Edgar Filing: FRANKLIN RESOURCES INC

Form 10Q 06.30.2011

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011



o	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: 001-09318

FRANKLIN RESOURCES, INC.

(Exact name of registrant as specified in its charter)



Delaware		13-2670991
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Franklin Parkway, San Mateo, CA		94403
(Address of principal executive offices)		(Zip Code)

(650) 312-2000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x YES o NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x YES o NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x		Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES x NO

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Outstanding: 220,537,173 shares of common stock, par value $0.10 per share, of Franklin Resources, Inc. as of July 25, 2011.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

FRANKLIN RESOURCES, INC.

Condensed Consolidated Statements of Income

Unaudited



	Three Months Ended June 30,						Nine Months Ended June 30,
(in thousands, except per share data)	2011			2010			2011			2010
Operating Revenues
Investment management fees	$	1,142,846		$	915,866		$	3,260,440		$	2,558,607
Sales and distribution fees	620,261			529,313			1,785,236			1,514,147
Shareholder servicing fees	77,520			72,976			225,325			213,895
Other, net	12,406			15,916			31,908			37,946
Total operating revenues	1,853,033			1,534,071			5,302,909			4,324,595
Operating Expenses
Sales, distribution and marketing	719,311			590,876			2,043,399			1,683,867
Compensation and benefits	313,592			280,333			921,796			805,686
Information systems and technology	41,266			40,156			123,110			117,968
Occupancy	32,112			35,862			95,683			96,268
General, administrative and other	64,055			65,280			147,508			171,130
Total operating expenses	1,170,336			1,012,507			3,331,496			2,874,919
Operating Income	682,697			521,564			1,971,413			1,449,676
Other Income (Expenses)
Consolidated sponsored investment products gains (losses), net	5,395			(14,670		)	14,427			6,071
Investment and other income (losses), net	9,108			(7,262		)	103,855			68,204
Interest expense	(10,056		)	(4,836		)	(26,315		)	(6,514		)
Other income (expenses), net	4,447			(26,768		)	91,967			67,761
Income before taxes	687,144			494,796			2,063,380			1,517,437
Taxes on income	208,944			135,113			599,498			441,795
Net income	478,200			359,683			1,463,882			1,075,642
Less: net income (loss) attributable to
Nonredeemable noncontrolling interests	(24,575		)	180			(44,029		)	600
Redeemable noncontrolling interests	(572		)	(992		)	307			2,259
Net Income Attributable to Franklin Resources, Inc.	$	503,347		$	360,495		$	1,507,604		$	1,072,783
Earnings per Share
Basic	$	2.27		$	1.59		$	6.76		$	4.70
Diluted	2.26			1.58			6.73			4.68
Dividends per Share	$	0.25		$	0.22		$	0.75		$	3.66

See Notes to Condensed Consolidated Financial Statements.

FRANKLIN RESOURCES, INC.

Condensed Consolidated Balance Sheets

Unaudited



(in thousands)	June 30, 2011		September 30, 2010
Assets
Current Assets
Cash and cash equivalents	$	4,481,196	$	3,985,312
Cash and cash equivalents of consolidated variable interest entities	77,892		—
Receivables	840,370		684,223
Receivables of consolidated variable interest entities, at fair value	56,305		—
Investment securities, trading	907,827		361,396
Investment securities, available-for-sale	1,032,645		1,114,637
Investments of consolidated variable interest entities, at fair value	34,705		—
Investments in equity method investees and other	17,661		91,866
Deferred taxes	108,656		89,242
Prepaid expenses and other	28,640		36,117
Total current assets	7,585,897		6,362,793
Banking/Finance Assets
Cash and cash equivalents	160,901		138,404
Investment securities, trading	—		23,362
Investment securities, available-for-sale	360,422		408,239
Loans receivable, net	429,219		374,886
Loans receivable of consolidated variable interest entities, net	186,617		—
Other	37,608		16,303
Total banking/finance assets	1,174,767		961,194
Non-Current Assets
Investments of consolidated variable interest entities, at fair value	899,644		—
Investments in equity method investees and other	715,451		702,634
Property and equipment, net	563,921		548,956
Goodwill	1,481,955		1,444,269
Other intangible assets, net	611,618		562,360
Other	117,746		125,882
Total non-current assets	4,390,335		3,384,101
Total Assets	$	13,150,999	$	10,708,088

[Table continued on next page]

See Notes to Condensed Consolidated Financial Statements.

FRANKLIN RESOURCES, INC.

Condensed Consolidated Balance Sheets

Unaudited

[Table continued from previous page]



(dollars in thousands, except per share data)	June 30, 2011		September 30, 2010
Liabilities and Stockholders’ Equity
Current Liabilities
Compensation and benefits	$	375,085	$	330,879
Commercial paper	29,999		29,997
Current maturities of long-term debt of consolidated variable interest entities, at fair value	50,695		—
Accounts payable, accrued expenses and other	247,410		244,203
Other liabilities of consolidated variable interest entities, at fair value	79,546		—
Commissions	392,515		302,366
Income taxes	105,405		99,197
Total current liabilities	1,280,655		1,006,642
Banking/Finance Liabilities
Deposits	689,299		655,748
Long-term debt of consolidated variable interest entities	204,009		—
Federal Home Loan Bank advances	49,000		51,000
Other	2,071		16,745
Total banking/finance liabilities	944,379		723,493
Non-Current Liabilities
Long-term debt	899,106		898,903
Long-term debt of consolidated variable interest entities, at fair value	877,187		—
Deferred taxes	254,747		237,810
Other	96,328		91,261
Total non-current liabilities	2,127,368		1,227,974
Total liabilities	4,352,402		2,958,109
Commitments and Contingencies (Note 11)
Redeemable Noncontrolling Interests	35,161		19,533
Stockholders’ Equity
Preferred stock, $1.00 par value, 1,000,000 shares authorized; none issued	—		—
Common stock, $0.10 par value, 1,000,000,000 shares authorized; 220,425,607 and 224,007,674 shares issued and outstanding, at June 30, 2011 and September 30, 2010	22,043		22,401
Retained earnings	8,373,938		7,530,877
Appropriated retained earnings of consolidated variable interest entities	59,538		—
Accumulated other comprehensive income	230,980		173,716
Total Franklin Resources, Inc. stockholders’ equity	8,686,499		7,726,994
Nonredeemable noncontrolling interests	76,937		3,452
Total stockholders’ equity	8,763,436		7,730,446
Total Liabilities and Stockholders’ Equity	$	13,150,999	$	10,708,088

See Notes to Condensed Consolidated Financial Statements.

FRANKLIN RESOURCES, INC.

Condensed Consolidated Statements of Cash Flows

Unaudited



	Nine Months Ended June 30,
(in thousands)	2011			2010
Net Income	$	1,463,882		$	1,075,642
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	181,765			200,804
Stock-based compensation	67,267			62,708
Excess tax benefit from stock-based compensation	(13,911		)	(11,035		)
Net gains on sale of assets	(64,839		)	(13,887		)
Equity in net (income) losses of affiliated companies	(59,243		)	20,438
Provision for loan losses	4,181			2,722
Other-than-temporary impairment of investments	13,606			1,463
Net losses of consolidated variable interest entities	43,226			—
Deferred income taxes	(3,471		)	(1,998		)
Changes in operating assets and liabilities:
Increase in receivables, prepaid expenses and other	(222,922		)	(239,930		)
Increase in trading securities, net	(539,297		)	(122,314		)
Increase in income taxes payable	18,999			51,670
Increase in commissions payable	88,476			59,840
(Decrease) increase in other liabilities	(8,466		)	176,682
Increase in accrued compensation and benefits	39,346			77,132
Net cash provided by operating activities	1,008,599			1,339,937
Purchase of investments	(278,833		)	(586,152		)
Purchase of investments by consolidated variable interest entities	(817,282		)	—
Liquidation of investments	521,193			550,271
Liquidation of investments by consolidated variable interest entities	991,256			—
Purchase of banking/finance investments	(41,794		)	(20,000		)
Liquidation of banking/finance investments	88,092			160,481
Increase in loans receivable, net	(56,252		)	(60,987		)
Decrease in loans receivable held by consolidated variable interest entities, net	123,223			—
Additions of property and equipment, net	(84,716		)	(52,987		)
Acquisitions of subsidiaries, net of cash acquired	(58,067		)	—
Cash and cash equivalents recognized due to adoption of new consolidation guidance	45,841			—
Net cash provided by (used in) investing activities	432,661			(9,374		)
Increase in deposits	33,551			5,212
Issuance of common stock	35,964			28,365
Dividends paid on common stock	(161,193		)	(833,893		)
Repurchase of common stock	(617,103		)	(503,762		)
Excess tax benefit from stock-based compensation	13,911			11,035
Decrease in commercial paper, net	(39		)	(64,510		)
Proceeds from issuance of debt	—			952,036
Payments on debt	—			(66,000		)
Payments on debt by consolidated variable interest entities	(259,592		)	—
Noncontrolling interests	84,742			56,897
Net cash used in financing activities	$	(869,759	)	$	(414,620	)

[Table continued on next page]

See Notes to Condensed Consolidated Financial Statements.

FRANKLIN RESOURCES, INC.

Condensed Consolidated Statements of Cash Flows

Unaudited

[Table continued from previous page]



	Nine Months Ended June 30,
(in thousands)	2011			2010
Effect of exchange rate changes on cash and cash equivalents	$	24,772		$	(29,772	)
Increase in cash and cash equivalents	596,273			886,171
Cash and cash equivalents, beginning of period	4,123,716			3,104,451
Cash and Cash Equivalents, End of Period	$	4,719,989		$	3,990,622

Components of Cash and Cash Equivalents
Cash and cash equivalents, beginning of period:
Current assets	$	3,985,312		$	2,982,539
Banking/finance assets	138,404			121,912
Total	$	4,123,716		$	3,104,451
Cash and cash equivalents, end of period
Current assets	$	4,481,196		$	3,859,467
Current assets of consolidated variable interest entities	77,892			—
Banking/finance assets	160,901			131,155
Total	$	4,719,989		$	3,990,622

Supplemental Disclosure of Non-Cash Information
Decrease in noncontrolling interests due to net deconsolidation of certain sponsored investment products	$	(1,674	)	$	(94,940	)
Increase in assets, net of liabilities, related to consolidation of variable interest entities	60,760			—
Increase in receivables of consolidated variable interest entities related to investment trades pending settlement	57,111			—
Increase in other liabilities of consolidated variable interest entities related to investment trades pending settlement	(78,328		)	—

Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes	$	586,033		$	383,210
Cash paid for interest	37,445			5,601
Cash paid for interest by consolidated variable interest entities	35,604			—

See Notes to Condensed Consolidated Financial Statements.

FRANKLIN RESOURCES, INC.

Notes to Condensed Consolidated Financial Statements

June 30, 2011

(Unaudited)

Note 1 – Basis of Presentation

The unaudited interim financial statements of Franklin Resources, Inc. (“Franklin”) and its consolidated subsidiaries (collectively, the “Company”) included herein have been prepared by the Company in accordance with the instructions to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Under these rules and regulations, some information and footnote disclosures normally included in financial statements prepared under accounting principles generally accepted in the United States of America have been shortened or omitted. Management believes that all adjustments necessary for a fair statement of the financial position and the results of operations for the periods shown have been made. All adjustments are normal and recurring. These financial statements should be read together with the Company’s audited financial statements included in its Form 10-K for the fiscal year ended September 30, 2010. Certain amounts for the comparative prior fiscal year period have been reclassified to conform to the financial statement presentation as of and for the period ended June 30, 2011.

In the quarter ended December 31, 2010 the Company changed the presentation of its condensed consolidated statements of income. The primary changes consisted of the classification of amortization of deferred sales commissions, previously presented as a separate line, and marketing support payments, previously included in advertising and promotion expenses, with related sales and distribution expenses previously reported as underwriting and distribution. The line was renamed sales, distribution and marketing to reflect the broader nature of the underlying expenses. Occupancy expenses previously included in information systems, technology and occupancy are now presented as a separate line to enhance transparency of each of the expense categories. Advertising and promotion expenses unrelated to marketing support payments are now classified with expenses previously reported as other, and the line was renamed general, administrative and other. No changes were made to the classification of revenues, however the line previously reported as underwriting and distribution fees was renamed sales and distribution fees.

Management believes that the revised presentation is more useful to readers of its financial statements and provides enhanced disclosure of its total sales, distribution and marketing expenses. The nature of the amortization of deferred sales commissions is consistent with the sales commission expenses recognized at the time of sale, therefore they are presented together. Similarly, marketing support payments, which are incurred in the Company’s U.S. business, are comparable in nature to a component of non-U.S. distribution expenses. Because of the growth in the Company’s international business and corresponding increase in distribution expenses, presenting them together with marketing support provides a more complete view of these distribution-related, asset-based expenses. Amounts for the comparative prior fiscal year period have been reclassified to conform to the current year presentation. These reclassifications had no impact on previously reported net income or financial position and do not represent a restatement of any previously published financial results.

The following table presents the effects of the changes in the presentation of operating expenses to the Company’s previously-reported condensed consolidated statement of income:



(in thousands)	Three Months Ended June 30, 2010							Nine Months Ended June 30, 2010
(in thousands)	As Reported		Adjustments			As Amended		As Reported		Adjustments			As Amended
Operating Expenses
Underwriting and distribution	$	519,607	$	(519,607	)	$	—	$	1,473,657	$	(1,473,657	)	$	—
Sales, distribution and marketing	—		590,876			590,876		—		1,683,867			1,683,867
Compensation and benefits	280,333		—			280,333		805,686		—			805,686
Information systems, technology and occupancy	76,018		(76,018		)	—		214,236		(214,236		)	—
Information systems and technology	—		40,156			40,156		—		117,968			117,968
Occupancy	—		35,862			35,862		—		96,268			96,268
Advertising and promotion	37,976		(37,976		)	—		110,945		(110,945		)	—
Amortization of deferred sales commissions	50,121		(50,121		)	—		142,949		(142,949		)	—
Other	48,452		(48,452		)	—		127,446		(127,446		)	—
General, administrative and other	—		65,280			65,280		—		171,130			171,130
Total operating expenses	$	1,012,507	$	—		$	1,012,507	$	2,874,919	$	—		$	2,874,919

Note 2 – New Accounting Guidance

On October 1, 2010, the Company adopted new Financial Accounting Standards Board (“FASB”) guidance related to transfers of financial assets. The guidance revises sale accounting criteria for transfers of financial assets and eliminates the concept of a qualifying special-purpose entity (“QSPE”). The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

On October 1, 2010, the Company adopted new FASB guidance related to the consolidation of variable interest entities (“VIEs”). The guidance changes the model used to identify the primary beneficiary of VIEs other than entities that have the attributes of an investment company. The new model requires a qualitative analysis to determine whether a company’s variable interests give it a controlling financial interest in a VIE. The guidance also requires an ongoing reassessment of whether a company is the primary beneficiary of a VIE. The adoption of the guidance resulted in the consolidation of automobile loan securitization trusts and collateralized loan obligations (“CLOs”) that were not previously consolidated. The consolidation of these entities resulted in increases to total assets, long-term debt and total stockholders’ equity of $1,384.7 million, $1,278.1 million and $106.6 million as of October 1, 2010. See Note 6 – Variable Interest Entities.

Note 3 – Acquisition

On January 18, 2011, the Company acquired all of the outstanding shares of Rensburg Fund Management Limited (“Rensburg”), a specialist U.K. equity manager, for a purchase consideration of $72.4 million in cash. The purchase price was allocated $10.2 million to tangible net assets, $52.6 million to indefinite-lived intangible assets, $14.0 million to deferred tax liabilities and $23.6 million to goodwill. The indefinite-lived intangible assets relate to management contracts. At acquisition date, Rensburg had approximately $1.5 billion in assets under management (“AUM”) relating to various U.K. unit trusts.

The Company has not presented pro forma combined results of operations for this acquisition because the results of operations as reported in the accompanying condensed consolidated statements of income would not have been materially different.

Note 4 – Stockholders' Equity, Redeemable Noncontrolling Interests and Comprehensive Income

The changes in total stockholders’ equity and redeemable noncontrolling interests were as follows:



(in thousands)	Franklin Resources, Inc. Stockholders’ Equity			Nonredeemable Noncontrolling Interests			Total Stockholders’ Equity			Redeemable Noncontrolling Interests
for the nine months ended June 30, 2011	Franklin Resources, Inc. Stockholders’ Equity			Nonredeemable Noncontrolling Interests			Total Stockholders’ Equity			Redeemable Noncontrolling Interests
Balance at October 1, 2010	$	7,726,994		$	3,452		$	7,730,446		$	19,533
Adjustment for adoption of new consolidation guidance	106,601						106,601
Net income (loss)	1,507,604			(44,029		)	1,463,575			307
Net loss reclassified to appropriated retained earnings	(46,294		)	46,294			—
Other comprehensive income
Net unrealized losses on investments, net of tax	(5,354		)				(5,354		)
Currency translation adjustments	63,096						63,096
Net unrealized gains on defined benefit plans, net of tax	232						232
Cash dividends on common stock	(166,856		)				(166,856		)
Repurchase of common stock	(617,103		)				(617,103		)
Noncontrolling interests
Net subscriptions				70,471			70,471			16,995
Purchase of noncontrolling equity interest	(3,473		)	749			(2,724		)
Net deconsolidation of certain sponsored investment products				—			—			(1,674		)
Other ¹	121,052						121,052
Balance at June 30, 2011	$	8,686,499		$	76,937		$	8,763,436		$	35,161

^{_____________________}

¹ Primarily relates to stock-based compensation plans.



(in thousands)	Franklin Resources, Inc. Stockholders’ Equity			Nonredeemable Noncontrolling Interests		Total Stockholders’ Equity			Redeemable Noncontrolling Interests
for the nine months ended June 30, 2010	Franklin Resources, Inc. Stockholders’ Equity			Nonredeemable Noncontrolling Interests		Total Stockholders’ Equity			Redeemable Noncontrolling Interests
Balance at October 1, 2009	$	7,632,173		$	2,262	$	7,634,435		$	65,126
Net income	1,072,783			600		1,073,383			2,259
Other comprehensive income
Net unrealized gains on investments, net of tax	2,738					2,738
Currency translation adjustments	(46,568		)			(46,568		)
Net unrealized losses on defined benefit plans, net of tax	(263		)			(263		)
Cash dividends on common stock	(836,773		)			(836,773		)
Repurchase of common stock	(503,762		)			(503,762		)
Noncontrolling interests
Net deconsolidation of certain sponsored investment products				—		—			(94,940		)
Net subscriptions				547		547			56,350
Other¹	106,174					106,174
Balance at June 30, 2010	$	7,426,502		$	3,409	$	7,429,911		$	28,795

^{_____________________}

¹ Primarily relates to stock-based compensation plans.

The components of comprehensive income, including amounts attributable to noncontrolling interests, were as follows:



(in thousands)	Three Months Ended June 30,						Nine Months Ended June 30,
(in thousands)	2011			2010			2011			2010
Net income	$	478,200		$	359,683		$	1,463,882		$	1,075,642
Net unrealized gains (losses) on investments, net of tax	7,678			(32,416		)	(5,354		)	2,738
Currency translation adjustments	17,771			(51,505		)	63,096			(46,568		)
Net unrealized gains (losses) on defined benefit plans, net of tax	—			(508		)	232			(263		)
Total comprehensive income	503,649			275,254			1,521,856			1,031,549
Less: comprehensive income (loss) attributable to
Nonredeemable noncontrolling interests	(24,575		)	180			(44,029		)	600
Redeemable noncontrolling interests	(572		)	(992		)	307			2,259
Total Comprehensive Income Attributable to Franklin Resources, Inc.	$	528,796		$	276,066		$	1,565,578		$	1,028,690

During the three and nine months ended June 30, 2011, the Company repurchased 1.6 million and 5.1 million shares of its common stock at a cost of $203.6 million and $617.1 million under its stock repurchase program. In December 2010, the Company’s Board of Directors authorized the repurchase of up to 10.0 million additional shares of its common stock under the stock repurchase program. At June 30, 2011, approximately 7.9 million shares of common stock remained available for repurchase under the stock repurchase program. During the three and nine months ended June 30, 2010, the Company repurchased 2.1 million and 4.9 million shares of its common stock at a cost of $212.3 million and $503.8 million. The stock repurchase program is not subject to an expiration date.

Note 5 – Earnings per Share

The components of basic and diluted earnings per share were as follows:



(in thousands, except per share data)	Three Months Ended June 30,				Nine Months Ended June 30,
(in thousands, except per share data)	2011		2010		2011		2010
Net Income Attributable to Franklin Resources, Inc.	$	503,347	$	360,495	$	1,507,604	$	1,072,783
Less: Allocation of earnings to participating nonvested stock and stock unit awards	2,887		2,016		7,638		5,976
Net Income Available to Common Stockholders	$	500,460	$	358,479	$	1,499,966	$	1,066,807

Weighted-average shares outstanding – basic	220,313		225,626		221,731		226,858
Effect of dilutive common stock options and non-participating nonvested stock unit awards	971		1,180		1,077		1,282
Weighted-Average Shares Outstanding – Diluted	221,284		226,806		222,808		228,140

Earnings per Share
Basic	$	2.27	$	1.59	$	6.76	$	4.70
Diluted	2.26		1.58		6.73		4.68

Non-participating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive were nil for the three and nine months ended June 30, 2011, and 0.4 million for the three and nine months ended June 30, 2010.

Note 6 – Variable Interest Entities

The Company consolidates VIEs for which it is considered the primary beneficiary. A VIE is an entity in which the equity investment holders have not contributed sufficient capital to finance its activities or the equity investment holders do not have defined rights and obligations normally associated with an equity investment.

The Company uses two different models for determining whether it is the primary beneficiary of VIEs. For all investment entities with the exception of CLOs, the Company is considered to be the primary beneficiary if it has the majority of the risks or rewards of ownership. For all other VIEs, including CLOs, the Company is considered to be the primary beneficiary if it has the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses of or right to receive benefits from the VIE that could potentially be significant to the VIE.

Under both models, the key estimates and assumptions used in the analyses may include the amount of AUM, investment management and related service fee rates, the life of the investment product, prepayment rates, and the discount rate.

Collateralized Loan Obligations

The Company provides collateral management services to CLOs, which are considered VIEs. These CLOs are asset-backed financing entities collateralized by a pool of assets, primarily corporate loans and, to a lesser extent, high-yield bonds. Multiple tranches of debt securities are issued by the CLOs, offering investors various maturity and credit risk characteristics. The debt holders of the CLOs have recourse only to the corresponding collateralized assets, which cannot be used by the Company for any other purpose. Scheduled debt payments are based on the performance of the CLOs collateral pool. The Company generally earns management fees in the form of senior and subordinated management fees from the CLOs based on the par value of outstanding investments and, in certain instances, may also receive performance-based fees. In addition, the Company holds equity interests in certain of these investment vehicles. The Company determined that it is the primary beneficiary of the CLOs as it has the power to direct the activities that most significantly impact the CLOs’ economic performance in its role as collateral manager and holds a variable interest for which the Company has the right to receive benefits that could potentially be significant to the CLOs.

The Company elected the fair value option for the financial assets and liabilities of the consolidated CLOs as this option better matches the changes in fair value of the assets and liabilities. During the three months ended June 30, 2011, the changes in fair values of the underlying assets and liabilities of the consolidated CLOs resulted in a $7.5 million net gain and $32.7 million net loss, for a combined net loss of $25.2 million. During the nine months ended June 30, 2011, the changes in fair value of the underlying assets and liabilities of the consolidated CLOs resulted in a $71.5 million net gain and $111.6 million net loss, for a combined net loss of $40.1 million. The net losses include interest income and expense and are recognized in investment and other income (losses), net in the condensed consolidated statements of income. The net losses attributable to third-party investors are reflected as net income (loss) attributable to nonredeemable noncontrolling interests in the condensed consolidated statements of

income and appropriated retained earnings in the condensed consolidated balance sheets.

The following table presents the unpaid principal balance and fair value of investments, including investments 90 days or more past due, and long-term debt of the consolidated CLOs:



(in thousands)	Total Investments			Investments 90 Days or More Past Due			Long-term Debt
as of June 30, 2011	Total Investments			Investments 90 Days or More Past Due			Long-term Debt
Unpaid principal balance	$	948,442		$	21,566		$	1,090,993
Excess unpaid principal over fair value	(14,093		)	(8,941		)	(163,111		)
Fair value	$	934,349		$	12,625		$	927,882

Automobile Loan Securitization Trusts

In previous years, the Company entered into automobile loan securitization transactions with securitization trusts, which then issued asset-backed securities to private investors. The securitization transactions were comprised of prime, non-prime and sub-prime contracts for retail installment sales that were secured by new and used automobiles purchased from motor vehicle dealers. The Company purchased the sale contracts in the ordinary course of business.

The Company retained certain interests as part of the securitization transactions. The interests, which consist of interest-only strips receivable and cash on deposit, represent the Company’s contractual right to receive excess interest and cash from the pool of securitized loans after the payment of required amounts to holders of the asset-backed securities and certain other costs associated with the securitization. Prior to October 1, 2010, retained interests were recorded at fair value estimated using discounted cash flow analyses and recognized as banking/finance trading securities in the condensed consolidated balance sheets.

The Company also retained servicing responsibilities for the securitization trusts and receives annual servicing fees ranging from 1% to 2% of the loans securitized. The services provided primarily consist of the management, service and administration of the loans, collection and posting of payments, and maintenance of accounts for the benefit of, and making distributions to, the holders of the asset-backed securities. The Company determined that it is the primary beneficiary of the securitization trusts as it has the power to direct the activities that most significantly impact the securitization trusts’ economic performance in its role as servicer and holds a variable interest for which the Company has the right to receive benefits or the obligation to absorb losses that could potentially be significant to the securitization trusts. Prior to October 1, 2010, all of the securitization trusts met the definition of a QSPE and were not subject to consolidation under the previous accounting guidance.

The assets and liabilities of the securitization trusts are consolidated at their carrying values (the amounts at which they would have been carried in the Company’s condensed consolidated financial statements if the Company had always consolidated the securitization trusts). The holders of the asset-backed securities have recourse only to the collateralized assets of the securitization trusts, which cannot be used by the Company for any other purpose.

The following table shows further details of the loans serviced by the Company that were held by the securitization trusts and the loans that were managed together with them:



(in thousands)	June 30, 2011		September 30, 2010
Principal amount of loans
Loans receivable of consolidated VIEs¹	$	193,833	$	319,976
Loans receivable	84,366		73,602
Total	$	278,199	$	393,578
Principal amount of loans 30 days or more past due
Loans receivable of consolidated VIEs¹	$	4,195	$	12,080
Loans receivable	1,398		2,825
Total	$	5,593	$	14,905

^{_____________________}

¹ Disclosed as securitized loans prior to the adoption of new consolidation guidance.

The Company has provided guarantees to cover shortfalls for the securitization trusts in amounts due to the holders of the asset-backed securities if the shortfall exceeds cash on deposit. At June 30, 2011 and September 30, 2010, the maximum potential amounts of future payments related to these guarantees were $3.8 million and $6.2 million. During the nine months ended June 30, 2011 and 2010, the Company did not provide any additional financial or other support to the securitization trusts or the holders of the asset-backed securities.

The original amount of loans serviced for the securitization trusts that were still in existence at June 30, 2011 and September 30, 2010 totaled $1.5 billion and $1.8 billion. At June 30, 2011 and September 30, 2010, the securitization trusts had approximately 22,900 and 31,600 loans outstanding, with weighted-average annualized interest rates of 11.00% and 10.51%.

Other Investment Products

The Company’s VIEs also include certain sponsored investment products other than CLOs and certain other investment products (collectively “other investment products”). These VIEs include limited partnerships, limited liability companies, and joint ventures. The Company’s variable interests generally consist of its equity ownership in and its investment management and related services fees earned from the VIEs. Based on its evaluations, the Company determined it was not the primary beneficiary of these VIEs and, as a result, did not consolidate these entities as of and for the periods ended June 30, 2011 and 2010.

The carrying values of the Company’s equity ownership interest in and investment management and related service fees receivable from the other investment products as recorded in the Company’s condensed consolidated balance sheets at June 30, 2011 and September 30, 2010 are set forth below. These amounts represent the Company’s maximum exposure to loss from these investment products.



(in thousands)	June 30, 2011		September 30, 2010
Current Assets
Receivables	$	64,007	$	63,813
Investment securities, available-for-sale	213,620		164,994
Investments in equity method investees and other	933		5,401
Total Current	278,560		234,208
Non-Current Assets
Investment securities, available-for-sale	—		845
Investments in equity method investees and other	648,832		636,548
Total Non-Current	648,832		637,393
Total	$	927,392	$	871,601

Total AUM of the other investment products in which the Company held a variable interest but was not the primary beneficiary was $54.1 billion at June 30, 2011 and $48.1 billion at September 30, 2010.

While the Company has no contractual obligation to do so, it routinely makes cash investments in the course of launching sponsored investment products. The Company also may voluntarily elect to provide its sponsored investment products with additional direct or indirect financial support based on its business objectives. The Company did not provide financial or other support to its investment products during the three and nine months ended June 30, 2011 and 2010.

Note 7 – Investments

Investments consisted of the following:



(in thousands)	June 30, 2011		September 30, 2010
Current
Investment securities, trading	$	907,827	$	361,396
Investment securities, available-for-sale
Sponsored investment products	960,200		1,032,602
Securities of U.S. states and political subdivisions	49,952		64,654
Securities of the U.S. Treasury and federal agencies	603		601
Other equity securities	21,890		16,780
Total investment securities, available-for-sale	1,032,645		1,114,637
Investments of consolidated VIEs, at fair value¹	34,705		—
Investments in equity method investees and other	17,661		91,866
Total Current	$	1,992,838	$	1,567,899
Banking/Finance
Investment securities, trading	$	—	$	23,362
Investment securities, available-for-sale
Securities of U.S. states and political subdivisions	319		835
Securities of the U.S. Treasury and federal agencies²	2,443		53,099
Corporate debt securities³	122,036		123,108
Mortgage-backed securities – agency residential²	235,534		231,046
Other equity securities	90		151
Total investment securities, available-for-sale	360,422		408,239
Total Banking/Finance	$	360,422	$	431,601
Non-Current
Investments of consolidated VIEs, at fair value¹	$	899,644	$	—
Investments in equity method investees and other	715,451		702,634
Total Non-Current	$	1,615,095	$	702,634

__________________________

¹ See Note 6 – Variable Interest Entities.

²Includes total U.S. government-sponsored enterprise obligations with fair values of $235.5 million and $281.7 million at June 30, 2011 and September 30, 2010.

³Corporate debt securities are insured by the Federal Deposit Insurance Corporation or non-U.S. government agencies.

At June 30, 2011 and September 30, 2010, current investment securities, trading included $330.2 million and $86.3 million of investments held by sponsored investment products that were consolidated in the Company’s condensed consolidated financial statements.

At June 30, 2011 and September 30, 2010, banking/finance segment investment securities with aggregate carrying amounts of $164.7 million and $196.7 million were pledged as collateral for the ability to borrow from the Federal Reserve Bank, $63.9 million and $76.7 million were pledged as collateral for outstanding Federal Home Loan Bank (“FHLB”) borrowings and amounts available in secured FHLB short-term borrowing capacity, and $2.4 million and $3.5 million were pledged as collateral as required by federal and state regulators (see Note 10 – Debt). In addition, investment management and related services segment securities with aggregate carrying values of $7.3 million and $8.0 million were pledged as collateral at June 30, 2011 and September 30, 2010.

A summary of the gross unrealized gains and losses relating to investment securities, available-for-sale is as follows:



(in thousands)			Gross Unrealized
as of June 30, 2011	Cost Basis		Gains		Losses			Fair Value
Sponsored investment products	$	838,798	$	127,461	$	(6,059	)	$	960,200
Securities of U.S. states and political subdivisions	48,560		1,719		(8		)	50,271
Securities of the U.S. Treasury and federal agencies	3,037		9		—			3,046
Corporate debt securities	120,071		1,965		—			122,036
Mortgage-backed securities – agency residential	229,711		5,823		—			235,534
Other equity securities	21,892		416		(328		)	21,980
Total	$	1,262,069	$	137,393	$	(6,395	)	$	1,393,067



(in thousands)			Gross Unrealized
as of September 30, 2010	Cost Basis		Gains		Losses			Fair Value
Sponsored investment products	$	901,923	$	138,105	$	(7,426	)	$	1,032,602
Securities of U.S. states and political subdivisions	62,674		2,815		—			65,489
Securities of the U.S. Treasury and federal agencies	52,909		791		—			53,700
Corporate debt securities	120,159		2,949		—			123,108
Mortgage-backed securities – agency residential	225,443		5,603		—			231,046
Other equity securities	16,393		649		(111		)	16,931
Total	$	1,379,501	$	150,912	$	(7,537	)	$	1,522,876

The net unrealized holding gains (losses) on investment securities, available-for-sale included in accumulated other comprehensive income were $15.6 million and $43.6 million for the three and nine months ended June 30, 2011 and $(23.2) million and $15.6 million for the three and nine months ended June 30, 2010.

The following tables show the gross unrealized losses and fair values of investment securities, available-for-sale with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:



	Less Than 12 Months					12 Months or Greater					Total
(in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
as of June 30, 2011	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Sponsored investment products	$	37,501	$	(6,029	)	$	4,844	$	(30	)	$	42,345	$	(6,059	)
Securities of U.S. states and political subdivisions	2,938		(8		)	—		—			2,938		(8		)
Other equity securities	—		—			4,272		(328		)	4,272		(328		)
Total	$	40,439	$	(6,037	)	$	9,116	$	(358	)	$	49,555	$	(6,395	)



	Less Than 12 Months					12 Months or Greater					Total
(in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
as of September 30, 2010	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Sponsored investment products	$	66,816	$	(5,506	)	$	23,394	$	(1,920	)	$	90,210	$	(7,426	)
Other equity securities	4,174		(108		)	26		(3		)	4,200		(111		)
Total	$	70,990	$	(5,614	)	$	23,420	$	(1,923	)	$	94,410	$	(7,537	)

The Company did not recognize any other-than-temporary impairment of investments for the three months ended June 30, 2011 and 2010. For the nine months ended June 30, 2011, the Company recognized $13.6 million of other-than-temporary impairment of investments, of which $7.3 million related to available-for-sale equity securities. Other-than-temporary impairment of investments for the nine months ended June 30, 2010 was $1.5 million, and related entirely to available-for-sale equity securities. The Company did not recognize any other-than-temporary impairment of available-for-sale debt securities during the nine months ended June 30, 2011 and 2010.

At June 30, 2011, maturities of available-for-sale debt securities were as follows:



(in thousands)	Cost Basis		Fair Value
Securities of U.S. states and political subdivisions
Due in one year or less	$	7,046	$	7,146
Due after one year through five years	33,480		34,667
Due after five years through ten years	8,034		8,458
Total	$	48,560	$	50,271
Securities of the U.S. Treasury and federal agencies
Due in one year or less	$	602	$	603
Due after one year through five years	100		100
Due after ten years	2,335		2,343
Total	$	3,037	$	3,046
Corporate debt securities
Due in one year or less	$	50,071	$	50,584
Due after one year through five years	70,000		71,452
Total	$	120,071	$	122,036
Mortgage-backed securities – agency residential
Due after five years through ten years	$	19,907	$	21,624
Due after ten years	209,804		213,910
Total	$	229,711	$	235,534

Note 8 – Fair Value Measurements

The Company records substantially all of its investments at fair value or amounts that approximate fair value. There were no significant transfers between Level 1 and Level 2 for the nine months ended June 30, 2011.

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis.



(in thousands)	Level 1		Level 2		Level 3		Total
as of June 30, 2011	Level 1		Level 2		Level 3		Total
Current Assets
Cash and cash equivalents of consolidated VIEs	$	17,136	$	60,756	$	—	$	77,892
Receivables of consolidated VIEs	—		56,305		—		56,305
Investment securities, trading	627,023		275,926		4,878		907,827
Investment securities, available-for-sale
Sponsored investment products	960,200		—		—		960,200
Securities of U.S. states and political subdivisions	—		49,952		—		49,952
Securities of the U.S. Treasury and federal agencies	—		603		—		603
Other equity securities	17,636		4,254		—		21,890
Investments of consolidated VIEs	—		34,705		—		34,705
Banking/Finance Assets
Investment securities, available-for-sale
Securities of U.S. states and political subdivisions	—		319		—		319
Securities of the U.S. Treasury and federal agencies	—		2,443		—		2,443
Corporate debt securities	—		122,036		—		122,036
Mortgage-backed securities – agency residential	—		235,534		—		235,534
Other equity securities	—		—		90		90
Non-Current Assets
Investments of consolidated VIEs	—		897,759		1,885		899,644
Life settlement contracts	—		—		10,601		10,601
Total Assets Measured at Fair Value	$	1,621,995	$	1,740,592	$	17,454	$	3,380,041
Current Liabilities
Current maturities of long-term debt of consolidated VIEs	$	—	$	—	$	50,695	$	50,695
Other liabilities of consolidated VIEs	—		79,546		—		79,546
Non-Current Liabilities
Long-term debt of consolidated VIEs	—		821,976		55,211		877,187
Total Liabilities Measured at Fair Value	$	—	$	901,522	$	105,906	$	1,007,428



(in thousands)	Level 1		Level 2		Level 3		Total
as of September 30, 2010	Level 1		Level 2		Level 3		Total
Current Assets
Investment securities, trading	$	263,444	$	94,622	$	3,330	$	361,396
Investment securities, available-for-sale
Sponsored investment products	1,032,602		—		—		1,032,602
Securities of U.S. states and political subdivisions	—		64,654		—		64,654
Securities of the U.S. Treasury and federal agencies	—		601		—		601
Other equity securities	12,610		4,170		—		16,780
Banking/Finance Assets
Investment securities, trading	—		—		23,362		23,362
Investment securities, available-for-sale
Securities of U.S. states and political subdivisions	—		835		—		835
Securities of the U.S. Treasury and federal agencies	—		53,099		—		53,099
Corporate debt securities	—		123,108		—		123,108
Mortgage-backed securities – agency residential	—		231,046		—		231,046
Other equity securities	—		—		151		151
Non-Current Assets
Life settlement contracts	—		—		9,214		9,214
Total Assets Measured at Fair Value	$	1,308,656	$	572,135	$	36,057	$	1,916,848

The fair values of trading and available-for-sale securities are determined based on valuation techniques using the best information available, and may include quoted market prices, published net asset values of sponsored investment products, independent third-party broker or dealer price quotes, and discounted cash flows or other valuation methods as appropriate for each security type. For further discussion of the Company’s valuation techniques, see Note 1 – Significant Accounting Policies in the Company’s Form 10-K for fiscal year 2010.

Cash and cash equivalents of consolidated VIEs primarily consist of short-term money market instruments which are not traded on an active market. The fair value of these instruments is based on market observable inputs and they are classified as Level 2.

Investments and long-term debt of consolidated VIEs. The fair values of investments and debt held by consolidated VIEs are primarily obtained from independent third-party broker or dealer price quotes and they are classified as Level 2. The VIEs also issued debt that is classified as Level 3 because its fair value is determined using significant unobservable inputs. In these instances, the Company employs a market-based approach, which uses prices of recent transactions, various market multiples, book values and other relevant information for the instrument or related or other comparable debt instruments to determine the fair value. If the market-based approach is not available, the Company utilizes an income-based valuation approach, which considers the net present value of anticipated future cash flows of the instrument. A discount may also be applied due to the nature or duration of any restrictions on the disposition of the instrument.

Receivables and other liabilities of consolidated VIEs primarily consist of investment trades pending settlement. The fair values of these receivables and liabilities are obtained from independent third-party broker or dealer quotes and they are classified as Level 2.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:



(in thousands)	Securities Held by Consolidated Sponsored Investment Products				Investments of Consolidated VIEs			Other¹			Total Level 3 Assets			Long-term Debt of Consolidated VIEs
for the three months ended June 30, 2011					Investments of Consolidated VIEs			Other¹			Total Level 3 Assets			Long-term Debt of Consolidated VIEs
Balance at April 1, 2011	$	3,609			$	1,826		$	9,972		$	15,407		$	(85,264	)
Total realized and unrealized gains (losses):
Included in consolidated sponsored investment products gains (losses), net	86				—			—			86			—
Included in investment and other income (losses), net	—				59			520			579			(19,512		)
Purchases, sales and settlements, net	1,380				—			199			1,579			—
Transfers out of Level 3	(197		)		—			—			(197		)	—
Effect of exchange rate changes	—				—			—			—			(1,130		)
Balance at June 30, 2011	$	4,878			$	1,885		$	10,691		$	17,454		$	(105,906	)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at June 30, 2011	$	78		²	$	59	³	$	311	³	$	448		$	(19,512	)	³

___________________________

¹Other primarily consists of life settlement contracts.

²Included in consolidated sponsored investment products gains (losses), net.

³Included in investment and other income (losses), net.



(in thousands)	Securities Held by Consolidated Sponsored Investment Products		Residual Interests from Securitization Transactions			Investments of Consolidated VIEs		Other¹		Total Level 3 Assets			Long-term Debt of Consolidated VIEs
for the nine months ended June 30, 2011			Residual Interests from Securitization Transactions			Investments of Consolidated VIEs		Other¹		Total Level 3 Assets			Long-term Debt of Consolidated VIEs
Balance at October 1, 2010	$	3,330	$	23,362		$	—	$	9,365	$	36,057		$	—
Adjustment for adoption of new consolidation guidance	—		(23,362		)	1,738		—		(21,624		)	(71,382		)
Total realized and unrealized gains (losses):