including officers and directors who are employed by the Company, require prior clearance and reporting of some transactions and restrict certain transactions so as to reduce the possibility of conflicts of interest. To the extent that existing or future regulations affecting the sale of Fund shares or other investment products or their investment strategies cause or contribute to reduced sales of Fund shares or investment products or impair the investment performance of the Funds or such other investment products, the Company's aggregate assets under management and its revenues might be adversely affected. Changes in regulations affecting free movement of international currencies might also adversely affect the Company. Since 1993, the NASD Conduct Rules have limited the amount of aggregate sales charges which may be paid in connection with the purchase and holding of investment company shares sold through brokers. The effect of the rule might be to limit the amount of fees that could be paid pursuant to a fund's 12b-1 Plan in a situation where a fund has no, or limited, new sales for a prolonged period of time. None of the Franklin Templeton funds are in, or close to, that situation at the present time. Technology The Company established a dedicated Year 2000 Project Team in 1996 to assess and modify all systems in its computing environment and is currently modifying or replacing all non-Year-2000-compliant systems. The Company is also upgrading its desktop hardware and software to support the next generation of more sophisticated business applications. Communication links were also upgraded in 1997 to support the Company's global offices, as well as to provide dedicated links to key business partners. The Company will continue to assess the impact of Year 2000 issues on its global computer systems and applications. See "MD&A--Operating Expenses". Competition The financial services industry is highly competitive and has increasingly become a global industry. As a result, comparative market data is not readily available. There are over 6,600 open-end investment companies of varying sizes, investment policies and objectives whose shares are being offered to the public in the United States. Due to the Company's international presence and varied product mix, it is difficult to assess the Company's market position relative to other investment managers on a worldwide basis, but the Company believes that it is one of the more widely diversified investment managers in the United States. The Company believes that its strong equity and fixed-income base coupled with its strong global presence will serve its competitive needs well over time. The Company continues its focus on service to customers, performance on investments and extensive marketing activities with its strong broker-dealer and other financial institution distribution network. The Company is in competition with the financial services and other investment alternatives offered by stock brokerage and investment banking firms, insurance companies, banks, savings and loan associations and other financial institutions. Many of these competitors have substantially greater resources than the Company. Although the banking industry continues to expand its sponsorship of proprietary funds distributed through third party distributors, the Company has and continues to actively pursue sales relationships with banks and insurance companies to broaden its distribution network in response to such competitive pressures. As investor interest in the mutual fund industry has increased, competitive pressures have increased on sales charges of broker-dealer distributed funds. The Company believes that, although this trend will continue, a significant portion of the investing public still relies on the services of the broker-dealer community, particularly during weaker market conditions. However, in response to competitive pressures or for other similar reasons, the Company might be forced to lower or further adjust sales charges, substantially all of which are currently paid to broker-dealers and other financial intermediaries. The reduction in such sales charges could make the sale of shares of the Franklin Templeton Funds somewhat less attractive to the broker-dealer community, which could in turn have a material adverse effect on the Company's revenues. The Company believes that it is well positioned to deal with such changes in marketing trends as a result of its already extensive advertising activities and broad based marketplace recognition. The Company advertises the Franklin Templeton Group in major national financial publications, as well as on radio and television to promote name recognition and to assist its distribution network. Such activities included purchasing network and cable programming, sponsorship of sporting events, such as the "Franklin Templeton Shark Shoot-Out", sponsorship of The Nightly Business Report on public television, and extensive newspaper and magazine advertising. Further aspects of competition are discussed below under "Risk Factors and Cautionary Statements". Asset Mix As discussed above, the Company's revenues are derived primarily from investment management activities. Broadly speaking, the direction and amount of change in the net assets of the Funds are dependent upon two factors: (1) the level of sales of shares of the funds as compared to redemptions of shares of the funds; and (2) the increase or decrease in the market value of the securities owned by the Funds. Although the Company believes that it has substantially benefited from the Templeton and Mutual Acquisitions, the resultant shift in asset mix from primarily a fixed-income base to a combination of fixed-income and global equities has increased the possibility of volatility in the Company's managed portfolios due to the increased percentage of equity investments managed. In addition, the Company derives higher revenues and income from its equity assets and therefore a future shift in assets from equity to fixed-income would have an adverse impact on the Company's income and revenues. Despite this potential for volatility, management believes that the Franklin Templeton Group is more competitive as a result of the greater diversity of global investments and product mix available to its customers. Market values are affected by many things, including the general condition of national and world economics and the direction and volume of changes in interest rates and/or inflation rates. Fluctuations in interest rates and in the yield curve will have an effect on fixed-income assets under management as well as on the flow of monies to and from fixed-income funds and, therefore, on the Company's revenues from such funds. In addition, the impact of changes in the equity marketplace may significantly affect assets under management. The effects of the foregoing factors on equity funds and fixed-income funds often operate inversely and it is, therefore, difficult to predict the net effect of any particular set of conditions on the level of assets under management. Although the Company and its assets under management are subject to political and currency risks, due to its international activities, as is discussed in more detail in "Risk Factors and Cautionary Statements" and "MD&A--Liquidity and Capital Resources", its exposure to fluctuations in foreign currency markets and to fixed-asset value depreciation is limited. Forward-Looking Statements When used in this Form 10-K and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including those discussed under the caption "Risk Factors and Cautionary Statements" below, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed below could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company will not undertake and specifically declines any obligation to release publicly the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Risk Factors and Cautionary Statements The Company's revenues and income are derived primarily from the management of a variety of financial services products. The financial services industry is highly competitive, as discussed above. Such competition could negatively impact the Company's market share, which could impact assets under management, from which the bulk of the Company's revenues and income arise. Sales of mutual fund shares and other financial services products can also be negatively affected by adverse general securities market conditions, burdensome governmental regulations and recessionary global economic conditions. In addition, securities dealers, whose large retail distribution systems play an important role in the sale of shares of the Franklin, Templeton and Mutual Series funds, also sponsor competing proprietary mutual funds. To the extent that these firms limit or restrict the sale of Franklin, Templeton or Mutual Series funds shares through their brokerage systems in favor of their proprietary mutual funds, future sales may be negatively impacted and the Company's revenues might be adversely affected. In addition, as the number of competitors in the investment management industry increases, greater demands are placed on existing distribution channels, which may cause distribution costs to increase. The Company's assets under management include a significant number of global equities, which increase the volatility of the Company's managed portfolios and its revenue and income streams. In addition, the shift in the Company's asset mix from primarily fixed-income to a combination of fixed-income and global equities has increased the possibility of volatility in the Company's managed portfolios due to the increased percentage of equity investments managed. The securities market is currently experiencing the longest "bull market" in history with unprecedented levels of investor demand for equity securities. As a result of this financial environment, the Company's equity holdings have increased in value, which has contributed to increased assets under management and revenues. The valuation of the equity portion of the Company's assets under management is especially subject to the securities market, which is cyclical and subject to periodic corrections. A downturn in this financial market would have an adverse effect on the value of the equity portion of the Company's assets under management which in turn would have a negative effect on the Company's revenues. In addition, the Company derives higher revenues and income from its equity assets and therefore a future shift in assets from equity to fixed-income would have an adverse impact on the Company's income and revenues. Market values are affected by many things, including the general condition of national and world economics and the direction and volume of changes in interest rates and/or inflation rates. A significant portion of the Company's assets under management are fixed-income securities. Fluctuations in interest rates and in the yield curve will have an effect on fixed-income assets under management as well as on the flow of monies to and from fixed-income funds and, therefore, on the Company's revenues from such funds. In addition, the impact of changes in the equity marketplace may significantly affect assets under management. The effects of the foregoing factors on equity funds and fixed-income funds often operate inversely and it is, therefore, difficult to predict the net effect of any particular set of conditions on the level of assets under management. Certain portions of the Company's managed portfolios are invested in various securities of corporations located or doing business in developing regions of the world commonly known as emerging markets. These portfolios and the Company's revenues derived from the management of such portfolios are subject to significant risks of loss from unfavorable political and diplomatic developments, currency fluctuations, social instability, changes in governmental policies, expropriation, nationalization, confiscation of assets and changes in legislation relating to foreign ownership. Foreign trading markets, particularly in some emerging market countries are often smaller, less liquid, less regulated and significantly more volatile. A number of mutual fund sponsors presently market their funds without sales charges. As investor interest in the mutual fund industry has increased, competitive pressures have increased on sales charges of broker-dealer distributed funds. In response to such competitive pressures, the Company might be forced to lower or further adjust sales charges, substantially all of which are currently paid to broker-dealers and other financial intermediaries. The reduction in such sales charges could make the sale of shares of the Franklin, Templeton and Mutual Series funds less attractive to the broker-dealer community, which could in turn have a material adverse effect on the Company's revenues. In the alternative, the Company might be required to pay additional fees, commissions or charges in connection with the distribution of its shares which could have a negative effect on the Company's earnings. Sales of Class II shares have increased relative to the Company's overall sales, resulting in higher distribution expenses, which have caused distribution expenses to exceed distribution revenues for certain products and put increasing pressure on the Company's profit margins. If the Company is unable to fund commissions on Class II shares using existing cash flow and debt facilities, additional funding will be necessary. Past sales of Class II shares are not necessarily indicative of future sales volume, and future sales of Class II shares may be lower or higher as a result of changes in investor demand or lessened or unsuccessful sales efforts by the Company. The Company is in competition with the financial services and other investment alternatives offered by stock brokerage and investment banking firms, insurance companies, banks, savings and loan associations and other financial institutions. Many of these competitors have substantially greater resources than the Company. In addition, there has been a trend of consolidation in the mutual fund industry which has resulted in stronger competitors. The banking industry also continues to expand its sponsorship of proprietary funds distributed through third party distributors. To the extent that banks limit or restrict the sale of Franklin, Templeton or Mutual Series shares through their distribution systems in favor of their proprietary mutual funds, assets under management might decline and the Company's revenues might be adversely affected. The Company is unable to predict at this time whether the Taxpayer Relief Act of 1997 will have a positive or a negative effect on the Company's portfolios or revenues. The Company's real estate activities are subject to fluctuations in the real estate market place as well as to significant competition from companies with much larger real estate portfolios giving them significantly greater economies of scale. The Company's auto loan receivables business and credit card receivable activities are subject to significant fluctuations in those consumer market places as well as to significant competition from companies with much larger receivable portfolios. In addition, certain of the Company's competitors are engaged in the financing of auto loans in connection with a much larger automobile manufacturing businesses and may at times provide loans at significantly below market interest rates in order to further the sale of automobiles. The consumer loan market is highly competitive. The Company competes with many types of institutions including banks, finance companies, credit unions and the finance subsidiaries of large automobile manufacturers. Interest rates the Company can charge and, therefore, its yields vary based on this competitive environment. The Company is reliant on its relationships with various automobile dealers and this relationship is highly dependent on the rates and service that the Company provides. There is no guarantee that in this competitive environment the Company can maintain its relationships with these dealers. Auto loan and credit card portfolio losses can also be influenced significantly by trends in the economy and credit markets which negatively impact borrowers' ability to repay loans. Item 2. Properties General As of September 30, 1997, the Company leases offices and facilities in ten (10) locations in the immediate vicinity of its principal executive and administrative offices located at 777 Mariners Island Boulevard, San Mateo, California. In addition, the Company owns six (6) buildings near Sacramento, California, as well as two (2) buildings in St. Petersburg, Florida, one (1) building in Phoenix, Arizona, two (2) buildings in Nassau, Bahamas as well as substantial space in high rise office buildings in Argentina and Singapore. Certain properties of the Company were under construction during fiscal 1997 as described below. Since the Company is operated on a unified basis, corporate activities, fund related activities, accounting operations, sales, real estate and banking operations, auto loans and credit cards, management information system activities, publishing and printing operations, shareholder service operations and other business activities and operations take place in a variety of such locations. The Company or its subsidiaries also lease office space in Florida, New York, and Utah and in several other states. In addition, the Company or its subsidiaries also lease office space in Australia, Bermuda, Brazil, Canada, Dubai, England, France, Germany, Hong Kong, India, Italy, Japan, Luxembourg, Poland, Russia, Scotland, South Africa, Taiwan, and Vietnam. Property Description Leased As of September 30, 1997, the Company leased properties at the locations set forth below: Approximate Approximate Base Expiration Location Square Footage Monthly Rental Date 777 Mariners Island Boulevard San Mateo, CA 94404 177,000 $443,000 February 2001 1147 & 1149 Chess Drive Foster City, CA 94404 121,000 $108,000 June 2000 500 East Broward Boulevard Ft. Lauderdale, FL 33394 104,000 $175,000 December 2000 1810 Gateway Drive San Mateo, CA 94404 49,000 $89,000 June 2000 2 Waters Drive San Mateo, CA 94404 49,000 $70,000 July 1999 1950 Elkhorn Court San Mateo, CA 94403 37,000 $43,000 July 2001 901 & 951 Mariners Island Between March Boulevard 34,000 $62,000 1999 & San Mateo, CA 94404 April 2000 1850 Gateway Drive San Mateo, CA 94404 19,000 $34,000 July 2000 1400 Fashion Island Boulevard San Mateo, CA 94404 14,000 $41,000 June 2002 Other U.S. Locations 68,000 -- -- Foreign Operations 147,000 -- -- Owned The Company maintains a customer service facility in the property that it owns at 10600 White Rock Road, Rancho Cordova, California. The Company occupies 75,000 square feet in this property and has leased out 46,000 square feet to a third party until February 2000 at an approximate monthly rental of $69,000. The Company owns an additional twenty-seven (27) acres of adjoining land on which it has constructed two (2) office buildings of approximately 67,000 square feet each and a data center/warehouse facility of approximately 162,000 square feet. The Company owns six (6) facilities in St. Petersburg, Florida, including an approximate 90,000 square foot office building and an approximate 117,000 square foot facility devoted to a computer data center, training, warehouse and mailing operations. Four (4) new office buildings of approximately 70,000 square feet each were under construction during fiscal 1997 and were completed in November 1997. Shareholder servicing activities have been relocated to this new 280,000 square foot development. The Company plans to develop additional facilities at this site in the future. The Company also owns two (2) office buildings in Nassau, Bahamas, of approximately 14,000 square feet and approximately 25,000 square feet, respectively as well as a nearby condominium residence. Other The Company is the sole limited partner with a 60% partnership interest in Mariner Partners, a California limited partnership formed in 1984 to develop, operate and hold the property occupied by the Company at 777 Mariners Island Boulevard. Mariner Partners obtained thirty year non-recourse financing for the property from Metropolitan Life Insurance Company at an interest rate of 8.10% per annum, due November 2002. The principal balance outstanding as of September 30, 1997, was $24.9 million. Property Changes The Company entered into two (2) separate contracts, totaling approximately $13.8 million, in May 1997 and September 1997, respectively, for the design and construction of Buildings C and D in Rancho Cordova. Construction of Building C, a 74,000 square foot office building, was completed in November 1997 and Building D, a 95,000 square foot office building, is expected to be completed in August 1998. During fiscal 1997, the Company also owned an office building of approximately 70,000 square feet at 1800 Gateway Drive, San Mateo, California. In October 1997, the Company sold, but continued to occupy it pursuant to a lease. The lease provides for base monthly rental payments of $199,500 and terminates in July 2002. The Company has the right to terminate the lease without penalty at any time after July 2000. On December 12, 1997, the Board of Directors of the Company approved the previously-executed contract to acquire approximately thirty-three (33) acres of land ("Bay Meadows") located in San Mateo, California for a total estimated purchase price of approximately $21.6 million. A subsidiary of the Company, PRI, executed a contract in May 1995 to purchase the property, which contract was subsequently assigned to FRI. The Bay Meadows purchase was subject to receipt of governmental regulatory approvals, which were obtained in April 1997. As a result, a related escrow deposit of $850,000 made by the Company became non-refundable. As a condition to approval of the Company's planned use of the Bay Meadows property, the City of San Mateo will require construction of roads, modification to a freeway interchange, and other off-site improvements. The Company is obligated to reimburse the seller of Bay Meadows for a portion of the cost of certain of these off-site improvements. Presently, this reimbursement is expected to approximate $7.9 million. Escrow on the purchase is scheduled to close in April 1998, at which time the Company is obligated to make its first payment for off-site improvements. After receiving the necessary governmental approvals for purchase of the Bay Meadows property, the Company executed a design build contract in July 1997 for the design and construction of a new 900,000 square foot campus at Bay Meadows. The total contract amount will not be final until after the project is completely designed and building permits issued by the City of San Mateo, California. Item 3. Pending Legal Proceedings There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party, or of which any of their property is the subject; nor are any such proceedings known to be contemplated by any governmental authorities. Item 4. Submission of Matters to a Vote of Security Owners During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of security holders. Executive Officers of Registrant The following information on the executive officers of the Company is given as of December 1, 1997: Name Age Principal Occupation for the Past Five Years - -------------------------------------------------------------------------------- Charles B. Johnson 64 President, Chief Executive Officer and Director of the Company; Chairman and Director, Franklin Advisers, Inc. and Franklin/Templeton Distributors, Inc.; Director, Templeton Worldwide, Inc., Franklin Bank, Franklin/Templeton Investor Services, Inc., Franklin Mutual Advisers, Inc. and General Host Corporation; officer and/or director, as the case may be, of most other principal U.S. subsidiaries of the Company; officer and/or director or trustee, as the case may be, of 54 of the investment companies in the Franklin Templeton Group of Funds. Harmon E. Burns 52 Executive Vice President, Director and Secretary of the Company; Executive Vice President and Director of Franklin/Templeton Distributors, Inc., and Franklin Templeton Services, Inc.; Executive Vice President of Franklin Advisers, Inc.; Director, Templeton Worldwide, Inc., Franklin/Templeton Investor Services, Inc., and Franklin Mutual Advisers, Inc.; officer and/or director, as the case may be, of most other principal U.S. subsidiaries of the Company; officer and/or director or trustee, as the case may be, of 58 of the investment companies in the Franklin Templeton Group of Funds. Rupert H. Johnson, Jr. 57 Executive Vice President and Director of the Company; Director and President, Franklin Advisers, Inc.; Director and Executive Vice President, Franklin/Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services, Inc., Templeton Worldwide, Inc., Franklin Bank and Franklin Mutual Advisers, Inc.; officer and/or director or trustee, as the case may be, of most other principal U.S. subsidiaries of the Company; and of 58 of the investment companies in the Franklin Templeton Group of Funds. Martin L. Flanagan 37 Senior Vice President, Chief Financial Officer of the Company; President and Chief Executive Officer of Franklin Templeton Services, Inc., Senior Vice President of Franklin Advisers, Inc., Executive Vice President and Director of Templeton Worldwide, Inc.; officer of most of the subsidiaries of the Company since March 1993; and officer and/or director, trustee or managing partner, as the case may be, of most other principal U.S. subsidiaries of the Company; and of 58 of the investment companies in the Franklin Templeton Group of Funds. Prior to 1993, employed by various Templeton entities. Deborah R. Gatzek 49 Senior Vice President of the Company since March 1990; General Counsel since January 1996; Vice President of the Company from, 1986 to March 1990; Senior Vice President, Franklin/Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Vice President, Franklin Advisers, Inc.; officer of most other principal U.S. subsidiaries of the Company; and officer of 58 of the investment companies in the Franklin Templeton Group of Funds. Charles E. Johnson 41 Senior Vice President and Director of the Company; President and Director, Templeton Worldwide, Inc., Director, Franklin Mutual Advisers, Inc.; President, CEO and Director, Franklin Institutional Services Corporation; Senior Vice President, Franklin/Templeton Distributors Inc.; Chairman, Director, Franklin Agency, Inc.; Vice President, Franklin Advisers, Inc.; Chairman and Director, Templeton Investment Counsel, Inc.; officer and/or director, as the case may be, of other U.S. and international subsidiaries of the Company; officer and/or director or trustee, as the case may be, of 36 of the investment companies in the Franklin Templeton Group of Funds. William J. Lippman 72 Senior Vice President of the Company since March 1990; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee of seven of the investment companies in the Franklin Group of Funds. Until June 1988, President, Chief Executive Officer, and Director of L.F. Rothschild Fund Management, Inc., Director of L.F. Rothschild Asset Management, Inc., Administrative Managing Director and Director of L.F. Rothschild & Co., Incorporated. Jennifer J. Bolt 33 Vice President of the Company since June 1994; Executive Vice President, Franklin Bank since August 1993; President and Director, Franklin Capital Corporation, since November 1993; employed by the Company in various other capacities for more than the past five (5) years. Donna S. Ikeda 41 Vice President since October 1993; re-joined the Company in August 1993. Previously employed from 1982 to 1990 as Director of Human Resources and also held position as Manager/AVP of Shareholder Services, Retirement Plan Phone Service and Customer New Accounts. From 1990 until August 1993, Vice President, Human Resources for G.T. Capital Management, Inc. and G.T. Global Financial Services, Inc., mutual fund management and financial services companies. Gregory E. Johnson 36 Vice President of the Company since June 1994; President, Franklin/Templeton Distributors, Inc. since September 1994; Vice President, Franklin Advisers, Inc. Prior to that time, Senior Vice President and Assistant National Sales Manager, Franklin/Templeton Distributors, Inc.; Employee of Franklin Resources, Inc. and its subsidiaries in administrative and portfolio management capacities since January 1986; officer of one investment company in the Franklin Group of Funds. Gordon F. Jones 50 Vice President and Chief Information Officer of the Company since March 1995. From March 1990 to March 1995, Vice President of Novell, Inc., a worldwide network systems company; Vice President and Chief Information Officer of Novell, Inc. from March 1994 to March 1995. Leslie M. Kratter 52 Vice President of the Company since March 1993. Employed by the Company since January 1992. Secretary of Franklin Advisers, Inc., Franklin/Templeton Distributors, Inc., Templeton Worldwide, Inc., and a number of the Company's subsidiaries. Charles R. Sims 36 Treasurer of the Company. Employed by the Company since 1989. From August 1991 to October 1997, Vice President and Chief Financial Officer and from February 1992 to October 1997, Director of Canadian operations. Kenneth A. Lewis 36 Vice President, Corporate Controller and Chief Accounting Officer of the Company, Senior Vice President and Controller of Templeton Worldwide, Inc., and an officer of several other U.S. subsidiaries of the Company. Prior to the Templeton Acquisition, employed by various Templeton entities. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Peter M. Sacerdote, a director of the Company, is a brother-in-law of Charles B. Johnson and Rupert H. Johnson, Jr. Charles E. Johnson is the son of Charles B. Johnson and the nephew of Rupert H. Johnson, Jr. and Peter Sacerdote. Gregory E. Johnson is the son of Charles B. Johnson, the nephew of Rupert H. Johnson, Jr. and Peter Sacerdote and the brother of Jennifer Bolt and Charles E. Johnson. Jennifer Bolt is the daughter of Charles B. Johnson, the niece of Rupert H. Johnson, Jr. and Peter Sacerdote, and the sister of Charles E. Johnson and Gregory E. Johnson. Leslie M. Kratter is the spouse of Deborah R. Gatzek. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information About the Company's Common Stock The Company's common stock is traded on the New York Stock Exchange ("NYSE") and the Pacific Exchange under the ticker symbol BEN and the London Stock Exchange under the ticker symbol FKR. On September 30, 1997, the closing price of the Company's common stock on the NYSE was $93 1/8 per share. At December 1, 1997, there were approximately 2,500 shareholders of record. In addition, the Company estimates that there are approximately 22,000 beneficial shareholders whose shares are held in street name. The following table sets forth the high and low sales prices for the Company's common stock from the NYSE Composite Tape. All sales prices have been adjusted retroactively to reflect the Stock Dividend. 1997 Fiscal Year 1996 Fiscal Year Quarter High Low High Low - -------------------------------------------------------------------------------- October-December 49 3/4 43 1/12 38 2/3 31 1/16 January-March 71 7/8 48 3/4 39 5/12 30 11/12 April-June 74 1/4 51 7/8 41 1/6 35 3/4 July-September 93 9/16 72 5/8 45 3/4 34 1/2 The Company declared dividends of $0.34 per share in fiscal 1997 and $0.29 per share in fiscal 1996. The Company expects to continue paying dividends on a quarterly basis to common stockholders depending upon earnings and other relevant factors. Item 6. Selected Financial Highlights IN MILLIONS, EXCEPT ASSETS UNDER MANAGEMENT AND PER SHARE AMOUNTS AS OF AND FOR THE YEARS 1997 1996 1995 1994 1993 ENDED SEPTEMBER 30, - -------------------------------------------------------------------------------- Summary of Operations: Operating revenues** $2,163.3 $1,519.5 $1,253.3 $1,340.8 $1,175.5 Net income $ 434.1 $ 314.7 $ 268.9 $ 251.3 $ 175.5 Financial Data: Total assets $3,095.2 $2,374.2 $2,244.7 $1,968.8 $1,581.5 Long-term debt $ 493.2 $ 399.5 $ 382.4 $ 383.7 $ 454.8 Stockholders' equity $1,854.2 $1,400.6 $1,161.0 $ 930.8 $ 720.4 Assets Under Management (IN BILLIONS) $ 226.0 $ 151.6 $ 130.8 $ 118.2 $ 107.5 Per Common Share* Earnings Primary $ 3.43 $ 2.52 $ 2.16 $ 2.00 $ 1.41 Fully diluted $ 3.43 $ 2.50 $ 2.13 $ 2.00 $ 1.40 Cash dividends $ 0.34 $ 0.29 $ 0.27 $ 0.21 $ 0.19 Book value $ 14.71 $ 11.63 $ 9.56 $ 7.60 $ 5.85 * Prior year amounts have been restated to reflect the Stock Dividend. ** Prior year amounts have been restated to correspond to current year treatment. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. GENERAL Franklin Resources, Inc. and its consolidated subsidiaries (the "Company") derive substantially all of their revenues and net income from providing investment management, administration, distribution and related services to the Franklin, Templeton and Mutual Series funds, institutional accounts and other investment products (collectively, "The Franklin Templeton Group"). The Company has a diversified base of assets under management and a full range of investment products and services to meet the needs of most individuals and institutions. The Company offers its services in most global markets including Asia, Australia, Canada, the Caribbean, Continental Europe, South Africa, South America, the United Kingdom and the United States. At September 30, 1997, the Company had offices in over 20 different nations, employing over 6,400 people. On November 1, 1996, the Company acquired the assets and liabilities of Heine Securities Corporation ("Heine"), the former investment manager to Mutual Series Fund Inc., other funds and private accounts ("Mutual"). This transaction ("the Acquisition") had an aggregate value of approximately $616 million. Heine received $551 million in cash and 1.1 million shares of the Company's common stock (before the effect of the three-for-two stock dividend paid January 15, 1997) that may not be sold for two years from the date of the Acquisition and that are subject to other restrictions. ASSETS UNDER MANAGEMENT BY INVESTMENT OBJECTIVE, IN BILLIONS AS OF SEPTEMBER 30, 1997 1996 1995 - -------------------------------------------------------------------------------- Franklin Templeton Group FIXED-INCOME Tax-free $45.8 $42.5 $40.5 U.S. government (primarily GNMAs) 15.1 15.8 16.3 Taxable and tax-free money funds 3.7 3.7 3.6 Global/international 4.0 3.2 3.2 - -------------------------------------------------------------------------------- Total fixed-income 68.6 65.2 63.6 - -------------------------------------------------------------------------------- EQUITY Global/international 104.3 67.2 51.5 U.S. 53.1 19.2 15.7 -------------------------------------------------------------------------- Total equity 157.4 86.4 67.2 - -------------------------------------------------------------------------------- Total Franklin Templeton Group $226.0 $151.6 $130.8 - -------------------------------------------------------------------------------- BY INVESTMENT VEHICLE, IN BILLIONS AS OF SEPTEMBER 30, 1997 1996 1995 - -------------------------------------------------------------------------------- Franklin Templeton Group MUTUAL FUNDS Open-end $175.1 $113.7 $100.1 Closed-end 6.6 5.7 5.1 Annuities 13.6 10.9 8.8 -------------------------------------------------------------------------- Total mutual funds 195.3 130.3 114.0 -------------------------------------------------------------------------- Institutional trusts and managed accounts 30.7 21.3 16.8 - -------------------------------------------------------------------------------- Total Franklin Templeton Group $226.0 $151.6 $130.8 - -------------------------------------------------------------------------------- The Company's revenues are derived largely from the amount and composition of assets under its management. Assets under the Company's management grew by $74.4 billion (49%) and $20.8 billion (16%) in fiscal 1997 and 1996, respectively. Equity assets grew at the highest rate: 82% and 29%, respectively, and represented 70% and 57% of total assets under management during these years. The proportionately higher growth rate of equity assets in 1997 was related to the effects of increased net sales and market appreciation relative to other categories. The addition of Mutual contributed $28.4 billion to the 1997 growth in this category. Institutional assets, which are comprised predominantly of global/international equity portfolios, grew 44% and 27% in 1997 and 1996, respectively. Fixed-income assets grew 5% and 3% in 1997 and 1996, respectively. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, amounts included in the Consolidated Statements of Income of Franklin Resources, Inc. and the percentage change in those amounts from period to period. Franklin Resources, Inc. Consolidated Income Statement Data IN MILLIONS, EXCEPT PER SHARE DATA PERCENT INCREASE - -------------------------------------------------------------------------------- FOR THE YEARS ENDED SEPTEMBER 30, 1997 1996 1995 1997 1996 - -------------------------------------------------------------------------------- OPERATING REVENUES Investment management fees $1,292.5 $880.8 $726.8 47% 21% Underwriting and distribution fees 735.1 545.0 449.1 35% 21% Shareholder servicing fees 124.9 88.7 68.7 41% 29% Other, net 10.8 5.0 8.7 116% (43)% - ------------------------------------------------------------------------------- Total operating revenues 2,163.3 1,519.5 1,253.3 42% 21% - -------------------------------------------------------------------------------- OPERATING EXPENSES Underwriting and distribution 712.3 518.1 406.1 37% 28% Compensation and benefits 447.2 325.1 260.1 38% 25% Information systems, technology and occupancy 135.4 88.5 73.7 53% 20% Advertising and promotion 96.6 71.7 70.1 35% 2% Amortization of deferred sales commissions 59.5 24.2 5.9 146% 310% Amortization of intangible assets 34.3 18.3 18.3 87% -- Other 86.5 56.5 51.0 53% 11% - -------------------------------------------------------------------------------- Total operating expenses 1,571.8 1,102.4 885.2 43% 25% - -------------------------------------------------------------------------------- Operating income 591.5 417.1 368.1 42% 13% OTHER INCOME (EXPENSES) Investment and other income 49.5 50.4 29.8 (2)% 69% Interest expense (25.3) (11.3) (11.2) 124% 1% - ------------------------------------------------------------------------------ Other income, net 24.2 39.1 18.6 (38)% 110% - -------------------------------------------------------------------------------- Income before taxes on income 615.7 456.2 386.7 35% 18% Taxes on income 181.6 141.5 117.8 28% 20% - ------------------------------------------------------------------------------ Net income $434.1 $314.7 $268.9 38% 17% ============================================================================== OPERATING PROFIT MARGIN 27% 27% 29% -- -- Earnings per share Primary $3.43 $2.52 $2.16 36% 17% Fully diluted $3.43 $2.50 $2.13 37% 17% Revenues, net income and earnings per share rose to the highest levels in the Company's history. Net income and fully diluted earnings per share for 1997 increased by 38% and 37%, respectively, driven principally by increased investment management fee revenues. Net income and earnings per share for 1996 increased 17%, primarily as a result of a 21% increase in investment management fee revenues. OPERATING REVENUES Investment management fees are derived primarily from contractual fixed-fee arrangements that are based upon the level of assets under management with open-end and closed-end investment companies and institutional portfolios. Under various investment management agreements, annual rates vary and generally decline as the average net assets of the portfolios exceed certain threshold levels. The majority of fund investment management contracts are subject to periodic approval by each fund's Board of Directors/Trustees and shareholders. There have been no significant changes in the investment management fee structures for the Franklin Templeton funds in the periods under review. Investment management fees increased 47% and 21% in fiscal 1997 and 1996, respectively. Management fees grew at a faster rate than average assets under management in both 1997 and 1996 as a result of a shift in composition of average assets under management to higher-fee equity funds during the years under consideration. Underwriting commission fees are earned primarily from fund sales. Distribution fees are generally based on the level of assets under management. Most sales of Franklin Templeton funds include a sales commission which is paid to the Company. Certain subsidiaries of the Company act as distributors for its sponsored funds and receive distribution fees from those funds in reimbursement for distribution expenses incurred. A significant portion of underwriting commission and distribution fee revenues are paid to selling intermediaries. Underwriting and distribution fees increased 35% and 21% in 1997 and 1996, respectively, largely due to increased fund sales which were partially offset by a decrease in effective commission rates. Effective commission rates have declined as relative sales of products with lower commission rates have increased. Shareholder servicing fees are generally fixed charges per account which vary with the particular type of fund and the service being rendered. Shareholder servicing fees increased 41% and 29% in 1997 and 1996, respectively. The increases were a result of an increase in fund shareholder accounts, as well as an increase in the average per account charge. During the second quarter of 1997, the average annual per account charge was increased for approximately 120 of the Company's U.S. registered funds. Other revenues, net consist primarily of the revenues from the Company's bank and finance subsidiaries, which are shown net of interest expense and the provision for loan losses. Other revenues, net increased 116% in 1997 and decreased 43% in 1996. The increase in 1997 resulted primarily from decreasing loss and delinquency trends at the Company's bank and finance subsidiaries. The past due rate at the end of 1997 was 3.2% compared to 4.0% at the end of 1996. Actual gross charge-offs decreased 43% in 1997 compared to a 24% increase in 1996, reflecting the Company's more stringent underwriting policies and improved collection efforts. OPERATING EXPENSES Underwriting and distribution includes sales commissions and distribution fees paid to brokers and other third-party intermediaries. During both 1997 and 1996, underwriting and distribution expenses increased consistent with mutual fund sales. Compensation and benefits increased 38% and 25% in 1997 and 1996, respectively, reflecting an increase in the number of full-time employees, the Acquisition and increased contributions to the Company's Annual Incentive Plan that are based upon the Company's profitability. The number of full-time employees increased 30% and 9% in 1997 and 1996, respectively, as the Company continued to expand its operations and as a result of the Acquisition. Information systems, technology and occupancy increased in 1997 due to costs related to the integration of systems related to the Acquisition, several major system implementations, as well as upgrades to our network, desktop and Internet environments. The growth in this area in 1996 was in line with the general growth in the Company. The Company is in the process of assessing the impact of Year 2000 issues on its global computer systems and applications. The Company expects to incur internal staff costs as well as consulting and other related expenses. At this time, management believes that the costs associated with resolving these issues will not have a material impact on the Company's financial statements. Advertising and promotion expenses increased 35% and 2% in 1997 and 1996, respectively. The 1997 increase was due to marketing and promotion efforts related to the Mutual Series funds and other promotional activities. Amortization of deferred sales commissions increased 146% and 310% in 1997 and 1996, respectively, primarily as a result of the increase in Class II and Canadian fund sales. Amortization of intangibles increased in 1997 as a result of the Acquisition. Other expenses increased in 1997 due to costs associated with the Acquisition, as well as general growth of the Company. Other expenses increased in 1996 due to general growth of the Company. OTHER INCOME (EXPENSES) Investment income declined in 1997 as a result of the sale of a portion of the Company's investment portfolio that was used to fund the Acquisition. Investment and other income increased in 1996 as a result of increases in investment assets, as well as approximately $17 million in capital gains realized on the Acquisition-related sale of investments at the end of 1996. Interest expense increased in 1997 due to a $221.0 million increase in amounts outstanding under the Company's commercial paper lines and a $100 million increase in notes payable (medium-term notes) outstanding, partially offset by a $150 million reduction in subordinated debentures. TAXES ON INCOME The Company's effective tax rate has remained relatively stable at 30%, 31% and 30% in 1997, 1996 and 1995, respectively. The Company's effective tax rate differs from the U.S. statutory rate primarily due to the Company's non-U.S. subsidiaries' relative contributions to taxable income. The Company does not provide U.S. taxes on these earnings to the extent they have been reinvested for an indefinite period of time. The effective tax rate will continue to be reflective of the relative contribution of foreign earnings, which are subject to reduced tax rates and are not currently included in U.S. taxable income. The Company is currently reviewing the effect of the Taxpayer Relief Act of 1997. This Act may cause a change in the effective tax rate for future periods. FINANCIAL CONDITION At September 30, 1997, the Company's assets aggregated $3.1 billion, up from $2.4 billion a year earlier, primarily as a result of the Acquisition and reinvested net income. Stockholders' equity increased to approximately $1.9 billion at September 30, 1997 compared to $1.4 billion at the end of 1996, primarily as a result of net income and the issuance of shares in connection with the Acquisition. Outstanding debt (long-term and short-term) increased by $211.7 million to $611.6 million at September 30, 1997, principally as a result of the Acquisition. However, the Company's ratio of earnings (before taxes) to fixed charges (interest and the interest factor on rent) remains high at 12.0 for 1997 compared to 11.1 for 1996. The Company's interest coverage ratio (pretax income before interest expense divided by interest expense) is 14.2 for 1997 as compared to 13.4 for 1996. The Company's overall weighted average interest rate at September 30, 1997, including the effect of interest-rate swap agreements, was 6.3% on $569.7 million of outstanding commercial paper and notes payable (medium-term notes) as compared to 6.53% on $398.7 million of debt outstanding at September 30, 1996. Cash provided by operating activities increased to $428.5 million in 1997, up from $359.6 million and $296.5 million in 1996 and 1995, respectively. During the year ended September 30, 1997, the Company used net cash of $593.4 million for investing activities, of which $550.7 million was for the Acquisition. Net cash provided by financing activities during the year was $105.5 million, primarily as a result of the issuance of $416.4 million in notes payable and commercial paper, which was partially offset by payments on debt aggregating $128.8 million and the purchase of option rights related to the subordinated debentures of $91.7 million (see Note 8 of Notes to the Consolidated Financial Statements). During fiscal year 1997, the Company paid $40.4 million in dividends to stockholders and purchased 313,000 shares of its common stock for $19.1 million. The Company's auto loan and credit card receivables business activities are subject to fluctuations in those consumer market places, as well as to competition from companies with much larger receivable portfolios. Auto loan and credit card portfolio results can also be influenced significantly by trends in the economy and credit markets that may negatively impact borrowers' ability to repay loans. Credit card and auto loans receivable decreased from 1996 levels due to net paydowns of existing loans. As a result of its improved auto loan collection efforts and enhanced systems supporting those activities, the Company has experienced a decrease in delinquency rates and loan losses since September 30, 1996. Any future increases in the Company's investment in dealer auto loan and credit card portfolios are expected to be funded either through existing debt facilities and operating cash flows or through the securitization of a portion of the portfolios. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1997, the Company held liquid assets of $889.7 million, including $442.7 million of cash and cash equivalents, as compared to $889.9 million and $502.2 million, respectively, at September 30, 1996. Revolving credit facilities at September 30, 1997 aggregated $500 million of which $200 million was under a 364-day revolving credit facility. The remaining $300 million revolving facility has a five-year term. At September 30, 1997, approximately $548.5 million was available to the Company under unused commercial paper and medium-term note facilities. Management expects that the principal needs for cash in the coming year will be to advance sales commissions, fund increased property and equipment acquisitions, pay shareholder dividends, repurchase shares of the Company's common stock and service debt. Management believes that the Company's existing liquid assets, together with the expected continuing cash flow from operations, its borrowing capacity under current credit facilities and its ability to issue stock will be sufficient to meet its present and reasonably foreseeable cash requirements. Results of operations will continue to be dependent upon general economic growth, the strength of capital markets and the Company's ability to meet investor demands with competitive products and services. Operating revenues will be dependent upon the amount and composition of assets under management, mutual fund sales, and the number of mutual fund investors, private and institutional clients. Operating costs are expected to increase with the Company's continued expansion, the increase in competition and the Company's continued commitment to improving its products and services. Despite the Company's global presence, its exposure to adverse fluctuations in foreign currency markets is limited because a substantial portion of its foreign subsidiaries' revenues and the majority of their monetary assets are U.S. and Canadian dollar denominated. Over 95% of the Company's operating revenues were earned in U.S. and Canadian dollars in both 1997 and 1996. Accordingly, the Company has not deemed it necessary to enter into foreign currency hedging transactions. The Company participates in the financial derivatives markets to manage its exposure to interest-rate fluctuations on a portion of its commercial paper. The Company has entered into interest-rate swap agreements to convert interest payment obligations under variable-rate debt instruments to fixed-rate interest payment obligations. Through interest-rate swap agreements and its medium-term note program, the Company has fixed the rates of interest it pays on 84% of outstanding debt (see Note 8 of Notes to the Consolidated Financial Statements). Item 8. Financial Statements and Supplementary Data Index of Consolidated Financial Statements for the years ended September 30, 1997, 1996 and 1995. CONTENTS Consolidated Financial Statements of Franklin Resources, Inc.: Pages Report of Independent Accountants Consolidated Statements of Income, for the years ended September 30, 1997, 1996, and 1995 Consolidated Balance Sheets September 30, 1997 and 1996 Consolidated Statements of Stockholders' Equity, for the years ended September 30, 1997, 1996 and 1995 Consolidated Statements of Cash Flows, for the years ended September 30, 1997, 1996 and 1995 Notes to Consolidated Financial Statements All schedules have been omitted as the information is provided in the financial statements or in related notes thereto or is not required to be filed as the information is not applicable. REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Franklin Resources, Inc.: We have audited the accompanying consolidated balance sheets of Franklin Resources, Inc. and subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Franklin Resources, Inc. and subsidiaries as of September 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. San Francisco, California October 22, 1997 CONSOLIDATED STATEMENTS OF INCOME IN THOUSANDS, EXCEPT PER SHARE DATA FOR THE YEARS ENDED SEPTEMBER 30, 1997 1996 1995 - -------------------------------------------------------------------------------- OPERATING REVENUES Investment management fees $1,292,488 $880,684 $726,719 Underwriting and distribution fees 735,112 545,039 449,141 Shareholder servicing fees 124,905 88,715 68,701 Other, net 10,770 5,035 8,703 - -------------------------------------------------------------------------------- Total operating revenues 2,163,275 1,519,473 1,253,264 ---------------------------------------------------------------------------- OPERATING EXPENSES Underwriting and distribution 712,328 518,122 406,100 Compensation and benefits 447,169 325,135 260,097 Information systems, technology and occupancy 135,391 88,500 73,697 Advertising and promotion 96,552 71,655 70,138 Amortization of deferred sales commissions 59,468 24,237 5,894 Amortization of intangible assets 34,294 18,348 18,305 Other 86,613 56,368 50,892 - -------------------------------------------------------------------------------- Total operating expenses 1,571,815 1,102,365 885,123 ---------------------------------------------------------------------------- OPERATING INCOME 591,460 417,108 368,141 Other income (expenses) Investment and other income 49,586 50,458 29,673 Interest expense (25,333) (11,336) (11,159) - -------------------------------------------------------------------------------- OTHER INCOME, NET 24,253 39,122 18,514 ------------------------------------------------------------------------------ Income before taxes on income 615,713 456,230 386,655 Taxes on income 181,650 141,500 117,710 ------------------------------------------------------------------------------ Net income $434,063 $314,730 $268,945 - -------------------------------------------------------------------------------- Earnings per Share Primary $3.43 $2.52 $2.16 Fully diluted $3.43 $2.50 $2.13 The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED BALANCE SHEETS IN THOUSANDS AS OF SEPTEMBER 30, 1997 1996 - -------------------------------------------------------------------------------- Assets CURRENT ASSETS Cash and cash equivalents $434,864 $483,975 Receivables Fees from Franklin Templeton funds 213,547 133,453 Other 20,315 54,727 Investment securities, available-for-sale 189,674 174,156 Prepaid expenses and other 20,039 9,952 - -------------------------------------------------------------------------------- Total current assets 878,439 856,263 - -------------------------------------------------------------------------------- BANKING/FINANCE ASSETS Cash and cash equivalents 7,877 18,214 Loans receivable, net 296,188 345,399 Investment securities, available-for-sale 24,232 25,325 Other 3,739 4,660 - -------------------------------------------------------------------------------- Total banking/finance assets 332,036 393,598 - -------------------------------------------------------------------------------- OTHER ASSETS Deferred sales commissions 119,537 24,316 Property and equipment, net 217,085 161,613 Intangible assets, net 1,224,019 641,983 Receivable from banking/finance group 203,787 236,532 Other 120,297 59,862 - -------------------------------------------------------------------------------- Total other assets 1,884,725 1,124,306 - -------------------------------------------------------------------------------- Total assets $3,095,200 $2,374,167 - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED BALANCE SHEETS IN THOUSANDS AS OF SEPTEMBER 30, 1997 1996 - -------------------------------------------------------------------------------- Liabilities and Stockholders' Equity CURRENT LIABILITIES Compensation and benefits $154,222 $77,935 Commissions 46,125 28,067 Income taxes 31,908 27,673 Short-term debt 118,372 427 Other 54,873 48,099 - -------------------------------------------------------------------------------- Total current liabilities 405,500 182,201 - -------------------------------------------------------------------------------- BANKING/FINANCE LIABILITIES Deposits Interest bearing 91,433 125,124 Non-interest bearing 6,971 6,095 Payable to Parent 203,787 236,532 Other 2,213 1,725 - -------------------------------------------------------------------------------- Total banking/finance liabilities 304,404 369,476 - -------------------------------------------------------------------------------- OTHER LIABILITIES Long-term debt 493,244 399,462 Other 37,831 22,437 - -------------------------------------------------------------------------------- Total other liabilities 531,075 421,899 - -------------------------------------------------------------------------------- Total liabilities 1,240,979 973,576 - -------------------------------------------------------------------------------- Commitments and Contingencies (Note 11) STOCKHOLDERS' EQUITY Preferred stock, $1.00 par value, 1,000,000 shares authorized; none issued -- -- Common stock, $.10 par value, 500,000,000 shares authorized; 126,230,916 and 82,264,982 shares issued; and 126,031,900 and 80,272,131 shares outstanding, for 1997 and 1996, respectively 12,623 8,226 Capital in excess of par value 91,207 101,226 Retained earnings 1,757,536 1,370,513 Less cost of treasury stock (11,070) (90,301) Other 3,925 10,927 - -------------------------------------------------------------------------------- Total stockholders' equity 1,854,221 1,400,591 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $3,095,200 $2,374,167 - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY IN THOUSANDS AS OF AND FOR THE YEARS CAPITAL IN ENDED SEPTEMBER 30, COMMON STOCK EXCESS OF RETAINED TREASURY STOCK 1997, 1996 AND 1995 SHARES AMOUNT PAR VALUE EARNINGS SHARES AMOUNT OTHER TOTAL - -------------------------------------------------------------------------------------------------------------------------------- Balance, October 1, 1994 82,265 $8,226 $92,283 $855,513 (667) $(25,409) $202 $930,815 Net income 268,945 268,945 Unrealized gain on investment securities, net of tax 13,745 13,745 Foreign currency translation adjustment 835 835 Purchase of treasury stock (1,126) (41,749) (41,749) Cash dividends on common stock (33,254) (33,254) Issuance of restricted shares, net (48) 431 17,121 3,160 20,233 Other (45) 37 1,518 1,473 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 30, 1995 82,265 8,226 92,190 1,091,204 (1,325) (48,519) 17,942 1,161,043 Net income 314,730 314,730 Unrealized loss on investment securities, net of tax (10,644) (10,644) Foreign currency translation adjustment (752) (752) Purchase of treasury stock (1,001) (53,413) (53,413) Cash dividends on common stock (35,421) (35,421) Issuance of restricted shares, net 9,672 280 9,777 4,381 23,830 Other (636) 53 1,854 1,218 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 30, 1996 82,265 8,226 101,226 1,370,513 (1,993) (90,301) 10,927 1,400,591 Net income 434,063 434,063 Issuance of stock for Heine acquisition 22,300 1,100 43,287 65,587 Exercise and purchase of option rights related to subordinated debentures, net 1,796 180 (47,914) 565 31,065 (16,669) Issuance of stock for 3-for-2 stock dividend 42,028 4,203 (4,203) Unrealized gain on investment securities, net of tax 3,219 3,219 Foreign currency translation adjustment (5,192) (5,192) Purchase of treasury stock (313) (19,135) (19,135) Cash dividends on common stock (42,837) (42,837) Issuance of restricted shares, net 96 10 14,360 352 19,455 (5,029) 28,796 Other 46 4 1,235 89 4,559 5,798 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 30, 1997 126,231 $12,623 $91,207 $1,757,536 (200) $(11,070) $3,925 $1,854,221 - ------------------------------------------------------------------------------------------------------------------------------------ The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS IN THOUSANDS FOR THE YEARS ENDED SEPTEMBER 30, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $434,063 $314,730 $268,945 Adjustments to reconcile net income to net cash provided by operating activities Increase in receivables, prepaid expenses and other (106,024) (33,405) (9,525) Increase in deferred sales commissions (154,689) (40,080) (11,316) Increase (decrease) in other current liabilities 22,370 3,315 (2,529) Increase (decrease) in income taxes payable 4,235 19,452 (9,405) Increase in commissions payable 18,058 6,787 19,191 Increase (decrease) in accrued compensation and benefits 102,171 41,328 (3,137) Depreciation and amortization 123,908 64,728 46,834 Gains on disposition of assets (15,563) (17,272) (2,604) - ---------------------------------------------------------------------------------------------------- Net cash provided by operating activities 428,529 359,583 296,454 - ----------------------------------------------------------------------------------------------------- Purchase of investments (110,019) (70,768) (130,194) Liquidation of investments 98,826 107,287 90,869 Purchase of banking/finance investments (27,120) (60,936) (110,163) Liquidation of banking/finance investments 28,376 59,316 113,265 Originations of banking/finance loans receivable (114,836) (103,532) (222,341) Collections of banking/finance loans receivable 165,051 207,664 146,963 Purchase of property and equipment (82,973) (64,419) (40,365) Acquisition of assets and liabilities of Heine Securities Corporation (550,742) -- -- - ------------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities (593,437) 74,612 (151,966) - ------------------------------------------------------------------------------------------------------ Decrease in bank deposits (32,814) (38,155) (21,525) Exercise of common stock options 1,878 1,219 375 Dividends paid on common stock (40,387) (34,650) (31,688) Purchase of treasury stock (19,135) (53,413) (41,749) Issuance of debt 416,410 134,377 34,254 Payments on debt (128,807) (203,083) (32,832) Purchase of option rights from subordinated debenture holdings (91,685) -- -- - ------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 105,460 (193,705) (93,165) - ----------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (59,448) 240,490 51,323 Cash and cash equivalents, beginning of year 502,189 261,699 210,376 - ----------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $442,741 $502,189 $261,699 - ------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for Interest, including banking/finance group interest $42,154 $36,619 $28,129 Income taxes $172,906 $122,486 $125,496 SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION Value of common stock issued for the Acquisition $65,587 -- -- Value of common stock issued for redemption of debentures $75,015 -- -- Value of common stock issued in other transactions $31,954 $18,667 $18,546 The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SIGNIFICANT ACCOUNTING POLICIES Franklin Resources, Inc. and its consolidated subsidiaries (the "Company") derive substantially all of their revenues and net income from providing investment management, administration, distribution and related services to the Franklin Templeton funds, institutional accounts and other investment products that operate in the United States, Canada, Europe and other international markets under various rules and regulations set forth by the Securities and Exchange Commission, individual state agencies and foreign governments. Services to the Franklin Templeton funds are provided under contracts that definitively set forth the fees to be charged for these services. The majority of these contracts are subject to periodic review and approval by each fund's Board of Directors/Trustees and shareholders. Currently, no fund's revenues represent more than 10% of total revenues. Company revenues are largely dependent on the total value and composition of assets under management, which include U.S. and international equity and debt portfolios. Accordingly, fluctuations in financial markets and in the composition of assets under management impact revenues and results of operations. Basis of Presentation. The consolidated financial statements are prepared in accordance with generally accepted accounting principles which require the use of estimates made by the Company's management. Certain 1996 and 1995 amounts have been reclassified to conform to 1997 presentation. The consolidated financial statements include the accounts of Franklin Resources, Inc. and its majority-owned subsidiaries. All material inter-company accounts and transactions have been eliminated except the inter-company payable from the banking/finance group to the parent to fund auto and credit card loans. Operating revenues of the banking/finance group are included in Other revenues, net and are presented net of related interest expense and the provision for loan losses. Accordingly, reported interest expense excludes interest expense attributable to the banking/finance group. Cash and Cash Equivalents include cash on hand, demand deposits with banks or other high credit quality financial institutions, debt instruments with original maturities of three months or less and other highly liquid investments, including money market funds, which are readily convertible into cash. Due to the relatively short-term nature of these instruments, the carrying value approximates fair value. Investment Securities, available for sale are carried at fair value. Fair values for investments in Franklin Templeton funds are based on the last reported net asset value. Fair values for other investments are based on the last reported price on the exchange on which they are traded. Investments not traded on an exchange are carried at management's estimate of fair value. Realized gains and losses are included in investment income currently based on specific identification. Unrealized gains and losses are reported net of tax as a separate component of stockholders' equity until realized. Derivative Instruments. The Company enters into interest-rate swap agreements to manage its exposure to fluctuations in interest rates. Under these agreements the Company agrees to exchange, at specified intervals, the difference between fixed- and variable-interest amounts calculated by reference to an agreed-upon notional principal amount. The interest-rate differential between the fixed pay-rate and the variable receive-rate is reflected as an adjustment to interest expense over the life of the swaps. The Company does not hold or issue derivative financial instruments for trading purposes. Loans Receivable. Interest on auto installment loans is accrued principally using the rule of 78s method, which approximates the interest method. Interest on all other loans is accrued using the simple interest method. An allowance for loan losses is established monthly based on historical experience, including delinquency and loss trends. A loan is charged to the allowance when it is deemed to be uncollectible, taking into consideration the value of the collateral, the financial condition of the borrower and other factors. Recoveries on loans previously charged off as uncollectible are credited to the allowance for loan losses. Deferred Sales Commissions. Sales commissions paid to financial intermediaries in connection with the sale of certain share classes of open-end Franklin Templeton funds are deferred and amortized on a straight-line basis over periods ranging from eighteen months to six years. Property and Equipment are recorded at cost and are depreciated on the straight-line basis over their estimated useful lives. Expenditures for repairs and maintenance are charged to expense when incurred. Leasehold improvements are amortized on the straight-line basis over their estimated useful lives or the lease term, whichever is shorter. Intangible Assets, consisting principally of the estimated value of mutual fund management contracts and goodwill resulting from the acquisitions of the assets of Templeton and Heine Securities Corporation, are being amortized over various lives ranging from 5 to 40 years. The Company has evaluated the potential impairment of its intangible assets on the basis of the expected future operating cash flows to be derived from these assets in relation to the Company's carrying values and has determined that there is no impairment. Periodically, the Company reviews the carrying value of its intangible assets for potential impairment. Recognition of Revenues. Investment management fees, shareholder servicing fees, investment income and distribution fees are all recognized as earned. Underwriting commissions related to the sale of Franklin Templeton mutual fund shares are recorded on the trade date. Advertising and Promotion. Costs of advertising and promotion are expensed as the advertising appears in the media. Foreign Currency Translation. Assets and liabilities of foreign subsidiaries are translated at current exchange rates as of the end of the accounting period, and related revenues and expenses are translated at average exchange rates in effect during the period. Net exchange gains and losses resulting from translation are excluded from income and are recorded as a separate component of stockholders' equity. Foreign currency transaction gains and losses are reflected in income currently. Dividends. During the years ended September 30, 1997, 1996 and 1995, the Company declared dividends to common stockholders of $.34, $.29 and $.27, respectively. All common shares and per share amounts have been adjusted to give retroactive effect to a three-for-two stock dividend paid January 15, 1997 to shareholders of record on December 31, 1996. Stockholders' equity as of September 30, 1996 and 1995 has not been restated. Earnings per Share are computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents considered outstanding during each year. The weighted average number of shares and common stock equivalents used in computing earnings per share in 1997, 1996 and 1995 were 126,715,000, 124,970,000 and 124,671,000 for primary and 126,733,000, 125,642,000 and 126,047,000 for fully diluted, respectively. Note 2 ACQUISITION On November 1, 1996, the Company acquired the assets and liabilities of Heine Securities Corporation ("Heine"), the former investment manager to Mutual Series Fund Inc., other funds and private accounts ("Mutual"). The transaction had an aggregate value of approximately $616 million. Heine received $551 million in cash and 1.1 million shares of the Company's common stock (before the effect of the three-for-two stock dividend declared December 31, 1996) that may not be sold for two years from the date of the Acquisition and that are subject to other restrictions. Pursuant to the terms of the acquisition agreement, the shareholder of Heine invested $150 million of the cash proceeds in Mutual and agreed to maintain a minimum balance of $100 million for five years from the date of the Acquisition. In addition to the base purchase price, the purchase agreement also provides for contingent payments to Heine ranging from $96.25 million to $192.5 million under certain conditions if certain agreed-upon growth targets are met. The Acquisition has been accounted for using the purchase method of accounting. Note 3 INVESTMENT SECURITIES Investment securities, available-for-sale at September 30, 1997 and 1996 consisted of the following: AMORTIZED GROSS UNREALIZED FAIR IN THOUSANDS COST GAINS LOSSES VALUE - ----------------------------------------------------------------------------- 1997 Franklin Templeton funds $151,726 $21,552 -- $173,278 Debt 33,176 341 $(134) 33,383 Equities 5,853 1,414 (79) 7,188 Other 51 6 -- 57 - ---------------------------------------------------------------------------- $190,806 $23,313 $(213) $213,906 - ---------------------------------------------------------------------------- AMORTIZED GROSS UNREALIZED FAIR IN THOUSANDS COST GAINS LOSSES VALUE - ----------------------------------------------------------------------------- 1996 Franklin Templeton funds $116,146 $12,993 -- $129,139 Debt 36,108 278 $(91) 36,295 Equities 1,578 2,332 (61) 3,849 Other 30,178 20 -- 30,198 - ------------------------------------------------------------------------------- $184,010 $15,623 $(152) $199,481 - -------------------------------------------------------------------------------- At September 30, 1997, maturities of debt securities were as follows: ESTIMATED IN THOUSANDS COST FAIR VALUE - ---------------------------------------------------------------------------- Due in one year or less $14,063 $14,087 Due after one year through three years 15,381 15,465 Due after three years 3,732 3,831 - ------------------------------------------------------------------------------- $33,176 $33,383 - ------------------------------------------------------------------------------- Note 4 BANKING/FINANCE GROUP LOANS AND ALLOWANCE FOR LOAN LOSSES Activity of the banking/finance group's loans and allowance for loan losses for the years ended September 30, 1997 and 1996 was as follows: NET CHARGE IN THOUSANDS 1996 ADDITIONS PAYDOWNS OFFS 1997 - ------------------------------------------------------------------------------- Auto $284,141 $92,708 $(131,058) $(6,436) $239,355 Credit Card 87,527 21,622 (29,974) (927) 78,248 Other 6,387 506 (2,736) (165) 3,992 - ------------------------------------------------------------------------------- 378,055 114,836 (163,768) (7,528) 321,595 - ------------------------------------------------------------------------------- Unearned fees and discounts (23,092) (7,400) 13,645 (16,847) Allowance for loan losses (9,564) (6,524) 7,528 (8,560) - ------------------------------------------------------------------------------- Loans receivable, net $345,399 $100,912 $(150,123) -- $296,188 ---------------------------------------------------------------------------- NET CHARGE IN THOUSANDS 1995 ADDITIONS PAYDOWNS OFFS 1996 - ------------------------------------------------------------------------------- Auto $400,867 $62,840 $(165,380) $(14,186) $284,141 Credit Card 95,040 39,846 (45,476) (1,883) 87,527 Other 6,000 846 (320) (139) 6,387 - ------------------------------------------------------------------------------- 501,907 103,532 (211,176) (16,208) 378,055 - ------------------------------------------------------------------------------- Unearned fees and discounts (42,813) (6,900) 26,621 (23,092) Allowance for loan losses (9,081) (16,691) 16,208 (9,564) - ------------------------------------------------------------------------------- Loans receivable, net $450,013 $79,941 $(184,555) -- $345,399 --------------------------------------------------------------------------- For the years ended September 30, 1997, 1996 and 1995, the interest expense of the banking/finance group included in other operating revenues, net was $21.2 million, $25.6 million and $28.6 million, respectively. At September 30, 1996 and 1995, the carrying value of loans receivable approximated fair value. The fair value of consumer loans is estimated using interest rates that consider the current credit and interest rate risk inherent in the loans and current economic and lending conditions. At September 30, 1997 and 1996, the carrying values of deposits approximated fair value. The fair values of the banking subsidiary's deposit amounts payable on demand at the reporting date are estimated using interest rates currently offered on time deposits with similar remaining maturities. Note 5 PROPERTY AND EQUIPMENT The following is a summary of property and equipment at September 30, 1997 and 1996: USEFUL LIVES IN THOUSANDS IN YEARS 1997 1996 ----------------------------------------------------------------------------- Furniture and equipment 3-5 $181,173 $114,228 Premises and leasehold improvements 5-35 101,299 92,493 Leased equipment 5 6,860 2,451 Land -- 24,722 23,811 ----------------------------------------------------------------------------- 314,054 232,983 Less: Accumulated depreciation and amortization (96,969) (71,370) - ------------------------------------------------------------------------------- $217,085 $161,613 - ------------------------------------------------------------------------------- Note 6 INTANGIBLE ASSETS The following is a summary of intangible assets at September 30, 1997 and 1996: AMORTIZATION IN THOUSANDS PERIOD IN YEARS 1997 1996 - ----------------------------------------------------------------------------- Goodwill and management contracts 40 $1,300,793 $716,010 Other intangibles 5-15 31,546 -- - ----------------------------------------------------------------------------- 1,332,339 716,010 Accumulated amortization (108,320) (74,027) - ----------------------------------------------------------------------------- $1,224,019 $641,983 - ----------------------------------------------------------------------------- Note 7 SEGMENT INFORMATION The Company conducts operations in five principal geographic areas of the world: the U.S., Canada, the Bahamas, Europe and Asia/Pacific. Revenues by geographic area include fees and commissions charged to customers and fees charged to affiliates. Identifiable assets are those assets used exclusively in the operations of each geographic area. Information is summarized below:
IN THOUSANDS ADJUSTMENT ASIA/ AND 1997 US CANADA BAHAMAS EUROPE PACIFIC ELIMINATION CONSOLIDATED - --------------------------------------------------------------------------------------------------------------------- REVENUES FROM Unaffiliated customers $1,512,873 $169,560 $250,216 $61,109 $169,517 -- $2,163,275 Affiliates 152,203 1,099 3,182 26,237 8,071 $(190,792) -- - ---------------------------------------------------------------------------------------------------------------------- Total $1,665,076 $170,659 $253,398 $87,346 $177,588 $(190,792) $2,163,275 - ---------------------------------------------------------------------------------------------------------------------- Operating income $249,700 $49,374 $175,518 $1,629 $115,239 -- $591,460 - ---------------------------------------------------------------------------------------------------------------------- Identifiable assets $1,302,166 $122,335 $449,112 $32,028 $181,191 -- $2,086,832 Corporate assets -- -- -- -- -- $1,008,368 1,008,368 - --------------------------------------------------------------------------------------------------------------------- Total assets $1,302,166 $122,335 $449,112 $32,028 $181,191 $1,008,368 $3,095,200 - ---------------------------------------------------------------------------------------------------------------------- IN THOUSANDS ADJUSTMENT ASIA/ AND 1996 US CANADA BAHAMAS EUROPE PACIFIC ELIMINATION CONSOLIDATED - --------------------------------------------------------------------------------------------------------------------- REVENUES FROM Unaffiliated customers $1,106,448 $99,658 $173,697 $31,752 $107,918 -- $1,519,473 Affiliates 34,452 509 1,773 13,742 5,982 $(56,458) -- - -------------------------------------------------------------------------------------------------------------------- Total $1,140,900 $100,167 $175,470 $45,494 $113,900 $(56,458) $1,519,473 - -------------------------------------------------------------------------------------------------------------------- Operating income $193,821 $29,131 $115,826 $742 $77,588 -- $417,108 - --------------------------------------------------------------------------------------------------------------------- Identifiable assets $848,156 $69,547 $432,088 $24,912 $154,503 -- $1,529,206 Corporate assets -- -- -- -- -- $844,961 844,961 - ---------------------------------------------------------------------------------------------------------------------- Total assets $848,156 $69,547 $432,088 $24,912 $154,503 $844,961 $2,374,167 - ---------------------------------------------------------------------------------------------------------------------- IN THOUSANDS ADJUSTMENT ASIA/ AND 1995 US CANADA BAHAMAS EUROPE PACIFIC ELIMINATION CONSOLIDATED - ---------------------------------------------------------------------------------------------------------------------- REVENUES FROM Unaffiliated customers $947,376 $66,970 $131,571 $24,624 $82,723 -- $1,253,264 Affiliates 17,080 492 1,606 10,903 7,160 $(37,241) -- - ---------------------------------------------------------------------------------------------------------------------- Total $964,456 $67,462 $133,177 $35,527 $89,883 $(37,241) $1,253,264 - ---------------------------------------------------------------------------------------------------------------------- Operating income/(loss) $199,615 $22,362 $90,393 $(1,770) $57,541 -- $368,141 - ---------------------------------------------------------------------------------------------------------------------- Identifiable assets $819,287 $43,589 $438,859 $23,681 $138,213 -- $1,463,629 Corporate assets -- -- -- -- -- $781,052 781,052 - ---------------------------------------------------------------------------------------------------------------------- Total assets $819,287 $43,589 $438,859 $23,681 $138,213 $781,052 $2,244,681 - ----------------------------------------------------------------------------------------------------------------------
Summarized below are the business segments: IN THOUSANDS OPERATING IDENTIFIABLE INCOME/ 1997 ASSETS REVENUES (LOSS) - -------------------------------------------------------------------------------- Investment management $1,746,827 $2,152,505 $598,154 Banking/finance 332,036 8,617 (5,102) Real estate 7,969 2,153 (1,592) - -------------------------------------------------------------------------------- Company totals $2,086,832 $2,163,275 $591,460 - -------------------------------------------------------------------------------- 1996 - -------------------------------------------------------------------------------- Investment management $1,124,229 $1,514,438 $429,348 Banking/finance 393,598 3,179 (11,090) Real estate 11,379 1,856 (1,150) - -------------------------------------------------------------------------------- Company totals $1,529,206 $1,519,473 $417,108 - -------------------------------------------------------------------------------- 1995 - -------------------------------------------------------------------------------- Investment management $958,200 $1,244,561 $379,288 Banking/finance 496,059 6,841 (10,217) Real estate 9,370 1,862 (930) - ------------------------------------------------------------------------------ Company totals $1,463,629 $1,253,264 $368,141 - ------------------------------------------------------------------------------- The investment management segment's assets are primarily intangibles and receivables from, and investments in, Franklin Templeton funds. The banking/finance segment's assets are primarily investment securities and consumer loans. Note 8 DEBT Debt at September 30, 1997 and 1996 was as follows: 1997 WEIGHTED IN THOUSANDS AVERAGE INTEREST RATE 1997 1996 - -------------------------------------------------------------------------------- SHORT-TERM DEBT Commercial paper 6.26% $51,500 -- Notes payable 6.63% 60,000 -- Other -- 6,872 $427 - -------------------------------------------------------------------------------- Total short-term debt $118,372 $427 - -------------------------------------------------------------------------------- LONG-TERM DEBT Commercial paper issued under long-term borrowing agreements 6.26% $298,245 $128,731 Notes payable 6.36% 160,000 120,000 Subordinated debentures -- -- 150,000 Other 34,999 731 - -------------------------------------------------------------------------------- Total long-term debt $493,244 $399,462 - -------------------------------------------------------------------------------- As of September 30, 1997, maturities of long-term debt are as follows: IN THOUSANDS 1998 $298,245 1999 56,612 2000 56,612 2001 66,612 2002 6,612 Thereafter 8,551 ---------------------------------- $493,244 ---------------------------------- The Company has a revolving credit agreement with a group of commercial banks that will allow it, at its option, to refinance the commercial paper for up to five years from the closing date, May 16, 1997. In accordance with the Company's intention and ability to refinance these obligations on a long-term basis, $298.2 million of commercial paper at September 30, 1997 has been classified long-term. The credit agreements include various restrictive covenants, including: a capitalization ratio, interest coverage ratio, minimum working capital and limitation on additional debt. The Company was in compliance with all covenants as of September 30, 1997. At September 30, 1997, amounts available for issuance under the Company's commercial paper program were $148.5 million. At September 30, 1997, the Company had interest-rate swap agreements maturing through October 2000 which effectively fixed interest rates on $295 million of commercial paper. These financial instruments are placed with major financial institutions. The creditworthiness of the counterparties is subject to continuous review and full performance is anticipated. Any potential loss from failure of the counterparties to perform is deemed to be immaterial. The following table presents information for outstanding interest-rate swaps at September 30, 1997: IN THOUSANDS MATURING IN THE YEARS ENDING SEPTEMBER 30, 1999 2000 2001 - -------------------------------------------------------------------------------- Notional amounts $165,000 $40,000 $90,000 Fair value $(1,215) $(563) $(1,215) Carrying value $(168) $(65) $(133) Weighted average receive rate 5.53% 5.56% 5.56% Weighted average pay rate 6.36% 6.52% 6.43% Notes payable represents the Company's participation in a medium-term note program. Notes totaling $100 million and $120 million were issued during 1997 and 1996, respectively, with interest rates ranging from 6.02% to 6.63%. These notes mature at various times from 1998 through 2001. At September 30, 1997, amounts available for issuance under the Company's medium-term note program were $400 million. On November 26, 1996, the holders of the option rights related to the Company's subordinated debentures exercised their option rights to receive approximately 2.4 million shares of the Company's common stock in return for approximately $75 million of the subordinated debentures. The holders of the subordinated debentures also agreed to sell to the Company the remaining option rights representing an additional 2.4 million shares, and to surrender the remaining $75 million of debentures plus accrued interest for cash of approximately $170 million. This transaction was financed through the issuance of $100 million in medium-term notes referred to above and through cash on hand. No material gain or loss was recognized on this transaction. At September 30, 1997 and 1996, the fair value of long-term debt approximated its carrying value. The fair values of long-term debt are estimated using interest rates currently offered to the Company for debt with similar remaining maturities. Note 9 INVESTMENT INCOME IN THOUSANDS 1997 1996 1995 - ------------------------------------------------------------------------ Dividends $14,141 $15,683 $12,873 Interest 16,105 16,787 12,029 Realized gains, net 15,563 17,271 2,499 Foreign exchange gains (losses), net 2,245 (394) (355) Other 1,532 1,111 2,627 - ------------------------------------------------------------------------ $49,586 $50,458 $29,673 - ------------------------------------------------------------------------ Substantially all of the Company's dividend income was generated by investments in the Franklin Templeton funds. Note 10 TAXES ON INCOME Taxes on income for the years ended September 30, 1997, 1996 and 1995 were comprised of the following: IN THOUSANDS 1997 1996 1995 - ------------------------------------------------------------------------------- Current Federal $122,361 $98,803 $76,350 State 33,874 23,118 19,969 Foreign 26,637 25,558 20,018 Deferred (benefit) expense (1,222) (5,979) 1,373 - -------------------------------------------------------------------------------- Total provision $181,650 $141,500 $117,710 - -------------------------------------------------------------------------------- Included in income before taxes was $358.9 million, $225.7 million and $161.7 million, of foreign income for the years ended September 30, 1997, 1996 and 1995, respectively. The major components of the net deferred tax asset as of September 30, 1997 and 1996 were as follows: IN THOUSANDS 1997 1996 - -------------------------------------------------------------------------------- DEFERRED TAX ASSETS State taxes expensed currently, deductible in following year $6,844 $6,608 Temporary differences on investment losses 1,974 2,124 Loan loss reserves 3,850 3,760 Deferred compensation 3,442 1,983 Restricted stock compensation plan 34,933 20,016 Net operating loss carryforwards 27,510 18,203 Other 8,256 5,077 - -------------------------------------------------------------------------------- Total deferred tax assets 86,809 57,771 - -------------------------------------------------------------------------------- Valuation allowance for net operating loss carryforwards (27,510) (18,203) - -------------------------------------------------------------------------------- Deferred tax assets, net of valuation allowance 59,299 39,568 - -------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES Temporary differences on partnership earnings $4,774 $5,504 Capitalized compensation costs 6,728 7,503 Net unrealized gains on securities 8,967 4,622 Depreciation on fixed assets 11,384 6,244 Prepaid expenses 15,419 6,019 Other 9,233 1,315 - -------------------------------------------------------------------------------- Total deferred tax liabilities 56,505 31,207 - -------------------------------------------------------------------------------- Net deferred tax asset $2,794 $8,361 - -------------------------------------------------------------------------------- At September 30, 1997, there were approximately $28.2 million of foreign net operating loss carryforwards of which approximately $13.0 million expire between 1999 and 2005 and the remaining have an indefinite life. In addition, there are approximately $288.5 million in state net operating loss carryforwards that expire between 2006 and 2012. A valuation allowance has been recognized to offset the related deferred tax assets due to the uncertainty of realizing the benefit of the loss carryforwards. A substantial portion of the undistributed earnings of the Company's foreign subsidiaries has been reinvested for an indefinite period of time. Accordingly, no U.S. federal or state income taxes have been provided thereon. At September 30, 1997, the cumulative amount of reinvested income for which no U.S. taxes have been provided was approximately $588 million. Determination of the amount of the unrecognized deferred U.S. income tax liability related to such reinvested income is not practicable because of the numerous assumptions associated with this hypothetical calculation; however, foreign tax credits would be available to reduce some portion of this amount. The following is a reconciliation between the amount of tax expense at the federal statutory rate and taxes on income as reflected in operations for the years ended September 30, 1997, 1996 and 1995, respectively: IN THOUSANDS 1997 1996 1995 - -------------------------------------------------------------------------------- U.S. federal statutory rate 35.0% 35.0% 35.0% Federal taxes at statutory rate $215,500 $159,786 $135,329 State taxes, net of federal tax effect 21,099 18,167 12,747 Foreign earnings subject to reduced tax rates for which no U.S. tax is provided (69,973) (43,159) (32,956) Other 15,024 6,706 2,590 - -------------------------------------------------------------------------------- Actual tax provision $181,650 $141,500 $117,710 - -------------------------------------------------------------------------------- Effective tax rate 29.5% 31.0% 30.4% - -------------------------------------------------------------------------------- Note 11 COMMITMENTS AND CONTINGENCIES The Company leases office space (including space from an unconsolidated affiliate) and equipment under long-term operating leases expiring at various dates through fiscal year 2017. Lease expense aggregated $27.6 million, $24.3 million and $21.8 million for the fiscal years ended September 30, 1997, 1996 and 1995, respectively. At September 30, 1997, future minimum lease payments under operating leases were as follows: IN THOUSANDS 1998 $22,958 1999 20,900 2000 16,645 2001 7,169 2002 2,893 Thereafter 13,109 ----------------------------------- $83,674 ----------------------------------- At September 30, 1997, the Company's banking/finance group had commitments to extend credit aggregating $390.9 million, principally under its credit card lines. The Company through certain subsidiaries acts as fiduciary for retirement and employee benefit plans. At September 30, 1997, assets held in trust were approximately $20.1 billion. The Company is involved in various claims and legal proceedings of a nature considered normal to its business. While it is not feasible to predict or determine the final outcome of these proceedings, management does not believe that they should result in a materially adverse effect on the Company's financial position, results of operations or liquidity. Note 12 EMPLOYEE STOCK AWARD AND OPTION PLANS The Company sponsors an Annual Incentive Plan which provides eligible employees payment of both cash and restricted stock. The costs associated with the Annual Incentive Plan awards are charged to income currently. In December 1993, the Company adopted a Universal Stock Plan providing for the issuance of up to 3 million shares of the Company's stock for various stock-related awards including restricted stock and stock options. As of September 30, 1997, the Company had approximately 892,000 shares remaining available for grant under the Universal Stock Plan. Terms and conditions under the option plans (including price, exercise date and number of shares) are determined by the Compensation Committee of the Board of Directors. Information regarding the option plans for the fiscal years ending September 30, 1997, 1996 and 1995 is as follows: FOR THE YEARS ENDED SEPTEMBER 30, 1997 1996 1995 - -------------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES IN THOUSANDS SHARES PRICE SHARES PRICE SHARES PRICE - -------------------------------------------------------------------------------- Outstanding, beginning of year 282 $21.42 325 $18.12 250 $15.06 Granted 39 $44.29 36 $37.63 103 $25.04 Exercised (154) $17.50 (79) $15.31 (28) $20.32 - -------------------------------------------------------------------------------- Outstanding, end of year 167 $30.42 282 $21.42 325 $18.12 - -------------------------------------------------------------------------------- Exercisable, end of year 70 $28.25 51 $28.38 47 $22.47 - -------------------------------------------------------------------------------- Range of exercise prices at September 30, 1997 -- $7.88 to $44.29. Weighted-average remaining contractual life -- 4 years. All share and price information above has been adjusted to give retroactive effect to a three-for-two stock dividend declared December 31, 1996. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). Accordingly, no compensation costs have been recognized for the stock options granted. Had compensation costs for the Company's stock options granted after September 30, 1995 been determined consistent with the provisions of FAS 123, the Company's net income and earnings per share would not have been materially affected because the number of such stock options is insignificant. Total compensation cost recognized for stock-based compensation during 1997, 1996 and 1995 was $42.2 million, $27.8 million and $16.9 million, respectively. Note 13 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) IN THOUSANDS QUARTER FIRST SECOND THIRD FOURTH - -------------------------------------------------------------------------------- 1997 Revenues $437,625 $519,196 $572,547 $633,907 Net income $96,229 $101,411 $111,188 $125,235 Earnings per share Primary $0.76 $0.80 $0.88 $0.99 Fully diluted $0.76 $0.80 $0.88 $0.99 1996 Revenues $341,755 $393,199 $394,762 $389,757 Net income $73,951 $75,212 $81,066 $84,501 Earnings per share Primary $0.59 $0.60 $0.65 $0.68 Fully diluted $0.59 $0.60 $0.65 $0.67 1995 Revenues $303,303 $297,554 $316,568 $335,839 Net income $63,304 $63,040 $69,029 $73,572 Earnings per share Primary $0.51 $0.51 $0.56 $0.59 Fully diluted $0.51 $0.51 $0.55 $0.59 Note 14 NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS In 1997, the Financial Accounting Standards Board issued three Statements of Financial Accounting Standards which will become effective for the Company's fiscal year ending September 30, 1999. Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128") specifies the computation, presentation and disclosure requirements for earnings per share for entities with publicly held common stock. FAS 128 will require the Company to change its presentation of earnings per share from primary and fully diluted to basic and diluted. At that time, all prior period earnings per share data will be restated. The impact on reported earnings per share is not expected to be material as the Company's common stock equivalents are currently not material. Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130") establishes the disclosure requirements for reporting comprehensive income in an entity's annual and interim financial statements. Comprehensive income includes such items as foreign currency translation adjustments and unrealized gains on securities currently reported as components of stockholders' equity. FAS 130 will require the Company to classify items of comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately in the equity section of the consolidated balance sheet. The Company has not yet determined the type of presentation it will adopt. Statement of Financial Accounting Standards No. 131, "Disclosures of Segment Information" establishes standards for the way a public enterprise reports information about operating segments in annual financial statements and requires that these enterprises report selected information about operating segments in interim financial statements. The Company has not yet determined the effect, if any, of this pronouncement on the consolidated financial statements. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. PART III Items 10-13 are incorporated by reference to the Company's definitive proxy statement to be mailed to stockholders in connection with the Annual Meeting of Stockholders to be held January 20, 1998. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) Please see the index in Item 8 for a list of the financial statements filed as part of this report. (2)Please see the index in Item 8 for a list of the financial statement schedules filed as part of this report. (3) The following exhibits are filed as part of this report: (3)(i)(a) Registrant's Certificate of Incorporation, as filed November 28, 1969, incorporated by reference to Exhibit (3)(i) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (the "1994 Annual Report") (3)(i)(b) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed March 1, 1985, incorporated by reference to Exhibit (3)(ii) to the 1994 Annual Report (3)(i)(c) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed April 1, 1987, incorporated by reference to Exhibit (3)(iii) to the 1994 Annual Report (3)(i)(d) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed February 2, 1994, incorporated by reference to Exhibit (3)(iv) to the 1994 Annual Report (3)(ii) Registrant's By-Laws are incorporated by reference to Form 10 (File No. 06952), incorporated by reference to Exhibit (3)(v) to the 1994 Annual Report 10.1 Representative Distribution Plan between Templeton Growth Fund, Inc. and Franklin/Templeton Investor Services, Inc. incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993 (the "1993 Annual Report") 10.2 Representative Transfer Agent Agreement between Templeton Growth Fund, Inc. and Franklin/Templeton Investor Services, Inc. incorporated by reference to Exhibit 10.3 to the 1993 Annual Report 10.3 Representative Investment Management Agreement between Templeton Growth Fund, Inc. and Templeton, Galbraith & Hansberger Ltd. incorporated by reference to Exhibit 10.5 to the 1993 Annual Report 10.4 Representative Management Agreement between Advisers and the Franklin Group of Funds incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1992 (the "1992 Annual Report") 10.5 Representative Distribution 12b-1 Plan between Distributors and the Franklin Group of Funds incorporated by reference to Exhibit 10.3 to the 1992 Annual Report 10.6 Amended Annual Incentive Compensation Plan approved January 24, 1995 incorporated by reference to the Company's Proxy Statement filed under cover of Schedule 14A on December 28, 1994 in connection with its Annual Meeting of Stockholders held on January 24, 1995 10.7 Universal Stock Plan approved January 19, 1994 incorporated by reference to the Company's 1995 Proxy Statement filed under cover of Schedule 14A on December 29, 1993 in connection with its Annual Meeting of Stockholders held on January 19, 1994 10.8 Representative Amended and Restated Distribution Agreement between Franklin/Templeton Distributors, Inc. and Franklin Federal Tax-Free Income Fund, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 (the "June 1995 Quarterly Report") 10.9 Distribution 12b-1 Plan for Class II shares between Franklin/Templeton Distributors, Inc. and Franklin Federal Tax-Free Income Fund, incorporated by reference to Exhibit 10.2 to the June 1995 Quarterly Report 10.10 Representative Investment Management Agreement between Templeton Global Strategy SICAV and Templeton Investment Management Limited, incorporated by reference to Exhibit 10.3 to the June 1995 Quarterly Report 10.11 Representative Sub-Distribution Agreement between Templeton, Galbraith & Hansberger Ltd. and BAC Corp. Securities, incorporated by reference to Exhibit 10.4 to the June 1995 Quarterly Report 10.12 Representative Dealer Agreement between Franklin/Templeton Distributors, Inc. and Dealer, incorporated by reference to Exhibit 10.5 to the June 1995 Quarterly Report 10.13 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (ERISA), incorporated by reference to Exhibit 10.6 to the June 1995 Quarterly Report 10.14 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (NON-ERISA), incorporated by reference to Exhibit 10.7 to the June 1995 Quarterly Report 10.15 Representative Amended and Restated Transfer Agent and Shareholder Services Agreement between Franklin/Templeton Investor Services, Inc. and Franklin Custodian Funds, Inc., dated July 1, 1995, incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 (the "1995 Annual Report") 10.16 Representative Amended and Restated Distribution Agreement between Franklin/Templeton Distributors, Inc. and Franklin Custodian Funds, Inc., incorporated by reference to Exhibit 10.17 to the 1995 Annual Report 10.17 Representative Class II Distribution Plan between Franklin/Templeton Distributors, Inc. and Franklin Custodian Funds, Inc., on behalf of its Growth Series, incorporated by reference to Exhibit 10.18 to the 1995 Annual Report 10.18 Representative Dealer Agreement between Franklin/Templeton Distributors, Inc. and Dealer, incorporated by reference to Exhibit 10.19 to the 1995 Annual Report 10.19 Representative Mutual Fund Purchase and Sales Agreement for Accounts of Bank and Trust Company Customers, effective July 1, 1995, incorporated by reference to Exhibit 10.20 to the 1995 Annual Report 10.20 Representative Management Agreement between Franklin Value Investors Trust, on behalf of Franklin MicroCap Value Fund, and Franklin Advisers, Inc., incorporated by reference to Exhibit 10.21 to the 1995 Annual Report 10.21 Representative Sub-Distribution Agreement between Templeton, Galbraith & Hansberger Ltd. and Sub-Distributor, incorporated by reference to Exhibit 10.22 to the 1995 Annual Report 10.22 Representative Non-Exclusive Underwriting Agreement between Templeton Growth Fund, Inc. and Templeton Franklin Investment Services (Asia) Limited, dated September 18, 1995, incorporated by reference to Exhibit 10.23 to the 1995 Annual Report 10.23 Representative Shareholder Services Agreement between Franklin/Templeton Investor Services, Inc. and Templeton Franklin Investment Services (Asia) Limited, dated September 18, 1995, incorporated by reference to Exhibit 10.24 to the 1995 Annual Report 10.24 Agreement to Merge the Businesses of Heine Securities Corporation, Elmore Securities Corporation and Franklin Resources, Inc., dated June 25, 1996, incorporated by reference to Exhibit 2 to Registrant's Report on Form 8-K dated June 25, 1996 10.25 Subcontract for Transfer Agency and Shareholder Services dated November 1, 1996 by and between Franklin Investor Services, Inc. and PFPC Inc., incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996 (the "1996 Annual Report") 10.26 Representative Sample of Franklin/Templeton Investor Services, Inc. Transfer Agent and Shareholder Services Agreement, incorporated by reference to Exhibit 10.26 to the 1996 Annual Report 10.27 Representative Administration Agreement between Templeton Growth Fund, Inc. and Franklin Templeton Services, Inc., incorporated by reference to Exhibit 10.27 to the 1996 Annual Report 10.28 Representative Sample of Fund Administration Agreement with Franklin Templeton Services, Inc., incorporated by reference to Exhibit 10.28 to the 1996 Annual Report 10.29 Representative Subcontract for Fund Administrative Services between Franklin Advisers, Inc. and Franklin Templeton Services, Inc., incorporated by reference to Exhibit 10.29 to the 1996 Annual Report 10.30 Representative Investment Advisory Agreement between Franklin Mutual Series Fund Inc. and Franklin Mutual Advisers, Inc., incorporated by reference to Exhibit 10.30 to the 1996 Annual Report 10.31 Representative Management Agreement between Franklin Valuemark Funds and Franklin Mutual Advisers, Inc., incorporated by reference to Exhibit 10.31 to the 1996 Annual Report 10.32 Representative Investment Advisory and Asset Allocation Agreement between Franklin Templeton Fund Allocator Series and Franklin Advisers, Inc., incorporated by reference to Exhibit 10.32 to the 1996 Annual Report 10.33 Representative Management Agreement between Franklin New York Tax-Free Income Fund, Inc. and Franklin Investment Advisory Services, Inc., incorporated by reference to Exhibit 10.33 to the 1996 Annual Report 10.34 1998 Employee Stock Purchase Plan approved December 12, 1997 by the Board of Directors, incorporated by reference to the Company's Proxy Statement filed under cover of Schedule 14A on December 17, 1997 in connection with its Annual Meeting of Stockholders to be held on January 20, 1998 10.35 System Development and Services Agreement dated as of August 29, 1997 by and between Franklin/Templeton Investor Services, Inc. and Sungard Shareholder Systems, Inc. 12 Computation of Ratios of Earnings to Fixed Charges 21 List of Subsidiaries 23 Consent of Independent Accountants 27 Financial Data Schedule (b)(1) Current Report on Form 8-K dated July 24, 1997 was filed on July 24, 1997 attaching Registrant's press release dated July 24, 1997 under Items 5 and 7. (c) See Item 14(a)(3) above. (d) No separate financial statements are required; schedules are included in Item 8. SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN RESOURCES, INC. Date: December 12, 1997 By /s/ Charles B. Johnson Charles B. Johnson, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Date: December 12, 1997 By /s/ Charles B. Johnson Charles B. Johnson, Principal Executive Officer and Director Date: December 12, 1997 By /s/ Harmon E. Burns Harmon E. Burns, Executive Vice President-Legal and Administrative Secretary and Director Date: December 12, 1997 By /s/ Martin L. Flanagan Martin L. Flanagan, Treasurer and Chief Financial Officer Date: December 12, 1997 By /s/ Kenneth A. Lewis Kenneth A. Lewis, Controller Date: December 12, 1997 By /s/ James A. McCarthy James A. McCarthy, Director Date: December 12, 1997 By /s/ F. Warren Hellman F. Warren Hellman, Director Date: December 12, 1997 By /s/ Charles E. Johnson Charles E. Johnson, Director Date: December 12, 1997 By /s/ Rupert H. Johnson, Jr. Rupert H. Johnson, Jr., Director Date: December 12, 1997 By /s/ Harry O. Kline Harry O. Kline, Director Date: December 12, 1997 By /s/ Louis E. Woodworth Louis E. Woodworth, Director Date: December 12, 1997 By Peter M. Sacerdote, Director ITEM (3)(i)(a) Registrant's Certificate of Incorporation, as filed November 28, 1969, incorporated by reference to Exhibit (3)(i) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (the "1994 Annual Report") (3)(i)(b) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed March 1, 1985, incorporated by reference to Exhibit (3)(ii) to the 1994 Annual Report (3)(i)(c) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed April 1, 1987, incorporated by reference to Exhibit (3)(iii) to the 1994 Annual Report (3)(i)(d) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed February 2, 1994, incorporated by reference to Exhibit (3)(iv) to the 1994 Annual Report (3)(ii) Registrant's By-Laws are incorporated by reference to Form 10 (File No. 06952), incorporated by reference to Exhibit (3)(v) to the 1994 Annual Report 10.1 Representative Distribution Plan between Templeton Growth Fund, Inc. and Franklin/Templeton Investor Services, Inc. incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993 (the "1993 Annual Report") 10.2 Representative Transfer Agent Agreement between Templeton Growth Fund, Inc. and Franklin/Templeton Investor Services, Inc. incorporated by reference to Exhibit 10.3 to the 1993 Annual Report 10.3 Representative Investment Management Agreement between Templeton Growth Fund, Inc. and Templeton, Galbraith & Hansberger Ltd. incorporated by reference to Exhibit 10.5 to the 1993 Annual Report 10.4 Representative Management Agreement between Advisers and the Franklin Group of Funds incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1992 (the "1992 Annual Report") 10.5 Representative Distribution 12b-1 Plan between Distributors and the Franklin Group of Funds incorporated by reference to Exhibit 10.3 to the 1992 Annual Report 10.6 Amended Annual Incentive Compensation Plan approved January 24, 1995 incorporated by reference to the Company's Proxy Statement filed under cover of Schedule 14A on December 28, 1994 in connection with its Annual Meeting of Stockholders held on January 24, 1995 10.7 Universal Stock Plan approved January 19, 1994 incorporated by reference to the Company's 1995 Proxy Statement filed under cover of Schedule 14A on December 29, 1993 in connection with its Annual Meeting of Stockholders held on January 19, 1994 10.8 Representative Amended and Restated Distribution Agreement between Franklin/Templeton Distributors, Inc. and Franklin Federal Tax-Free Income Fund, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 (the "June 1995 Quarterly Report") 10.9 Distribution 12b-1 Plan for Class II shares between Franklin/Templeton Distributors, Inc. and Franklin Federal Tax-Free Income Fund, incorporated by reference to Exhibit 10.2 to the June 1995 Quarterly Report 10.10 Representative Investment Management Agreement between Templeton Global Strategy SICAV and Templeton Investment Management Limited, incorporated by reference to Exhibit 10.3 to the June 1995 Quarterly Report 10.11 Representative Sub-Distribution Agreement between Templeton, Galbraith & Hansberger Ltd. and BAC Corp. Securities, incorporated by reference to Exhibit 10.4 to the June 1995 Quarterly Report 10.12 Representative Dealer Agreement between Franklin/Templeton Distributors, Inc. and Dealer, incorporated by reference to Exhibit 10.5 to the June 1995 Quarterly Report 10.13 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (ERISA), incorporated by reference to Exhibit 10.6 to the June 1995 Quarterly Report 10.14 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (NON-ERISA), incorporated by reference to Exhibit 10.7 to the June 1995 Quarterly Report 10.15 Representative Amended and Restated Transfer Agent and Shareholder Services Agreement between Franklin/Templeton Investor Services, Inc. and Franklin Custodian Funds, Inc., dated July 1, 1995, incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 (the "1995 Annual Report") 10.16 Representative Amended and Restated Distribution Agreement between Franklin/Templeton Distributors, Inc. and Franklin Custodian Funds, Inc., incorporated by reference to Exhibit 10.17 to the 1995 Annual Report 10.17 Representative Class II Distribution Plan between Franklin/Templeton Distributors, Inc. and Franklin Custodian Funds, Inc., on behalf of its Growth Series, incorporated by reference to Exhibit 10.18 to the 1995 Annual Report 10.18 Representative Dealer Agreement between Franklin/Templeton Distributors, Inc. and Dealer, incorporated by reference to Exhibit 10.19 to the 1995 Annual Report 10.19 Representative Mutual Fund Purchase and Sales Agreement for Accounts of Bank and Trust Company Customers, effective July 1, 1995, incorporated by reference to Exhibit 10.20 to the 1995 Annual Report 10.20 Representative Management Agreement between Franklin Value Investors Trust, on behalf of Franklin MicroCap Value Fund, and Franklin Advisers, Inc., incorporated by reference to Exhibit 10.21 to the 1995 Annual Report 10.21 Representative Sub-Distribution Agreement between Templeton, Galbraith & Hansberger Ltd. and Sub-Distributor, incorporated by reference to Exhibit 10.22 to the 1995 Annual Report 10.22 Representative Non-Exclusive Underwriting Agreement between Templeton Growth Fund, Inc. and Templeton Franklin Investment Services (Asia) Limited, dated September 18, 1995, incorporated by reference to Exhibit 10.23 to the 1995 Annual Report 10.23 Representative Shareholder Services Agreement between Franklin/Templeton Investor Services, Inc. and Templeton Franklin Investment Services (Asia) Limited, dated September 18, 1995, incorporated by reference to Exhibit 10.24 to the 1995 Annual Report 10.24 Agreement to Merge the Businesses of Heine Securities Corporation, Elmore Securities Corporation and Franklin Resources, Inc., dated June 25, 1996, incorporated by reference to Exhibit 2 to Registrant's Report on Form 8-K dated June 25, 1996 10.25 Subcontract for Transfer Agency and Shareholder Services dated November 1, 1996 by and between Franklin Investor Services, Inc. and PFPC Inc., incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996 (the "1996 Annual Report") 10.26 Representative Sample of Franklin/Templeton Investor Services, Inc. Transfer Agent and Shareholder Services Agreement, incorporated by reference to Exhibit 10.26 to the 1996 Annual Report 10.27 Representative Administration Agreement between Templeton Growth Fund, Inc. and Franklin Templeton Services, Inc., incorporated by reference to Exhibit 10.27 to the 1996 Annual Report 10.28 Representative Sample of Fund Administration Agreement with Franklin Templeton Services, Inc., incorporated by reference to Exhibit 10.28 to the 1996 Annual Report 10.29 Representative Subcontract for Fund Administrative Services between Franklin Advisers, Inc. and Franklin Templeton Services, Inc., incorporated by reference to Exhibit 10.29 to the 1996 Annual Report 10.30 Representative Investment Advisory Agreement between Franklin Mutual Series Fund Inc. and Franklin Mutual Advisers, Inc., incorporated by reference to Exhibit 10.30 to the 1996 Annual Report 10.31 Representative Management Agreement between Franklin Valuemark Funds and Franklin Mutual Advisers, Inc., incorporated by reference to Exhibit 10.31 to the 1996 Annual Report 10.32 Representative Investment Advisory and Asset Allocation Agreement between Franklin Templeton Fund Allocator Series and Franklin Advisers, Inc., incorporated by reference to Exhibit 10.32 to the 1996 Annual Report 10.33 Representative Management Agreement between Franklin New York Tax-Free Income Fund, Inc. and Franklin Investment Advisory Services, Inc., incorporated by reference to Exhibit 10.33 to the 1996 Annual Report 10.34 1998 Employee Stock Purchase Plan approved December 12, 1997 by the Board of Directors, incorporated by reference to the Company's Proxy Statement filed under cover of Schedule 14A on December 17, 1997 in connection with its Annual Meeting of Stockholders to be held on January 20, 1998 10.35 System Development and Services Agreement dated as of August 29, 1997 by and between Franklin/Templeton Investor Services, Inc. and Sungard Shareholder Systems, Inc. 12 Computation of Ratios of Earnings to Fixed Charges 21 List of Subsidiaries 23 Consent of Independent Accountants 27 Financial Data Schedule (b)(1) Current Report on Form 8-K dated July 24, 1997 was filed on July 24, 1997 attaching Registrant's press release dated July 24, 1997 under Items 5 and 7. (c) See Item 14(a)(3) above. (d) No separate financial statements are required; schedules are included in Item 8. EX-10 2 COMPUTER SOFTWARE AND SERVICES AGREEMENT EXHIBIT 10.35 SYSTEM DEVELOPMENT AND SERVICES AGREEMENT BETWEEN FRANKLIN/TEMPLETON INVESTOR SERVICES, INC AND SUNGARD SHAREHOLDER SYSTEMS, INC. Table of Contents Recitals...............................................................1 1. Definitions............................................................1 2. Deliverables...........................................................8 2.1 General................................................................8 2.2 Priority...............................................................9 2.3 Schedule...............................................................9 2.4 Investar and Investar*ONE..............................................9 (a) Investar...............................................................9 (b) Investar*ONE...........................................................9 2.5 Modification Process..................................................10 (a) General procedures....................................................10 (b) SRAs. ................................................................10 (c) SRA review process....................................................10 (d) SDS's.................................................................10 (e) SDS review process....................................................11 (f) Accepted SDS..........................................................11 (g) SDS Amendments........................................................11 (h) SDS Cancellation......................................................12 2.6 Specific Deliverables.................................................13 (a) Day One Class A Deliverables..........................................13 (b) Day One Class B Deliverables..........................................13 (i) Agreed-upon SRAs..................................................13 (ii) Interfaces and reports....... ....................................13 (a) Day One Deferred Deliverables and Day Two Deliverables...............14 (b) Requested Enhancements ..............................................14 (c) Eliminated subsystems................................................14 3. Scalability..........................................................14 3.1 Scalability Target...................................................14 (a) Completion of Initial Conversion.....................................14 (b) Subsequent scalability...............................................14 (c) Acquisitions.........................................................14 3.2 Performance Requirements.............................................15 3.3 Cost of Modifying the Software for Scalability Purposes...............15 4. Correction of Non-Conformities........................................16 4.1 General...............................................................16 4.2 Procedure.............................................................16 (a) Notification..........................................................16 (i) Discovery by FTIS.................................................16 (ii) Discovery by SunGard..............................................16 (b) SunGard response.......................................................16 (c) Class One Non-Conformities.............................................17 (d) Class Two Non-Conformities.............................................17 4.3 Fault Determination...................................................17 4.4 Compensation..........................................................17 5. SunGard Development...................................................18 5.1 DefinedDeliverables... ...............................................18 (a) Day One Class A Deliverables..........................................18 (b) Dedicated Developer Hours.............................................18 (c) Additional Developer Hours............................................18 5.2 FTIS Hours............................................................18 5.3 AdditionalServices.... ...............................................20 (a) In general............................................................20 (b) Rates for Additional Services.........................................20 (c) Increase in rates.....................................................20 5.4 Updates and enhancements..............................................20 (a) Development not requested by FTIS.....................................20 (b) Requested Enhancements................................................20 6. Delivery, Installation and Conversion...............................21 6.1 Testing by Third Party Vendors........................................21 6.2 Manner of Delivery....................................................21 6.3 Installation..........................................................21 (a) Acceptance testing....................................................21 (b) Installation..........................................................21 (c) Subsequent installation. .............................................22 (d) Installation prior to Completion of Initial Conversion................22 6.4 Conversion............................................................22 (a) Schedule..............................................................22 (b) Requirements..........................................................22 (c) Cost..................................................................22 (i) Initial Conversion....................................................22 (ii) Conversion necessitated by new Deliverables...........................22 (iii) Conversion necessitated by Acquired Accounts..........................22 6.5 Legacy System.........................................................23 7. Processing............................................................23 7.1 Operating Environment.................................................23 7.2 Modifications to the Operating Environment............................23 (a) Non-material modifications............................................23 (b) Material modifications................................................23 7.3 Operation.............................................................24 (a) Data center management................................................24 (b) Production control....................................................25 8. SunGard Services......................................................25 8.1 Training..............................................................25 (a) Prior to Completion of Initial Conversion.............................25 (b) Subsequent training...................................................25 8.2 Support...............................................................25 (a) Prior to Completion of Initial Conversion.............................25 (b) Subsequent support....................................................26 8.3 Disaster Recovery.....................................................26 9. Compensation..........................................................26 9.1 Initial Payment......................................................26 9.2 Account Fees..........................................................26 9.3 Modification of Account Fees..........................................26 9.4 Expenses..............................................................27 9.5 Taxes.................................................................28 9.6 Late Payment..........................................................28 10. Licenses and Ownership................................................28 10.1 License by SunGard....................................................28 (a) License rights regarding Software.....................................28 (b) License rights regarding Documentation................................29 (c) Term..................................................................29 (d) License limitations...................................................29 (e) FTIS liability........................................................29 10.2 License by FTIS.......................................................29 10.3 Ownership.............................................................30 (a) SunGard ownership.....................................................30 (b) FTIS ownership........................................................30 (c) Exceptions............................................................30 11. Confidentiality.......................................................30 11.1 Definition of Confidential Information................................30 11.2 Nondisclosure and Nonuse of Confidential Information..................31 11.3 Limitations on Confidentiality........................................31 11.4 Return of Tangible Materials..........................................32 12. FTIS Enhancements.....................................................32 12.1 In General............................................................32 12.2 Use of Deliverables...................................................32 12.3 Restrictions on FTIS Enhancement......................................32 12.4 Limitation of SunGard Obligations.....................................32 13. Certain FTIS Obligations..............................................32 13.1 Access to Facilities and Personnel....................................32 13.2 FTIS Resources........................................................33 13.3 Use of Software.......................................................33 13.4 Non-U.S. Processing Site..............................................33 13.5 Export Control........................................................33 13.6 Data Accuracy.........................................................33 13.7 Data Use..............................................................33 13.8 Backups...............................................................33 13.9 Review of Data and Discovery of Non-Conformities......................34 13.10 Account Purging.......................................................34 14. Term/Termination/Transition Services..................................34 14.1 Term..................................................................34 14.2 Termination for Material Breach.......................................34 14.3 Effect of Termination for Material Breach.............................35 (a) Termination by FTIS...................................................35 (b) Termination by SunGard................................................35 14.4 Transition Services...................................................35 14.5 Survival..............................................................36 15. Dispute Resolution....................................................36 15.1 Resolution by the Parties.............................................36 15.2 Arbitration...........................................................36 15.3 Abbreviated Arbitration Procedures....................................36 (a) Commencement..........................................................36 (b) Selection of Arbitrator...............................................36 (c) Procedures............................................................37 (d) Decision..............................................................37 15.4 General Arbitration Procedures........................................37 (a) Commencement..........................................................37 (b) Selection of arbitrator...............................................37 (c) Procedures............................................................37 (d) Decision..............................................................37 16. Remedies; Limitations of Liability....................................37 16.1 General...............................................................37 16.2 Attorneys' Fees and Costs.............................................37 16.3 Interlocutory Relief..................................................38 16.4 Limitations of Liability..............................................38 17. Audit Procedures......................................................39 17.1 Record Keeping........................................................39 17.2 Audit Right...........................................................39 18. Representations and Warranties........................................40 18.1 FTIS Representations and Warranties...................................40 18.2 SunGard Representations and Warranties................................40 18.3 Disclaimer ...........................................................41 19. Indemnification.......................................................41 19.1 SunGard's Indemnification.............................................41 19.2 FTIS' Indemnification.................................................41 19.3 SunGard-Caused Infringement...........................................42 19.4 FTIS-Caused Infringement..............................................42 20. Insolvency............................................................42 20.1 Right to Terminate....................................................42 20.2 License of "Intellectual Property"....................................43 21. Guarantee.............................................................43 21.1 By SunGard Data Systems...............................................43 21.2 By FRI................................................................43 22. SunGard Insurance.....................................................43 23. Miscellaneous.........................................................44 23.1 Cooperation...........................................................44 23.2 Assignment............................................................44 23.3 Modification..........................................................44 23.4 Entire Agreement......................................................44 23.5 Severability..........................................................44 23.6 Force Majeure.........................................................45 23.7 Waiver................................................................45 23.8 No Joint Venture or Agency............................................45 23.9 Notices...............................................................45 23.10 Applicable Law; Jurisdiction..........................................46 23.11 No Third Party Beneficiaries..........................................46 23.12 Counterparts; Facsimiles..............................................46 23.13 Prior Work............................................................46 23.14 Non-Solicitation......................................................46 Exhibit A:..Day One Class A Deliverables Exhibit B:..Day One Class B Deliverables Exhibit C:..Day One Deferred Deliverables Exhibit D:..Day Two Deliverables Exhibit E:..Investar Performance Requirements Exhibit F:..Initial Conversion Schedule Exhibit G:..Operating Environment Exhibit H:..SunGard Data Systems Insurance Policies Exhibit I:..SunGard Calling List Exhibit J:..SunGard Payment Schedule Under Section 14.3(a) Exhibit K:..Excluded Transactions Exhibit L:..Year 2000 Compliance Exhibit M:..Scheduled Rates (EXHIBITS A THROUGH M INTENTIONALLY OMITTED) THIS SYSTEM DEVELOPMENT AND SERVICES AGREEMENT ("Agreement") is made and entered into as of the 29th day of August, 1997 (the "Effective Date") by and between: (i) FRANKLIN/TEMPLETON INVESTOR SERVICES, INC., a California Corporation, having a place of business at 777 Mariners Island Blvd., San Mateo, CA 94404 ("FTIS"); and (ii) SUNGARD SHAREHOLDER SYSTEMS, INC., a Delaware Corporation, having a place of business at 951 Mariners Island Blvd., San Mateo, CA 94404 ("SunGard") with reference to the following: RECITALS The following provisions form the basis for, and are hereby made a part of, this Agreement: A. SunGard is in the business of developing and distributing mutual fund shareholder accounting systems, including Investar and Investar*ONE. B. FTIS is in the business of providing transfer agency services to clients receiving investment management services from affiliates of Franklin Resources, Inc. ("FRI"). C. This Agreement sets forth the terms and conditions upon which FTIS will engage SunGard to develop and deliver mutual fund shareholder accounting systems. AGREEMENT Now, Therefore, in consideration of the promises and the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Definitions. 1.1 1981 Agreement. "1981 Agreement" shall mean the Stock Transfer Data Processing Services Agreement between SunGard (f/k/a Applied Financial Systems, Inc.) and FTIS (f/k/a Franklin Administrative Services, Inc.), dated July 19, 1981, as amended. 1.2 Account. "Account" shall mean a unique combination of a company number, a fund number of any FRI Client and an account number. 1.3 Account Fees. "Account Fees" shall mean per Account fees as specified in Section 1.2 1.4 Acquired Accounts. "Acquired Accounts" shall mean Accounts relating to assets under management by subsidiaries of FRI where such assets became managed by FRI subsidiaries during the term of this Agreement in connection with an acquisition by FRI or its subsidiaries of an unrelated investment management company, a merger with an unrelated investment management company or a similar transaction. 1.5 Additional Services. "Additional Services" shall mean services provided to FTIS on a fee for service basis, as further specified in Section 5.3. 1.6 Advance. "Advance" shall have the meaning specified in the Third Amended MOU. 1.7 At No Additional Charge to FTIS. "At No Additional Charge to FTIS" shall mean that services provided to FTIS are compensated through payment of Account Fees and shall not be treated as FTIS Hours, or as Additional Services, or Chargeable to FTIS, but shall be provided without additional compensation by FTIS. 1.8 Audit Cost. "Audit Cost" shall mean, (i) if the audit is performed by independent certified public accountants, the cost, including reasonable expenses billed by such certified public accountants to the auditing party for such audit; or (ii) if the audit is performed by employees of the auditing party, all reasonable expenses incurred during the course of such audit plus a reasonable allocation of each such employee's salary reflecting the time spent on the audit. 1.9 Calling List. "Calling List" shall mean the list of SunGard-designated personnel specified in Exhibit I, as such list may be modified from time to time by SunGard. 1.10 Chargeable to FTIS. "Chargeable to FTIS" shall mean that services provided to FTIS shall be treated as FTIS Hours, if available, or as Additional Services if FTIS Hours are unavailable. 1.11 Claim. "Claim" shall mean any claim, action, suit, proceeding or litigation and any loss, deficiency, damages, liabilities, costs and expenses, including, without limitation, reasonable settlement costs and reasonable attorneys' fees and all related costs and expenses, payable as a result thereof or otherwise incurred in connection therewith. 1.12 Class One Non-Conformity. "Class One Non-Conformity" shall mean a Non-Conformity that (i) renders continued use of the Software either impossible or substantially impractical or (ii) either materially interrupts production by FTIS or makes continued production substantially more costly for FTIS. 1.13 Class Two Non-Conformity. "Class Two Non-Conformity" shall mean a Non-Conformity other than a Class One Non-Conformity. 1.14 Completion of Initial Conversion. "Completion of Initial Conversion" shall mean successful completion of the last of the Initial Conversions. 1.15 Confidential Information. "Confidential Information" shall have the meaning specified in Section 11.1, below. 1.16 Conversion. "Conversion" shall mean conversion of Account data into a format which allows processing of such data by the Software. At a minimum, Conversion shall include (i) analysis of data transfer results and tests for data integrity; (ii) conversion of all current data for all Open Accounts and Zero Balance Accounts that are included at the time of such conversion in the databases of the system from which such data is being converted; (iii) conversion of all historical data since and beginning with the beginning of the preceding calendar year to the extent that such data exists on such databases at the time of conversion; and (iv) conversion of certain historical data since and beginning with the beginning of the tenth preceding calendar year for all Open Accounts and Zero Balance Accounts, such conversion to include data sufficient to allow FTIS to generate reports used to establish the cost basis for assets held in such Open Accounts and Zero Balance Accounts, to the extent that such data exists on such databases at the time of such Conversion. Notwithstanding the foregoing, with respect to the Initial Conversion only, all historical data shall be converted since and beginning with January 1, 1996 with respect to Titan data and January 1, 1997 with respect to MPS data, as well as such additional historical data as is required beginning with the twelfth preceding calendar year to establish cost basis data as provided for above. 1.17 CPI. "CPI" shall mean the United States Consumer Price Index for all Urban Consumers (CPI-U) All Items, U.S. City Average, as published by the U.S. Department. of Labor, or, in the event that such index is no longer published, such other index as most closely substitutes for such index. 1.18 Customer Documentation. "Customer Documentation" shall mean that user documentation provided by SunGard to its service bureau customers. 1.19 Day One Class A Deliverables. "Day One Class A Deliverables" shall mean those Deliverables specified in the attached Exhibit A. 1.20 Day One Class B Deliverables. "Day One Class B Deliverables" shall mean those Deliverables specified in the attached Exhibit B. 1.21 Day One Deferred Deliverables. "Day One Deferred Deliverables" shall mean those Deliverables specified in the attached Exhibit C. 1.22 Day Two Deliverables. "Day Two Deliverables" shall mean those Deliverables specified in the attached Exhibit D. 1.23 Dedicated Developer Hours. "Dedicated Developer Hours" shall mean Developer Hours which SunGard shall dedicate to development and related tasks under this Agreement as specified in Section 5.1(b). 1.24 Deliverables. "Deliverables" shall mean the Software and the Documentation. 1.25 Developer Hours. "Developer Hours" shall mean hours worked on development and related tasks under this Agreement, including, without limitation, hours spent by SunGard on design, development, documentation and SunGard testing and hours spent on the SRA/SDS process specified in Section 2.5. 1.26 Discloseable Items. "Discloseable Items" shall mean the following information from the Deliverables: the End User Documentation, the format and visual expression of all data input screens, data output screens and data reports produced by the Software (but not including the data contained on such screens or in such reports), and the format and structure of all data extract files extracted from the database used by the Software, including descriptions of the fields of such data extract files. 1.27 Distribution. "Distribution" shall mean dividend distributions counting ordinary income, short-term capital gains and long-term capital gains separately. 1.28 Documentation. "Documentation" shall mean the Operating Documentation, the Customer Documentation and the End User Documentation. 1.29 Effective Date. "Effective Date" shall mean the date first written above. 1.30 End User Documentation. "End User Documentation" shall mean that portion of the Customer Documentation that is identified by SunGard as non-confidential and that shall be reasonably sufficient to allow End Users to provide input to and receive output from the Software, including a reasonable explanation of (a) data input and output screens (including commands available from such screens), (b) data reports, and (c) the format and structure of data extract files extracted by the Software from the database used by the Software. 1.31 End Users. "End Users" shall mean FRI Clients, investors in FRI Clients, vendors to FRI Clients, distributors for FRI Clients, and other individuals and entities to whom FTIS may reasonably choose to disclose information in the ordinary course of its business. 1.32 First Amended MOU. "First Amended MOU" shall mean the First Amended Memorandum of Understanding executed by the parties effective January 24, 1997. 1.33 Force Majeure Event. "Force Majeure Event" shall mean, with respect to a party, any event beyond such party's reasonable control, including but not limited to, any war, riot, labor strike or other labor problem, any act of God or natural disaster, any disruption or outage of power, communications or other utility, any act of any third party for whom the party in question does not have responsibility under this Agreement, or any law, regulation, ordinance or other act or order of any court, government or governmental agency, excluding any such law, regulation, ordinance or other act or order as to which such party has indemnified the other party. 1.34 FTIS-Caused Infringement. "FTIS-Caused Infringement" shall mean any infringement by FTIS, FRI or any FRI Affiliate of any third party Intellectual Property Right, but shall not include any SunGard-Caused Infringement. 1.35 FRI. "FRI" shall mean Franklin Resources, Inc. 1.36 FRI Affiliate. "FRI Affiliate" shall mean any company controlled by or under common control with FRI, including, without limitation, any direct or indirect parent, sibling or direct or indirect FRI subsidiary, but only during such time as such relationship exists. 1.37 FRI Client. "FRI Client" shall mean any individual or entity to whom FRI, or any FRI Affiliate, provides investment management or investment advisory services, including any such entity that constitutes an open or closed end investment company, unit investment trust, real estate investment trust or similar investment entity, but only during such time as such relationship exists.. 1.38 FTIS. "FTIS " shall mean Franklin/Templeton Investor Services, Inc. 1.39 FTIS Enhancements. "FTIS Enhancements" shall mean enhancements to the Software created pursuant to Section 12 by FTIS or for FTIS by a third party other than SunGard. 1.40 FTIS Hours. "FTIS Hours" shall mean hours of SunGard employees and individual contractors when providing services to FTIS hereunder, as further specified in Section 5.2. 1.41 FTIS Trainers. "FTIS Trainers" shall mean employees and/or individual contractors of FTIS, FRI or any FRI Affiliate designated by FTIS to perform training on the Software. 1.42 FTIS Unrelated Party. "FTIS Unrelated Party" shall mean any individual or entity other than FRI, FRI Affiliates, FRI Clients or End Users. 1.43 Increase in the CPI. "Increase in the CPI" shall mean the net increase in the CPI for the immediately preceding twelve (12) month period, or the closest available approximation of such period. 1.44 Incremental Accounts. "Incremental Accounts" shall mean the number of Processed Open Accounts which exceeds the number of Processed Open Accounts in existence as of the seventh anniversary of the Completion of Initial Conversion. 1.45 Initial Conversion. "Initial Conversion" shall mean completion of Conversion of Accounts to Investar as specified in the schedule attached hereto as Exhibit F, including any modifications to such schedule as may be agreed in writing by the parties under the terms of this Agreement. 1.46 Initial Payment. "Initial Payment" shall have the meaning specified in Section 9.1, below. 1.47 Intellectual Property Right. "Intellectual Property Right" shall mean any intellectual property right, whether arising inside or outside the United States, and whether arising under the laws of the United States or of any foreign jurisdiction, including patent rights, copyright rights, trade secret rights and any other similar intellectual property rights. 1.48 Investar. "Investar" shall mean the production version of the mutual fund shareholder accounting system marketed by SunGard under the name "Investar," current as of the date initially installed in a production environment at FTIS. 1.49 Investar*ONE. "Investar*ONE" shall mean the production version of the mutual fund shareholder accounting systems marketed by SunGard under the name "Investar*ONE," current as of the date initially installed in a production environment at a Processing Site. 1.50 MOU. "MOU" shall mean the Memorandum of Understanding executed by the parties effective January 3, 1997. 1.51 Non-Conformity. "Non-Conformity" shall mean a failure of Software to correctly perform the functionality specified in the associated SDS, a Software bug, or a failure to meet a Performance Requirement. In the event that the requirements of an SDS conflict with the Performance Requirements, for purposes of determining whether a Non-Conformity exists, the Performance Requirements shall govern (except that the foregoing shall not prevent the parties from agreeing in an accepted SDS to modify one or more Performance Requirements for particular functionality or reports). 1.52 Normal Processing. "Normal Processing" shall mean processing which occurs on business days (excluding weekends and holidays), but excluding the six (6) hour period of time following the commencement of "F Day Processing." 1.53 Open Account. "Open Account" shall mean an Account that carries a positive balance. 1.54 Operating Documentation. "Operating Documentation" shall mean (i) prior to Completion of Initial Conversion, such documentation as SunGard uses internally for operation of the Software; and (ii) within a reasonable time period following Completion of Initial Conversion, reasonably current and reasonably complete documentation which is reasonably sufficient to allow trained FTIS, FRI and FRI Affiliate personnel to operate the Software in the Operating Environment and in the ordinary course of business. 1.55 Operating Environment. "Operating Environment" shall mean the hardware and software environment specified in the attached Exhibit G, including amendments as may from time to time be agreed by the parties. 1.56 Performance Requirements. "Performance Requirements" shall mean those standards specified in the attached Exhibit E, including any modifications to such standards as may be agreed by the parties in writing under the terms of this Agreement. 1.57 POA. "POA" shall mean Processed Open Account. 1.58 Processed Open Account. "Processed Open Account" shall mean an Account that is running "live" on Investar and/or Investar*ONE and that is an Open Account for at least one day during a calendar month. A Processed Open Account running "live" on both Investar and Investar*ONE during the same month will be counted as a single Processed Open Account. 1.59 Processing Sites. "Processing Sites" shall mean those sites of FTIS, FRI or any FRI Affiliate designated by FTIS. Each Processing Site shall contain a full, operational Operating Environment. 1.60 Proprietary Item. "Proprietary Item" shall mean the Software (including the object code and source code for the Software), the Documentation, the ideas, methods, algorithms, formulae and concepts used in developing and/or incorporated in the Software or Documentation, including, but not limited to, the visual expressions and other design features of the Software, and all revisions, modifications, refinements, releases, versions, enhancements and improvements of the Software or Documentation, but shall exclude Discloseable Items. 1.61 Reasonable Transition Period. "Reasonable Transition Period" shall mean a period of not less than one year which is reasonably sufficient to allow FTIS to convert processing to a replacement system following expiration or termination of this Agreement, including reasonable time for (i) investigation of alternative systems; (ii) negotiation with other vendors; (iii) development work; and (iv) account conversion. 1.62 Reimbursable Expenses. "Reimbursable Expenses" shall mean (a) the following reasonable out-of-pocket expenses incurred by SunGard's employees and individual contractors in the course of traveling to or from an FTIS facility or a third party facility to which travel is required under this Agreement or in the course of traveling to or from a SunGard facility for a meeting with FTIS personnel or with third party personnel if such meeting is requested by FTIS: (i) ground transportation expenses; (ii) air travel in coach class; (iii) lodging and meal expenses reasonably incurred during such travel, or during the visit to such FTIS or third party facility; (b) the cost of data communication lines necessary in order to allow SunGard to provide services required under this Agreement; and (c) reasonable delivery charges. 1.63 Requested Enhancements. "Requested Enhancements" shall mean Deliverables requested by FTIS during the term of this Agreement, excluding Day One Class A Deliverables, Day One Class B Deliverables, Day One Deferred Deliverables and Day Two Deliverables. 1.64 Response Time. "Response Time" shall mean host response time as measured in the IMS log. 1.65 Scalability Target. "Scalability Target" shall mean the number of Processed Open Accounts calculated pursuant to Exhibit E. 1.66 SDS. "SDS" shall mean a System Design Specification in substantially the same format as those currently in use by the parties. Each SDS shall specify (i) the functional design to be used to implement the functionality specified in one or more SRAs, (ii) a schedule for delivery, testing, installation of Software, conversion of data (if applicable) and preparation of Documentation, and (iii) a budget specified in terms of Developer Hours. 1.67 Second Amended MOU. "Second Amended MOU" shall mean the Second Amended Memorandum of Understanding executed by the parties effective April 30, 1997. 1.68 Software. "Software" shall mean Investar and Investar*ONE and that computer software developed and/or delivered by SunGard pursuant to this Agreement. 1.69 SRA. "SRA" shall mean a Systems Requirement Analysis document in substantially the same form as those currently in use by the parties. An SRA shall specify one or more functional requirements requested by FTIS. 1.70 SunGard Affiliate. "SunGard Affiliate" shall mean any company controlled by or under common control with SunGard Data Systems, including, without limitation, any direct or indirect parent, sibling or direct or indirect SunGard Data Systems subsidiary, but only during such time as such relationship exists. 1.71 SunGard-Caused Infringement. "SunGard-Caused Infringement" shall mean infringement by any Deliverable of any third party Intellectual Property Right, but shall not include (i) infringement to the extent attributable to an SRA, unless (a) a non-infringing implementation was reasonably available or (b) SunGard knew that such SRA required such infringement but failed to inform FTIS; or (ii) infringement to the extent attributable to (a) any unauthorized or improper use or modification of any Deliverable, (b) any authorized modification of any Deliverable made by FTIS or on behalf of FTIS by any individual or entity other than SunGard, (c) any unauthorized combination of any Deliverable with any other software, documentation or other item, or (d) any breach of any provision of this Agreement by FTIS or any FRI Affiliate, FRI Client, End User or Third Party Vendor. 1.72 SunGard-Caused Non-Conformity. "SunGard-Caused Non-Conformity" shall mean a Non-Conformity caused by (i) a failure of Software caused other than by a Force Majeure Event; or (ii) a failure of SunGard personnel to properly carry out production control requirements during such time as SunGard is responsible for production control. 1.73 SunGard Data Systems. "SunGard Data Systems" shall mean SunGard Data Systems, Inc., the ultimate corporate parent of SunGard. 1.74 SunGard Unrelated Party. "SunGard Unrelated Party" shall mean any individual or entity other than SunGard Data Systems, SunGard Affiliates or customers of SunGard, SunGard Data Systems or SunGard Affiliates. 1.75 Termination Date. "Termination Date" shall mean the effective date of a termination for material breach by FTIS pursuant to Section 14.2. 1.76 Testing Period. "Testing Period" shall mean the period of time during which FTIS shall complete testing of delivered Software. The Testing Period will be that period provided by SunGard to its service bureau customers for testing such Software prior to installation of such Software at the SunGard service bureau data center, or, if FTIS determines in its reasonable discretion that the magnitude of such Software delivery is such that parallel processing is necessary in which such Software would be tested on a test database made up of duplicates of a large subset or the entirety of Open Accounts, the Testing Period shall be a reasonable time for completion of such parallel processing testing. 1.77 Third Amended MOU. "Third Amended MOU" shall mean the Third Amended Memorandum of Understanding executed by the parties effective June 30, 1997. 1.78 Third Party Vendors. "Third Party Vendors" shall mean third party companies and consultants providing computer hardware and/or software products, services or consultation to FTIS, FRI or any FRI Affiliate or any company or consultant under consideration for provision of such products, services or consultation. 1.79 Year 2000 Compliant. "Year 2000 Compliant," with respect to Software, shall mean that such Software is capable of accurately accounting for 20th and 21st century dates and processing the fact that year 2000 is a leap year, and normal operation will not be impaired by the advent of the year 2000, including accurately recognizing and accommodating the rollover to the year 2000. 1.80 Zero Balance Accounts. "Zero Balance Accounts" shall mean Accounts with a balance of zero. 2. Deliverables. 2.1 General. SunGard shall use commercially reasonable efforts to deliver Software that is free from Non-Conformities, including testing Software prior to delivery, in accordance with SunGard's past practices and normal and reasonable industry standards, unless FTIS requests that Software be delivered prior to completion of testing, in which event SunGard shall comply with such request. In addition, SunGard shall maintain a System Development Life Cycle methodology which meets current industry standards, including controls regarding the integrity, auditability and compatibility of all Software. Such methodology shall be consistent with SunGard's past practices, but in any event will meet current industry standards. 2.2 Priority. The successful implementation of the Day One Class A Deliverables, Day One Class B Deliverables, Day One Deferred Deliverables and Day Two Deliverables shall be SunGard's highest customer priority. 2.3 Schedule. SunGard shall deliver and install Deliverables, and convert Accounts (if relevant), pursuant to the schedule specified in the SDS associated with such Deliverables. In addition, SunGard shall meet all dates specified in Exhibit F, including all Initial Conversion dates. 2.4 Investar and Investar*ONE. (a) Investar. SunGard has delivered and installed Investar at the FTIS Processing Center in St. Petersburg, Florida and shall undertake Initial Conversion of Accounts pursuant to the schedule attached as Exhibit F. SunGard has also delivered the Documentation for Investar. (b) Investar*ONE. During the term of this Agreement, FTIS may evaluate Investar*ONE to determine whether, in FTIS' reasonable, good faith judgment, Investar*ONE is suitable for FTIS applications. If FTIS reaches a preliminary conclusion that Investar*ONE may be suitable for FTIS applications, FTIS shall communicate such conclusion to SunGard and shall act reasonably in response to any request by SunGard that the schedule for Investar Year 2000 Compliance be extended pending a final FTIS determination on Investar*ONE. If FTIS reaches a final conclusion that Investar*ONE is suitable for FTIS applications, the parties shall negotiate regarding Performance Requirements applicable to Investar*ONE, and SunGard shall specify the Operating Environment required for Investar*ONE. If FTIS agrees to install SunGard's Operating Environment specification, and if the parties reach agreement on the Performance Requirements for Investar*ONE, then the Operating Environment and Performance Requirements specified by this Agreement shall be amended and SunGard shall install Investar*ONE at all then-existing Processing Sites. If FTIS determines that Investar*ONE is not suitable for FTIS applications, or if FTIS determines that it is unwilling to install the Investar*ONE Operating Environment specified by SunGard, or if the parties are unable to agree on Investar*ONE Performance Requirements, then FTIS shall have no obligation to accept Investar*ONE, and the Performance Requirements, including any applicable Year 2000 requirements (including any extension in the Year 2000 schedule agreed upon pursuant to this Section), shall continue to apply to Investar. If Franklin accepts Investar*ONE by using it in production, then, irrespective of whether the parties agree on Performance Requirements, SunGard should have no further obligation to render Investar Year 2000 Compliant. 2.5 Modification Process. The parties contemplate a definition process leading to agreement on defined functionality, a schedule and a budget for modifications to Investar and Investar*ONE. This process has been partially completed for Day One Class A Deliverables, Day One Class B Deliverables, Day One Deferred Deliverables and Day Two Deliverables. This definition process encompasses the steps outlined below, which may be waived by mutual agreement. (a) General procedures. The parties will cooperate in defining the nature of development to be accomplished. Such cooperation will include, but not be limited to, meetings among project personnel on a weekly basis, such meetings to include discussions of progress and of functionality which may be requested by FTIS. In addition, the parties will exercise reasonable discretion in responding to any request to extend the deadlines for response specified in this Section. All notices specified in this Section shall be in writing and shall be given in accordance with Section 23.9 except that faxes and electronic mail shall not require confirmation. (b) SRAs. Once FTIS has defined functionality which it wishes to request, FTIS shall describe that functionality in an SRA, which shall be delivered to an appropriate SunGard representative. Each SRA shall contain sufficient information to define the nature of the FTIS functional requirements and shall specify a date for SunGard to complete its review process pursuant to subsection (c) hereof, such date to be seven (7) business days from the date of delivery of the SRA unless another reasonable date is specified (the "review period"). In the event that SunGard reasonably believes such dates are unreasonable under the circumstances, the parties shall discuss modifying such dates. (c) SRA review process. Once it has received an SRA from FTIS, SunGard shall review that SRA within the review period in order to determine whether the FTIS requirements are described in a reasonably complete and unambiguous manner. If SunGard determines, in its reasonable discretion, that the SRA is either not reasonably complete or contains ambiguities, SunGard shall request additional information from FTIS, in which event the parties shall reasonably work together to clarify the SRA. This process shall continue in an iterative fashion until (i) SunGard has notified FTIS that the SRA is reasonably complete and unambiguous, or (ii) FTIS has withdrawn the SRA. Neither party shall have any further obligation hereunder with respect to an SRA which has been withdrawn by FTIS, except that FTIS shall be responsible for any Developer Hours incurred by SunGard during the response and evaluation process. (d) SDS's. Once SunGard has notified FTIS that an SRA is reasonably complete and unambiguous, SunGard shall provide FTIS with one or more SDS's, within a thirty (30) day period, or such longer or shorter period as the parties may agree, detailing the manner in which SunGard proposes to implement the functionality specified in such SRA. Each such SDS shall include (i) a detailed description of the functionality which SunGard proposes to provide, (ii) a schedule for delivery, testing and installation of Software, conversion of data, if applicable, and preparation of Documentation, (iii) a budget specifying the number of Development Hours required to implement the SDS, (iv) an explanation, if applicable, of the impact of such SDS on other SDS's, the Initial Conversion schedule, or Performance Requirements, and (v) a date by which the SDS shall be deemed withdrawn if not accepted, such date to be thirty (30) days from the date of delivery of such SDS unless another reasonable date is specified (the "response period"). (e) SDS review process. Once it has received an SDS from SunGard, FTIS shall review that SDS within the response period. Within the response period, FTIS shall notify SunGard that (i) the SDS is accepted, (ii) the SDS is rejected, or (iii) FTIS requires further clarification or wishes to further discuss the terms of the SDS. If FTIS does not provide any such notice within such time period, the SDS shall be deemed rejected. In the event that FTIS rejects the SDS or it is deemed rejected, neither party shall have any further obligation with respect to the SDS or the associated SRA(s), subject to FTIS' right to submit a similar SRA to SunGard, thereby again triggering the SRA review process, except that FTIS shall remain responsible for any Developer Hours incurred by SunGard during the response and evaluation process. In the event that FTIS requests further clarification or discussion, such clarification or discussion shall take place, after which SunGard shall either submit a new SDS or resubmit the original SDS, either event again triggering a new response period for response by FTIS. If the duration of the SDS review process renders the proposed schedule unrealistic, SunGard may propose a revision to the schedule, in which event FTIS may, in its reasonable discretion (a) promptly accept the revised schedule in writing; (b) discuss the necessity of the revised schedule, and possible alternatives with SunGard, or (c) reject the SDS in writing or fail to respond within the response period, in which event the SDS shall be deemed rejected. (f) Accepted SDS. Once FTIS has accepted an SDS in writing, SunGard shall deliver corresponding Deliverables pursuant to the schedule and within the budget specified in the SDS. The Developer Hours actually incurred by SunGard with respect to such SDS, capped at the budget specified in the SDS, shall be subtracted from the Dedicated Developer Hours, if available, or shall be Chargeable to FTIS, if Dedicated Developer Hours are unavailable. In the event that FTIS authorizes SunGard to begin work on an SDS prior to formal acceptance of the SDS, this will be deemed an acceptance of the SDS. (g) SDS amendments. Either party may request an amendment to any SDS previously accepted by FTIS by submitting a written request to the other party describing the nature of the requested change. In such event, the parties shall discuss the nature of the amendment in order to determine whether, in the reasonable judgment of both parties, the amendment would have a material effect on the schedule or budget for the SDS to be amended, any other related SDS, the Performance Requirements or the Initial Conversion schedule. If the parties determine that the amendment would have no such material effect, then the parties shall cooperate to define an amended SDS. If the parties determine that the amendment would have a material effect, then the parties shall negotiate the terms upon which the SDS, and/or other SDS's and/or the Initial Conversion, schedule and/or the Performance Requirements, would be amended, and the parties shall determine whether SunGard should suspend work on such other SDS's during such negotiations. Such terms may include a modification of the Initial Conversion schedule, the schedule or budget for the SDS('s), or such other terms as may be agreeable to the parties. If the parties agree in writing on one or more amended SDS's, such amended SDS's shall be substituted for the original SDS's, and both parties will be bound by the terms of the amended SDS's. If the parties fail to agree on one or more amended SDS's, the original SDS's will remain in effect unless canceled by FTIS as provided below (provided that any period during which such work was suspended shall be added to the schedule under such SDS's). (h) SDS cancellation. At any point after acceptance of an SDS, FTIS shall have the right, in its reasonable discretion, to cancel such SDS, by providing written notice of cancellation to SunGard. Once SunGard receives such notice of cancellation, SunGard may request that the parties discuss the nature of the cancellation in order to determine whether, in the reasonable judgment of both parties, the cancellation would have a material effect on the schedule or budget for other SDS's or the Initial Conversion schedule. Otherwise, SunGard shall promptly unwind and discontinue work on the SDS and shall notify FTIS of the Developer Hours and Reimbursable Expenses expended with respect to such SDS prior to and after receipt of such cancellation notice. For purposes of compensation and/or allocation, such Developer Hours and Reimbursable Expenses shall then be treated as if such SDS had been completed and the associated Deliverable delivered and accepted, as of the date SunGard completes the unwinding and discontinuance of work on such SDS. If the parties determine that the cancellation would have a material effect on other SDS's or the Initial Conversion schedule, then the parties shall reasonably negotiate the terms upon which the other SDS's or the Initial Conversion schedule would be amended, and FTIS shall have the right to authorize SunGard to suspend work on such other SDS's during such negotiations. Such terms may include a modification of the schedule or budget for the other SDS's, or such other terms as may be agreeable to the parties. If the parties agree in writing on one or more amended SDS's, such amended SDS's shall be substituted for the original SDS's, and both parties will be bound by the terms of the amended SDS's. If the parties fail to agree on one or more amended SDS's, the original SDS's will remain in effect, provided that any period during which work was suspended shall be added to the schedule under such SDS's. 2.6 Specific Deliverables. (a) Day One Class A Deliverables. With respect to the Day One Class A Deliverables, the parties have agreed on the SRAs specified in Exhibit A as well as the accompanying schedule, and SunGard has proposed SDS's corresponding to such SRAs, but FTIS has not yet accepted all of such SDS's. FTIS shall promptly provide responses to all such SDS's not already accepted as of the Effective Date. SunGard shall deliver the Day One Class A Deliverables with functionality corresponding to the SRAs specified in Exhibit A pursuant to the schedule specified in such Exhibit and pursuant to the Initial Conversion schedule. If FTIS' responses require a change to one or more SDS's not accepted as the Effective Date and such change requires a material increase in the Developer Hours budgeted by SunGard for such SDS, then SunGard shall have the right to refuse to implement such change unless FTIS also agrees to a modification of the schedule for such SDS (which may include treating the modification as a Day One Class B Deliverable or a Day One Deferred Deliverable) or a modification of the Initial Conversion schedule. In such event, both parties will act reasonably in attempting to meet such schedules and in negotiating alterations if necessary. (b) Day One Class B Deliverables. The Day One Class B Deliverables are specified in Exhibit B hereto. (i)Agreed-upon SRAs. With respect to the Day One Class B Deliverables, the parties have agreed on the SRAs specified in Exhibit B as well as the accompanying schedule, and SunGard has proposed partial SDS's corresponding to such SRAs, but without complete specification of all budget information. Promptly after the Effective Date, SunGard shall provide FTIS proposed amended SDS's corresponding to the Day One Class B Deliverable SRAs identified in Exhibit B. Each such amended SDS shall specify the same functionality and schedule as the original corresponding SDS, but shall also specify a budget, in terms of Developer Hours, for development. Each such proposed amended SDS shall be treated, for purposes of the SDS review and acceptance procedure specified above, as if such proposed amended SDS constituted an SDS newly delivered to FTIS. If FTIS requires a change to one or more SDS's not accepted as of the Effective Date and such change requires a material increase in the Developer Hours budgeted by SunGard for such SDS, then SunGard shall have the right to refuse to implement such change unless FTIS also agrees to a modification of the schedule for such SDS or a modification of the Initial Conversion schedule. In such event, both parties will act reasonably in attempting to meet such schedules and in negotiating alterations if necessary. (ii) Interfaces and reports. In addition to the SRAs specified in Exhibit B, the Day One Class B Deliverables shall also include certain interface and report functionality. Certain of such interface and report functionality is specified in Exhibit B. Promptly after the Effective Date, FTIS will supplement the Exhibit B description of such functionality with a complete description, and will provide SunGard with a reasonable prioritization list for such interface and report functionality. SunGard's obligation to provide such interface and report functionality pursuant to the Day One Class B schedule shall be limited to providing 3,000 hours for interface functionality and 2,000 hours for report functionality. Prior to the delivery dates specified in such schedule, SunGard shall devote such hours to such functionality, following the prioritization order provided by FTIS. Any such functionality not complete within such budget shall become a Day One Deferred Deliverable, and shall be delivered according to a schedule and budget to be agreed upon by the parties. (c) Day One Deferred Deliverables and Day Two Deliverables. FTIS has provided SunGard with SRAs corresponding to requested Day One Deferred and Day Two Deliverables. SunGard's response to such SRAs shall be delivered to FTIS within sixty (60) days after Completion of Initial Conversion. In responding to such SRAs, SunGard shall prioritize delivery of Day One Deferred Deliverables over Day Two Deliverables. (d) Requested Enhancements. FTIS has not yet provided SRAs to SunGard corresponding to Requested Enhancements. Such SRAs may be provided at any time during the term of this Agreement. SunGard shall have no obligation to provide any response to any SRA proposing a Requested Enhancement until sixty (60) days following the Completion of Initial Conversion, with the exception of SRAs seeking modification of interfaces between Investar and FTIS subsystems designed to modify the output of dates from Investar to the subsystems in such a manner as to adequately handle dates during and after the year 2000. SunGard shall respond to any such SRAs within the normal response time provided above. Any such response shall specify that work shall be completed within four (4) months of the acceptance of the SDS. (e) Eliminated subsystems. By December 31, 1997, SunGard will provide to FTIS a list of existing FTIS subsystems that will be eliminated through incorporation of subsystem functionality into the Software prior to January 1, 2000. 3. Scalability. 3.1 Scalability Target. The Scalability Target shall be calculated as follows: (a) Completion of Initial Conversion. The Scalability Target as of the Completion of Initial Conversion shall be as specified in Exhibit M. (b) Subsequent scalability. At the end of each calendar quarter after the first full calendar quarter following the Completion of Initial Conversion, the Scalability Target will be set as specified in Exhibit M (c) Acquisitions. FTIS shall provide notice of any acquisition of Acquired Accounts as follows: six (6) months notice of any acquisition involving an increase of POAs of six percent (6%) or less and twelve (12) months notice of any acquisition involving an increase of POAs of greater than six percent (6%). For these purposes, the percentage increase of POAs shall be calculated by comparing the number of Accounts to be acquired with the number of POAs, both numbers calculated as of the date of such notice. Providing that proper notice has been given, the Scalability Target shall be increased by the number of POAs given in such notice, such increase to take effect as of the date of closing of such acquisition or as of the date when such notice runs, whichever is later, such increase to be added to the existing Scalability Target as of the date such increase takes effect. 3.2 Performance Requirements. Subject to the requirements of this Agreement, including Sections 7.1and 7.2, the Software will be required to meet all Performance Requirements when running with actual Processed Open Accounts, if the number of Processed Open Accounts is equal to or less than the Scalability Target. The Software shall not be required to meet the Performance Requirements if running with actual Processed Open Accounts in excess of the Scalability Target; provided, however, that during any such period the Software shall continue to be able to meet the Performance Requirements if running with a number of Processed Open Accounts which equals the Scalability Target. In any period during which the number of Processed Open Accounts exceeds the Scalability Target, SunGard will undertake commercially reasonable good faith efforts to render the Software capable of continuing to meet the Performance Requirements. Nothing herein contained shall require the Software to meet the Performance Requirements for a volume of Processed Open Accounts which exceeds the number actually in existence. 3.3 Cost of Modifying the Software for Scalability Purposes. In general, SunGard shall be solely responsible for any work required in order to modify the Software as may be required to meet the Scalability Target, and such work shall be At No Additional Cost to FTIS. Notwithstanding the foregoing, FTIS shall be responsible for any incremental cost required for tuning for any acquisition of Acquired Accounts involving an increase of POAs of greater than 10% (ten percent), such percentage to be calculated at the time of giving notice of such acquisition, as specified in Section 3.1(c). In such event, tuning required in order to meet the Scalability Targets in effect during the notice period shall be At No Additional Charge to FTIS, but tuning required in order to meet scalability required for such Acquired Accounts shall be Chargeable to FTIS. The parties recognize that it may be difficult to differentiate costs incurred in order to meet Scalability Targets during the notice period and costs incurred in order to meet the requirements of the additional Acquired Accounts, and the parties will negotiate reasonably in attempting to determine the cost to be borne by FTIS. If the parties are unable to agree on such cost, the matter will be submitted to the dispute resolution process specified in Section 15. FTIS will make any payment required hereunder within thirty (30) days of conversion of the Acquired Accounts, unless the parties are unable to agree on the amount of such payment, in which event the timing of the payment shall be specified pursuant to the dispute resolution process. 4. Correction of Non-Conformities. 4.1 General. During the term of this Agreement, SunGard shall use commercially reasonable efforts to correct Non-Conformities pursuant to the procedures specified in this Section. FTIS shall use commercially reasonable efforts to cooperate in such SunGard correction efforts, including but not limited to, promptly providing to SunGard (i) all documentation, examples, source data and other information regarding each Non-Conformity as is reasonably possible for FTIS to provide and (ii) all potentially relevant information regarding data center management and system performance and, (iii) if FTIS was responsible for production control during any period when the Non-Conformity occurred, all potentially relevant information regarding production control. 4.2 Procedure. (a) Notification. Each party shall use commercially reasonable efforts to discover Non-Conformities, and shall inform the other of any Non-Conformities promptly once discovered. (i)Discovery by FTIS. When and if FTIS discovers a Class One Non-Conformity, FTIS shall immediately report such Class One Non-Conformity to SunGard using the Calling List. If the first person on the Calling List is not available when FTIS attempts to contact such person, or if SunGard fails to respond to such call, then FTIS shall continue calling the persons on the Calling List (in the order listed) until contact is made and SunGard responds to the call. When and if FTIS discovers a Class Two Non-Conformity, FTIS shall report such Class Two Non-Conformity using written reporting procedures consistent with the parties' past practices, unless FTIS determines, in its reasonable judgment, that such Class Two Non-Conformity is sufficiently important to be reported to SunGard by telephone, in which case FTIS shall use the Calling List procedure set forth above, but shall identify the Non-Conformity as a Class Two Non-Conformity. (ii) Discovery by SunGard. When and if SunGard discovers a Class One Non-Conformity, SunGard shall immediately report such Class One Non-Conformity to the president of FTIS, or, in the event such individual is unavailable, to the most senior representative of FTIS available on immediate notice. When and if SunGard discovers a Class Two Non-Conformity, SunGard shall report such Class Two Non-Conformity using written reporting procedures consistent with the parties' past practices, unless SunGard determines, in its reasonable judgment, that such Class Two Non-Conformity is sufficiently important to be reported to FTIS by telephone, in which event SunGard shall promptly report such Class Two Non-Conformity to the appropriate FTIS personnel. (b) SunGard response. SunGard shall use commercially reasonable efforts to respond to FTIS reports of Non-Conformities through off-site telephone consultation, assistance and advice within fifteen (15) minutes for Class One Non-Conformities and within one (1) hour for Class Two Non-Conformities that are reported by FTIS by telephone, but, in any event, SunGard shall respond within no more than one (1) hour to reports of Class One Non-Conformities and within no more than four (4) hours to reports of Class Two Non-Conformities that are reported by FTIS by telephone. (c) Class One Non-Conformities. Upon detecting or being notified of a Class One Non-Conformity, SunGard shall immediately assemble the appropriate personnel to analyze the problem, identify potential solutions and determine the best plan of action. FTIS shall participate in this process as reasonably necessary. Once an appropriate plan of action is determined, SunGard shall take all reasonably necessary steps to supply a reasonable work-around or correction as soon as possible. This shall include assigning qualified, dedicated staff to work on the Non-Conformity 24 hours a day, seven days per week, at either the SunGard site or a Processing Site as necessary. SunGard personnel shall be dedicated to resolving the Non-Conformity until an acceptable work-around or correction is supplied or until FTIS determines in its reasonable judgment after consultation with SunGard that a work-around or correction cannot be produced. A SunGard representative shall keep FTIS regularly informed of the status of the Non-Conformity correction process. (d) Class Two Non-Conformities. For any Class Two Non-Conformities, SunGard shall work with FTIS to document the Non-Conformity through mutually established procedures consistent with the parties' past practices. Class Two Non-Conformities shall be resolved according to priorities reasonably established by SunGard after consultation with FTIS. SunGard personnel shall be dedicated to resolving Class Two Non-Conformities through SunGard's normal software support procedures. 4.3 Fault Determination. The parties will cooperate reasonably to investigate any suspected or confirmed Non-Conformity to determine if the Non-Conformity is a SunGard-Caused Non-Conformity. If the parties are unable to agree whether a Non-Conformity is a SunGard-Caused Non-Conformity, such dispute will be subject to the dispute resolution procedures of Section 15. In any such arbitration, FTIS shall have the burden to establish, by a preponderance of the evidence, that any Non-Conformity first manifested while FTIS was responsible for production control is a SunGard-Caused Non-Conformity, whether or not such Non-Conformity is similar to a Non-Conformity previously reported. 4.4 Compensation. SunGard's investigation and correction of SunGard-Caused Non-Conformities shall be At No Additional Charge to FTIS and SunGard shall not be entitled to reimbursement of Reimbursable Expenses incurred in connection therewith. SunGard's investigation and correction of Non-Conformities other than SunGard-Caused Non-Conformities shall be Chargeable to FTIS. In the event the parties agree that the ultimate responsibility for a Non-Conformity is unclear or is shared, the parties may agree to any allocation of the cost of investigation and correction that the parties determine to be reasonable. 5. SunGard Development. 5.1 Defined Deliverables. (a) Day One Class A Deliverables. SunGard shall devote sufficient resources to ensure timely completion of the Day One Class A Deliverables and agrees that the Day One Class A Deliverables shall be completed without the imposition of any hourly development charges to FTIS. (b) Dedicated Developer Hours. SunGard shall provide Dedicated Developer Hours for development of Day One Class B Deliverables, Day One Deferred Deliverables, Day Two Deliverables or Requested Enhancements. Such Dedicated Developer Hours shall be provided to FTIS without the imposition of any hourly development charges. The number of Dedicated Developer Hours to be provided by SunGard shall be calculated by taking the number of Developer Hours used by SunGard from July 1, 1997 through the Effective Date, other than Developer hours used during such period related to Day One Class A Deliverables, and subtracting that number from 44,325. For purposes of calculation of the Dedicated Developer Hours, within seven (7) days of the Effective Date, SunGard shall notify FTIS of the number of Developer Hours used by SunGard from July 1, 1997 through the Effective Date, other than Developer Hours used during such period related to Day One Class A Deliverables. (c) Additional Developer Hours. To the extent that Day One Class B Deliverables, Day One Deferred Deliverables, Day Two Deliverables or Requested Enhancements require Developer Hours in excess of the Dedicated Developer Hours, such excess Developer Hours shall be Chargeable to FTIS. 5.2 FTIS Hours. (a) After Completion of Initial Conversion and throughout the remainder of the term of this Agreement, SunGard shall provide FTIS a pool of hours for services ("FTIS Hours"). Such services shall include: (i) assistance in the operation of the Software; (ii) help desk support; (iii) training; (iv) new conversions, representing customers of FRI Clients newly managed by FRI or any FRI Affiliate; (v) custom development; and (vi) maintenance, support and other services provided by SunGard hereunder to the extent that FTIS Hours are used therefor in accordance with this Agreement. (b) In assigning personnel to tasks using FTIS Hours, SunGard shall use reasonable efforts to maintain continuity of personnel. Notwithstanding the foregoing, SunGard shall have the right, in its reasonable discretion, to assign tasks using FTIS Hours to various SunGard employees and individual contractors, so long as such employees and individual contractors are qualified for such tasks, it being understood that both parties will benefit if SunGard personnel who have responsibilities for multiple customers are sometimes assigned to tasks using FTIS Hours. (c) On a monthly basis, FTIS and SunGard shall consult regarding the types of tasks being performed using FTIS Hours, as well as the types of tasks anticipated by the parties. SunGard shall provide personnel suited to the anticipated tasks. FTIS shall act reasonably in any request that the mix of tasks be altered in such a manner as to require the assignment of different personnel by SunGard, and shall provide SunGard at least three (3) months notice prior to requiring any such alteration. (d) Beginning the first complete month after Completion of Initial Conversion, SunGard shall provide FTIS with two thousand eight hundred thirty-three (2,833) FTIS Hours per month. SunGard shall provide FTIS with an additional one hundred forty-two (142) hours per month for each seven hundred fifty thousand (750,000) Processed Open Accounts by which the Processed Open Accounts exceeds five million (5,000,000). Such additional hours shall be provided beginning three (3) months following the month in which such 750,000 Processed Open Accounts came into existence. In the event that Processed Open Accounts grow to a level requiring additional hours per month, but later sink below that level, SunGard's requirement to provide such additional hours shall terminate three (3) months following the month in which such Processed Open Accounts sank below such level. Notwithstanding the foregoing, SunGard's requirement to provide FTIS Hours shall never decrease below 2,833 FTIS Hours per month, subject to FTIS' right to require a lower amount, as specified below. All FTIS Hours shall be provided monthly on a non-cumulative basis with no carry-forward of unused hours to subsequent months. (e) After completion of the first twelve (12) month period following the Completion of Initial Conversion, FTIS shall have the right to decrease (in increments of 1,700 hours per year) the number of FTIS Hours below SunGard's current minimum requirement (as based on the number of Processed Open Accounts), or to increase such number (in increments of 1,700 hours per year) up to the current minimum (as based on the number of Processed Open Accounts), if the number had previously been reduced. FTIS' right to alter the number of FTIS Hours shall be exercisable on three (3) months' notice to SunGard, and shall be exercisable no more than once in any twelve (12) month period. (f) For each twelve (12) month period during which the FTIS Hours are reduced below the current SunGard minimum requirement (as based on the number of Processed Open Accounts), FTIS shall receive a credit of $100,000 for each such reduction of 1,700 FTIS Hours. Such credit shall be applied against compensation otherwise due SunGard pursuant to this Agreement. In the event that such a reduction applies for a period of less than twelve months, FTIS shall receive a pro-rated credit. (g) SunGard shall maintain records sufficient to show the FTIS Hours worked each month, and shall report such information to FTIS on a monthly basis. 5.3 Additional Services. (a) In general. If, following the Completion of Initial Conversion, the maintenance, support, development and other requirements of FTIS exceed that which can be provided through the use of FTIS Hours, FTIS may, after reasonable consultation with SunGard, require that SunGard assign additional personnel to such requirements, subject to the terms and conditions of this Section. (b) Rates for Additional Services. For work performed through the end of 1998, such personnel shall be billed at a rate not to exceed the rate specified in Exhibit M. (c) Increase in rates. Increases in rates for Additional Services shall take place no more than once annually, with the earliest such increase to take place no earlier than January 1, 1999. Any such increase shall be calculated in accordance with the formula specified in Exhibit M. 5.4 Updates and Enhancements. (a) Development not requested by FTIS. During the term of this Agreement, and consistent with SunGard's past practices, SunGard shall continue to devote resources to maintenance and updating of Investar and/or Investar*ONE. Accordingly, from time to time, at its own cost and expense, and in accordance with its past practice, SunGard shall develop updates and enhancements to such products. SunGard shall provide such updates and enhancements to FTIS. If SunGard charges other SunGard customers for such updates and enhancements, the parties shall negotiate regarding whether a charge shall be imposed on FTIS for such updates and enhancements. Both parties shall be reasonable in such negotiations, which shall conform generally to the past practices of the parties with respect to charges for updates and enhancements. If the parties agree that a charge should be imposed on FTIS, FTIS shall have the right, at its option, to apply available FTIS Hours to such charge, with such FTIS Hours to be valued at the then-current cost for Additional Services. No charge for updates or enhancements not requested by FTIS shall be imposed if FTIS notifies SunGard that FTIS has no need of the new functionality incorporated in such update or enhancement. In such event, FTIS shall install such update or enhancement, subject to the other provisions of this Agreement, but shall pay no update or enhancement charge until and unless FTIS uses any material part of such new functionality. (b) Requested Enhancements. If SunGard incorporates a Requested Enhancement into a new enhancement to software made available to third parties, and if SunGard charges third parties for such enhancement, then SunGard shall provide FTIS with a credit reflecting a reasonable allocation of the amount of such charges to third parties, such credit to take the form of a credit against Account Fees, and to be capped at the amount of the payment made by FTIS for such enhancement, calculated either by the dollar amount paid by FTIS for Additional Services or by an attributed dollar amount for FTIS Hours used for such development, calculated by multiplying the number of such hours used by the then-current hourly rate for Additional Services. 6. Delivery, Installation and Conversion. 6.1 Testing by Third Party Vendors. At FTIS' request set forth in an SRA, SunGard shall cooperate reasonably with FTIS in providing Software to Third Party Vendors for testing in accordance with reasonable test plans and procedures set forth by such vendors, such delivery to occur sufficiently in advance of the scheduled delivery date for such Software to allow for completion of reasonable testing and revision of the Software in light of testing results (if necessary) prior to such scheduled delivery date. 6.2 Manner of Delivery. SunGard shall deliver Software by providing the following to FTIS at each Processing Site designated by FTIS: (i) two (2) executable copies of such Software, and (ii) two (2) source code versions of such Software. SunGard shall deliver Documentation by delivering ten (10) hard copies and one machine-readable copy of associated Documentation. 6.3 Installation. (a) Acceptance testing. Following delivery of Software by SunGard, SunGard shall install such Software in a test environment maintained by FTIS at a single Processing Site reasonably designated by FTIS, following which FTIS shall perform initial testing to determine whether such Software appears to contain material Non-Conformities. Such testing will be completed within the Testing Period, and SunGard shall have the right to observe and reasonably participate in such testing. If FTIS discovers material Non-Conformities during such testing, FTIS shall have the right to reject such Software until and unless such material Non-Conformities have been substantially corrected. In the event of such a rejection, such Software will be deemed non-delivered until and unless conforming Software has been delivered. If the parties disagree regarding whether Software contains material Non-Conformities, such dispute may be submitted to the arbitration procedures specified in this Agreement. Neither such FTIS initial testing, nor any statement by FTIS that the Software does not appear to contain Non-Conformities, shall waive or otherwise affect SunGard's obligation to correct Non-Conformities in accordance with the terms of this Agreement. (b) Installation. If FTIS notifies SunGard that delivered Software does not appear to contain material Non-Conformities, or if the Testing Period passes with no identification of actual or suspected material Non-Conformities by FTIS, or if FTIS authorizes SunGard to install the Software in a production environment, then FTIS will be deemed to have accepted such Software. In such event, SunGard shall install such Software in production environments in such Processing Sites as may be reasonably designated by FTIS. This Section 6.3(b) shall not apply to any delivery of Investar*ONE which takes place prior to acceptance and installation of Investar*ONE pursuant to the provisions of Section 2.4(b). Such delivery shall be governed by the provisions of such section. (c) Subsequent installation. Following initial installation at Processing Sites designated by FTIS, and throughout the term of this Agreement, FTIS shall have the right, upon reasonable notice, to designate additional Processing Sites for installation of previously delivered and installed Software. In such event, SunGard shall undertake such installation pursuant to terms and conditions to be agreed by the parties and such SunGard services shall be Chargeable to FTIS. (d) Installation prior to Completion of Initial Conversion. Notwithstanding any of the foregoing provisions, prior to the Completion of Initial Conversion, SunGard shall be responsible for installation at the FTIS Processing Site located in St. Petersburg, Florida and at the FTIS Processing Site in Rancho Cordova, California. Prior to Completion of Initial Conversion, the sole use made of the Software at the Rancho Cordova Processing Site shall be for scalability testing and to perform read-only functions and prepare reports during that time period. Notwithstanding the foregoing, in the event that a disaster adversely affects processing at the St. Petersburg Processing Site prior to Completion of Initial Conversion, SunGard shall reasonably cooperate with FTIS in shifting installation and processing to the Rancho Cordova Processing Site. Subsequent to the Completion of Initial Conversion, FTIS shall have the right, upon reasonable notice, to require that SunGard install the Software at additional Processing Sites chosen by FTIS, subject to the other provisions of this Agreement. 6.4 Conversion. (a) Schedule. SunGard shall meet the deadlines specified in the Initial Conversion schedule and shall meet any other Conversion deadlines which may be specified in SDS's agreed to by the parties. (b) Requirements. Conversion shall take place pursuant to procedures mutually agreed by the parties, which procedures shall minimize any necessary disruption to the operations of FTIS, FRI or any FRI Affiliate. (c) Cost. (i) Initial Conversion. Initial Conversion shall be performed by SunGard At No Additional Charge to FTIS. (ii) Conversion necessitated by new Deliverables. Any Conversion necessitated by the delivery of new Deliverables by SunGard (other than Initial Conversion) shall be accomplished within the budget specified in the associated SDS(s). (iii) Conversion necessitated by Acquired Accounts. In the event that FRI or any FRI Affiliate acquires Acquired Accounts which require Conversion in order to run on Software previously installed by SunGard, SunGard shall undertake such Conversion pursuant to terms and conditions to be agreed by the parties, and such conversion services shall be Chargeable to FTIS. 6.5 Legacy System. For a period of thirty (30) days following the Initial Conversion of any Account previously serviced by SunGard pursuant to the 1981 Agreement, SunGard shall At No Additional Charge to FTIS maintain existing data as of the time of such Conversion and legacy systems for such Account, so as to allow processing for such Account to be shifted back if necessary, it being understood that, if processing is shifted back, data changes made since the date of such Conversion may need to be reinput. In the event such a reversion becomes necessary, the parties shall negotiate regarding payment for the cost of such reversion and of processing under such legacy system, and shall submit such dispute to arbitration if no agreement is reached. In any such dispute, the parties' relative fault shall be taken into account in setting such costs. Notwithstanding the foregoing, there shall be a rebuttable presumption that SunGard shall be paid for processing pursuant to the most recent prices paid by FTIS for MPS processing under the 1981 Agreement, if the reversion to the legacy system is not due to any fault of SunGard. 7. Processing. 7.1 Operating Environment. It shall be FTIS' responsibility, at its expense, to procure and maintain an operational Operating Environment for each Processing Site in sufficient time to allow SunGard to meet the schedules required under this Agreement. 7.2 Modifications to the Operating Environment. SunGard shall have the right to propose modifications to the Operating Environment. SunGard shall not propose any such modifications unless SunGard has implemented such modifications in its own processing center, or will implement such modification as of the effective date of the modification proposed by SunGard, or such modification is, in SunGard's reasonable judgment, necessary to meet Performance Requirements related to scalability or otherwise to handle growth in Account volume processed under this Agreement. (a) Non-material modifications. If proposed Operating Environment modifications do not impose a material cost on FTIS, Exhibit G shall be amended to incorporate such modification, and FTIS shall implement such modification within a time period which is reasonable under the circumstances. (b) Material modifications. SunGard shall consult with FTIS prior to proposing a modification to the Operating Environment which imposes a material cost on FTIS. Any such material modification shall not be imposed on less than one (1) years' notice or such shorter period as may be reasonable under the circumstances. If SunGard proposes a material modification to the Operating Environment, FTIS shall, within a reasonable time period, determine whether it is willing to implement such modification. If FTIS determines that it is willing to implement such modification, Exhibit G shall be amended to incorporate such modification and FTIS shall implement such modification within the notice period. If FTIS determines that it is not willing to implement such modification, FTIS shall so notify SunGard. In such event, SunGard shall propose a percentage increase in the amount of Account Fees (the "proposed increase"). If FTIS agrees to the proposed increase, then (i) the Account Fees shall be increased through the remaining term of this Agreement by the proposed increase, (ii) such modification to the Operating Environment shall not take effect, and (iii) SunGard shall continue to perform all of its obligations under this Agreement, except that SunGard's obligations under Section 5.4 to develop periodic updates and enhancements of the Software shall apply only to the version of the Software maintained by SunGard in its service bureau environment, and SunGard shall have no liability for any failure to meet the Performance Requirements to the extent caused by the failure to modify the Operating Environment. If FTIS refuses to agree to the proposed increase, then (i) the proposed increase shall be treated as a percentage decrease in the Account Fees, which decreased Account Fees shall remain in effect through the remaining term of this Agreement, (ii) SunGard shall continue to perform all of its obligations under this Agreement, except that SunGard's obligation under Section 5.4 to develop periodic updates and enhancements of the Software as used by FTIS shall apply only to the version of the Software maintained by SunGard in its service bureau environment, SunGard shall have no liability for any failure to meet the Performance Requirements to the extent caused by the failure to modify the Operating Environment and SunGard shall have no further liability for Non-Conformities other than to use reasonable efforts to investigate and correct Non-Conformities in accordance with Section 4.2, provided that all such investigations and corrections shall be Chargeable to FTIS, and (iii) the then current minimum requirement for FTIS Hours shall be reduced by a percentage equal to the amount of the proposed increase. 7.3 Operation. (a) Data center management. FTIS shall be responsible for data center management. In accordance with normal industry standards, FTIS shall monitor the performance of the system on an ongoing basis and will implement reasonable hardware tuning or improvements, including, without limitation, disk cache increases, in order to maximize throughput and minimize I/O time. Such changes shall not include any changes to the Operating Environment. Although FTIS shall not be contractually obligated to meet the following requirements, the Performance Requirements shall be waived for any period during which any of the following requirements are not met: (i) a reasonable number of message regions must be allocated to support IMS message activity; (ii) a reasonable number of initiators must be allocated to achieve optimum throughput for production jobs; (iii) Investar has the highest application priority, which may be shared only with other critical applications as agreed, and provided that Investar never has less than 60 MIPS available to it; or (iv) average daily system utilization of the MVS LPAR in which Investar production executes will not exceed 90% during both on-line production and batch processing. (b) Production control. During the period prior to Completion of Initial Conversion, SunGard shall provide production control from SunGard's facility in San Mateo At No Additional Charge to FTIS. Following Completion of Initial Conversion, SunGard shall continue to provide production control from such facility, or from such other SunGard facility as SunGard may reasonably designate, with such production control services to be Chargeable to FTIS, until FTIS assumes responsibility for production control. FTIS shall provide reasonable notice once it intends to assume responsibility for production control. At such time, SunGard and FTIS shall cooperate in transferring such responsibility from SunGard to FTIS. 8. SunGard Services. 8.1 Training. FTIS Trainers shall have primary responsibility for End-User training. Pursuant to the terms and conditions of this Section, SunGard shall train such FTIS Trainers. Such training shall take place in a professional manner in accordance with standard industry practices. The parties will cooperate in scheduling any training required of SunGard hereunder, and FTIS will provide reasonable notice of training requests to SunGard. If, in SunGard's reasonable judgment, a proposed FTIS Trainer is unable or unwilling to be properly trained, SunGard shall notify FTIS of such judgment, and FTIS shall replace such proposed FTIS Trainer. (a) Prior to Completion of Initial Conversion. Prior to Completion of Initial Conversion, SunGard shall provide training to a reasonable number of FTIS Trainers sufficient to provide such FTIS Trainers with a thorough understanding of the Deliverables and to allow such FTIS Trainers to adequately train other personnel regarding use of such Deliverables. Such training shall take place At No Additional Charge to FTIS. (b) Subsequent training. Following Completion of Initial Conversion, training of FTIS Trainers shall be Chargeable to FTIS. In addition, FTIS may request training other than training of FTIS Trainers, in which event SunGard shall provide such training on reasonable notice, and such training shall be Chargeable to FTIS. 8.2 Support. Pursuant to the terms and conditions specified below in this Section, SunGard shall provide reasonable support for operation of the Software, including help desk support and reasonable consultation. (a) Prior to Completion of Initial Conversion. Prior to Completion of Initial Conversion, SunGard shall provide reasonable support to FTIS At No Additional Charge to FTIS. (b) Subsequent support. Following Completion of Initial Conversion, SunGard support shall be Chargeable to FTIS. 8.3 Disaster Recovery. FTIS shall be solely responsible for disaster recovery. Notwithstanding the foregoing, in the event of a disaster, SunGard shall provide reasonable support to FTIS to assist FTIS in resuming full operation, including providing additional copies of the Deliverables as may be necessary. Any such support shall be Chargeable to FTIS. 9. Compensation. 9.1 Initial Payment. Pursuant to the First Amended MOU, the Second Amended MOU and the Third Amended MOU, FTIS has paid to SunGard an Advance in the amount of three million two hundred fifty thousand dollars ($3,250,000). Upon execution of this Agreement, FTIS shall pay SunGard the additional amount of four million two hundred fifty thousand dollars ($4,250,000). The cumulative total of seven million five hundred thousand dollars ($7,500,000) shall be referred to herein as the "Initial Payment." The Initial Payment is being made and has been made due to the significant development, installation and conversion costs being incurred by SunGard prior to the Completion of Initial Conversion. 9.2 Account Fees. During the term of this Agreement, and subject to Section 1.1, FTIS shall pay SunGard a fee based on the number of Processed Open Accounts. Such fee shall be calculated as specified in Exhibit M, subject to a minimum of five hundred thousand dollars ($500,000) per month, which shall apply beginning the first full month after the Completion of Initial Conversion, such minimum to be calculated before application of Section 9.3. Such fee shall be paid within thirty (30) days of the end of the month to which the fee pertains. 9.3 Modification of Account Fees. Account Fees otherwise due and owing to SunGard pursuant to pursuant to Section 9.1 may be modified as follows: (a) Account Fees otherwise due and owing to SunGard shall be reduced by one hundred fifty-five thousand, six hundred eighty-seven dollars and sixty-seven cents ($155,687.67) per month for each of the first sixty (60) months following the Completion of Initial Conversion. In addition, the Account Fees due and owing for the first full month following the Completion of Initial Conversion shall be reduced by an amount equal to fifty-six thousand two hundred and fifty dollars ($56,250.00) multiplied by the number of months (full and partial) between the Effective Date and the Completion of Initial Conversion, and, if the amount of such total reduction for such first month following the Completion of Initial Conversion exceeds the Account Fees for such month, then any balance shall serve as a reduction in the Account Fees due and owing for each subsequent month until such balance is reduced to zero. (b) If SunGard misses an Initial Conversion Date, or Software contains a Class One Non-Conformity which constitutes a SunGard-Caused Non-Conformity, the parties agree that the value of the Software to FTIS will be reduced during such period. In such event, the Account Fees payable by FTIS shall be reduced by 10%. Such reduction will apply to the Account Fees payable for the entirety of any month if such condition existed during any portion of such month, if the condition constituted (i) a failure to meet an Initial Conversion Date, (ii) a Class One Non-Conformity which was not promptly corrected, or (iii) repeated Class One Non-Conformities during the month, even if each such Non-Conformity was promptly corrected. Such reduction will apply only to Account Fees payable for any day(s) during which such condition existed, if the failure constituted a Class One Non-Conformity which was promptly corrected, unless repeated Class One Non-Conformities occurred during such month. Such a reduction shall not be imposed unilaterally by FTIS, but shall be imposed only by an arbitrator following an arbitration in which the burden shall be on FTIS to establish the existence and duration of the condition justifying such reduction by a preponderance of the evidence. In such event, the amount of any damages which would otherwise be awarded to FTIS based on or arising out of such condition shall be reduced by the amount of such reduction in Account Fees. (c) If SunGard misses an SDS schedule other than an Initial Conversion schedule and such schedule miss is material, or Software contains a Class Two Non-Conformity which constitutes a SunGard-Caused Non-Conformity and which is both material and not promptly corrected, the parties agree that the value of the Software to FTIS may be reduced during such period, and an arbitrator may reduce Account Fees payable for a month by up to 5% if such a condition existed during some or all of such month. If such condition existed for less than an entire month, any such reduction shall be applied pro rata for a reasonable portion of such month, taking into account the severity of the problem, provided that such period may be longer or shorter than the actual period of such condition. Such a reduction shall not be imposed unilaterally by FTIS, but shall be imposed only by an arbitrator following an arbitration in which the burden shall be on FTIS to establish the existence and duration of the condition justifying such reduction by a preponderance of the evidence. In such event, the amount of any damages which would otherwise be awarded to FTIS based on or arising out of such condition shall be reduced by the amount of such reduction in Account Fees. (d) On the seventh, eighth and ninth anniversaries of the Completion of Initial Conversion, SunGard shall have the right to increase the Account Fees applicable to Incremental Accounts by the Increase in the CPI, plus two percent (2%). 9.4 Expenses. FTIS shall reimburse SunGard for Reimbursable Expenses incurred by SunGard in the course of the SRA/SDS process, and in providing development, training and related services from December 1, 1996 through the Effective Date, and FTIS shall reimburse SunGard for Reimbursable Expenses incurred by SunGard in the course of providing services under this Agreement, except as this Agreement may expressly provide to the contrary. SunGard shall provide an invoice, copies of receipts and other supporting documentation within two (2) months of the date of such expense, except that such documentation for expenses incurred before the Effective Date shall be provided within two (2) months after the Effective Date. FTIS shall reimburse SunGard for such Reimbursable Expenses within thirty (30) days of receipt of such documentation. 9.5 Taxes. The fees and other amounts payable by FTIS to SunGard under this Agreement do not include any taxes of any jurisdiction that may be assessed or imposed upon the copies of the Software and Documentation delivered to FTIS, the license granted under this Agreement or the services provided under this Agreement, or that may be otherwise assessed or imposed in connection with the transactions contemplated by this Agreement, including sales, use, excise, value added, personal property, export, import and withholding taxes, excluding only taxes based upon SunGard's net income and taxes similar to or in lieu of income taxes that are based upon SunGard's revenues. FTIS shall directly pay any such taxes assessed against it, and FTIS shall promptly reimburse SunGard for any such taxes payable or collectable by SunGard. 9.6 Late Payment. If FTIS fails to make any payment required hereunder, FTIS shall not be in breach of this Agreement for such failure unless FTIS fails to make such payment within seven (7) business days after receipt of SunGard's notice that such payment was not made by the date required hereunder (the "due date"). If FTIS disputes whether a payment is required hereunder, FTIS shall be entitled to withhold such payment pending resolution of such dispute pursuant to the provisions of Section 15, and such act of withholding shall not constitute a breach of this Agreement unless FTIS continues to withhold such payment in violation of an arbitration decision. If the arbitrator(s) assigned to such dispute determines that FTIS' position was incorrect but reasonable, FTIS shall be ordered to pay the amount due plus reasonable interest (which shall be no lower than SunGard's then most recent cost of funds rate) from the due date. If the arbitrator(s) assigned to such dispute determines that FTIS' position was incorrect and unreasonable, FTIS shall be ordered to pay the amount due plus reasonable interest (which shall be no lower than SunGard's then most recent cost of funds rate) from the due date plus liquidated damages of two percent (2%) of such disputed amount, multiplied by the number of months (full or partial) between the due date and the date of payment, the parties being in agreement that in such event the actual damages would be difficult or impossible to calculate and such liquidated damages would be a reasonable measure of such damages. 10. Licenses and Ownership. 10.1 License by SunGard. SunGard grants FTIS, FRI and FRI Affiliates (the "licensees") a limited, world-wide, non-exclusive license under all relevant SunGard Intellectual Property Rights which inhere in or are relevant to any of the Deliverables, and which are necessary to exercise the rights set forth in Subsections (a) and (b) of this Section 10.1, subject to the terms and conditions of this Agreement. (a) License rights regarding Software. The license to Software shall include and be limited to the following rights: (i) the right to execute the Software only for the purpose of providing shareholder accounting processing and related services for FRI Clients and providing related services to End Users, including the right to make any copies necessarily made in the course of such execution, such right limited to execution at Processing Sites; (ii) the right to make one backup/archive copy; (iii) the right to disclose Discloseable Items to FRI Clients, End Users and Third Party Vendors, whether or not located at Processing Sites; (iv) the right, subject to the requirements of Section 12, to create or have created FTIS Enhancements; and (v) the right to disclose the Software to Third Party Vendors approved by SunGard pursuant to Section 11 on a need-to-know basis. (b) License rights regarding Documentation. The license to Documentation shall include the following rights: (i) the right to make copies of Documentation; (ii) the right to modify Documentation; (iii) the right to provide End User Documentation to FRI Clients, End Users and Third Party Vendors; (iv) the right to provide Customer Documentation to employees and individual contractors of FTIS, FRI and FRI Affiliates on a need-to-know basis and subject to the non-disclosure obligations of Section 11; and (v) the right to disclose the Customer Documentation to Third Party Vendors approved by SunGard pursuant to Section 11 on a need-to-know basis. (c) Term. The licenses extended hereunder shall terminate at the later of: (i) the expiration or termination of this Agreement, or (ii) the expiration of any Reasonable Transition Period. (d) License limitations. Except as otherwise permitted pursuant to this Agreement, or with the prior written consent of SunGard, the licensees will not, nor will they permit any FRI Client, End User or third party to, (i) use any Proprietary Item for any purpose, at any location or in any manner, (ii) license, sublicense, market, sell or otherwise distribute any Proprietary Item, (iii) make or retain any copy of any Proprietary Item, (iv) refer to or use any Proprietary Item as part of any effort to develop a program having functional attributes, visual expressions or other features similar to those of the Software or to otherwise compete with SunGard, (v) modify, adapt, translate or create derivative works based upon any Proprietary Item, or combine or merge any part of any Proprietary Item with or into any other software or documentation, or (vi) remove, erase or tamper with any copyright or other proprietary notice printed or stamped on, affixed to, or encoded or recorded in any Proprietary Item. (e) FTIS liability. FTIS shall be liable for any breach of the provisions of this Section 10.1 or of Section 11 by any FRI Affiliate, FRI Client, Third Party Vendor or End User to which FTIS has disclosed or made available any information subject to such provisions. 10.2 License by FTIS. FTIS grants SunGard a limited, perpetual, world-wide, non-exclusive, royalty-free license under all relevant FTIS Intellectual Property Rights which inhere in or are relevant to any of the ideas, methods, algorithms, formulae and concepts incorporated in SRAs conveyed to SunGard and which are necessary to allow SunGard to (i) use such ideas, methods, algorithms, formulae and concepts, and (ii) incorporate such ideas, methods, algorithms, formulae and concepts into materials, including computer programs, and documentation, to be provided by SunGard to third parties, and to exploit such ideas, methods, algorithms, formulae and concepts for SunGard's commercial purposes. 10.3 Ownership. (a) SunGard ownership. Title to all Proprietary Items and all Discloseable Items will remain exclusively in SunGard. (b) FTIS ownership. The provisions of Subsection (a) of this Section shall not apply to any ideas, methods, algorithms, formulae and concepts which are currently owned by and used in the course of business of FTIS, FRI or FRI Affiliates, or to those ideas, methods, algorithms, formulae and concepts which may be disclosed by FTIS, FRI or any FRI Affiliate to SunGard pursuant to this Agreement. Title to all such ideas, methods, algorithms, formulae and concepts will remain exclusively in FTIS, FRI or FRI Affiliates. (c) Exceptions. Notwithstanding the provisions of Subsections (a) and (b) of this Section, (i) nothing herein contained shall limit either party's right to use any ideas, methods, algorithms, formulae or concepts which are owned by such party, in the public domain or owned by any third party (subject to such third party's rights), including ideas, methods, algorithms, formulae or concepts incorporated in the Proprietary Items, (ii) nothing herein contained shall limit any disclosure right expressly granted to FTIS pursuant to this Agreement, including the right to disclose Discloseable Items. 11. Confidentiality. 11.1 Definition of Confidential Information. This Confidentiality Section shall apply to any information conveyed by one party hereunder to the other party, or learned by either party from the other during the course of dealings between the parties. Such information shall constitute Confidential Information if (1) the information is specifically identified as confidential when conveyed or learned, or (2) the information is of a type that the other party should reasonably recognize as confidential, or is conveyed under circumstances which the other party should reasonably recognize as denoting confidentiality. Without limitation of the foregoing, (1) FTIS acknowledges that Proprietary Items (subject to the limitations contained in Sections 10.3(b) and (c)) are trade secrets, Confidential Information and proprietary property of SunGard, having great commercial value to SunGard, and that the development and design of the Proprietary Items have involved and will involve the expenditure by SunGard of substantial amounts of time and money and the use by SunGard of skilled experts; (2) information regarding the business or financial condition of either party constitutes Confidential Information; (3) information regarding the business or technical plans or prospects of either party constitutes Confidential Information; and (4) the terms of this Agreement constitute Confidential Information. Notwithstanding the foregoing, or anything else in this Agreement, Discloseable Items shall not constitute Confidential Information. 11.2 Nondisclosure and Nonuse of Confidential Information. The receiving party will undertake reasonable precautions to avoid inadvertent disclosure of Confidential Information, such precautions to be at least as extensive as those taken to protect confidential information belonging to the receiving party. The receiving party will not disclose, publish, or disseminate Confidential Information to anyone other than the following individuals, each of whom must have a need to know in order to carry out the receiving party's rights or obligations under this Agreement, and each of whom must have been informed of and agreed to be bound by the receiving party's obligations relating to disclosure and use restrictions hereunder: (1) employees, (2) individual contractors engaged by the receiving party (directly or through an agency) who sign written non-disclosure agreements, and (3) Third Party Vendors (other than agencies providing individual contractors) engaged by FTIS, but only to the extent that SunGard authorizes disclosure to each such Third Party Vendor in writing, such authorization to be not unreasonably withheld. The receiving party agrees to take reasonable precautions to prevent any unauthorized use, disclosure, publication, or dissemination of Confidential Information. The receiving party agrees to accept Confidential Information for the sole purpose of carrying out the receiving party's rights and obligations under this Agreement. The receiving party agrees not to use Confidential Information otherwise for its own or any third party's benefit without the prior written approval of an authorized representative of the disclosing party in each instance. The receiving party shall have the right to disclose Confidential Information as strictly necessary for compliance with legal or regulatory requirements, including subpoenas. Prior to any such disclosure, the receiving party shall provide reasonable notice to the disclosing party, and shall cooperate in any effort by the disclosing party to petition the authority compelling such disclosure for an order that such disclosure not occur or that such disclosure occur pursuant to terms and conditions designed to ensure continued confidentiality. 11.3 Limitations on Confidentiality. The receiving party's obligations hereunder with respect to any Confidential Information shall terminate when the receiving party can document that: (a) such Confidential Information has become generally available to the public through no fault on the part of the receiving party; (b) the conveying party has made such Confidential Information available to other parties without any obligation of confidentiality; (c) the receiving party rightfully had such Confidential Information in its possession, free of any obligation of confidentiality to the disclosing party, prior to disclosure by the disclosing party; (d) such Confidential Information was independently developed by the receiving party independently of and without reference to any Confidential Information; (e) the receiving party rightfully obtained such Confidential Information from a third party with the right to transfer or disclose it without any obligation of confidentiality; or (f) such Confidential Information does not constitute a Proprietary Item and was first conveyed to the receiving party more than seven (7) years previously. 11.4 Return of Tangible Materials. Upon expiration or termination of this Agreement, and following a Reasonable Transition Period, within thirty (30) business days of receipt of written request by the disclosing party, the receiving party will return to the disclosing party all documents, records and copies thereof containing Confidential Information and will certify in writing to the disclosing party that all copies of Confidential Information have been permanently deleted or destroyed, including copies installed in computer memory, on computer disks, tapes or other media. For purposes of this section, the term "documents" includes all information fixed in any tangible medium of expression, in whatever form or format. 12. FTIS Enhancements. 12.1 In General. Subject to the restrictions contained in this Section, nothing herein contained shall be deemed to restrict FTIS' right to develop FTIS Enhancements, or to have FTIS Enhancements developed by third parties. FTIS shall refrain from developing any FTIS Enhancement, or having any FTIS Enhancement developed, unless and until FTIS has proposed an SRA corresponding to such FTIS Enhancement, and such SRA has been withdrawn by FTIS after receipt of a response from SunGard or has resulted in an SDS which has been rejected or canceled by FTIS. 12.2 Use of Deliverables. FTIS may make use of Documentation and Discloseable Items in creating FTIS Enhancements, and may disclose such information to Third Party Vendors for the purpose of having FTIS Enhancements developed, subject to the nondisclosure procedure of Section 11, provided, however, that, if Proprietary Items are to be disclosed to Third Party Vendors for such purpose, such Third Party Vendors must be approved in advance by SunGard pursuant to the provisions of Section 11.2. 12.3 Restrictions on FTIS Enhancements. FTIS Enhancements shall not incorporate or modify the Software source or object code or modify the database structure, data structures or file structures used by the Software. Notwithstanding the foregoing, nothing contained in this Section 12.3 shall limit FTIS' right to develop FTIS Enhancements which modify the structure or organization of data which has been output from the database used by the Software, as long as such data is not reinput into such database, or to develop FTIS Enhancements which translate data into the format used by the Software, in order to facilitate storage of such data in the database used by the Software. 12.4 Limitation of SunGard Obligations. FTIS acknowledges that modifications and additions to input and output of the Software could affect compliance of the Software with the Performance Requirements. SunGard shall have no liability for any Non-Conformities to the extent attributable to any FTIS Enhancement. 13. Certain FTIS Obligations. 13.1 Access to Facilities and Personnel. FTIS shall provide SunGard access to the Processing Sites and to FTIS' equipment and personnel, and shall otherwise cooperate with SunGard as reasonably necessary for SunGard to perform its installation, testing, conversion, training, maintenance, support and other obligations under this Agreement. 13.2 FTIS Resources. FTIS shall devote such facilities, personnel and other resources as are reasonably necessary, in FTIS' good faith judgment, to test and install the Software. 13.3 Use of Software. Except as may be otherwise expressly provided for herein, FTIS shall use the Software in production to process those Accounts identified in the Initial Conversion Schedule, as well as new Accounts generated through the normal expansion of business. Notwithstanding the foregoing, FTIS shall have no obligation to use the Software to process Acquired Accounts, unless FTIS has given SunGard notice pursuant to Section 3.1(c), in which event FTIS shall use the Software in production to process those Acquired Accounts actually acquired in connection with such transaction, beginning as soon as is reasonably practicable after closing of such transaction. 13.4 Non-U.S. Processing Site. If FTIS designates a Processing Site located in a country other than the United States, FTIS shall be solely responsible for compliance with all laws and regulations of (i) the United States which apply to export of any of the Deliverables to such country; and (ii) such other country, including those relating to compliance with import and export requirements, requirements of registration of this Agreement or the Deliverables, and laws and regulations related to possession, use or remote use of the Deliverables. This Section 13.4 shall not limit SunGard's responsibility for SunGard-Caused Infringement, except to the extent that such SunGard-Caused Infringement would not have occurred had FTIS complied with all laws and regulations of such country other than laws or regulations conveying an Intellectual Property Right to the third party seeking to enforce such Intellectual Property Right against FTIS. 13.5 Export Control. FTIS shall not export any of the Deliverables, or authorize any other party to export any of the Deliverables: (i) into (or to a national resident of) any country to which the U.S. has embargoed goods, (which currently include Cuba, Iraq, Libya, Sudan, North Korea, Iran and Syria); or (ii) to anyone on the U.S. Treasury Department's list of Specially Designated Nationals or the U.S. Commerce Department's Table of Denial Orders. 13.6 Data Accuracy. FTIS shall be exclusively responsible for, and SunGard shall have no liability with respect to, the accuracy of data and other information which is input into the Software by anyone other than SunGard, including, without limitation, data generated, obtained or gathered by FTIS or any FRI Affiliate, FRI Client, End User or Third Party Vendor, and any errors in data output or Non-Conformities caused by the input of erroneous data shall be FTIS' sole responsibility. 13.7 Data Use. SunGard shall have no responsibility for nor any liability for any loss or damage resulting from any use or misuse of the results obtained from the use of any Software or services provided under this Agreement, provided, however, that this Section 13.7 shall not apply to any damage resulting from use of inaccurate data resulting from a Non-Conformity (to the extent that such damages constitute direct damages to FTIS). 13.8 Backups. Consistent with normal industry standards, FTIS shall establish and maintain appropriate control and backup procedures designed to reduce any loss of information that could result from any interruption or delay in processing or from any Non-Conformity. Such procedures shall include maintaining duplicate copies of data and such other measures as may be reasonably consistent with normal industry practices. 13.9 Review of Data and Discovery of Non-Conformities. Consistent with normal industry standards, FTIS shall establish and maintain appropriate procedures to reasonably review data output from the Software and the operation of the Software. In the event that FTIS discovers Non-Conformities, FTIS shall promptly inform SunGard of such Non-Conformities. In the event that FTIS fails to inform SunGard of a Non-Conformity after discovery, or after FTIS reasonably should have discovered such Non-Conformity in the exercise of reasonable care, SunGard shall have no liability to FTIS for any damages or losses incurred following the date of such discovery or the date on which FTIS reasonably should have made such discovery, whichever is earlier; provided, however, that this Section 13.9 shall not affect SunGard's obligation to correct any such Non-Conformity in accordance with the terms of this Agreement. 13.10 Account Purging. FTIS shall periodically purge Account data and closed Accounts from the database used by the Software in a manner consistent with the parties' past practices and normal industry practices. 14. Term/Termination/Transition Services. 14.1 Term. Subject to the terms and conditions of the Agreement, the Agreement shall be effective from the date of execution and continue for a period of ten (10) years from and after Completion of Initial Conversion. 14.2 Termination for Material Breach. Subject to the terms and conditions of the Agreement, either party ("terminating party") may provide written notice of material breach to the other party ("breaching party"). The terminating party may then terminate the Agreement for material breach by providing written notice of termination, if such breach remains uncured for a period of thirty (30) days following such notice of breach; provided, however, that (i) such right to terminate shall lapse if the breaching party cures such breach prior to exercise of such right to terminate, and (2) if, following receipt of the notice of breach, the breaching party promptly begins and diligently prosecutes a reasonable cure of such breach, then the breaching party may dispute the materiality of the breach, and the grounds for termination, under Section 15 of this Agreement. In the event of such a dispute, the termination will not take effect until an arbitrator has determined that the agreement is in material breach, although, in such event, the termination will be deemed to have taken effect as of the date of the original notice of termination. In particular, and without limitation of the foregoing, this Agreement may be declared in material breach if (a) SunGard misses an Initial Conversion Date or Software contains a Class One Non-Conformity which constitutes a SunGard-Caused Non-Conformity and SunGard fails to promptly provide a reasonable correction or work-around; (b)(i) SunGard fails to meet an SDS schedule or Software contains a Class Two Non-Conformity which constitutes a SunGard-Caused Non-Conformity, (ii) such failure is material and is particularly egregious or damaging, and (iii) SunGard fails to promptly cure such failure within a reasonable period under the circumstances; (c) FTIS fails to make payment to SunGard, subject to the provisions of Section 9.6; or (d) FTIS fails to process Accounts on the Software as contemplated by Section 13.3, and such failure is particularly egregious or damaging and FTIS fails to promptly cure such failure within a reasonable period under the circumstances. 14.3 Effect of Termination for Material Breach. (a) Termination by FTIS. If FTIS terminates this Agreement for material breach, in addition to any other rights and remedies FTIS might otherwise have, SunGard shall be required to pay to FTIS those sums specified in Exhibit J. SunGard shall be entitled to retain any Account Fees previously paid by FTIS and other amounts previously paid or then owing by FTIS. This Section 14.3(a) shall not limit the ability of an arbitrator or arbitration panel to enter any additional award against SunGard. (b) Termination by SunGard. If SunGard terminates the Agreement for material breach, in addition to any other rights and remedies SunGard might otherwise have, SunGard shall be entitled to retain the Initial Payment as well as any Account Fees and other amounts previously paid or then owing by FTIS. This Section 14.3(b) shall not limit the ability of an arbitrator or arbitration panel to enter any additional award against FTIS. 14.4 Transition Services. (a) For a Reasonable Transition Period after the expiration or termination of this Agreement, including termination for material breach by either party, SunGard shall continue to (i) to the extent applicable, provide data processing services to FTIS in accordance with the terms of the 1981 Agreement for any MPS Accounts not successfully converted as of the date of such expiration or termination, and (ii) to the fullest extent possible under the circumstances, perform all obligations under this Agreement with respect to Accounts successfully converted as of the date of such expiration or termination, subject to performance by FTIS of its obligations under this Agreement, including its obligations to pay Account Fees and other amounts due hereunder. All such processing and/or services shall be subject to the payment terms and conditions of the 1981 Agreement and/or this Agreement, as applicable. (b) In connection with the expiration or termination of the Agreement, including termination for material breach by either party, SunGard shall comply with FTIS' reasonable directions to effect the orderly transition and migration of all or any of the Accounts to an alternative system designated by FTIS. The parties shall jointly develop and follow a transition plan setting forth the respective tasks to be accomplished by each party in connection with such orderly transition and migration and a schedule pursuant to which the tasks are to be completed, with such SunGard services to be Chargeable to FTIS. During a Reasonable Transition Period following such expiration or termination, SunGard shall continue to perform its obligations under this Agreement, subject to performance by FTIS of its obligations under this Agreement, including its obligation to pay Account Fees and other amounts due hereunder. Notwithstanding the foregoing, if the transition assistance provided by SunGard shall require resources beyond those otherwise then being provided by SunGard under this Agreement, FTIS shall compensate SunGard for such additional resources as Additional Services. (c) Nothing herein contained shall serve to limit FTIS' right to disclose Discloseable Items to third parties whom FTIS is considering or has decided to select as a replacement for SunGard. 14.5 Survival. The following Sections shall survive termination or expiration of this Agreement: 9, 10, 11, 14, 15, 16, 17, 19, 21, 23. 15. Dispute Resolution. 15.1 Resolution by the Parties. Prior to submitting any dispute for resolution in accordance with Section 15.3 or 15.4, the parties shall make a good faith attempt to resolve such dispute through negotiation involving the project managers. If the project managers are unable to resolve such dispute, the dispute shall be submitted for negotiations involving more senior management at the following levels: for FTIS: the President; for SunGard: the Chief Executive Officer of SunGard's Trust & Shareholder Systems Group or of SunGard Data Systems. If such negotiations fail to reach a resolution within seven (7) business days, either party shall be free to initiate arbitration proceedings. 15.2 Arbitration. All disputes arising out of or relating to this Agreement shall be settled by binding arbitration, to be carried out in San Mateo County, California, or in such other jurisdiction as the parties may mutually designate. Either party shall have seven (7) business days to seek reconsideration of any arbitration decision. If neither party seeks reconsideration, or if reconsideration is denied, the arbitration decision shall become final and binding on both parties and shall be enforceable in any court of law. All arbitration proceedings, results and all documents prepared in connection with any arbitration shall be confidential and shall not be disclosed to any person other than the parties to the proceedings, their counsel, witnesses and experts, the arbitrator(s), the special master (if any), or, if involved, the court and court staff. All documents filed with the arbitrators or with a court shall be filed under seal, unless the court denies permission to file documents under seal. 15.3 Abbreviated Arbitration Procedures. If a dispute arises which cannot be resolved pursuant to Section 15.1, the parties may agree to an abbreviated arbitration procedure before a single neutral arbitrator jointly selected by the parties. If the parties are unable to agree to use the abbreviated arbitration procedure, the dispute shall be resolved pursuant to the full arbitration procedure specified in Section 15.4. (a) Commencement. An abbreviated arbitration shall be commenced by written notification from one party to the other party specifying the nature of the dispute and proposing abbreviated arbitration. If the other party agrees to the abbreviated arbitration procedure, or if the other party fails to respond within seven (7) days of receipt of such notice, the abbreviated arbitration procedure shall be used. (b) Selection of arbitrator. The parties shall promptly agree on appointment of a single neutral arbitrator. In the event the parties are unable to agree upon an arbitrator within thirty (30) days of commencement of the arbitration, either party shall have the right to convert the arbitration to a full arbitration under Section 15.4. (c) Procedures. An abbreviated arbitration shall be handled in an informal manner and without discovery, but shall include a cooperative sharing by the parties of clearly relevant information. Procedures shall be by mutual agreement of the parties or, failing mutual agreement, shall be as specified by the arbitrator. (d) Decision. The decision of the arbitrator shall be provided to the parties within sixty (60) days of commencement of the arbitration. 15.4 General Arbitration Procedures. (a) Commencement. A general arbitration shall be commenced by (i) written notification from one party to the other party specifying the nature of the dispute and demanding general arbitration, or (ii) as specified in Section 15.3. (b) Selection of arbitrator. Disputes shall be decided by a panel of three (3) neutral arbitrators selected by mutual agreement of the parties. If within sixty (60) days of initiation of the arbitration procedure, the parties have not agreed upon a panel of neutral arbitrators, either party may petition the Superior Court of the State of California in and for the County of San Mateo or the District Court for the Northern District of California for the appointment of such panel. If, in their opinion it would be useful to do so, the arbitrators may select a special master with the appropriate qualifications to understand and review any technical and/or business issues raised by the claim(s). (c) Procedures. If requested by a party, or otherwise deemed necessary by the arbitrators, the parties will conduct discovery of a scope and nature as agreed upon by the parties, or, if the parties are unable to agree, as specified by the arbitrators. Hearings and other proceedings shall be subject to procedures agreed upon by the parties, or if the parties are unable to agree, as specified by the arbitrators. (d) Decision. A written decision of the arbitrators shall be rendered within thirty (30) days after the conclusion of the arbitration hearings and shall set forth in detail the reasons for such decision, which shall be based on applicable law. 16. Remedies; Limitations of Liability. 16.1 General. In any arbitration arising out or related to this Agreement, the arbitrator(s) shall have the power to award equitable relief and damages as provided by law for the particular claim(s) asserted. 16.2 Attorneys' Fees and Costs. In any litigation or arbitration arising out or related to this Agreement, reasonable costs and attorneys' fees shall be awarded to the prevailing party. For purposes of this provision, the "prevailing" party shall be that party the positions of which have been substantially vindicated, even if the other party has nominally prevailed in the dispute. The award of attorneys' fees and costs may be reduced or eliminated if, taking into account the significance of the issues at stake, and the overall cost of the dispute resolution, the prevailing party is deemed to have acted unreasonably in bringing the claims or in defending against them. 16.3 Interlocutory Relief. Notwithstanding the requirement that all disputes be resolved by binding arbitration, either party may request a temporary restraining order or other interlocutory relief from any court with jurisdiction. Neither the making of such a request, nor the granting of interlocutory relief, shall serve to waive either party's right to seek arbitration. 16.4 Limitations of Liability. (a) EXCEPT FOR THE PARTIES' RESPECTIVE INDEMNIFICATION OBLIGATIONS AS PROVIDED IN SECTIONS 19.1 AND 19.2 HEREOF, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY INCIDENTAL, CONSEQUENTIAL, SPECIAL, OR PUNITIVE DAMAGES OF ANY KIND OR NATURE, INCLUDING, WITHOUT LIMITATION, SUCH DAMAGES ARISING FROM ANY BREACH OF THIS AGREEMENT OR ANY TERMINATION OF THIS AGREEMENT, WHETHER SUCH LIABILITY IS ASSERTED ON THE BASIS OF CONTRACT, TORT (INCLUDING NEGLIGENCE OR STRICT LIABILITY), OR OTHERWISE, EVEN IF THE OTHER PARTY HAS BEEN ADVISED OR WAS AWARE OF THE POSSIBILITY OF SUCH LOSS OR DAMAGES. THE LIMITATIONS OF LIABILITY OF THIS SECTION 16.4(a) SHALL NOT EXTEND TO LIABILITY ARISING OUT OF ACTIONS WHICH ARE WILLFUL, DELIBERATE OR RECKLESS. (b) EXCEPT FOR FTIS' OBLIGATIONS UNDER SECTION 9, AND EXCEPT FOR THE PARTIES' RESPECTIVE INDEMNIFICATION OBLIGATIONS AS PROVIDED IN SECTIONS 19.1 AND 19.2 HEREOF, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR DIRECT DAMAGES IN AN AMOUNT EXCEEDING FIVE MILLION DOLLARS ($5,000,000) PER TWELVE (12) MONTH PERIOD AND TWENTY MILLION DOLLARS ($20,000,000) IN THE AGGREGATE DURING THE ENTIRE TERM OF THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, DIRECT DAMAGES ARISING FROM ANY BREACH OF THIS AGREEMENT OR ANY TERMINATION OF THIS AGREEMENT, WHETHER SUCH LIABILITY IS ASSERTED ON THE BASIS OF CONTRACT, TORT (INCLUDING NEGLIGENCE OR STRICT LIABILITY) OR OTHERWISE. IN THE EVENT THAT THIS AGREEMENT IS TERMINATED FOR MATERIAL BREACH, AND THE OTHER PARTY ACCEPTS SUCH TERMINATION OR AN ARBITRATOR DETERMINES THAT THE AGREEMENT WAS MATERIALLY BREACHED AND WAS PROPERLY TERMINATED, THE FOREGOING FIVE MILLION DOLLAR ($5,000,000) ANNUAL LIMITATION SHALL NOT APPLY TO ANY LIABILITY ASSESSED FOR SUCH BREACH, BUT THE TWENTY MILLION DOLLAR ($20,000,000) AGGREGATE LIMITATION SHALL APPLY THERETO. THE LIMITATIONS OF LIABILITY OF THIS SECTION 16.4(b) SHALL NOT EXTEND TO LIABILITY ARISING OUT OF ACTIONS WHICH ARE WILLFUL, DELIBERATE OR RECKLESS. (c) THE PARTIES HAVE FREELY AND OPENLY NEGOTIATED THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO THE PRICING TERMS HEREOF, WITH THE KNOWLEDGE THAT THE LIABILITY OF THE PARTIES IS TO BE LIMITED IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT. (d) SunGard shall have no liability with respect to any failure to meet a schedule, including any Initial Conversion schedule, failure to meet a Performance Requirement, Non-Conformity, claim of infringement or other matter to the extent attributable to (i) any unauthorized or improper use or modification of any Deliverable, (ii) any authorized modification of any Deliverable made by FTIS or on behalf of FTIS by any individual or entity other than SunGard, (iii) any unauthorized combination of any Deliverable with any other software, documentation or other item, or (iv) any breach of any provision of this Agreement by FTIS or any FRI Affiliate, FRI Client or End User. 17. Audit Procedures. 17.1 Record Keeping. During the term of this Agreement, and for a period of three (3) years thereafter, each party shall maintain accurate and complete records relating to and documenting each party's performance hereunder, including, without limitation of the foregoing, records on the following subjects: (i) for SunGard: (a) Developer Hours used, (b) Additional Services performed; (c) Reimbursable Expenses submitted; (d) terms of agreements with third parties entered into by SunGard which relate to delivery of any Deliverables to such third party; and (e) FTIS Hours used; (ii) for FTIS, with respect to each Processing Site: (a) the number of Accounts, including Processed Open Accounts being processed each month; (b) data center management; (c) production control; and (d) computer hardware, software and infrastructure used for processing hereunder. Such records will be maintained for a minimum of three (3) years and in a manner consistent with normal industry practices for the maintenance of significant records. 17.2 Audit Right. From time to time during the term of this Agreement, each party shall have the right to appoint either its own employees or individual contractors or an independent firm of certified public accountants reasonably acceptable to the other party to audit the other party's books and records relating to obligations under this Agreement, and/or review the other party's operations and facilities pertaining to its obligations under this Agreement. Any such auditor must agree to execute the audited party's standard form of non-disclosure agreement requiring that information learned be held in strict confidence, except as may be necessary to report conclusions to the auditing party and to explain the basis for such conclusions. Audits shall occur no more frequently than annually and shall be conducted in a manner that does not interfere unreasonably with the audited party's business activities. An audit may cover any period within the preceding two (2) years unless such period has been previously audited. The Audit Cost shall be borne by the auditing party unless such audit results in a finding of a discrepancy the reasonable value of which exceeds one hundred fifty percent (150%) of the Audit Cost, in which event the Audit Cost shall be borne by the audited party. If an audit reveals a discrepancy, the audited party shall promptly cure such discrepancy, unless the audited party disputes the existence or extent of such discrepancy, in which event the audited party shall have the right to invoke the dispute resolution procedures of this Agreement. In such dispute resolution procedures, the cost of the audit shall be treated as an expense for purposes of reimbursement to the prevailing party. 18. Representations and Warranties. 18.1 FTIS Representations and Warranties. FTIS hereby represents and warrants to SunGard that: (a) FTIS has the full corporate right, power and authority to enter into this Agreement and to perform the acts required of it hereunder, and to grant the rights granted by it hereunder; (b) the execution of this Agreement by FTIS, and the performance by FTIS, FRI and FRI Affiliates of their obligations and duties hereunder, do not and will not violate any agreement by which any of them is bound, and FTIS shall not enter into any agreement of any nature whatsoever that would: (i) prohibit FTIS from performing its obligations to SunGard hereunder; or (ii) constitute a breach of any of FTIS' representations, warranties or covenants hereunder; (c) FTIS is not aware of any material claim, or threat of material claim, by any third party that any of the ideas, methods, algorithms, formulae and concepts referred to in Section 10.2 hereof or any FTIS Enhancements violate any Intellectual Property Right of any third party; and (d) FTIS has obtained or will obtain all third party licenses, permits and authorizations necessary for FTIS to use and operate the Operating Environment at all Processing Sites. 18.2 SunGard Representations and Warranties. SunGard hereby represents and warrants to FTIS that: (a) SunGard has full corporate right, power and authority to enter into this Agreement, to perform the acts required of it hereunder, and to grant the rights granted by it hereunder; (b) the execution of this Agreement by SunGard, and the performance by SunGard of its obligations and duties hereunder, do not violate any agreement to which SunGard is a party or by which it is otherwise bound, and SunGard shall not enter into any agreement of any nature whatsoever that would: (i) prohibit SunGard from performing its obligations to FTIS hereunder; or (ii) constitute a breach of any of SunGard's representations, warranties or covenants; (c) SunGard is not aware of any material claim, or threat of material claim, by any third party that any of the Deliverables violate any Intellectual Property Right of any third party. 18.3 Disclaimer. EXCEPT AS EXPRESSLY STATED IN THIS AGREEMENT, NEITHER PARTY HAS MADE OR IS MAKING, DIRECTLY OR INDIRECTLY, ANY WARRANTIES OR REPRESENTATIONS, ORAL OR WRITTEN, EXPRESS OR IMPLIED. IN PARTICULAR, AND WITHOUT LIMITATION, SUNGARD MAKES NO SUCH WARRANTIES OR REPRESENTATIONS REGARDING ANY SOFTWARE OR OTHER DELIVERABLE, ANY SERVICES PROVIDED HEREUNDER, OR ANY OTHER MATTER PERTAINING TO THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO ANY EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS REGARDING SUITABILITY, DURABILITY, MERCHANTABILITY, QUALITY, CONDITION, FITNESS FOR A PARTICULAR PURPOSE, OR CONFORMITY TO ANY REPRESENTATION OR DESCRIPTION. 19. Indemnification. 19.1 SunGard's Indemnification. SunGard shall indemnify, defend and hold harmless FTIS, FRI and FRI Affiliates, and each of their respective officers, directors, employees and individual contractors from and against any and all Claims by any party other than an FRI Affiliate arising from or in connection with (i) any willful misconduct of SunGard in the performance of this Agreement; (ii) SunGard's failure to comply with federal, state or local law; and (iii) any SunGard-Caused Infringement. SunGard shall indemnify, defend and hold harmless FTIS, FRI and FRI Affiliates, and each of their respective officers, directors, employees and individual contractors from and against any and all Claims by any FTIS Unrelated Party arising from or in connection with: (i) a material breach by SunGard of this Agreement or the covenants, representations or warranties of SunGard provided herein; (ii) any negligent act, or negligent omission of SunGard in the performance of this Agreement. FTIS shall give SunGard prompt written notice of the assertion of any such Claim. SunGard shall assume defense of such Claim at its own expense and with counsel of its own choosing. At SunGard's expense, FTIS shall render assistance in this defense as reasonably requested by SunGard. FTIS shall be entitled to participate in any such action or proceeding at its own expense with counsel of its own choosing. Nothing in this Section 19.1 shall serve to limit any obligation SunGard might otherwise have pursuant to this Agreement to compensate FTIS for direct damages suffered by FTIS, including damages suffered as a result of any claim brought against FTIS by any other party, to the extent that such damages constitute direct damages to FTIS. 19.2 FTIS' Indemnification. FTIS shall indemnify, defend and hold harmless SunGard, SunGard Data Systems and SunGard Affiliates, and each of their respective officers, directors, employees and individual contractors, harmless from and against any and all Claims by any party other than a SunGard Affiliate arising from or in connection with (i) any willful misconduct of FTIS in the performance of this Agreement; (ii) FTIS' failure to comply with federal, state or local law; (iii) any violation of any law or regulation of any non-United States jurisdiction in which FTIS locates a Processing Site caused by operation of the Software, with the exception of laws or regulations relating to SunGard-Caused Infringement; and (iv) any Franklin-Caused Infringement. FTIS shall indemnify, defend and hold harmless SunGard, SunGard Data Systems and SunGard Affiliates, and each of their respective officers, directors, employees and individual contractors from and against any and all Claims by any SunGard Unrelated Party arising from or in connection with: (i) a material breach by FTIS of this Agreement or the covenants, representations or warranties of FTIS provided herein; (ii) any negligent act, or negligent omission of FTIS in the performance of this Agreement. SunGard shall give FTIS prompt written notice of the assertion of any such Claim. FTIS shall assume the defense of such Claim at its own expense with counsel of its own choosing. SunGard shall render assistance in this defense as reasonably requested by FTIS. SunGard shall be entitled to participate in any such action or proceeding at its own expense with counsel of its own choosing. Nothing in this Section 19.2 shall serve to limit any obligation FTIS might otherwise have pursuant to this Agreement to compensate SunGard for direct damages suffered by SunGard, including damages suffered as a result of any claim brought against SunGard by any other party, to the extent that such damages constitute direct damages to SunGard. 19.3 SunGard-Caused Infringement. If any SunGard-Caused Infringement is found to exist, in addition to any indemnity obligations which may arise, SunGard shall promptly (1) procure, at SunGard's expense, the right of FTIS to continue to use the affected Deliverables or (2) alter such Deliverables so as to render such Deliverables non-infringing, such alteration to be At No Additional Charge to FTIS. If SunGard believes in its reasonable good faith judgment that such a finding is likely, SunGard may take such steps in the exercise of its reasonable, good faith discretion. 19.4 FTIS-Caused Infringement. If any FTIS-Caused Infringement involving any Deliverables is found to exist, in addition to any indemnity obligations which may arise, at FTIS' reasonable option, SunGard shall promptly (1) procure, at FTIS' expense, the right of SunGard and FTIS to continue to use the affected Deliverables or (2) alter such Deliverables so as to render such Deliverables non-infringing, which may, at FTIS' reasonable option, include an alteration to remove that portion of such Deliverables which caused such infringement, such alteration to be Chargeable to FTIS. If FTIS believes in its reasonable good faith judgment that such a finding is likely, FTIS may require such steps in the exercise of its reasonable, good faith discretion. 20. Insolvency. 20.1 Right to Terminate. If SunGard institutes or is made a defendant in any proceeding for its protection (if not dismissed within one hundred eighty (180) days) under any bankruptcy, insolvency, reorganization or receivership law or makes an assignment for the benefit of creditors or is unable to meet its debts as they become due for a period exceeding one hundred eighty (180) days, FTIS may elect to terminate this Agreement and any licenses granted hereunder immediately, by written notice to SunGard, without prejudice to any right or remedy that FTIS may have including, but not limited to, damages, to the extent that the same may be recoverable. 20.2 License of "Intellectual Property". All rights and licenses granted under or pursuant to this Agreement by the parties with respect to the Deliverables are, and shall otherwise be deemed to be, for purposes of Section 365(n) of Title 11 of the United States Code (the "Bankruptcy Code"), licenses of rights to "intellectual property" as defined under Section 101 of the Bankruptcy Code. The parties agree that if FTIS does not terminate this Agreement for material breach by SunGard, FTIS, as a licensee of such rights and licenses, shall retain and may fully exercise, provided it abides by the terms of this Agreement, all of its rights and elections under the Bankruptcy Code, including without limitation any and all rights to upgrades of, and improvements made by SunGard whether such upgrades and improvements arise prior or subsequent to the commencement of a case under the Bankruptcy Code. The parties further agree that, in the event that any proceeding shall be instituted by or against SunGard (if not dismissed within one hundred eighty (180) days) seeking to adjudicate it bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking an entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or any substantial part of its property, or SunGard shall take any action to authorize any of the foregoing actions (each a "Proceeding"), FTIS shall have the right, in the event it has not terminated this Agreement hereunder, to retain and enforce its rights under this Agreement, including, but not limited to, the following rights; provided it abides by the terms of this Agreement: (a) the right to continue to use the Deliverables in accordance with the terms and conditions of this Agreement; and. (b) the right to access to all Deliverables as provided in this Agreement, and the Deliverables, if not already in FTIS' possession, shall be promptly delivered to FTIS upon any such commencement of a Proceeding upon written request therefor by FTIS, unless SunGard elects to continue to perform its obligations under this Agreement. 21. Guarantee. 21.1 By SunGard Data Systems. SunGard's ultimate parent company, SunGard Data Systems, Inc. guarantees the payment of all credits, reimbursements, damages, indemnities and other amounts owed by SunGard to FTIS under this Agreement and shall assume full responsibility for payment of such amounts in the event that SunGard is unable to pay such amounts. 21.2 By FRI. FTIS' parent company, FRI, guarantees the payment of all fees, reimbursements, damages, indemnities and other amounts owed by FTIS to SunGard under this Agreement and shall assume full responsibility for payment of such amounts in the event that FTIS is unable to pay such amounts. 22. SunGard Insurance. SunGard represents that Exhibit H is an accurate list of the insurance policies maintained by SunGard Data Systems as of the Effective Date for the benefit of SunGard Data Systems and all of its direct and indirect subsidiaries, including SunGard. Promptly after the Effective Date, FTIS shall be named as an additional insured on SunGard Data Systems' liability insurance policies, and SunGard shall deliver appropriate certificates of insurance to FTIS. SunGard shall promptly notify FTIS of any material decrease in coverage or other material adverse change with respect to SunGard Data Systems' insurance policies. If FTIS reasonably determines that any such change will require FTIS to incur a materially greater risk, then FTIS shall give written notice to SunGard of such determination, explaining the reasons therefor and requesting specific changes in SunGard Data Systems' insurance policies. Any changes in SunGard Data Systems' insurance policies that are agreed to by the parties shall be promptly implemented. If the parties are unable to agree on changes to SunGard Data Systems' insurance policies, then their dispute shall be resolved in accordance with the provisions of Section 15 of this Agreement. 23. Miscellaneous. 23.1 Cooperation. Each party shall use commercially reasonable efforts to cooperate with the other party in connection with the performance of this Agreement including, without limitation, executing and delivering such documents and taking such actions as reasonably necessary and appropriate to carry out the intent and purposes of this Agreement. 23.2 Assignment. Neither party may assign its rights, or delegate its duties, under this Agreement in whole or in part without the express written consent of the other party, such consent not to be unreasonably withheld. Any attempted or purported assignment without such required consent shall be null and void and a material breach of this Agreement. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties hereto. 23.3 Modification. This Agreement, including all terms and conditions contained herein or in any other schedule or attachment hereto, may be amended, modified or supplemented only in writing, signed by each party hereto. 23.4 Entire Agreement. This Agreement, including all schedules and attachments hereto, sets forth the entire understanding between the parties with respect to the subject matter hereof, and supersedes all prior or contemporaneous understandings, communications or agreements, whether written or oral, regarding the subject matter hereof. In particular, and without limitation of the foregoing, this Agreement supersedes the Third Amended MOU, the Non-Disclosure Agreement entered into by the parties effective May 31, 1996 and the Software Evaluation Agreement entered into by the parties effective January 24, 1997. In addition, upon Completion of Initial Conversion, the 1981 Agreement shall terminate. 23.5 Severability. If any provision of this Agreement or the application thereof to any party or circumstance shall at any time or to any extent be determined to be invalid or unenforceable, such provision (or part thereof) shall be enforced to the extent possible consistent with the stated intentions of the parties, or, if incapable of such enforcement, shall be deemed deleted from this Agreement, while the remainder of this Agreement shall remain in full force and effect. 23.6 Force Majeure. Neither party hereto shall be responsible for any failure to perform or delay in performing its obligations under this Agreement that is caused by a Force Majeure Event, and neither party shall be considered in breach of or in default under this Agreement as a result of any such failure or delay caused by a Force Majeure Event. Without limiting the foregoing, SunGard shall not be responsible for any failure to meet any schedule, any failure to meet Performance Requirements or any other Non-Conformities caused by any Force Majeure Event. Obligations hereunder, however, shall in no event be permanently excused but shall be suspended only until the cessation of any Force Majeure Event, at which time the parties shall consult with each other in order to determine whether any schedule changes should be made. In the event that a Force Majeure Event obstructs performance of this Agreement for more than one (1) month, the parties hereto shall consult with each other to determine whether this Agreement should be modified or terminated. A party experiencing a Force Majeure Event shall use commercially reasonable efforts under the circumstances in order to remedy that situation as well as to minimize its effects and shall notify the other party as soon as possible after its occurrence. 23.7 Waiver. Any of the provisions of this Agreement may be waived by the party entitled to the benefit thereof. Neither party shall be deemed, by any act or omission, to have waived any of its rights or remedies hereunder unless such waiver is in writing and signed by the waiving party, and then only to the extent specifically set forth in such writing. A waiver with reference to one event shall not be construed as continuing or as a bar to or waiver of any right or remedy as to a subsequent event. 23.8 No Joint Venture or Agency. Nothing herein shall be construed or deemed to create any relationship of joint venture, partnership, master-servant or principal-agent between the parties. Except as expressly provided herein, neither party shall have authority to commit or bind the other with respect to any third party. 23.9 Notices. Any notice or other communication to be given hereunder shall be in writing and shall be (as elected by the party giving such notice): (i) personally delivered; (ii) transmitted by postage prepaid first class registered or certified airmail, return receipt requested; (iii) deposited prepaid with a nationally recognized overnight courier service; or (iv) delivered by facsimile transmission or e-mail, with confirmation provided under options (i)-(iii). Unless otherwise provided herein, all notices shall be deemed to have been duly given on: (a) the date of receipt (or if delivery is refused, the date of such refusal) if delivered personally or by courier; or (b) five (5) days after the date of posting if transmitted by mail. Notice hereunder shall be directed to the following addresses or at such other addresses as either party may designate from time to time: FTIS: SUNGARD: Franklin Templeton Investor Services, Inc. SunGard Shareholders Systems, Inc. 777 Mariners Island Blvd. 951 Mariners Island Blvd. San Mateo, CA 94404 San Mateo, CA 94404 Attn: President Attn: President cc: cc: Franklin Resources, Inc. SunGard Data Systems, Inc. 777 Mariners Island Blvd. 1285 Drummers Lane San Mateo, CA 94404 Suite 300 Attn: General Counsel Wayne, PA 19087 Attn: General Counsel 23.10 Applicable Law; Jurisdiction. This Agreement shall be governed by the laws of the State of California applicable to agreements made and to be wholly performed therein (without reference to conflict of laws). The parties agree that the only proper venues for any action to enforce this agreement shall be the Superior Court of the State of California in and for the County of San Mateo or the United States District Court for the Northern District of California. 23.11 No Third Party Beneficiaries. Nothing express or implied in this Agreement is intended to confer, nor shall anything herein confer, upon any person other than the parties and the respective successors or permitted assigns of the parties, any rights, remedies, obligations or liabilities whatsoever. 23.12 Counterparts, Facsimiles. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute one and the same instrument. For purposes hereof, a facsimile copy of this Agreement, including the signature pages hereto, shall be deemed to be an original. Notwithstanding the foregoing, the parties shall each deliver original execution copies of this Agreement to one another as soon as practicable following execution thereof. 23.13 Prior Work. Development, design and other work done by SunGard prior to the Effective Date under the MOU, the First Amended MOU, the Second Amended MOU and the Third Amended MOU shall fall within the scope of this Agreement as if such work had been done after the Effective Date. 23.14 Non-Solicitation. During the term of this Agreement and any Reasonable Transition Period, without the other party's prior written consent, neither party shall employ, engage, or solicit for employment or engagement, any person who then is an employee or individual contractor of the other party or was an employee or individual contractor of the other party within the previous six (6) months. IN WITNESS WHEREOF, the undersigned parties have caused this Agreement to be executed by its duly authorized representatives as of the day and year first above written. FRANKLIN TEMPLETON INVESTOR SERVICES, INC. By: /s/ Frank Isola ---------------- Name: Frank Isola Title: President SUNGARD SHAREHOLDER SYSTEMS, INC. By: /s/Norman Schlansky -------------------- Name: Norman Schlansky Title: President and Chief Operating Officer GUARANTEED IN ACCORDANCE WITH SECTION 21 SUNGARD DATA SYSTEMS, INC. By: /s/Lawrence A. Gross --------------------- Name: Lawrence A. Gross Title: Vice President & General Counsel FRANKLIN RESOURCES, INC. By: /s/ Harmon E. Burns --------------------- Name: Harmon E. Burns Title: Executive Vice President EX-12 3 COMPUTATION OF RATIOS OF EARNIGNS TO FIXED CHARGES Exhibit 12 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES For the Years Ended (Dollars in thousands) 1997 1996 1995 - ---------------------------------- ------------- --------------- ------------- Income before taxes $615,713 $456,230 $386,655 Add fixed charges: Interest expense 46,563 36,866 39,721 Interest factor on rent 9,202 8,085 7,271 - ---------------------------------- ------------- --------------- ------------- Total fixed charges 55,765 44,951 46,992 Earnings before fixed charges and taxes on income $671,478 $501,181 $433,647 ================================== ============= =============== ============= Ratio of earnings to fixed charges 12.0 11.1 9.2 ================================== ============= =============== ============= EX-21 4 LIST OF SUBSIDIARIES EXHIBIT 21 FRANKLIN RESOURCES, INC. FOR FISCAL YEAR ENDED SEPTEMBER 30, 1997 LIST OF PRINCIPAL SUBSIDIARIES* State or Nation of Name Incorporation - -------------------------------------------------------------------------------- Closed Joint-Stock Company Templeton Russia Continental Property Management Company California Franklin Advisers, Inc. California Franklin Advisory Services, Inc. Delaware Franklin Agency, Inc. California Franklin Asset Management (Proprietary) Limited South Africa Franklin Bank California Franklin Capital Corporation Utah Franklin Institutional Services Corporation California Franklin Investment Advisory Services, Inc. Delaware Franklin Management, Inc. California Franklin Mutual Advisers, Inc. Delaware Franklin Partners, Inc. California Franklin Properties, Inc. California Franklin Real Estate Management, Inc. California Franklin Templeton Holding Limited Mauritius Franklin Templeton Services, Inc. Delaware Franklin Templeton Trust Company California Franklin/Templeton Distributors, Inc. New York Franklin/Templeton Investor Services, Inc. California Franklin/Templeton Travel, Inc. California FS Capital Group California FS Properties Inc. California Happy Dragon Holdings Ltd. British Virgin Islands Orion Fund Management Limited Bermuda Property Resources Equity Trust California Property Resources, Inc. California T.G.H. Holdings Ltd. Bahamas TDA Emerging Europe Fund, LLC Delaware Templeton Global Value Investors, Inc. Delaware Templeton Asset Management India Pvt. Ltd. India Templeton Asset Management Ltd. Japan Templeton Direct Advisors, Inc. Delaware Templeton do Brasil-Consultoria Financeira LTDA. Brazil Templeton Direct Investments, Inc. Delaware Templeton Direct Advisors, L.P. Delaware Templeton France S.A. France Templeton/Franklin Investment Services, Inc. Delaware Templeton Funds Annuity Company Florida Templeton Funds Trust Company Florida Templeton Global Advisors Limited Bahamas Templeton Global Investors Limited England Templeton Global Investors, Inc. Delaware Templeton Global Strategic Services (Deutschland) GmbH Germany Templeton Global Strategic Services S.A. Luxembourg Templeton Global Value Investors, Inc. Delaware Templeton Heritage Limited Canada Templeton Holdings Limited England Templeton International, Inc. Delaware Templeton Investment Counsel, Inc. Florida Templeton Investment Holdings (Cyprus) Limited Cyprus Templeton Investment Management (Australia) Limited Australia Templeton Investment Management Co., Ltd. Singapore Templeton Investment Management Limited England Templeton Italia, Srl. Italy Templeton Management Limited Canada Templeton Research Poland SP.z.o.o. Poland Templeton (Switzerland) Ltd. Switzerland Templeton Trust Services Pvt. Ltd. India Templeton Unit Trust Managers Limited England Templeton Worldwide, Inc. Delaware Templeton/Franklin Investment Services (Asia) Limited Hong Kong Templeton/Franklin Investment Services, Inc. Delaware *All subsidiaries currently do business only under their corporate name except for Templeton Quantitative Advisors, Inc., which also operates under the assumed name, "The DAIS Group"; Templeton Investment Counsel, Inc. which also operates under the name "Templeton Global Bond Managers"; and Templeton/Franklin Investment Services, Inc. which also operates under the assumed name, "Templeton Portfolio Advisory". All Templeton subsidiaries also on occasion use the name Templeton Worldwide. EX-23 5 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Franklin Resources, Inc. on Form S-3 dated October 9, 1996 for the issuance of medium term notes, Form S-3 filed September 30, 1994 for the registration of 1,411,736 shares, Form S-8 for the 1988 Restricted Stock Plan, Form S-8 for the Franklin Resources, Inc. Universal Stock Plan, Form S-8 for Franklin Resources, Inc. United Kingdom Stock Option Plan #1 and Form S-8 for the Canada Stock Option Plan, of our report dated October 22, 1997, on our audits of the consolidated financial statements of Franklin Resources, Inc. and subsidiaries as of September 30, 1997 and 1996 and for the years ended September 30, 1997, 1996, and 1995, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. San Francisco, California December 18, 1997 EX-27 6
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1997 SEP-30-1997 434,864 189,674 233,862 0 0 878,439 217,085 0 3,095,200 405,500 0 0 0 12,623 1,841,598 3,095,200 0 2,163,275 0 1,571,815 0 0 25,333 615,713 181,650 0 0 0 0 434,063 3.43 3.43
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