As filed with the Securities and Exchange Commission August 30, 1996
File Nos.
33-18516
811-5387
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Pre-Effective Amendment
No.
Post Effective Amendment No. 20 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 21 (X)
MUTUAL SERIES FUND INC.
(Exact Name of Registrant as Specified in Charter)
51 JOHN F. KENNEDY PARKWAY, SHORT HILLS, NJ 07078
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (201)912-2100
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ]immediately upon filing pursuant to paragraph (b)
[ ]on (date) pursuant to paragraph (b)
[x]60 days after filing pursuant to paragraph (a)(i)
[ ]on (date) pursuant to paragraph (a)(i)
[ ]75 days after filing pursuant to paragraph (a)(ii)
[ ]on (date) pursuant to paragraph (a)(ii)of rule 485
if appropriate, check the following box:
[ ]This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
DECLARATION PURSUANT TO RULE 24F-2. The Registrant has registered an indefinite
number or amount of securities under the Securities Act of 1933 pursuant to Rule
24f-2 under the Investment Company Act of 1940. The Rule 24f-2 Notice for the
issuer's most recent fiscal year was filed on February 27, 1996.
MUTUAL SERIES FUND INC.
CLASS Z
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
(All Series Prospectus)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Annual Expense Tables
3. Condensed Financial Information "Condensed Financial Information"
4. General Description of Cover Page; "The Fund";
Registrant "Additional Information"
5. Management of the Fund "Management of the Fund";
"Additional Information"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other Cover Page; "Dividends,
Securities Distributions and Taxes"; "Shares
of the Fund"; "Additional
Information"
7. Purchase of Securities Being "How to Purchase Shares";
Offered "Shareholder Services"; "Net
Asset Value"
8. Redemption or Repurchase "How to Redeem Shares"
9. Pending Legal Proceedings Not Applicable
MUTUAL SERIES FUND INC.
CLASS I & II
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
(All Series Prospectus)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Expense Summary
3. Condensed Financial Information "Condensed Financial Information"
4. General Description of "How is the Fund Organized?";
Registrant "Investment Objectives and Policies
and Risks"
5. Management of the Fund "Who Manages the Fund?"
6. Capital Stock and Other "How Is the Fund Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions Might
I Receive From the Fund?"; "How
Taxation Affects You and the Fund"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"
9. Pending Legal Proceedings Not Applicable
MUTUAL SERIES FUND INC.
CLASS Z
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in the
STATEMENT OF ADDITIONAL INFORMATION
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Cover Page
12. General Information and History See "Series Annual Expense Tables"
in the Prospectus
13. Investment Objectives and "Investment Objectives and
Policies Policies"; "Restrictions and
Limitations"
14. Management of the Fund "Management of the Fund"
15. Control Persons and Principal "Management of the Fund"
Holders of Securities
16. Investment Advisory and Other "Investment Adviser"; "Investment
Services Advisory Agreements"; "Custodian,
Transfer Agent, and Creditors"
17. Brokerage Allocation and Other "Investment Adviser"; "Portfolio
Practices Brokerage"
18. Capital Stock and Other See Prospectus "How to Purchase
Securities Shares"; "Net Asset Value";
"Shares of the Fund"
19. Purchase, Redemption and "Redemption of Shares"
Pricing of Securities Being
Offered
20. Tax Status "Taxes"
21. Underwriters Not Applicable
22. Calculation of Performance Data "Calculation of Performance Data"
23. Financial Statements "Financial Information"
MUTUAL SERIES FUND INC.
CLASS I & II
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in the
STATEMENT OF ADDITIONAL INFORMATION
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and History See "Expense Summary" in the
Prospectus
13. Investment Objectives and "Investment Objectives and
Policies Policies"; "Restrictions and
Limitations"
14. Management of the Fund "Officers and Directors";
"Investment Advisory and Other
Services"
15. Control Persons and Principal "Officers and Directors";
Holders of Securities "Investment Advisory and Other
Services"; "Miscellaneous
Information"
16. Investment Advisory and Other "Investment Advisory and Other
Services Services"; "The Fund's Underwriter"
17. Brokerage Allocation and Other "How Does the Fund Buy Securities
Practices for Its Portfolio?"
18. Capital Stock and Other See Prospectus "How Is the Fund
Securities Organized?"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; "How Are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How Does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
PROSPECTUS & APPLICATION
MUTUAL SERIES FUND INC.
NOVEMBER 1, 1996
MUTUAL SHARES FUND - INVESTMENT STRATEGY: GROWTH AND INCOME
MUTUAL QUALIFIED FUND - INVESTMENT STRATEGY: GROWTH AND INCOME
MUTUAL BEACON FUND - INVESTMENT STRATEGY: GROWTH AND INCOME
MUTUAL EUROPEAN FUND - INVESTMENT STRATEGY: GLOBAL
MUTUAL DISCOVERY FUND - INVESTMENT STRATEGY: GROWTH
This prospectus describes the Class I and Class II shares of the five series of
Mutual Series Fund Inc. (the "Fund") listed above. Each series may, separately
or collectively, be referred to as "series," "Fund" or "Funds." It contains
information you should know before investing in the Fund. Please keep it for
future reference.
The Fund's SAIs, dated November 1, 1996, as may be amended from time to time,
include more information about the Fund's procedures and policies. They have
been filed with the SEC and are incorporated by reference into this prospectus.
For a free copy or a larger print version of this prospectus, call 1-800/DIAL
BEN or write the Fund at the address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES REPRESENTATIVE, DEALER,
OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
Each series may invest in both domestic and foreign securities.
EACH SERIES MAY INVEST UP TO 100% OF ITS NET ASSETS IN NON-INVESTMENT GRADE
BONDS OF BOTH U.S. AND FOREIGN ISSUERS. THESE ARE COMMONLY KNOWN AS "JUNK
BONDS." THEIR DEFAULT AND OTHER RISKS ARE GREATER THAN THOSE OF HIGHER RATED
SECURITIES. YOU SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING IN THE
FUND. PLEASE SEE "INVESTMENT OBJECTIVES AND POLICIES AND RISKS."
MUTUAL SERIES FUND INC.
November 1, 1996
51 John F. Kennedy Parkway
Short Hills, NJ 07078
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary..........................................
Financial Highlights.....................................
Investment Objectives and Policies and Risks.............
Who Manages the Fund?....................................
How Does the Fund Measure Performance?...................
How Is the Fund Organized?.......................
How Taxation Affects You and the Fund....................
ABOUT YOUR ACCOUNT
How Do I Buy Shares?.....................................
May I Exchange Shares for Shares of Another Fund?........
How Do I Sell Shares?....................................
What Distributions Might I Receive From the Fund?........
Transaction Procedures and Special Requirements..........
Services to Help You Manage Your Account.................
GLOSSARY
Useful Terms and Definitions.............................
When reading this prospectus, you will see certain terms in capital letters.
This means the term is explained in our glossary section.
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of the Class Z shares of each
series for the fiscal year ended December 31, 1995, except that the expenses for
European are based on estimated annualized expenses. Your actual expenses may
vary.
<TABLE>
<CAPTION>
MUTUAL QUALIFIED BEACON EUROPEAN DISCOVERY
SHARES FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
A. SHAREHOLDER TRANSACTION EXPENSES+
CLASS I
Maximum Sales Charge Imposed on
Purchases (as a percentage of
Offering Price)...................... 4.50% 4.50% 4.50% 4.50% 4.50%
Deferred Sales Charge+++............. NONE NONE NONE NONE NONE
CLASS II
Maximum Sales Charge Imposed on
Purchases (as a percentage of
Offering Price)++.................... 1.00% 1.00% 1.00% 1.00% 1.00%
Deferred Sales Charge+++............. 1.00% 1.00% 1.00% 1.00% 1.00%
B. ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
CLASS I
Management Fees....................... 0.60%* 0.60%* 0.60%* 0.80%* 0.80%*
Rule 12b-1 Fees**..................... 0.35% 0.35% 0.35% 0.35% 0.35%
Other Expenses........................ 0.09% 0.12% 0.12% 0.19% 0.20%
------------------------------------------------------------
Total Fund Operating Expenses........ 1.04% 1.07% 1.07% 1.34% 1.35%
CLASS II
Management Fees....................... 0.60% 0.60% 0.60% 0.80% 0.80%
Rule 12b-1 Fees**..................... 1.00% 1.00% 1.00% 1.00% 1.00%
Other Expenses........................ 0.09% 0.12% 0.12% 0.19% 0.20%
------------------------------------------------------------
Total Fund Operating Expenses......... 1.69% 1.72% 1.72% 1.99% 2.00%
C. EXAMPLE
Assume the annual return for each class is 5% and operating expenses are
as described above. For each $1,000 investment, you would pay the
following projected expenses if you sold your shares after the number of
years shown.
MUTUAL MUTUAL MUTUAL MUTUAL MUTUAL
SERIES QUALIFIED BEACON EUROPEAN DISCOVERY
CLASS I
1 Year***................................ $55 $55 $55 $58 $58
3 Years.................................. $77 $78 $78 $86 $86
5 Years.................................. $100 $101 $101 $115 $116
10 Years................................. $166 $170 $170 $199 $200
CLASS II
1 Year................................... $37 $37 $37 $40 $40
3 Years.................................. $63 $64 $64 $72 $72
5 Years.................................. $101 $102 $102 $116 $117
10 Years................................. $208 $211 $211 $239 $240
</TABLE>
For the same Class II investment, you would pay projected expenses of $29
(Mutual Shares), $27 (Qualified), $27 (Beacon), $30 (European) and $30
(Discovery) if you did not sell your shares at the end of the first year.
Your projected expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service. ++Although Class II
has a lower front-end sales charge than Class I, its Rule 12b-1 fees are higher.
Over time you may pay more for Class II shares. Please see "How Do I Buy Shares?
- - Deciding Which Class to Buy." +++A Contingent Deferred Sales Charge of 1% may
apply to Class I purchases of $1 million or more if you sell the shares within
one year and any Class II purchase if you sell the shares within 18 months.
There is no front-end sales charge if you invest $1 million or more in Class I
shares. See "How Do I Sell Shares? - Contingent Deferred Sales Charge" for
details.
*On June 25, 1996, Heine entered into an agreement to merge the business of
Heine and Resources through a sale of Heine assets to Franklin Mutual (the
"Transaction"). In connection with the Transaction, Resources and Franklin
Mutual have agreed and have made commitments to the Fund's Board that for a
three (3) year period commencing on the date of the closing of the Transaction,
Franklin Mutual will not seek an increase in the rates of the investment
advisory fees payable to Franklin Mutual by each Series.
**The combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the maximum
front-end sales charge permitted under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited (except for the information for the six months ended June 30, 1996,
which is unaudited) by Ernst & Young LLP, the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in each Fund's Annual Report to Shareholders for the fiscal
year ended December 31, 1995. The Annual Reports to Shareholders also includes
more information about the Fund's performance. For a free copy, please call Fund
Information.
The financial highlights set forth below pertains to the Class z shares of the
Funds, which are not offered through this prospectus. No financial highlights
are shown for Class I and II shares, since these classes did not have operations
prior to June 30, 1996. Class I and II shares may bear additional expenses than
Class Z shares and would have correspondingly lower net investment income and
total return than Class Z.
<TABLE>
<CAPTION>
Mutual Shares Fund: Class Z Shares
(Unaudited)
For the six
months ended
June 30, Year Ended December 31,
---------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Year $86.45 $78.69 $80.97 $73.36 $64.49 $56.39 $67.16 $67.77 $57.83 $60.43 $57.57
INCOME FROM INVESTMENT
OPERATIONS:
Net Investment Income 1.49 1.99 1.34 1.41 1.55 2.04 3.32 4.03 2.64 2.23 2.43
Net Gains or Losses
on Securities
(realized and Unrealized) 5.64 20.51 2.28 13.89 12.07 9.69 (9.86) 6.00 14.98 1.78 7.29
---------------------------------------------------------------------------------------------------------
Total from Investment
Operations 7.13 22.50 3.62 15.30 13.62 11.73 (6.54) 10.03 17.62 4.01 9.72
---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends (from net
investment income) .10 1.93 1.34 1.38 1.59 2.00 3.34 4.09 2.63 2.52 2.34
Distributions (from
capital gains) 2.90 12.81 4.56 6.31 3.16 1.63 .89 6.55 5.05 4.09 4.52
---------------------------------------------------------------------------------------------------------
Total Distributions 3.00 14.74 5.90 7.69 4.75 3.63 4.23 10.64 7.68 6.61 6.86
NET ASSET VALUE,
End of Year $90.58 $86.45 $78.69 $80.97 $73.36 $64.49 $56.39 $67.16 $67.77 $57.83 $60.43
=========================================================================================================
TOTAL RETURN** 8.20% 29.11% 4.53% 21.00% 21.33% 20.99% (9.82)% 14.93 30.69% 6.34% 16.99%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Year
(millions) $5,922 $5,230 $3,746 $3,527 $2,913 $2,640 $2,521 $3,403 $2,551 $1,685 $1,403
Ratio of Expenses to
Average Net Assets .67%* .69% .72% .74% .78% .82% .85% .65%+ .67%+ .69% .70%
Ratio of Net Investment
Income to Average
Net Assets 4.23%* 2.47% 1.80% 1.90% 2.18% 3.08% 4.88% 5.57%+ 4.16%+ 3.32% 4.07%
Portfolio Turnover Rate 22.96% 79.32% 66.55% 48.78% 41.06% 47.89% 43.41% 71.54% 89.67% 77.72% 122.30%
Average Commission Per
Share*** .040 --- --- --- --- --- --- --- --- --- ---
</TABLE>
*Annualized.
**Total Return includes changes in share price and reinvestment of dividends and
capital gain distributions. The Fund's total return is a historical measure of
past performance and is not intended to indicate future performance. Investment
return and principal value will fluctuate; therefore the Fund's shares may
become worth more or less than their original cost.
***Average commission rate is calculated for the periods beginning on or after
January 1, 1996.
+ After reduction of expenses by Heine. Had Heine not undertaken such action,
the ratios of operating expenses and net investment income would have been .67%
and 5.55% in 1989 and .74% and 4.09% in 1988.
<TABLE>
<CAPTION>
Mutual Qualified Fund: Class Z Shares
(Unaudited)
For the six
months ended
June 30, Year Ended December 31,
---------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Year $29.74 $26.67 $27.00 $24.43 $21.18 $18.37 $22.21 $22.71 $19.37 $20.06 $19
---------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net Investment Income .47 .66 .43 .38 .49 .67 1.22 1.34 .84 .77 .90
Net Gains or Losses on
Securities (Realized and
Unrealized) 2.28 6.33 1.10 5.12 4.27 3.18 (3.45) 1.91 4.95 .86 2.42
---------------------------------------------------------------------------------------------------------
Total from Investment
Operations 2.75 6.99 1.53 5.50 4.76 3.85 (2.23) 3.25 5.79 1.63 3.32
---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends (from net
investment income) .05 .65 .43 .37 .49 .67 1.23 1.36 .83 .88 .85
Distributions (from
capital gains) .95 3.27 1.43 2.56 1.02 .37 .38 2.39 1.62 1.44 1.56
---------------------------------------------------------------------------------------------------------
Total Distributions 1.00 3.92 1.86 2.93 1.51 1.04 1.61 3.75 2.45 2.32 2.41
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
End of Year 31.49 $29.74 $26.67 $27.00 $24.43 $21.18 $18.37 $22.21 $22.71 $19.37 $20.06
=========================================================================================================
TOTAL RETURN** 9.21% 26.60% 5.73% 22.71% 22.70% 21.13% (10.12)% 14.44 30.15% 7.72% 17.51%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Year
(millions) $3,787 $3,002 $1,792 $1,511 $1,251 $1,110 $1,075 $1,470 $1,094 $686 $561
Ratio of Expenses to
Average Net Assets .72%* .72% .73% .78% .82% .87% .89% .70%+ .62%+ .71% .68%
Ratio of Net Investment
Income to Average
Net Assets 4.06%* 2.71% 1.91% 1.65% 2.10% 3.09% 5.40% 5.61%+ 3.96%+ 3.43% 4.55%
Portfolio Turnover Rate 25.84% 75.59% 67.65% 56.22% 47.39% 51.99% 46.12% 73.41% 85.05% 73.50% 123.50%
Average Commission
Per Share*** .043 --- --- --- --- --- --- --- --- --- ---
</TABLE>
*Annualized.
**Total return includes changes in share price and reinvestment of dividends and
capital gain distributions. The Fund's total return is a historical measure of
past performance and is not intended to indicate future performance. Investment
return and principal value will fluctuate; therefore the Fund's shares may
become worth more or less than their original cost.
***Average commission rate is calculated for the periods beginning on or after
January 1, 1996.
+ After reduction of expenses by Heine. Had Heine not undertaken such action,
the ratios of operating expenses and net investment income would have been .71%
and 5.60% in 1989 and .69% and 3.89% in 1988.
<TABLE>
<CAPTION>
Mutual Beacon Fund: Class Z Shares
(Unaudited)
For the six
months ended Sept. 1,
June 30, Year Ended December 31, 1987 to
-----------------------------------------------------------------------------Dec. 31,--------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1987 1986
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Period $35.94 $31.03 $31.09 $27.10 $23.36 $20.80 $24.09 $22.85 $19.49 $24.78 $19.27 $15.73
---------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net Investment Income .70 .87 .46 .37 .45 .75 1.08 1.12 .77 .22 .37 .28
Net Gains or Losses
on Securities (Realized
and Unrealized) 3.02 7.09 1.28 5.81 4.85 2.88 (3.03) 2.84 4.80 (3.96) 6.39 3.51
---------------------------------------------------------------------------------------------------------
Total from Investment
Operations 3.72 7.96 1.74 6.18 5.30 3.63 (1.95) 3.96 5.57 (3.74) 6.76 3.79
---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends (from net
investment income) .05 .84 .44 .37 .46 .74 1.08 1.17 .80 .51 .31 .25
Distributions (from
capital gains) 1.15 2.21 1.36 1.82 1.10 .33 .26 1.55 1.41 1.04 .94 -0-
---------------------------------------------------------------------------------------------------------
Total Distributions 1.20 3.05 1.80 2.19 1.56 1.07 1.34 2.72 2.21 1.55 1.25 .25
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
End of Period $33.46 $35.94 $31.03 $31.09 $27.10 $23.36 $20.80 $24.09 $22.85 $19.49 $24.78 $19.27
=========================================================================================================
TOTAL RETURN** 10.31% 25.89% 5.61% 22.93% 22.92% 17.60% (8.17)% 17.46% 28.79% (15.12)% 37.33% 24.34%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period
(millions) $4,400 $3,573 $2,060 $1,062 $534 $398 $388 $409 $214 $131 $159 $65
Ratio of Expenses to
Average Net Assets .71%* .72% .75% .73% .81% .85% .85% .67%+ .59%+ .87%++ .85% 1.16%
Ratio of Net Investment
Income to Average
Assets Net 4.79%* 2.89% 1.96% 1.53% 1.90% 3.07% 4.59% 4.98%+ 3.64%+ 2.86%++ 2.50% 2.86%
Portfolio Turnover Rate 27.14% 73.18% 70.63% 52.88% 57.52% 56.63% 57.74% 67.18% 86.79% 28.07% 73.41% 112.91%
Average Commission
Per Share*** .038% --- --- --- --- --- --- --- --- --- --- ---
</TABLE>
*Annualized.
**Total return includes changes in share price and reinvestment of dividends and
capital gain distributions. The Fund's total return is a historical measure of
past performance and is not intended to indicate future performance. Investment
return and principal value will fluctuate; therefore the Fund's shares may
become worth more or less than their original cost.
***Average commission rate is calculated for the periods beginning on or after
January 1, 1996.
+After reduction of expenses by Heine. Had Heine not undertaken such action, the
ratios of operating expenses and net investment income would have been .68% and
4.97% in 1989 and .66% and 3.57% in 1988.
<TABLE>
<CAPTION>
Mutual Discovery Fund: Class Z Shares
(Unaudited),
For the six
months ended
June 30, Year Ended December 31,
1996 1995 1994 1993
------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $15.16 $12.55 $13.05 $10.00
------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .13 .17 .15 .10
Net Gain on Securities (Realized
and Unrealized) 1.82 3.40 .32 3.48
------------------------------------------------------
Total from Investment Operations 1.95 3.57 .47 3.58
------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends (from net investment income) .02 .14 .16 .09
Distributions (from capital gains) .33 .82 .81 .44
------------------------------------------------------
Total Distributions .35 .96 .97 .53
------------------------------------------------------
NET ASSET VALUE, END OF YEAR $16.76 $15.16 $12.55 $13.05
======================================================
Total Return* 12.85% 28.63% 3.62% 35.85%
======================================================
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Year (millions) $2,263 $1,370 $725 $548
Ratio of Expenses to Average Net .91%* .99% .99% 1.07%
Assets
Ratio of Net Investment Income to
Average Net Assets 3.59%* 2.00% 1.64% 1.17%
Portfolio Turnover Rate 38.27% 73.23% 72.70% 90.37%
Average Commission Per Share*** .023 --- --- ---
</TABLE>
*Annualized.
**Total Return includes changes in share price and reinvestment of dividends and
capital gain distributions. The Fund's total return is a historical measure of
past performance and is not intended to indicate future performance. Investment
return and principal value will fluctuate; therefore the Fund's shares may
become worth more or less than their original cost.
***Average commission rate is calculated for the periods beginning on or after
January 1, 1996.
INVESTMENT OBJECTIVES AND POLICIES AND RISKS
Mutual Shares, Qualified, Beacon and European each has as its principal
objective capital appreciation, which may occasionally be short term. A
secondary objective is income. These objectives are fundamental. Discovery has
long-term capital appreciation as its objective, it will seek to achieve its
objective by including investments in small capitalization companies. European
will normally invest at least 65% of its invested assets in the securities of
issuers organized under the laws of, or whose principal business operations or
at least 50% of whose revenue is earned from, European countries. European
countries are given a broad definition which includes all of the countries that
are members of the European Union, United Kingdom, Scandinavia, Eastern and
Western Europe and those regions of Russia and the former Soviet Union that are
considered part of Europe. European may also invest up to 35% of its invested
assets in U.S. securities as well as in securities of issuers from the Levant,
Middle East and the rest of the world. European is currently expected to invest
primarily in Western Europe and Scandinavia but may also include other
countries' investments. European will normally invest in at least 5 countries
although it may invest all of its assets in a single country. However, European
may include securities of issuers from outside of Europe and the U.S. For short
term purposes, European anticipates that it generally will buy short term
securities denominated in U.S. dollars. European will normally attempt to
maintain at least 50% of the value of its assets invested in stocks or
securities of foreign corporations at the close of each taxable year. Each
series pursues these objectives primarily through investments in common stock
and preferred stock as well as debt securities and securities convertible into
common stock (including convertible preferred and convertible debt securities).
You should bear in mind that since every investment carries risk, the value of
the assets of each series of the Fund fluctuates with changes in the market
value of its investments. Therefore, there is no assurance that the Fund's
objectives will be achieved. Except for the Fund's primary and secondary
investment objectives, these objectives are not fundamental and the Board of
Directors of the Fund reserves the right to change them without shareholder
approval, which may result in the Fund having an investment objective different
from that which an investor deemed appropriate at the time of investment.
The general investment policy of each existing series is to invest in common
stock, preferred stock and corporate debt securities, which may be convertible
into common stock and the other investments described below which, in the
opinion of the series' investment adviser, Franklin Mutual Advisers, Inc.
("Franklin Mutual"), are available at prices less than their intrinsic value.
(See "Non-U.S. Securities," "Repurchase Agreements and Loans of Securities" and
"Hedging.") Franklin Mutual also has no pre-set limits as to the percentage of
each series' portfolio which may be invested in equity securities, debt
securities (including "junk bonds" as described below), or cash equivalents.
Franklin Mutual's opinions are based upon analysis and research, taking into
account, among other factors, the relationship of book value to market value of
the securities, cash flow, and multiples of earnings of comparable securities.
These factors are not applied formulaically, as Franklin Mutual examines each
security separately; Franklin Mutual has no general criteria as to asset size,
earnings or industry type which would make a security unsuitable for purchase by
a series. Although the Fund may invest in securities from any size issuer,
Mutual Shares, Qualified and Beacon will tend to invest in securities of issuers
with market capitalizations in excess of $500 million due to the larger size of
these series. Each series may invest in securities that are traded on U.S. or
foreign exchanges, NASDAQ national market or in the over-the-counter market. The
series may invest in any industry sector although no series will be concentrated
in any one industry. Debt securities in which the Fund invests (such as
corporate and U.S. government bonds, debentures and notes) may or may not be
rated by rating agencies such as Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P), and, if rated, such rating may range from
the very highest to the very lowest, currently C for Moody's and D for S&P.
Medium and lower-rated debt securities in which each series expects to invest
are commonly known as "junk bonds." The series may be subject to investment
risks as to these unrated or lower rated securities that are greater in some
respects than the investment risks incurred by a fund which invests only in
securities rated in higher categories. In addition, the secondary market for
such securities may be less liquid and market quotations less readily available
than higher rated securities, thereby increasing the degree to which judgment
plays a role in valuing such securities. The general policy of each series is to
invest in debt instruments, including junk bonds, for the same reasons
underlying investments in equities, i.e., whenever such instruments are
available, in Franklin Mutual's opinion, at prices less than their intrinsic
value. Consequently, Franklin Mutual's own analysis of a debt instrument
exercises a greater influence over the investment decision than the stated
coupon rate or credit rating. The series have historically invested in debt
instruments issued by reorganizing or restructuring companies, or companies
which recently emerged from, or are facing the prospect of a financial
restructuring. It is under these circumstances, which usually involve unrated or
low rated securities that are often in, or about to default, that Franklin
Mutual identifies securities which are sometimes available at prices which it
believes are less than their intrinsic value. Although such debt securities may
pose a greater risk than higher rated debt securities of loss of principal, the
debt securities of reorganizing or restructuring companies typically rank senior
to the equity securities of such companies. See " Investment Objectives and
Policies - Medium and Lower Rated Corporate Debt Securities" in the SAI.
Each series also seeks to invest in the securities of domestic and foreign
companies involved in mergers, consolidations, liquidations and reorganizations
or as to which there exist tender or exchange offers, and may participate in
such transactions. Although there are no restrictions limiting the extent to
which each series may invest in such transactions, no series presently
anticipates investing more than 50% of its portfolio in such investments. There
can be no assurance that any merger, consolidation, liquidation, reorganization
or tender or exchange offer proposed at the time a series makes its investment
will be consummated or will be consummated on the terms and within the time
period contemplated. The series from time to time may also purchase indebtedness
and participations therein, both secured and unsecured, of debtor companies in
reorganization or financial restructuring ("Indebtedness"). Such Indebtedness
may be in the form of loans, notes, bonds or debentures. Participations normally
are made available only on a nonrecourse basis by financial institutions, such
as banks or insurance companies, or by governmental institutions, such as the
Resolution Trust Corporation or the Federal Deposit Insurance Corporation or the
Pension Benefit Guaranty Corporation or may include supranational organizations
such as World Bank. When a series purchases a participation interest it assumes
the credit risk associated with the bank or other financial intermediary as well
as the credit risk associated with the issuer of any underlying debt instrument.
The series may also purchase trade and other claims against, and other unsecured
obligations of, such debtor companies, which generally represent money due a
supplier of goods or services to such company. Some corporate debt securities,
including Indebtedness, purchased by the Fund may have very long maturities. The
length of time remaining until maturity is one factor Franklin Mutual considers
in purchasing a particular Indebtedness. The purchase of Indebtedness of a
troubled company always involves a risk as to the creditworthiness of the issuer
and the possibility that the investment may be lost. Franklin Mutual believes
that the difference between perceived risk and actual risk creates the
opportunity for profit which can be realized through proper analysis. There are
no established markets for some of this Indebtedness and thus it is less liquid
than more heavily traded securities. Indebtedness which represents indebtedness
of the debtor company to a bank are not securities of the banks issuing or
selling them. The series purchase loans from national and state chartered banks
as well as foreign ones. The series normally invest in senior indebtedness of
the debtor companies, although on occasion subordinated indebtedness may also be
acquired. Each series does not invest more than 15% of its portfolio in assets
which are illiquid, including Indebtedness which are not readily marketable. The
series may invest in securities considered illiquid such as those described
above as well as restricted securities not registered under the Securities Act
of 1933, OTC options and securities that are otherwise considered illiquid as a
result of market or other factors. The series may invest in securities eligible
for resale under Rule 144A of the Securities Act ("144A securities"). The Board
of Directors of the Fund has adopted procedures in accordance with Rule 144A
whereby specific 144A securities held in the Fund may be deemed to be liquid.
Nevertheless, due to changing market or other factors 144A securities may be
subject to a greater possibility of becoming illiquid than registered
securities. Fund purchases of 144A securities may increase the level of
illiquidy and institutional buyers may become disinterested in purchasing such
securities. The series may also invest in cash equivalents such as Treasury
bills and high quality commercial paper. The series generally purchases
securities for investment purposes and not for the purpose of influencing or
controlling management of the issuer. However, in certain circumstances when the
Adviser perceives that one or more of the series may benefit, the Fund may
itself seek to influence or control management or may invest in other entities
that purchase securities for the purpose of influencing or controlling
management, such as investing in a potential takeover or leveraged buyout or
investing in other entities engaged in such activities. The series may also
invest in distressed mortgage obligations and other debt secured by real
property and may sell short securities it does not own up to 5% of its assets.
Short sales have risks of loss if the price of the security sold short increases
after the sale, but the series can profit if the price decreases. The series may
also sell securities "short against the box" without limit. See "Investment
Objectives and Policies -Short Sales" in the SAI for more discussion of these
practices.
Discovery expects to invest to a greater degree than the other series in smaller
capitalized companies which may involve greater risks than investing in
securities of larger companies. The smaller companies in which Discovery invests
are often not well known, may often trade at a discount and may not be followed
by institutions.
Each series may invest in common stock, preferred stock and corporate debt
securities in such proportions as the Adviser deems advisable. Franklin Mutual
typically keeps a portion of the assets of each series invested in short-term
debt securities and preferred stocks although it may choose not do so when
circumstances dictate. In addition, the series may invest from time to time in
other investment company securities, subject to applicable law, which restricts
such investments. Investors should recognize that a series' purchase of the
securities of such investment companies results in layering of expenses such
that investors indirectly bear a proportionate share of the expenses of such
investment companies, including operating costs, and investment advisory and
administrative fees.
NON-U.S. SECURITIES
The series may purchase securities of non-U.S. issuers and Discovery expects
that up to approximately 50% of its assets may be so invested. European will
normally invest at least 65% of its invested assets in European countries (as
defined above). The series may purchase securities denominated in any currency
and generally expect currency risks will be hedged to the extent that hedging is
available. Investments in securities of non-U.S. issuers involve certain risks
not ordinarily associated with investments in securities of domestic issuers.
Such risks include fluctuations in foreign exchange rates, volatile political
and economic developments, and the possible imposition of exchange controls or
other foreign governmental laws or restrictions. Since each series may invest in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in the portfolio and the unrealized appreciation or depreciation of investments
although Franklin Mutual generally attempts to reduce such risks through hedging
transactions. In addition, with respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
There may be less publicly available information about a foreign company than
about a U.S. company. Foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to or as
uniform as those of U.S. companies. Non-U.S. securities markets, while growing
in volume, have, for the most part, substantially less volume than U.S. markets,
and securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable U.S. companies. Transaction costs on
non-U.S. securities markets are generally higher than in the U.S. There is
generally less government supervision and regulation of exchanges, brokers and
issuers than there is in the U.S. Each series foreign investments may include
both voting and non voting securities, sovereign debt and participations in
foreign government deals. The Fund might have greater difficulty taking
appropriate legal action with respect to foreign investments in non-U.S. courts
than with respect to domestic issuers in U.S. courts.
Each series of the Fund may invest in securities commonly known as Depository
Receipts of non-U.S. issuers which have certain risks, including trading for a
lower price, having less liquidity than their underlying securities and risks
relating to the issuing bank or trust company. Depository Receipts can be
sponsored by the issuing bank or trust company or unsponsored. Holders of
unsponsored Depository Receipts have a greater risk that receipt of corporate
information and proxy disclosure will be untimely, information may be incomplete
and costs may be higher.
Dividend and interest income from non-U.S. securities will generally be subject
to withholding taxes by the country in which the issuer is located, which may
not be recoverable, either directly or indirectly, as a foreign tax credit or
deduction by the Fund or its shareholders. See the SAI.
REPURCHASE AGREEMENTS AND LOANS OF SECURITIES
Each series may invest up to 10% of its assets in repurchase agreements. Each
series may also loan its portfolio securities in order to realize additional
income. Repurchase and tri-party agreements are generally agreements under which
the series obtains money market instruments subject to resale to the seller at
an agreed upon price and date. Any loans of portfolio securities which the
series may make must be fully collateralized at all times by securities with a
value at least equal to 100% of the current market value of the loaned
securities. The series presently do not anticipate loaning more than 5% of their
respective portfolio securities. There are certain risks associated with such
transactions which are described in the SAI.
HEDGING AND INCOME TRANSACTIONS
The series may utilize various investment strategies as described below to hedge
various market risks (such as interest rates, currency exchange rates, and broad
or specific equity market movements), to manage the effective maturity or
duration of fixed-income securities or for gain. Such strategies are generally
accepted by modern portfolio managers and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments may change
over time as new instruments and strategies are developed or regulatory changes
occur and the Fund will describe any such techniques in its registration
statement before using them. In the course of pursuing these investment
strategies, the series may purchase and sell exchange-listed and
over-the-counter put and call options on securities, equity and fixed-income
indices and other financial instruments, purchase and sell financial futures
contracts and options thereon, and enter into various currency transactions such
as currency forward contracts, currency futures contracts, currency swaps or
options on currencies or currency futures (collectively, all of the above are
called "Hedging Transactions"). Hedging Transactions may be used to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for a series' portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect the series' unrealized gains in
the value of its portfolio securities, to facilitate the sale of such securities
for investment purposes, or to establish a position in the derivatives markets
as a temporary substitute for purchasing or selling particular securities. Any
or all of these investment techniques may be used at any time and there is no
particular strategy that dictates the use of one technique rather than another,
as use of any Hedging Transaction is a function of numerous variables including
market conditions. The ability of a series to utilize these Hedging Transactions
successfully will depend on the Adviser's ability to predict pertinent market
movements, which cannot be assured. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. Each series generally hedges the foreign currency risk associated
with its investments in foreign securities. European expects to hedge for gain
on market risks including broad movements in markets in addition to the specific
currency risk of its portfolio securities. No more than 5% of the series' assets
will be at risk in such types of instruments entered into for non-hedging
purposes. Hedging Transactions involving financial futures and options thereon
will be purchased, sold or entered into generally for bona fide hedging, risk
management or portfolio management purposes .
Hedging Transactions, whether entered into as a hedge or for gain, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent Franklin Mutual's view as to certain
market movements is incorrect, the risk that the use of such Hedging
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to a series, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Fund can realize on its
investments, increase the cost of holding a security and reduce the returns on
securities or cause a series to hold a security it might otherwise sell. The use
of currency transactions can result in a series incurring losses as a result of
a number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
series might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Hedging Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Hedging
Transactions had not been utilized. The cost of entering into hedging
transactions may also reduce the series' total return to investors.
FUNDAMENTAL RESTRICTIONS
Each series has adopted a number of fundamental investment restrictions, which
may not be changed for a particular series without the approval of that series'
shareholders. These restrictions are set forth in the SAI. Other than such
restrictions, no series has any investment policies which it considers
fundamental.
Among other things, each series may not purchase the securities of any one
issuer, other than the U.S. Government or any of its agencies or
instrumentalities, if immediately after such purchase more than 5% of the value
of its total assets would be invested in such issuer, or such series would own
more than 10% of the outstanding voting securities of such issuer, except that
up to 25% of the value of such series' total assets may be invested without
regard to such 5% and 10% limitations; make loans, except to the extent the
purchase of debt obligations of any type are considered loans and except that
the series may lend portfolio securities to qualified institutional investors in
compliance with requirements established from time to time by the SEC and the
securities exchanges on which such securities are traded; invest more than 25%
of the value of its assets in a particular industry (except that U.S. Government
securities are not considered an industry); or issue securities senior to its
stock or borrow money or utilize leverage in excess of the maximum permitted by
the 1940 Act which is currently 331/3% of total assets (plus 5% for emergency or
other short-term purposes). Such borrowing has special risks. The Fund will not
engage in investment transactions when borrowing exceeds 5% of its assets.
While Mutual Shares, Qualified, Beacon, Discovery and European have
identical basic investment restrictions, and Mutual Shares, Qualified, Beacon
and European have identical investment objectives, the Adviser seeks to retain
certain historical differences among the series on an informal basis. Mutual
Shares, Qualified and Beacon have generally invested in larger and medium sized
companies with large share trading volume. Discovery, in comparison to the other
series, has tended to invest proportionately more of its portfolio in smaller
companies (see "Investment Objectives and Policies") and in foreign companies
(see "Non-U.S. Securities"). Qualified was originally intended for purchase by
pension plans, profit sharing plans and other nontaxpaying entities and the
portfolio was able to have greater flexibility due to reduced concerns about the
tax effects on shareholders. Depending on market conditions, and any future
changes in tax laws, Franklin Mutual expects that it will purchase securities
for Qualified which satisfy such a goal, although currently Qualified operates
in the same fashion as Mutual Shares and Beacon. European will utilize the same
investment philosophy but will apply it in the context of European investing.
Allocation of investments among the series will also depend upon, among other
things, the amount of cash in, and relative size of each series' portfolio. In
addition, the factors outlined above are not mutually exclusive and a particular
security may be owned by more than one of the series.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
classes of shares of each series. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER AND ADMINISTRATOR. FRANKLIN MUTUAL, 51 John F. Kennedy
Parkway, Short Hills, NJ 07078, is the investment manager of the Fund with
aggregate assets of over $[] billion. FT Services provides various
administrative services and supervises each series' daily business affairs.
Franklin Mutual and FT Services are wholly owned by Resources, a publicly owned
company engaged in the financial services industry through its subsidiaries.
Charles B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Michael Price since 1976, Jeffrey A. Altman since 1988,
Robert F. Friedman since 1987, Raymond Garea since 1991, Peter A. Langerman
since 1986 and Lawrence N. Sondike since 1984.
Michael F. Price
Chief Executive Officer of Franklin Mutual
Mr. Price has a Bachelor of Arts degree in business administration from the
University of Oklahoma. Prior to October 1996, Mr. Price was President and
Chairman of Heine Securities Corporation, the former investment advisor for the
Fund, for at least 5 years. He became Chief Executive Officer of Franklin Mutual
in October 1996. He is Chairman of the Board and President of the Fund.
Jeffrey A. Altman
Portfolio Manager of Franklin Mutual
Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
October 1996, Mr. Altman was employed as a Research Analyst and Trader for Heine
Securities Corporation, the former investment advisor for the Fund, for at least
5 years. He joined Franklin Mutual in October 1996.
Robert L. Friedman
Portfolio Manager of Franklin Mutual
Mr. Friedman has a Bachelor of Arts degree in humanities from the John Hopkins
University and a Masters in Business Administration from the Wharton School,
University of Pennsylvania. Prior to October 1996, Mr. Friendman was a Research
Analyst for Heine Securities Corporation, the former investment advisor for the
Fund, for at least 5 years. He joined Franklin Mutual in October 1996.
Raymond Garea
Portfolio Manager of Franklin Mutual
Mr. Garea has a Bachelor of Science degree in engineering from Case Institute of
Technology and a Masters in Business Administration the University of Michigan.
Prior to October 1996, he was a Research Analyst for Heine Securities
Corporation, the former investment advisor for the Fund, for at least 5 years.
He joined Franklin Mutual in October 1996. Mr. Garea is also a Manager
(Director) of MB Metroplis L.L.C. since 1994.
Peter A. Langerman
Portfolio Manager of Franklin Mutual
Mr. Langerman has a Bachelor of Arts degree from Yale University, a Masters in
Science from New York University Graduate School of Business and a Juris Doctor
from Standford University Law School. Prior to October 1996, he was a Research
Analyst for Heine Securities Corporation, the former investment advisor for the
Fund, for at least 5 years. He joined Franklin Mutual in October 1996. Mr.
Langerman is a director and Executive Vice President of the Fund, Director of
Sunbeam Oster since 1990, Lancer Industries since 1994 and Hexcel Corporation
N.M.M.S.p.A. since 1995 and Manager (Director) of MB Motori, L.L.C. since 1994
and MWCR L.L.C. since 1995.
Lawrence N. Sondike
Portfolio Manager of Franklin Mutual
Mr. Sondike has a Bachelor of Arts degree from Cornell University and a Masters
in Business Administration from New York University Graduate School of Business.
Prior to October 1996, he was a Research Analyst for Heine Securities
Corporation, the former investment advisor for the Fund, for at least 5 years.
He joined Franklin Mutual in October 1996. He is Vice President of the Fund.
SERVICES PROVIDED BY FRANKLIN MUTUAL AND FT SERVICES. Franklin Mutual manages
the Fund's assets and makes its investment decisions. FT Services provides
various administrative services and supervises each series' daily business
affairs. Please see "Investment Advisory and Other Services" and "Miscellaneous
Information" in the SAI for information on securities transactions and a summary
of the Fund's Code of Ethics.
MANAGEMENT AND ADMINISTRATION FEES. During the fiscal year ended December 31,
1995, management fees at the annual rate of 0.60%, 0.60%, 0.60% and 0.80% of the
average daily net assets of the Mutual Shares, Mutual Qualified, Mutual Beacon,
and Mutual Discovery, respectively, were paid to Heine. Total expenses for the
fiscal year ended December 31, 1995, including fees paid to Heine, were
0.69%,0.72%, 0.72% and 0.99% of the average daily net assets of Mutual Shares,
Mutual Qualified, Mutual Beacon, and Mutual Discovery, respectively.
The Fund pays its own operating expenses. These expenses include Franklin
Mutual's management fees; taxes, if any; custodian, legal and auditing fees; the
compensation and expenses of Board members who are not members of, affiliated
with, or interested persons of Franklin Mutual; salaries of any personnel not
affiliated with Franklin Mutual]; insurance premiums; trade association dues;
expenses of obtaining quotations for calculating the Fund's Net Asset Value; and
printing and other expenses that are not expressly required to be paid by
Franklin Mutual.
Under its management agreement, Mutual Shares, Mutual Qualified, Mutual Beacon,
Mutual Discovery and Mutual European pay Franklin Mutual a management fee equal
to an annual rate of 0.60%, 0.60%, 0.60%, 0.80%, and 0.80% of the average daily
net assets of the respective series. The fee is computed at the close of
business on the last business day of each month.
The management fee will be reduced as necessary to comply with the most
stringent limits on Fund expenses of any state where the Fund offers it shares.
Currently, the most restrictive limitation on a fund's allowable expenses for
each fiscal year, as a percentage of its average net assets, is 2.5% of the
first $30 million in assets, 2% of the next $70 million, and 1.5% of assets over
$100 million. Each class will pays its proportionate share of the management and
administration fees.
[FT Services is responsible for administering or arranging for administration
of the Fund's business affairs and operations, including maintenance of all
required records, employment of sufficient personnel, and maintenance of
sufficient equipment and facilities to permit Franklin Mutual to perform its
obligations under the Advisory Agreements. FT Services is paid a fee of .15% of
each series' average daily net assets up to $200 million, .135% bp up to $700
million, and .10% up to $1.2 billion, and .075% on assets in excess of $1.2
billion.]
[PORTFOLIO TRANSACTIONS. Franklin Mutual obtains the best execution on all
transactions. If Adviser believes more than one broker or dealer can provide the
best execution, it may consider research and related services and the sale of
Fund shares when selecting a broker or dealer. Please see "How Does the Fund Buy
Securities For Its Portfolio?" in the SAI for more information.]
THE RULE 12B-1 PLANS
Each class has a distribution plan or "Rule 12b-1 Plan" under which it may pay
or reimburse Distributors or others for activities primarily intended to sell
shares of the class. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the Class I plans may not exceed 0.35% per year of
Class I's average daily net assets. [Of this amount, the Fund may reimburse up
to []% to Distributors or others and may reimburse an additional []% to
Distributors for distribution expenses.] All distribution expenses over this
amount will be borne by those who have incurred them. During the first year
after certain Class I purchases aremade without a sales charge, Distributors may
keep the Rule 12b-1 fees associated with the purchase.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plans. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Performance figures are usually calculated using the
maximum sales charge, but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not indicate future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How Does the Fund Measure Performance?" in the SAI.
HOW IS THE FUND ORGANIZED?
The series are diversified series of Mutual Series Fund Inc., an open-end
management investment company, commonly called a mutual fund. It was organized
as a Maryland corporation on November 12, 1987 and is registered with the SEC
under the 1940 Act. Mutual Shares Corporation, Mutual Qualified Income Fund Inc.
and Mutual Beacon Fund, Inc. were merged into the Fund on February 19, 1988 and
became Mutual Shares, Qualified and Beacon, respectively. Discovery was added on
December 31, 1992. European commenced operations on July 3, 1996. The Fund began
offering multiple classes of shares on November 1, 1996: Mutual Shares Fund -
Class Z, Mutual Shares Fund - Class I, Mutual Shares Fund - Class II, Mutual
Qualified Fund - Class Z, Mutual Qualified Fund - Class I, Mutual Qualified Fund
- - Class II, Mutual Beacon Fund - Class Z, Mutual Beacon Fund - Class I, Mutual
Beacon Fund - Class II, Mutual European Fund - Class Z, Mutual European Fund -
Class I, Mutual European Fund - Class II, Mutual Discovery Fund - Class Z,
Mutual Discovery Fund - Class I, and Mutual Discovery Fund - Class II. All
shares purchased before Novembe 1, 1996, are considered Class Z shares.
Additional classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other classes
of the Fund as to matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state corporation law, or (3) required to
be voted on separately by the 1940 Act.]
[The Fund has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.]
[The Fund has cumulative voting rights. This gives each shareholder a number of
votes equal to the number of shares owned times the number of Board members to
be elected. You may cast all of your votes for one candidate or distribute your
votes between two or more candidates.]
The Fund does not intend to hold annual shareholder meetings. It may hold a
special or annual meeting of a series, however, for matters requiring
shareholder approval under the 1940 Act. A meeting may also be called by the
Board in its discretion or by shareholders holding at least 10% of the
outstanding shares. The 1940 Act requires that we help you communicate with
other shareholders in connection with electing or removing members of the Board.
HOW TAXATION AFFECTS YOU AND THE FUND
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
Each series intends to continue to qualify as a regulated investment company
under Subchapter M of the Code. By distributing all of its income and meeting
certain other requirements relating to the sources of its income and
diversification of its assets, each series will not be liable for federal income
or excise taxes.
You will generally have to pay Federal income taxes on the dividends and
distributions they receive from a series and on gains realized upon redemption
of your shares.
Following each calendar year, you will receive information for tax purposes on
the dividends and capital gain distributions received during the previous year.
The Fund may make distributions from net investment income or capital gain and
may also make distributions in kind. Dividends from net investment income and
any net short-term capital gain will be taxable as ordinary income whether
received in cash or in kind. Any distributions designated as realized net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) will be taxable as long-term capital gain, regardless of the
holding period of your shares of such series. All or a portion of any dividends
paid by the Fund to corporate shareholders may, under certain circumstances, be
eligible for the dividends received deduction. Credit for foreign taxes paid by
the Fund have generally not been available to shareholders.
Dividends or distributions have the effect of reducing the per share value of
shares owned by the shareholder by the per share amount of the dividends or
distributions. Furthermore, such dividends and distributions paid shortly after
the purchase of shares by an investor, although in effect a return of capital,
are subject to income taxes.
The IRS requires backup withholding of Federal income tax of 31% of the gross
amount of dividends, capital gain distributions, and redemption proceeds paid or
credited to shareholders who do not furnish a valid social security or taxpayer
identification number. If you are using the Fund as a medium for tax qualified
retirement plans you may be subject to a 20% mandatory withholding upon
withdrawal under certain circumstances.
Redemptions of shares of a series will be taxable transactions for Federal
income tax purposes. Generally, gain or loss will be recognized in an amount
equal to the difference between the shareholder's basis in his shares and the
amount received. Assuming that such shares are held as a capital asset, such
gain or loss will be a capital gain or loss and will be a long-term capital gain
or loss if you have held your shares for a period of more than one year. If you
redeems shares of any series at a loss and makes an additional investment in the
same series 30 days before or after such redemption, the loss may be disallowed
under the wash sale rules.
Income received by European from sources outside the United States may be
subject to withholding and other foreign taxes. As long as more than 50% of the
value of European's assets at the close of any taxable year consists of stocks
or securities of foreign corporations, European intends to elect to treat any
foreign income paid by the series as if it were paid by shareholders.
Accordingly, the amount of foreign income taxes paid by European will be
included in the income of its shareholders and the European shareholders will be
entitled to credit their portions of those amounts against their United States
federal income taxes, if any, or to deduct such portions from their taxable
income. No deduction for foreign taxes may be claimed by a shareholder who does
not itemize deductions. In addition, certain individual shareholders may be
subject to rules that limit or reduce their ability to deduct fully their pro
rata share of foreign taxes. Shortly after any year for which it makes such an
election, European will report to its shareholders, in writing, the amount per
share of any foreign tax that must be included in each shareholder's gross
income and the amount that will be available for deduction or credit.
In general, a credit for foreign taxes may not exceed the United States
shareholder's United States federal income tax attributable to its foreign
source taxable income. If European elects to treat foreign taxes paid by the
series as paid by the shareholders as described in the preceding paragraph, the
source of European's income will flow through to its shareholders for purposes
of calculating the limitation on foreign tax credits. Dividends and interest
received by the Fund in respect of non-U.S. securities will give rise to foreign
source income to shareholders. You are advised to consult their tax advisers
with respect to the federal, state, local or foreign tax consequences of the
pass-through of foreign tax credits described above.
The foregoing summary of Federal income tax consequences is included herein for
general informational purposes only. It does not address the tax consequences to
all investors and does not address the tax consequences under state, local,
foreign and other tax laws. Prospective investors are urged to consult their own
tax advisors with respect to the tax consequences of an investment in a series
of the Fund.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. PLEASE INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT
SPECIFY A CLASS, YOUR PURCHASE WILL BE AUTOMATICALLY INVESTED IN CLASS I SHARES.
MINIMUM
INVESTMENTS*
To Open Your Account...... $1,000
To Add to Your Account.... $ 50
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares. Currently, the Fund does not allow investments by Market Timers.
DECIDING WHICH CLASS TO BUY
You should consider a number of factors when deciding which class of shares to
buy. IF YOU PLAN TO BUY $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO
BUY CLASS I SHARES WITHOUT A SALES CHARGE, YOU MAY NOT BUY CLASS II SHARES.
Generally, you should consider buying Class I shares if:
you expect to invest in the Fund over the long term; you qualify to buy
Class I shares at a reduced sales charge; or you plan to buy $1 million or
more over time.
You should consider Class II shares if:
you expect to invest less than $100,000 in the Franklin Templeton Funds;
and you plan to sell a substantial number of your shares within
approximately six years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID TO
AS A PERCENTAGE OF DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I
Under $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million.
Please see "Deciding Which Class to Buy."
SALES CHARGE REDUCTIONS AND WAIVERS
IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't
include this statement, we cannot guarantee that you will receive the sales
charge reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your Class I and Class II
shares in the Franklin Templeton Funds, as well as those of your spouse,
children under the age of 21 and grandchildren under the age of 21. If you are
the sole owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
You authorize Distributors to reserve 5% of your total intended purchase
in Class I shares registered in your name until you fulfill your Letter.
You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
Was formed at least six months ago,
Has a purpose other than buying Fund shares at a discount, Has more than
10 members, Can arrange for meetings between our representatives and group
members,
Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to
Distributors,
Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and Meets other uniform criteria that allow
Distributors to achieve cost savings in distributing shares.
SALES CHARGE WAIVERS. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or a
REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4. Redemptions from any Franklin Templeton Fund if you:
Originally paid a sales charge on the shares, Reinvest the money
within 365 days of the redemption date, and Reinvest the money in
the SAME CLASS of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares reinvested were subject
to a Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to Class I purchases by:
6. Trust companies and bank trust departments agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of
assets held in a fiduciary, agency, advisory, custodial or similar
capacity and over which the trust companies and bank trust departments
or other plan fiduciaries or participants, in the case of certain
retirement plans, have full or shared investment discretion. We will
accept orders for these accounts by mail accompanied by a check or by
telephone or other means of electronic data transfer directly from the
bank or trust company, with payment by federal funds received by the
close of business on the next business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least
100 employees, (ii) have plan assets of $1 million or more, or (iii)
agree to invest at least $500,000 in the Franklin Templeton Funds over
a 13 month period. Retirement plans that are not Qualified Retirement
Plans or SEPS, such as 403(b) or 457 plans, must also meet the
requirements described under "Group Purchases - Class I Only" above.
9. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments
by the Fund on arbitrage rebate calculations.
10. Broker-dealers and qualified registered investment advisors who have
entered into a supplemental agreement with Distributors for their
clients who are participating in comprehensive fee programs, sometimes
known as wrap fee programs
11. Registered Securities Dealers and their affiliates, for their
investment accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family
members, consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments below apply to Securities Dealers who initiate and are responsible
for Class II purchases and certain Class I purchases made without a sales
charge. A Securities Dealer may only receive one of the following payments for
each qualifying purchase. Securities Dealers who receive payments under items 1,
2 or 3 below will earn the Rule 12b-1 fee associated with the purchase starting
in the thirteenth calendar month after the purchase. The payments described
below are paid by Distributors or one of its affiliates, at its own expense, and
not by the Fund or its shareholders.
1. Securities Dealers may receive up to 1% of the purchase price for Class II
purchases.
2. Securities Dealers will receive up to 1% of the purchase price for Class I
purchases of $1 million or more.
3. Securities Dealers may, in the sole discretion of Distributors, receive up to
1% of the purchase price for Class I purchases made under waiver category 8
above.
4. Securities Dealers may receive up to 0.25% of the purchase price for Class I
purchases made under waiver categories 6 and 9 above.
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI FOR ANY BREAKPOINTS THAT MAY APPLY.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. Securities Dealers may not use sales of the Fund's shares to qualify for
this compensation if prohibited by the laws of any state or self-regulatory
agency, such as the NASD.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Class II shares.
- -------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- -------------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you're exchanging
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to
exchange by phone to apply to your
account, please let us know.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- -------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge;
for example, they will not apply to Class Z shares of Mutual Series that you
have held for at least six months.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE - CLASS I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
CONTINGENT DEFERRED SALES CHARGE - CLASS II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
CDSC, such as shares from the reinvestment of dividends and capital gains ("free
shares"), $2,000 in shares that are no longer subject to a CDSC because you have
held them for longer than 18 months ("matured shares"), and $3,000 in shares
that are still subject to a CDSC ("CDSC liable shares"). If you exchange $3,000
into a new fund, $500 will be exchanged from free shares, $1,000 from matured
shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
You may only exchange shares within the SAME CLASS.*
The accounts must be identically registered. You may exchange shares from a Fund
account requiring two or more signatures into an identically registered money
fund account requiring only one signature for all transactions. PLEASE NOTIFY US
IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR ACCOUNT(S).
Additional procedures may apply. Please see "Transaction Procedures and Special
Requirements."
Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
The fund you are exchanging into must be eligible for sale in your state. We may
modify or discontinue our exchange policy if we give you 60 days' written
notice. Currently, the Fund does not allow investments by Market Timers.
*On or about May 1, 1997, Z shares of Mutual Series may be exchanged for Class I
shares of the Franklin Templeton Funds, as permitted by the fund's current
prospectus, provided you have held the shares for at least six months.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
HOW DO I SELL SHARES?
<TABLE>
<CAPTION>
You may sell (redeem) your shares at any time.
<S> <C>
- -------------------------------------- ------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- -------------------------------------- ------------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send additional
documents. Accounts under court jurisdiction may have additional
requirements.
- -------------------------------------- ------------------------------------------------------------------------------
- -------------------------------------- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services
(Only available if you have Telephone requests will be accepted:
completed and sent to us the
telephone redemption agreement If the request is $50,000 or less. Institutional accounts may exceed
included with this prospectus) $50,000 by completing a separate agreement. Call Institutional Services
to receive a copy.
If there are no share certificates
issued for the shares you want to
sell or you have already returned
them to the Fund]
Unless you are selling shares in a Trust Company retirement plan
account
Unless the address on your account was changed by phone within the
last 30 days
- -------------------------------------- ------------------------------------------------------------------------------
- -------------------------------------- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- -------------------------------------- ------------------------------------------------------------------------------
</TABLE>
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, if you did not pay a front-end sales charge because you
invested $1 million or more or agreed to invest $1 million or more under a
Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell all
or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make without
a sales charge may also be subject to a Contingent Deferred Sales Charge if they
are sold within the Contingency Period. The charge is 1% of the value of the
shares sold or the Net Asset Value at the time of purchase, whichever is less.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period, 2) Shares purchased with reinvested
dividends and capital gain distributions, and 3) Shares held longer than the
Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
Exchanges
Account fees
Sales of shares purchased pursuant to a sales charge waiver
Redemptions by the Fund when an account falls below the minimum required
account size Redemptions following the death of the shareholder or
beneficial owner Redemptions through a systematic withdrawal plan set up
before February 1, 1995 Redemptions through a systematic withdrawal plan
set up after February 1, 1995, up to 1% a month of an
account's Net Asset Value (3% quarterly, 6% semiannually or 12% annually).
For example, if you maintain an annual balance of $1 million in Class I
shares, you can withdraw up to $120,000 annually through a systematic
withdrawal plan free of charge. Likewise, if you maintain an annual balance
of $10,000 in Class II shares, $1,200 may be withdrawn annually free of
charge.
Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
Tax-free returns of excess contributions from employee benefit plans
Distributions from employee benefit plans, including those due to
termination or plan transfer
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semi-annually.
Capital gains, if any, may be distributed semi-annually, usually in December.
[Dividends and capital gains are calculated and distributed the same way for
each class.] The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of each class.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days prior to
the record date for us to process the new option. ] TRANSACTION PROCEDURES AND
SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share of each class as of the scheduled close of the
Exchange, generally 4:00 p.m. Eastern time. You can find the prior day's closing
Net Asset Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
Your name,
The Fund's name,
The class of shares,
A description of the request,
For exchanges, the name of the fund you're exchanging into, Your account
number, The dollar amount or number of shares, and
A telephone number where we may reach you during the day, or in the
evening if preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized
brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential
claims based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR PRIOR TO SIGNING. A
NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized telephone
transactions if we do not follow reasonable procedures designed to verify the
identity of the caller. When you call, we will request personal or other
identifying information, and will also record calls. For your protection, we may
delay a transaction or not implement one if we are not reasonably satisfied that
telephone instructions are genuine. If this occurs, we will not be liable for
any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
[TRUST COMPANY RETIREMENT PLAN ACCOUNTS. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.]
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, ALL owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------- -------------------------------------------------------------------------------------
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- ------------------------------- -------------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- ------------------------------- -------------------------------------------------------------------------------------
- ------------------------------- -------------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify the general partners, or
2. A certification for a partnership agreement
- ------------------------------- -------------------------------------------------------------------------------------
- ------------------------------- -------------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the trustees, or
2. A certification for trust
- ------------------------------- -------------------------------------------------------------------------------------
</TABLE>
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $500. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $500.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the front-end sales charge, you may not want to set up a systematic
withdrawal plan if you plan to buy shares on a regular basis. Shares sold under
the plan may also be subject to a Contingent Deferred Sales Charge.
Please see "Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
obtain information about your account;
obtain price and performance information about any Franklin Templeton
Fund; exchange shares between identically registered Franklin accounts;
and request duplicate statements and deposit slips for Franklin accounts.
You will need the code number for each class to use TeleFACTS. The code numbers
for Class I and Class II are as follows:
FUND
CODE FUND NAME__________________________
- -----------------------------------------------------
[ ] Mutual Shares Fund - Class I
[ ] Mutual Shares Fund - Class II
[ ] Mutual Qualified Fund- Class I
[ ] Mutual Qualified Fund- Class II
[ ] Mutual Beacon Fund- Class I
[ ] Mutual Beacon Fund- Class II
[ ] Mutual European Fund- Class I
[ ] Mutual European Fund- Class II
[ ] Mutual Discovery Fund- Class I
[ ] Mutual Discovery Fund- Class II
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
Financial reports of the Fund will be sent every six months. To reduce
Fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if you
would like an additional free copy of the Fund's financial reports or an
interim quarterly report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and FT Services are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
BOARD - The Board of Directors of the Fund
CD - Certificate of deposit
CLASS I, CLASS II AND CLASS Z - The Fund offers three classes of shares,
designated "Class I," "Class II" and "Class Z" The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge structures and Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
EXCHANGE - New York Stock Exchange
FT SERVICES - Franklin Templeton Services, Inc., administrator of the Fund
FRANKLIN FUNDS - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the
Franklin Government Securities Trust
FRANKLIN MUTUAL - Franklin Mutual Advisers, Inc., the Fund's investment manager
FRANKLIN TEMPLETON FUNDS - The Fund and the Franklin Funds and the Templeton
Funds
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
HEINE - Heine Securities Corporation, the Fund's former investment adviser that
was acquired by Resources effective October 31, 1996
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMER(S) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
QUALIFIED RETIREMENT PLAN(S) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TEMPLETON FUNDS - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources.
[MUTUAL SERIES LOGO]
MAIL THIS COMPLETED APPLICATION
TO THE FUND'S TRANSFER AGENT:
MUTUAL SERIES FUND INC.
C/O PFPC INC.
P.O. BOX 8901
WILMINGTON, DE 19899-8901
IF USING AN OVERNIGHT EXPRESS DELIVERY SERVICE
SEND TO:
MUTUAL SERIES FUND INC.
C/O PFPC INC.
400 BELLEVUE PARKWAY
WILMINGTON, DE 19809-3710
MUTUAL
SERIES
FUND
INC.
- -
CLASS Z
SHARES
PROSPECTUS
AND
APPLICATION
PROSPECTUS
DATED NOVEMBER 1, 1996
IF YOU HAVE ANY QUESTIONS AFTER READING
THIS PROSPECTUS, PLEASE CALL THE FUND
1-800-448-FUND
TRANSFER AGENT AND FUND ADDRESSES
PLEASE MAIL NEW ACCOUNT APPLICATIONS, REDEMPTION REQUESTS AND ALL OTHER
CORRESPONDENCE TO:
Mutual Series Fund
c/o PFPC Inc.
P.O. Box 8901
Wilmington, DE 19899-8901
PLEASE MAIL ADDITIONAL INVESTMENTS FOR EXISTING ACCOUNTS TO:
Mutual Series Fund
c/o PFPC Inc.
P.O. Box 8906
Wilmington, DE 19899-8906
ALL MAIL SENT BY ANY OVERNIGHT CARRIER OR PRIORITY MAIL SHOULD BE ADDRESSED
TO:
Mutual Series Fund c/o PFPC Inc.
400 Bellevue Parkway - Suite 108
Wilmington, DE 19809-3710
ANY CORRESPONDENCE DIRECTED TO THE FUND'S OFFICE RATHER THAN ITS TRANSFER
AGENT SHOULD BE SENT TO:
Mutual Series Fund
51 John F. Kennedy Parkway
Short Hills, NJ 07078
IMPORTANT PHONE NUMBERS
1-800-858-3013
MUTUAL SERIES FUND AUTOMATED TELEPHONE INQUIRY SYSTEM
CALL THIS NUMBER 24 HOURS A DAY. 7 DAYS A WEEK.
It's the fastest way to receive net asset value, account balance and
distribution information, order duplicate statements, and confirm your last
purchase or redemption transaction.
1-800-448-FUND
MUTUAL SERIES SHAREHOLDER SERVICES DEPARTMENT
CALL THIS NUMBER MONDAY-FRIDAY FROM 8:30 A.M. TO 11:00 P.M. EST AND ON
SATURDAY FROM 9:30 A.M. TO 5:30 P.M. EST
A shareholder service representative will be happy to answer your questions
or perform purchase transactions for existing shareholders.
1-800-553-3014
MUTUAL SERIES FUND PROSPECTUS/DOCUMENT REQUESTS
CALL THIS NUMBER 24 HOURS A DAY, 7 DAYS A WEEK
A representative will be happy to send you prospectus, applications, annual
reports or retirement account documents.
WIRE INSTRUCTIONS
TO WIRE AN INVESTMENT TO AN EXISTING ACCOUNT, WIRE FUNDS TO:
PNC Bank, PHL/ABA #031-00005-3, Attention: Mutual Series Fund
Purchase Account DDA 8551030376
[Series Name], [Shareholder Account Number], [Order/Confirm Number]
PROSPECTUS
DATED NOVEMBER 1, 1996
MUTUAL SERIES FUND INC.
51 JOHN F. KENNEDY PARKWAY
SHORT HILLS, NJ 07078
Mutual Series Fund Inc. (the "Fund") is an open-end management
investment company organized as a series fund with five diversified series
currently available. As of November 1, 1996, each series offers three classes
of shares to their investors. This prospectus describes only the no-load
Class Z shares. All shares purchased before November 1, 1996 are considered
Class Z shares.
Class Z shares are closed to new investors, except existing shareholders of
any series and their immediate family members residing at the same address,
officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members in
accordance with the Fund's current policies, the 401(k) Plan offered to
Franklin Templeton employees, and omnibus accounts in accordance with the
Fund's current policy may purchase Class Z shares of any series.
Each of Mutual Shares Fund ("Mutual Shares") originally organized in 1949,
Mutual Qualified Fund ("Qualified") and Mutual Beacon Fund ("Beacon") and
Mutual European Fund ("European"), has capital appreciation, which
occasionally may be short term, as its principal investment objective and
income as its secondary objective. Mutual Discovery Fund ("Discovery") has
long-term capital appreciation as its objective which it will seek to achieve
by including investments in small capitalization companies. European
anticipates having at least 65% of its invested assets invested in European
investments.
Each series may invest in the securities of companies involved in prospective
mergers, consolidations, liquidations and reorganizations, or as to which
there exist tender or exchange offers. The series may also invest in other
debt and equity securities including junk bonds. Each series may invest up to
15% of its net assets in illiquid securities; this could result in more risk
as well as higher transaction costs than investing in more liquid assets.
This Prospectus sets forth concisely the information that a prospective
investor should know before investing in the Class Z shares of any series of
the Fund. Please retain this Prospectus for future reference. Statements of
Additional Information, dated November 1, 1996, containing additional and
more detailed information about the Fund and its series has been filed with
the Securities and Exchange Commission and is incorporated herein by
reference. The Statements of Additional Information and the most recent
Annual Report of each series which contains additional performance
information can be obtained without charge by calling the Fund at
1-800-553-3014, or writing to the Fund at its above address, Attention:
Shareholder Services.
If you have any questions after reading the prospectus please call the
Fund at 1-800-448-FUND.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
--------------------------
INVESTMENT ADVISER
FRANKLIN MUTUAL ADVISERS, INC.
ANNUAL EXPENSE TABLES
Annual Mutual Shares Fund - Class Z Operating Expenses
(as a percentage of average net assets)
Management Fees .......................... .60%
Other Expenses ........................... .09%
----
Total Fund Operating Expenses .69%
Example* 1 year 3 years 5 years 10 years
$7 $23 $39 $88
-----------------------------------------
Annual Mutual Qualified Fund - Class Z Operating Expenses
(as a percentage of average net assets)
Management Fees .......................... .60%
Other Expenses ........................... .12%
----
Total Fund Operating Expenses .72%
Example* 1 year 3 years 5 years 10 years
$8 $24 $41 $92
-----------------------------------
Annual Mutual Beacon Fund - Class Z Operating Expenses
(as a percentage of average net assets)
Management Fees .......................... .60%
Other Expenses ........................... .12%
----
Total Fund Operating Expenses .72%
Example* 1 year 3 years 5 years 10 years
$8 $24 $41 $92
-----------------------------------
Annual Mutual Discovery Fund - Class Z Operating Expenses
(as a percentage of average net assets)
Management Fees .......................... .80%
Other Expenses ........................... .19%
----
Total Fund Operating Expenses .99%
Example* 1 year 3 years 5 years 10 years
$10 $32 $56 $125
---------------------------------------
Annual Mutual European Fund - Class Z Operating Expenses
(estimated as a percentage of average net assets)
Management Fees .......................... .80%
Other Expenses ........................... .20%
----
Total Fund Operating Expenses 1.00%
Example* 1 year 3 years 5 years 10 years
$11 $33 $57 $126
------------------------------
* You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return before expenses and (2) redemption at the end of each
time period .
The purpose of the preceding table is to assist an investor in
understanding the various direct and indirect costs and expenses that are
borne by an investor in each of the Fund's series. The table should not be
considered a representation of past or future expenses or return. Actual
expenses and return of each of the Fund's series vary from year to year and
may be higher or lower than those shown. There are presently no sales
charges, no deferred sales charges, no redemption fees and no contingent
charges which an investor is required to pay in connection with Class Z
shares. The Fund does not contemplate that any such charges will be imposed
in the future on Class Z shares, but the Fund, in its discretion, is
permitted to assess such charges. The only fees and expenses presently
incurred are the advisory fees paid to Franklin Mutual Advisers, Inc.
("Franklin Mutual" or the "Adviser") pursuant to an investment advisory
agreement with each series and the expenses of [operating the Fund and the
series, most of which are borne by the series pro rata according to each
series' total assets, pursuant to an administration agreement with Franklin
Templeton Services, Inc. ("FT Services") ]. The Trustee of Fund sponsored
retirement accounts currently waives but retains the right to charge a $9 per
account annual maintenance fee for all or any portion of the year that each
retirement account is open.
On June 25, 1996, Heine Securities Corporation ("Heine") entered into an
agreement to merge the business of Heine and Franklin Resources, Inc.
("Resources") through a sale of Heine assets to Franklin Mutual, a newly
organized subsidiary of Resources (the "Transaction"). In connection with the
Transaction, Resources and Franklin Mutual have agreed to two expense
limitations for the Class Z shares of each Series and have made commitments
to the Board in this regard. First, they have agreed that for a three (3)
year period commencing on the date of the closing of the Transaction,
Franklin Mutual will not seek an increase in the rates of the investment
advisory fees payable to Franklin Mutual by each Series. Second, the parties
have agreed that the ordinary expenses of each Series' Class Z shares (based
on a percentage of net assets) will not be higher than they are expected to
be for the Fund's 1996 fiscal year based on the projected annualized expense
ratios for each Series' Class Z shares. Increases in expenses beyond the
projected 1996 expense ratios will be permitted, however, if the Fund's Board
determines that such expenses also would have been higher (based upon such
considerations as they amount and composition of assets under management, the
number of security transactions, the number of shareholder accounts and
general economic conditions) had the Transaction not taken place. The second
expense limitation described above does not include items such as litigation
expenses, interest, taxes, insurance, brokerage commissions and expenses of
an extraordinary nature.
PERFORMANCE INFORMATION
From time to time the Fund may include in its communications to current
or prospective shareholders figures reflecting total return over various time
periods. "Total return" is the rate of return on an amount invested in one of
the series of the Fund from the beginning until the end of the stated period.
"Average annual total return" is the annual compounded percentage change in
the value of an amount invested in one of the series of the Fund from the
beginning until the end of the stated period. Both rates of return assume the
reinvestment of all dividends and distributions. The Class Z shares of the
Fund do not have a sales load or other charges paid by all shareholders that
affect its calculation of total or average annual total return.
The Fund's Class Z average annual total return for the 1, 5 and 10 year
periods ended June 30, 1996, respectively, are as follows:
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
Mutual Shares .................. 21.95% 17.36% 14.16%
Qualified ...................... 21.51% 18.43% 14.59%
Beacon ......................... 22.52% 17.42% 15.20%
Discovery ...................... 25.55 20.20%* N/A
European** ..................... N/A N/A N/A
* Mutual Discovery Fund commenced operations on December 31, 1992. The
average annual return for the three year period ended June 30, 1996 was
20.20%.
** Mutual European Fund commenced operations on July 3, 1996.
THE FUND'S TOTAL RETURN IS A HISTORICAL MEASURE OF PAST PERFORMANCE AND
IS NOT INTENDED TO INDICATE FUTURE PERFORMANCE. BECAUSE INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, THE FUND'S SHARES MAY BECOME
WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
<TABLE>
<CAPTION>
Mutual Shares Fund: Class Z Shares
(Unaudited)
For the six
months ended
June 30, Year Ended December 31,
---------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Year $86.45 $78.69 $80.97 $73.36 $64.49 $56.39 $67.16 $67.77 $57.83 $60.43 $57.57
INCOME FROM INVESTMENT
OPERATIONS:
Net Investment Income 1.49 1.99 1.34 1.41 1.55 2.04 3.32 4.03 2.64 2.23 2.43
Net Gains or Losses
on Securities
(realized and Unrealized) 5.64 20.51 2.28 13.89 12.07 9.69 (9.86) 6.00 14.98 1.78 7.29
---------------------------------------------------------------------------------------------------------
Total from Investment
Operations 7.13 22.50 3.62 15.30 13.62 11.73 (6.54) 10.03 17.62 4.01 9.72
---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends (from net
investment income) .10 1.93 1.34 1.38 1.59 2.00 3.34 4.09 2.63 2.52 2.34
Distributions (from
capital gains) 2.90 12.81 4.56 6.31 3.16 1.63 .89 6.55 5.05 4.09 4.52
---------------------------------------------------------------------------------------------------------
Total Distributions 3.00 14.74 5.90 7.69 4.75 3.63 4.23 10.64 7.68 6.61 6.86
NET ASSET VALUE,
End of Year $90.58 $86.45 $78.69 $80.97 $73.36 $64.49 $56.39 $67.16 $67.77 $57.83 $60.43
=========================================================================================================
TOTAL RETURN** 8.20% 29.11% 4.53% 21.00% 21.33% 20.99% (9.82)% 14.93 30.69% 6.34% 16.99%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Year
(millions) $5,922 $5,230 $3,746 $3,527 $2,913 $2,640 $2,521 $3,403 $2,551 $1,685 $1,403
Ratio of Expenses to
Average Net Assets .67%* .69% .72% .74% .78% .82% .85% .65%+ .67%+ .69% .70%
Ratio of Net Investment
Income to Average
Net Assets 4.23%* 2.47% 1.80% 1.90% 2.18% 3.08% 4.88% 5.57%+ 4.16%+ 3.32% 4.07%
Portfolio Turnover Rate 22.96% 79.32% 66.55% 48.78% 41.06% 47.89% 43.41% 71.54% 89.67% 77.72% 122.30%
Average Commission Per
Share*** .040 --- --- --- --- --- --- --- --- --- ---
</TABLE>
*Annualized.
**Total Return includes changes in share price and reinvestment of dividends and
capital gain distributions. The Fund's total return is a historical measure of
past performance and is not intended to indicate future performance. Investment
return and principal value will fluctuate; therefore the Fund's shares may
become worth more or less than their original cost.
***Average commission rate is calculated for the periods beginning on or after
January 1, 1996.
+ After reduction of expenses by Heine. Had Heine not undertaken such action,
the ratios of operating expenses and net investment income would have been .67%
and 5.55% in 1989 and .74% and 4.09% in 1988.
<TABLE>
<CAPTION>
Mutual Qualified Fund: Class Z Shares
(Unaudited)
For the six
months ended
June 30, Year Ended December 31,
---------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Year $29.74 $26.67 $27.00 $24.43 $21.18 $18.37 $22.21 $22.71 $19.37 $20.06 $19
---------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net Investment Income .47 .66 .43 .38 .49 .67 1.22 1.34 .84 .77 .90
Net Gains or Losses on
Securities (Realized and
Unrealized) 2.28 6.33 1.10 5.12 4.27 3.18 (3.45) 1.91 4.95 .86 2.42
---------------------------------------------------------------------------------------------------------
Total from Investment
Operations 2.75 6.99 1.53 5.50 4.76 3.85 (2.23) 3.25 5.79 1.63 3.32
---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends (from net
investment income) .05 .65 .43 .37 .49 .67 1.23 1.36 .83 .88 .85
Distributions (from
capital gains) .95 3.27 1.43 2.56 1.02 .37 .38 2.39 1.62 1.44 1.56
---------------------------------------------------------------------------------------------------------
Total Distributions 1.00 3.92 1.86 2.93 1.51 1.04 1.61 3.75 2.45 2.32 2.41
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
End of Year 31.49 $29.74 $26.67 $27.00 $24.43 $21.18 $18.37 $22.21 $22.71 $19.37 $20.06
=========================================================================================================
TOTAL RETURN** 9.21% 26.60% 5.73% 22.71% 22.70% 21.13% (10.12)% 14.44 30.15% 7.72% 17.51%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Year
(millions) $3,787 $3,002 $1,792 $1,511 $1,251 $1,110 $1,075 $1,470 $1,094 $686 $561
Ratio of Expenses to
Average Net Assets .72%* .72% .73% .78% .82% .87% .89% .70%+ .62%+ .71% .68%
Ratio of Net Investment
Income to Average
Net Assets 4.06%* 2.71% 1.91% 1.65% 2.10% 3.09% 5.40% 5.61%+ 3.96%+ 3.43% 4.55%
Portfolio Turnover Rate 25.84% 75.59% 67.65% 56.22% 47.39% 51.99% 46.12% 73.41% 85.05% 73.50% 123.50%
Average Commission
Per Share*** .043 --- --- --- --- --- --- --- --- --- ---
</TABLE>
*Annualized.
**Total return includes changes in share price and reinvestment of dividends and
capital gain distributions. The Fund's total return is a historical measure of
past performance and is not intended to indicate future performance. Investment
return and principal value will fluctuate; therefore the Fund's shares may
become worth more or less than their original cost.
***Average commission rate is calculated for the periods beginning on or after
January 1, 1996.
+ After reduction of expenses by Heine. Had Heine not undertaken such action,
the ratios of operating expenses and net investment income would have been .71%
and 5.60% in 1989 and .69% and 3.89% in 1988.
<TABLE>
<CAPTION>
Mutual Beacon Fund: Class Z Shares
(Unaudited)
For the six
months ended Sept. 1,
June 30, Year Ended December 31, 1987 to
-----------------------------------------------------------------------------Dec. 31,--------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1987 1986
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Period $35.94 $31.03 $31.09 $27.10 $23.36 $20.80 $24.09 $22.85 $19.49 $24.78 $19.27 $15.73
---------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net Investment Income .70 .87 .46 .37 .45 .75 1.08 1.12 .77 .22 .37 .28
Net Gains or Losses
on Securities (Realized
and Unrealized) 3.02 7.09 1.28 5.81 4.85 2.88 (3.03) 2.84 4.80 (3.96) 6.39 3.51
---------------------------------------------------------------------------------------------------------
Total from Investment
Operations 3.72 7.96 1.74 6.18 5.30 3.63 (1.95) 3.96 5.57 (3.74) 6.76 3.79
---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends (from net
investment income) .05 .84 .44 .37 .46 .74 1.08 1.17 .80 .51 .31 .25
Distributions (from
capital gains) 1.15 2.21 1.36 1.82 1.10 .33 .26 1.55 1.41 1.04 .94 -0-
---------------------------------------------------------------------------------------------------------
Total Distributions 1.20 3.05 1.80 2.19 1.56 1.07 1.34 2.72 2.21 1.55 1.25 .25
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
End of Period $33.46 $35.94 $31.03 $31.09 $27.10 $23.36 $20.80 $24.09 $22.85 $19.49 $24.78 $19.27
=========================================================================================================
TOTAL RETURN** 10.31% 25.89% 5.61% 22.93% 22.92% 17.60% (8.17)% 17.46% 28.79% (15.12)% 37.33% 24.34%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period
(millions) $4,400 $3,573 $2,060 $1,062 $534 $398 $388 $409 $214 $131 $159 $65
Ratio of Expenses to
Average Net Assets .71%* .72% .75% .73% .81% .85% .85% .67%+ .59%+ .87%++ .85% 1.16%
Ratio of Net Investment
Income to Average
Assets Net 4.79%* 2.89% 1.96% 1.53% 1.90% 3.07% 4.59% 4.98%+ 3.64%+ 2.86%++ 2.50% 2.86%
Portfolio Turnover Rate 27.14% 73.18% 70.63% 52.88% 57.52% 56.63% 57.74% 67.18% 86.79% 28.07% 73.41% 112.91%
Average Commission
Per Share*** .038% --- --- --- --- --- --- --- --- --- --- ---
</TABLE>
*Annualized.
**Total return includes changes in share price and reinvestment of dividends and
capital gain distributions. The Fund's total return is a historical measure of
past performance and is not intended to indicate future performance. Investment
return and principal value will fluctuate; therefore the Fund's shares may
become worth more or less than their original cost.
***Average commission rate is calculated for the periods beginning on or after
January 1, 1996.
+After reduction of expenses by Heine. Had Heine not undertaken such action, the
ratios of operating expenses and net investment income would have been .68% and
4.97% in 1989 and .66% and 3.57% in 1988.
<TABLE>
<CAPTION>
Mutual Discovery Fund: Class Z Shares
(Unaudited),
For the six
months ended
June 30, Year Ended December 31,
1996 1995 1994 1993
------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $15.16 $12.55 $13.05 $10.00
------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .13 .17 .15 .10
Net Gain on Securities (Realized
and Unrealized) 1.82 3.40 .32 3.48
------------------------------------------------------
Total from Investment Operations 1.95 3.57 .47 3.58
------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends (from net investment income) .02 .14 .16 .09
Distributions (from capital gains) .33 .82 .81 .44
------------------------------------------------------
Total Distributions .35 .96 .97 .53
------------------------------------------------------
NET ASSET VALUE, END OF YEAR $16.76 $15.16 $12.55 $13.05
======================================================
Total Return* 12.85% 28.63% 3.62% 35.85%
======================================================
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Year (millions) $2,263 $1,370 $725 $548
Ratio of Expenses to Average Net .91%* .99% .99% 1.07%
Assets
Ratio of Net Investment Income to
Average Net Assets 3.59%* 2.00% 1.64% 1.17%
Portfolio Turnover Rate 38.27% 73.23% 72.70% 90.37%
Average Commission Per Share*** .023 --- --- ---
</TABLE>
*Annualized.
**Total return includes changes in share price and reinvestment of dividends
and capital gain distributions. The Fund's total return is a historical
measure of past performance and is not intended to indicate future
performance. Investment return and principal value will fluctuate; therefore
the Fund's shares may become worth more or less than their original cost.
***Average commission rate is calculated for the periods beginning on or
after January 1, 1996.
+After reduction of expenses by Heine. Had Heine not undertaken such action,
the ratios of operating expenses and net investment income would have been
.68% and 4.97% in 1989 and .66% and 3.57% in 1988.
CONDENSED FINANCIAL INFORMATION
MUTUAL DISCOVERY FUND - CLASS Z
FINANCIAL HIGHLIGHTS
(Selected data for a share of capital stock outstanding throughout each year)
(Unaudited),
For the
six
months Year Ended
ended December
June 30, 31,
1996 1995 1994 1993
- -------------------------
------------------------------
NET ASSET VALUE, $15.16 $12.55 $13.05 $10.00
BEGINNING OF YEAR
------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net Investment Income
.13 .17 .15 .10
Net Gain on Securities
(realized and 1.82 3.40 .32 3.48
Unrealized)
------------------------------
Total from Investment
Operations 1.95 3.57 .47 3.58
------------------------------
LESS DISTRIBUTIONS:
Dividends (from net
investment income) .02 .14 .16 .09
Distributions (from
capital gains) .33 .82 .81 .44
------------------------------
Total Distributions
.35 .96 .97 .53
------------------------------
NET ASSET VALUE, END OF $16.76 $15.16 $12.55 $13.05
YEAR
==============================
Total Return** 12.85%
28.63% 3.62% 35.85%
==============================
RATIOS/SUPPLEMENTAL
DATA:
Net Assets, End of Year $2,263 $1,370 $725 $548
(millions)
Ratio of Expenses to
Average Net Assets .91%* .99% .99% 1.07%
Ratio of Net Investment
Income to
Average Net Assets
3.59%* 2.00% 1.64% 1.17%
Portfolio Turnover Rate 38.27%
73.23% 72.70% 90.37%
Average Commission Per
Share*** .023% --- --- ---
*Annualized.
**Total Return includes changes in share price and reinvestment of dividends
and capital gain distributions. The Fund's total return is a historical
measure of past performance and is not intended to indicate future
performance. Investment return and principal value will fluctuate; therefore
the Fund's shares may become worth more or less than their original cost .
***Average commission rate is calculated for the periods beginning on or after
January 1, 1996.
The preceding tables set forth information regarding financial
highlights for the Class Z shares of each series of the Fund. Prior to
February 19, 1988 Mutual Shares, Qualified and Beacon were separate entities;
as series of the Fund they continue their separate economic identities.
Beacon's fiscal year end was changed from August 31 to December 31 in
connection with the merger into the Fund.
The tables on the preceding pages should be read in conjunction with
each of the Fund's financial statements and related notes included in their
Annual Reports (incorporated by reference into the Statement of Additional
Information) which have been audited by Ernst & Young LLP, the Fund's
independent auditors, since January 1, 1987 for Mutual Shares and Mutual
Qualified, since September 1, 1987 for Mutual Beacon and for Mutual Discovery
since its inception. Further information regarding performance is contained
in the Fund's Annual Reports to Shareholders, which are available upon
request and without charge by calling 1-800-553-3014.
THE FUND
Mutual Series Fund Inc. (the "Fund") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") organized as a series fund with five separate, diversified series
currently outstanding, each of which is designed to provide investors with
participation in diversified investments under the supervision of experienced
investment counsel. This type of investment company is commonly called a
mutual fund. The Fund was organized as a Maryland corporation on November 12,
1987. Mutual Shares Corporation, Mutual Qualified Income Fund Inc. and Mutual
Beacon Fund, Inc. (the "predecessor funds" or "Funds") were merged into the
Fund on February 19, 1988 and became Mutual Shares, Qualified and Beacon,
respectively. Discovery was added on December 31, 1992. European commenced
operations on July 3, 1996. The Fund may add additional series or classes
from time to time. Each of the series should be perceived as being only a
portion of a balanced investment strategy.
INVESTMENT OBJECTIVES AND POLICIES AND RISKS
Mutual Shares, Qualified, Beacon and European each has as its principal
objective capital appreciation, which may occasionally be short term. A
secondary objective is income. These objectives are fundamental. Discovery
has long-term capital appreciation as its objective, which it will seek to
achieve by including investments in small capitalization companies. European
will normally invest at least 65% of its invested assets in the securities of
issuers organized under the laws of, or whose principal business operations
or at least 50% of whose revenue is earned from, European countries. European
countries are given a broad definition which includes all of the countries
that are members of the European Union, United Kingdom, Scandinavia, Eastern
and Western Europe and those regions of Russia and the former Soviet Union
that are considered part of Europe. European may also invest up to 35% of its
invested assets in U.S. securities as well as in securities of issuers from
the Levant, Middle East and the rest of the world. European is currently
expected to invest primarily in Western Europe and Scandinavia but may also
include other countries' investments. European will normally invest in at
least 5 countries although it may invest all of its assets in a single
country. However, European may include securities of issuers from outside of
Europe and the U.S. For short term purposes, European anticipates that it
generally will buy short term securities denominated in U.S. dollars.
European will normally attempt to maintain at least 50% of the value of its
assets invested in stocks or securities of foreign corporations at the close
of each taxable year. Each series pursues these objectives primarily through
investments in common stock and preferred stock as well as debt securities
and securities convertible into common stock (including convertible preferred
and convertible debt securities). You should bear in mind that since every
investment carries risk, the value of the assets of each series of the Fund
fluctuates with changes in the market value of its investments. Therefore,
there is no assurance that the Fund's objectives will be achieved. Except for
the Fund's primary and secondary investment objectives, these objectives are
not fundamental and the Board of Directors of the Fund reserves the right to
change them without shareholder approval, which may result in the Fund having
an investment objective different from that which an investor deemed
appropriate at the time of investment.
The general investment policy of each existing series is to invest in
common stock, preferred stock and corporate debt securities, which may be
convertible into common stock and the other investments described below
which, in the opinion of the series' investment adviser, Franklin Mutual, are
available at prices less than their intrinsic value. (See "Non-U.S.
Securities," "Repurchase Agreements and Loans of Securities" and "Hedging.")
Franklin Mutual also has no pre-set limits as to the percentage of each
series' portfolio which may be invested in equity securities, debt securities
(including "junk bonds" as described below), or cash equivalents. Franklin
Mutual's opinions are based upon analysis and research, taking into account,
among other factors, the relationship of book value to market value of the
securities, cash flow, and multiples of earnings of comparable securities.
These factors are not applied formulaically, as Franklin Mutual examines each
security separately; Franklin Mutual has no general criteria as to asset
size, earnings or industry type which would make a security unsuitable for
purchase by a series. Although the Fund may invest in securities from any
size issuer, Mutual Shares, Qualified and Beacon will tend to invest in
securities of issuers with market capitalizations in excess of $500 million
due to the larger size of these series. Each series may invest in securities
that are traded on U.S. or foreign exchanges, NASDAQ national market or in
the over-the-counter market. The series may invest in any industry sector
although no series will be concentrated in any one industry. Debt securities
in which the Fund invests (such as corporate and U.S. government bonds,
debentures and notes) may or may not be rated by rating agencies such as
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation
("S&P"), and, if rated, such rating may range from the very highest to the
very lowest, currently C for Moody's and D for S&P. Medium and lower-rated
debt securities in which each series expects to invest are commonly known as
"junk bonds." The series may be subject to investment risks as to these
unrated or lower rated securities that are greater in some respects than the
investment risks incurred by a fund which invests only in securities rated in
higher categories. In addition, the secondary market for such securities may
be less liquid and market quotations less readily available than higher rated
securities, thereby increasing the degree to which judgment plays a role in
valuing such securities. The general policy of each series is to invest in
debt instruments, including junk bonds, for the same reasons underlying
investments in equities, i.e., whenever such instruments are available, in
the Franklin Mutual's opinion, at prices less than their intrinsic value.
Consequently, Franklin Mutual's own analysis of a debt instrument exercises a
greater influence over the investment decision than the stated coupon rate or
credit rating. The series have historically invested in debt instruments
issued by reorganizing or restructuring companies, or companies which
recently emerged from, or are facing the prospect of a financial
restructuring. It is under these circumstances, which usually involve unrated
or low rated securities that are often in, or about to default, that Franklin
Mutual identifies securities which are sometimes available at prices which it
believes are less than their intrinsic value. Although such debt securities
may pose a greater risk than higher rated debt securities of loss of
principal, the debt securities of reorganizing or restructuring companies
typically rank senior to the equity securities of such companies. See "
Investment Objectives and Policies - Medium and Lower Rated Corporate Debt
Securities" in the Statement of Additional Information.
Each series also seeks to invest in the securities of domestic and
foreign companies involved in mergers, consolidations, liquidations and
reorganizations or as to which there exist tender or exchange offers, and may
participate in such transactions. Although there are no restrictions limiting
the extent to which each series may invest in such transactions, no series
presently anticipates investing more than 50% of its portfolio in such
investments. There can be no assurance that any merger, consolidation,
liquidation, reorganization or tender or exchange offer proposed at the time
a series makes its investment will be consummated or will be consummated on
the terms and within the time period contemplated. The series from time to
time may also purchase indebtedness and participations therein, both secured
and unsecured, of debtor companies in reorganization or financial
restructuring ("Indebtedness"). Such Indebtedness may be in the form of
loans, notes, bonds or debentures. Participations normally are made available
only on a nonrecourse basis by financial institutions, such as banks or
insurance companies, or by governmental institutions, such as the Resolution
Trust Corporation or the Federal Deposit Insurance Corporation or the Pension
Benefit Guaranty Corporation or may include supranational organizations such
as World Bank. When a series purchases a participation interest it assumes
the credit risk associated with the bank or other financial intermediary as
well as the credit risk associated with the issuer of any underlying debt
instrument. The series may also purchase trade and other claims against, and
other unsecured obligations of, such debtor companies, which generally
represent money due a supplier of goods or services to such company. Some
corporate debt securities, including Indebtedness, purchased by the Fund may
have very long maturities. The length of time remaining until maturity is one
factor Franklin Mutual considers in purchasing a particular Indebtedness. The
purchase of Indebtedness of a troubled company always involves a risk as to
the creditworthiness of the issuer and the possibility that the investment
may be lost. Franklin Mutual believes that the difference between perceived
risk and actual risk creates the opportunity for profit which can be realized
through proper analysis. There are no established markets for some of this
Indebtedness and thus it is less liquid than more heavily traded securities.
Indebtedness which represents indebtedness of the debtor company to a bank
are not securities of the banks issuing or selling them. The series purchase
loans from national and state chartered banks as well as foreign ones. The
series normally invest in senior indebtedness of the debtor companies,
although on occasion subordinated indebtedness may also be acquired. Each
series does not invest more than 15% of its portfolio in assets which are
illiquid, including Indebtedness which are not readily marketable. The series
may invest in securities considered illiquid such as those described above as
well as restricted securities not registered under the Securities Act of
1933, OTC options and securities that are otherwise considered illiquid as a
result of market or other factors. The series may invest in securities
eligible for resale under Rule 144A of the Securities Act ("144A
securities"). The Board of Directors of the Fund has adopted procedures in
accordance with Rule 144A whereby specific 144A securities held in the Fund
may be deemed to be liquid. Nevertheless, due to changing market or other
factors 144A securities may be subject to a greater possibility of becoming
illiquid than registered securities. Fund purchases of 144A securities may
increase the level of illiquidy and institutional buyers may become
disinterested in purchasing such securities. The series may also invest in
cash equivalents such as Treasury bills and high quality commercial paper.
The series generally purchases securities for investment purposes and not for
the purpose of influencing or controlling management of the issuer. However,
in certain circumstances when the Adviser perceives that one or more of the
series may benefit, the Fund may itself seek to influence or control
management or may invest in other entities that purchase securities for the
purpose of influencing or controlling management, such as investing in a
potential takeover or leveraged buyout or investing in other entities engaged
in such activities. The series may also invest in distressed mortgage
obligations and other debt secured by real property and may sell short
securities it does not own up to 5% of its assets. Short sales have risks of
loss if the price of the security sold short increases after the sale, but
the series can profit if the price decreases. The series may also sell
securities "short against the box" without limit. See "Investment Objectives
and Policies - Short Sales" in the Statement of Additional Information for
further discussion of these practices.
Discovery expects to invest to a greater degree than the other series
in smaller capitalized companies which may involve greater risks than
investing in securities of larger companies. The smaller companies in which
Discovery invests are often not well known, may often trade at a discount and
may not be followed by institutions.
Each series may invest in common stock, preferred stock and corporate
debt securities in such proportions as the Adviser deems advisable. The
Adviser typically keeps a portion of the assets of each series invested in
short-term debt securities and preferred stocks although it may choose not do
so when circumstances dictate. In addition, the series may invest from time
to time in other investment company securities, subject to applicable law,
which restricts such investments. Investors should recognize that a series'
purchase of the securities of such investment companies results in layering
of expenses such that investors indirectly bear a proportionate share of the
expenses of such investment companies, including operating costs, and
investment advisory and administrative fees.
NON-U.S. SECURITIES
The series may purchase securities of non-U.S. issuers and Discovery
expects that up to approximately 50% of its assets may be so invested.
European will normally invest at least 65% of its invested assets in European
countries (as defined above). The series may purchase securities denominated
in any currency and generally expect currency risks will be hedged to the
extent that hedging is available. Investments in securities of non-U.S.
issuers involve certain risks not ordinarily associated with investments in
securities of domestic issuers. Such risks include fluctuations in foreign
exchange rates, volatile political and economic developments, and the
possible imposition of exchange controls or other foreign governmental laws
or restrictions. Since each series may invest in securities denominated or
quoted in currencies other than the U.S. dollar, changes in foreign currency
exchange rates will affect the value of securities in the portfolio and the
unrealized appreciation or depreciation of investments although the Adviser
generally attempts to reduce such risks through hedging transactions. In
addition, with respect to certain countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social
instability or diplomatic developments which could adversely affect
investments in those countries.
There may be less publicly available information about a foreign
company than about a U.S. company. Foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S. companies. Non-U.S. securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.
companies. Transaction costs on non-U.S. securities markets are generally
higher than in the U.S. There is generally less government supervision and
regulation of exchanges, brokers and issuers than there is in the U.S. Each
series foreign investments may include both voting and non voting securities,
sovereign debt and participations in foreign government deals. The Fund might
have greater difficulty taking appropriate legal action with respect to
foreign investments in non-U.S. courts than with respect to domestic issuers
in U.S. courts.
Each series of the Fund may invest in securities commonly known as
Depository Receipts of non-U.S. issuers which have certain risks, including
trading for a lower price, having less liquidity than their underlying
securities and risks relating to the issuing bank or trust company.
Depository Receipts can be sponsored by the issuing bank or trust company or
unsponsored. Holders of unsponsored Depository Receipts have a greater risk
that receipt of corporate information and proxy disclosure will be untimely,
information may be incomplete and costs may be higher.
Dividend and interest income from non-U.S. securities will generally be
subject to withholding taxes by the country in which the issuer is located,
which may not be recoverable, either directly or indirectly, as a foreign tax
credit or deduction by the Fund or its shareholders. See "Taxes" in the
Statement of Additional Information.
REPURCHASE AGREEMENTS AND LOANS OF SECURITIES
Each series may invest up to 10% of its assets in repurchase
agreements. Each series may also loan its portfolio securities in order to
realize additional income. Repurchase and tri-party agreements are generally
agreements under which the series obtains money market instruments subject to
resale to the seller at an agreed upon price and date. Any loans of portfolio
securities which the series may make must be fully collateralized at all
times by securities with a value at least equal to 100% of the current market
value of the loaned securities. The series presently do not anticipate
loaning more than 5% of their respective portfolio securities. There are
certain risks associated with such transactions which are described under
"Investment Objectives and Policies" in the Statement of Additional
Information.
HEDGING AND INCOME TRANSACTIONS
The series may utilize various investment strategies as described below
to hedge various market risks (such as interest rates, currency exchange
rates, and broad or specific equity market movements), to manage the
effective maturity or duration of fixed-income securities or for gain. Such
strategies are generally accepted by modern portfolio managers and are
regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur and the Fund will
describe any such techniques in its registration statement before using them.
In the course of pursuing these investment strategies, the series may
purchase and sell exchange-listed and over-the-counter put and call options
on securities, equity and fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options
thereon, and enter into various currency transactions such as currency
forward contracts, currency futures contracts, currency swaps or options on
currencies or currency futures (collectively, all of the above are called
"Hedging Transactions"). Hedging Transactions may be used to attempt to
protect against possible changes in the market value of securities held in or
to be purchased for a series' portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect the series' unrealized gains
in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Any or all of these investment techniques may be used
at any time and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Hedging Transaction is a
function of numerous variables including market conditions. The ability of a
series to utilize these Hedging Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Each series
generally hedges the foreign currency risk associated with its investments in
foreign securities. European expects to hedge for gain on market risks
including broad movements in markets in addition to the specific currency
risk of its portfolio securities. No more than 5% of the series' assets will
be at risk in such types of instruments entered into for non-hedging
purposes. Hedging Transactions involving financial futures and options
thereon will be purchased, sold or entered into generally for bona fide
hedging, risk management or portfolio management purposes .
Hedging Transactions, whether entered into as a hedge or for gain, have
risks associated with them including possible default by the other party to
the transaction, illiquidity and, to the extent the Adviser's view as to
certain market movements is incorrect, the risk that the use of such Hedging
Transactions could result in losses greater than if they had not been used.
Use of put and call options may result in losses to a series, force the sale
or purchase of portfolio securities at inopportune times or for prices higher
than (in the case of put options) or lower than (in the case of call options)
current market values, limit the amount of appreciation the Fund can realize
on its investments, increase the cost of holding a security and reduce the
returns on securities or cause a series to hold a security it might otherwise
sell. The use of currency transactions can result in a series incurring
losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements
in the related portfolio position of the Fund creates the possibility that
losses on the hedging instrument may be greater than gains in the value of
the Fund's position. In addition, futures and options markets may not be
liquid in all circumstances and certain over-the-counter options may have
no markets. As a result, in certain markets, a series might not be able to
close out a transaction without incurring substantial losses, if at all.
Although the use of futures and options transactions for hedging should tend
to minimize the risk of loss due to a decline in the value of the hedged
position, at the same time they tend to limit any potential gain which might
result from an increase in value of such position. Finally, the daily
variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Hedging Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Hedging Transactions had
not been utilized. The cost of entering into hedging transactions may also
reduce the series' total return to investors.
FUNDAMENTAL RESTRICTIONS
Each series has adopted a number of fundamental investment
restrictions, which may not be changed for a particular series without the
approval of that series' shareholders. These restrictions are set forth in
the Statement of Additional Information. Other than such restrictions, no
series has any investment policies which it considers fundamental.
Among other things, each series may not purchase the securities of any
one issuer, other than the U.S. Government or any of its agencies or
instrumentalities, if immediately after such purchase more than 5% of the
value of its total assets would be invested in such issuer, or such series
would own more than 10% of the outstanding voting securities of such issuer,
except that up to 25% of the value of such series' total assets may be
invested without regard to such 5% and 10% limitations; make loans, except to
the extent the purchase of debt obligations of any type are considered loans
and except that the series may lend portfolio securities to qualified
institutional investors in compliance with requirements established from time
to time by the Securities and Exchange Commission and the securities
exchanges on which such securities are traded; invest more than 25% of the
value of its assets in a particular industry (except that U.S. Government
securities are not considered an industry); or issue securities senior to its
stock or borrow money or utilize leverage in excess of the maximum permitted
by the 1940 Act which is currently 331/3% of total assets (plus 5% for
emergency or other short-term purposes). Such borrowing has special risks.
The Fund will not engage in investment transactions when borrowing exceeds 5%
of its assets.
While Mutual Shares, Qualified, Beacon, Discovery and European have
identical basic investment restrictions, and Mutual Shares, Qualified, Beacon
and European have identical investment objectives, the Adviser seeks to
retain certain historical differences among the series on an informal basis.
Mutual Shares, Qualified and Beacon have generally invested in larger and
medium sized companies with large share trading volume. Discovery, in
comparison to the other series, has tended to invest proportionately more of
its portfolio in smaller companies (see "Investment Objectives and Policies")
and in foreign companies (see "Non-U.S. Securities"). Qualified was
originally intended for purchase by pension plans, profit sharing plans and
other nontaxpaying entities and the portfolio was able to have greater
flexibility due to reduced concerns about the tax effects on shareholders.
Depending on market conditions, and any future changes in tax laws, the
Adviser expects that it will purchase securities for Qualified which satisfy
such a goal, although currently Qualified operates in the same fashion as
Mutual Shares and Beacon. European will utilize the same investment
philosophy but will apply it in the context of European investing. Allocation
of investments among the series will also depend upon, among other things,
the amount of cash in, and relative size of each series' portfolio. In
addition, the factors outlined above are not mutually exclusive and a
particular security may be owned by more than one of the series.
MANAGEMENT OF THE FUND
The management and affairs of the Fund are supervised by the Fund's
Board of Directors.
THE INVESTMENT ADVISER AND ADMINISTRATOR
Franklin Mutual, 51 John F. Kennedy Parkway, Short Hills, NJ 07078
serves as each series' investment adviser. Franklin Mutual manages their
investments, subject to supervision by the Fund's Board of Directors. FT
Services provides various administrative services and supervises each series'
daily business affairs. Franklin Mutual and FT Services are wholly owned
subsidiaries of Resources, a publicly owned company engaged in the worldwide
financial services industry through its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are the principal shareholders of Resources.
MANAGEMENT TEAM
The team responsible for the day-to-day management of the Fund's
portfolio is: Michael Price since 1976, Jeffrey A. Altman since 1988, Robert
F. Friedman since 1987, Raymond Garea since 1991, Peter A. Langerman since
1986 and Lawrence N. Sondike since 1984.
Michael F. Price
Chief Executive Officer of Franklin Mutual
Mr. Price has a Bachelor of Arts degree in business administration from the
University of Oklahoma. Prior to October 1996, Mr. Price was President and
Chairman of Heine Securities Corporation, the former investment advisor for
the Fund, for at least 5 years. He became Chief Executive Officer of Franklin
Mutual in October 1996. He is Chairman of the Board and President of the Fund.
Jeffrey A. Altman
Portfolio Manager of Franklin Mutual
Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
October 1996, Mr. Altman was employed as a Research Analyst and Trader for
Heine Securities Corporation, the former investment advisor for the Fund, for
at least 5 years. He joined Franklin Mutual in October 1996.
Robert L. Friedman
Portfolio Manager of Franklin Mutual
Mr. Friedman has a Bachelor of Arts degree in humanities from the John
Hopkins University and a Masters in Business Administration from the Wharton
School, University of Pennsylvania. Prior to October 1996, Mr. Friendman was
a Research Analyst for Heine Securities Corporation, the former investment
advisor for the Fund, for at least 5 years. He joined Franklin Mutual in
October 1996.
Raymond Garea
Portfolio Manager of Franklin Mutual
Mr. Garea has a Bachelor of Science degree in engineering from Case Institute
of Technology and a Masters in Business Administration the University of
Michigan. Prior to October 1996, he was a Research Analyst for Heine
Securities Corporation, the former investment advisor for the Fund, for at
least 5 years. He joined Franklin Mutual in October 1996. Mr. Garea is also a
Manager (Director) of MB Metroplis L.L.C. since 1994.
Peter A. Langerman
Portfolio Manager of Franklin Mutual
Mr. Langerman has a Bachelor of Arts degree from Yale University, a Masters
in Science from New York University Graduate School of Business and a Juris
Doctor from Standford University Law School. Prior to October 1996, he was a
Research Analyst for Heine Securities Corporation, the former investment
advisor for the Fund, for at least 5 years. He joined Franklin Mutual in
October 1996. Mr. Langerman is a director and Executive Vice President of the
Fund, Director of Sunbeam Oster since 1990, Lancer Industries since 1994 and
Hexcel Corporation N.M.M.S.p.A. since 1995 and Manager (Director) of MB
Motori, L.L.C. since 1994 and MWCR L.L.C. since 1995.
Lawrence N. Sondike
Portfolio Manager of Franklin Mutual
Mr. Sondike has a Bachelor of Arts degree from Cornell University and a
Masters in Business Administration from New York University Graduate School
of Business. Prior to October 1996, he was a Research Analyst for Heine
Securities Corporation, the former investment advisor for the Fund, for at
least 5 years. He joined Franklin Mutual in October 1996. He is Vice
President of the Fund.
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS
Franklin Mutual serves as investment adviser to the series pursuant to
separate investment advisory agreements which were approved by the
shareholders of each such series at a meeting held on [October 25, 1996]. The
advisory agreement with each series ("the Advisory Agreements" or the
"Advisory Agreement" if individually) are identical in all material respects,
except that under each Advisory Agreement Franklin Mutual is paid a fee at an
annual rate of .60% of the average daily net assets of Mutual Shares,
Qualified and Beacon, .80% of the average daily net assets of Discovery and
.80% of the average net assets of European, which accrues daily and is
payable on the first business day of the next month for the number of days
the Advisory Agreement was in effect during the preceding month. Each class
will pays its proportionate share of the management fee.
Franklin Mutual has complete discretion in the investment and
management (including the voting of securities) of each series' assets in
accordance with their respective investment objectives and policies and
subject to general review and direction by the Board of Directors of the
Fund. Under these Agreements each series acknowledges that Franklin Mutual
may and does perform advisory services for others, that officers and
employees of Franklin Mutual act as broker or dealer for others and invest
for their own account and that the Fund does not expect, subject always to
the good faith of Franklin Mutual, to obtain the benefit of investment
opportunities developed by Franklin Mutual, or such officers and employees,
but in which Franklin Mutual does not cause such series to invest.
[FT Services is responsible for administering or arranging for
administration of the Fund's business affairs and operations, including
maintenance of all required records, employment of sufficient personnel, and
maintenance of sufficient equipment and facilities to permit Franklin Mutual
to perform its obligations under the Advisory Agreements. FT Services is paid
a fee of .15% of each series' average daily net assets up to $200 million,
.135% bp up to $700 million, and .10% up to $1.2 billion, and .075% on assets
in excess of $1.2 billion. Each class will pays its proportionate share of
the administration fee.]
Franklin Mutual and its agents, officers and directors are generally
indemnified under these agreements against liabilities and expenses
reasonably incurred in connection with acts taken while acting in the
capacities enumerated in the Advisory Agreements, except no indemnity is
provided for willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties of a position. Such indemnification will be made
pursuant to procedures which comply with the requirements of the 1940 Act and
applicable state law.
The Advisory Agreements of Mutual Shares, Qualified, Beacon, Discovery
and European continue in effect until [November 1, 1997]. The Advisory
Agreements may be terminated at any time, without penalty, by the Fund's
Board of Directors, or by the vote of a majority of the outstanding voting
securities of the Fund or by the Adviser, each on 60 days' written notice to
the other. The Advisory Agreements automatically terminate upon assignment .
[The Adviser will reimburse a series for any expenses incurred in
excess of that permitted by the most restrictive jurisdiction in which the
Fund is qualified to sell shares up to the total fee payable to the Adviser
as to such series.] Total expenses of each of Mutual Shares, Qualified,
Beacon and Discovery for fiscal 1995 amounted to 0.69%, 0.72%, 0.72% and
0.99%, respectively, of their average daily net assets during such year.
HOW TO PURCHASE SHARES
Class Z shares of the Fund are available to existing shareholders and
their family members who reside at the same address and are sold in a
continuous offering at the public offering price, which is equal to the net
asset value per share of the series being purchased next determined (see "Net
Asset Value") after a purchase order is received by the Fund or PFPC Inc.
("transfer agent"). For assistance in completing the application and for
additional information about the shareholder services listed herein, call the
Fund at 1-800-448-FUND.
Minimum
Minimum Initial Subsequent Purchase
PURCHASE (FOR ALL ACCOUNTS)
Beacon $1,000 $50
Discovery $1,000 $50
European $1,000 $50
Mutual Shares $1,000 $50
Qualified $1,000 $50
In exceptional cases the Fund may, in its sole discretion, waive these
amounts.
All orders for shares of a series which are accepted by the Fund will
be priced at the net asset value per share of that series next computed after
receipt of the order by the Fund's transfer agent, or by the Fund, subject to
collection of funds. In order to receive that day's price an order must be
received and accepted prior to the time that the series' net asset value is
calculated which is the earlier of 4:00 p.m. or the close of the New York
Stock Exchange (the "Exchange") on that day. Placement and acceptance of an
order results in the obligation on the part of an investor to pay for the
shares. Monies used to purchase shares of the Fund must be drawn on U.S.
banks and be payable in U.S. dollars. No third party checks will be accepted
by the Fund except with respect to shareholders who are rolling over money to
a retirement account from another retirement account. If for any reason funds
for a purchase are not collectible, the Fund may redeem the shares and hold
the investor liable for any amount by which the purchase price exceeds the
net asset value of the shares redeemed. Shareholders may not receive the
proceeds from a redemption of shares until funds covering such purchases have
been collected; however, shareholders who have existing accounts with a value
equal to or greater than the value of the securities to be redeemed may
redeem shares up to the value of the account at the time the request for
redemption is received. Payment made by certified check or wired funds is
considered to be collected upon receipt. (See "How to Redeem Shares".)
Unless a shareholder includes his taxpayer identification number
(social security number for individuals) on the Fund's Application and
certifies that he is not subject to backup withholding, no new account will
be opened. For existing accounts with no certification the Fund is required
to withhold and remit to the Internal Revenue Service ("IRS") 31% of all
taxable distributions to the shareholder.
The Fund reserves the right, in its sole discretion, to refuse at any
time to accept orders for the purchase of any series (from existing
shareholders as well as accounts to be opened by family members) and to
suspend the reinvestment of income dividends and capital gains distributions.
Without limiting the foregoing, the Adviser will consider exercising such
refusal right as to a series when it determines that it cannot effectively
invest the available funds on hand in accordance with that series' investment
policies.
WRITTEN SUBSCRIPTIONS
Written subscriptions for shares are accepted on any business day at
Mutual Series Fund Inc. All written subscriptions must specify the series to
be purchased, identify the family member who qualifies you as a subscriber
and must be accompanied by payment.
New account applications should be sent to:
Mutual Series Fund Inc.
c/o PFPC Inc.
P.O. Box 8901
Wilmington, DE 19899-8901.
Existing shareholders should mail additional investments to:
Mutual Series Fund Inc.
c/o PFPC Inc.
P.O. Box 8906
Wilmington, DE 19899-8906.
If an overnight delivery service is used, subscriptions
should be sent to:
Mutual Series Fund Inc.
c/o PFPC Inc.
400 Bellevue Parkway, Suite 108
Wilmington, DE 19809-3710.
Written subscriptions are also accepted at the Fund's offices at 51
John F. Kennedy Parkway, Short Hills, New Jersey 07078.
PURCHASE BY TELEPHONE
Purchases, except for retirement accounts, may be made orally by
current Fund shareholders who telephone the Fund at 1-800-448-FUND prior to
the earlier of 4:00 p.m. or the close of the Exchange. Such orders are
accepted or rejected in the sole discretion of the Adviser. Telephone
purchases must be for at least $1,000 and must be made in an account that has
an existing balance equal to at least one half of the telephone purchase.
Automated Transfers:
An Automated Transfers application must be completed and
effective prior to making telephone purchases. Please call
1-800-553-3014 for an application or, complete section 6 of the
application attached to this prospectus.
All telephone purchases will be processed through the Automated Transfers
process except for certain institutional investors who have established (via
the Fund's recorded telephone line) the ability to wire such purchase
payments to the Fund.
If for any reason funds are not received in a timely manner and the
Fund redeems the shares, the shareholder will be responsible for any amount
by which the purchase price exceeds the net asset value of the shares on the
day the shares are redeemed. As authorized by the shareholder's purchase
application, such amounts will be deducted from the shareholder's account and
PFPC Inc. will redeem a processing fee of $20 for any transfer not honored by
your bank. This feature will only apply to those persons who have completed
an application containing such authorization.
BROKERS AND DEALERS AND PLAN ADMINISTRATORS
Purchases and redemptions of any series shares may be effected through
registered broker-dealers. There is no sales or service charge imposed by the
Fund as to any series, but such broker-dealers may charge the investor a
transaction fee. Such transaction fees and services may vary among
broker-dealers, and such broker-dealers may impose higher initial or
subsequent investment requirements than those established by the Fund.
Services provided by broker-dealers may include allowing the investor to
establish a margin account and to borrow on the value of the Fund's shares in
that account. If a broker receives an order prior to pricing on a given day,
the broker is required to forward such order to the Fund on that day prior to
pricing. A broker's failure to timely forward an order may give rise to a
claim by the investor against the broker.
Third party plan administrators of tax-qualified retirement plans and
other entities may provide sub-transfer agent services to the Fund. In such
cases the Fund may pay the third party an annual sub transfer agency fee that
is not greater than the Fund otherwise would have paid for such services.
SHARE CERTIFICATES
All accounts will be maintained in book entry form; no share
certificate will be issued unless the shareholder specifically requests such
issuance in writing. Upon written request certificates for any number of full
shares, except for shares held in retirement accounts, will be issued and
sent to the shareholder of record. The shareholder may incur an expense in
replacing any lost share certificates. The Fund recommends that its transfer
agent retain all certificates at no cost to the shareholder.
HOW TO REDEEM SHARES
Shareholders may redeem all or a portion of their shares in a series by
executing and mailing a written request for redemption, as described below.
The written request for redemption should be mailed to:
Mutual Series Fund Inc.
c/o PFPC Inc.
P.O. Box 8901
Wilmington, DE 19899-8901 .
If an overnight delivery service is used, redemption
requests should be sent to:
Mutual Series Fund Inc.
c/o PFPC Inc.
400 Bellevue Parkway - Suite 108
Wilmington, DE 19809-3710.
Redemption requests will be executed at the net asset value per share
next computed after receipt of the redemption request, in good order, by the
Fund or by its transfer agent (see "Net Asset Value"). In order to receive
that day's price a redemption request in good order with an original
signature must be received by the earlier of 4:00 p.m. or the close of the
Exchange on that day. Neither the Fund nor the transfer agent will accept
redemption requests made by telephone or by fax. Payment of monies will be
made within seven days after receipt by the transfer agent of the redemption
request in good order and accompanied by the appropriate documents as
described below. Mailing of the proceeds of a redemption may be delayed up to
15 days from the day of a purchase to allow the purchase to clear. This
potential 15 day delay applies to payment by personal or bank check. If
payment is made by certified check or wire, proceeds from the redemption
request will not be subject to this potential 15 day delay. If the
shareholder has an existing account, the redemption request will be satisfied
up to the value of collected funds in such account. The Fund reserves the
right to redeem shares in kind although it is not likely to do so.
Conditional, ambiguous or vague requests cannot be honored.
If you have completed item 6 on the enclosed application to authorize
automated transfers to your bank account (retirement accounts have separate
form), and if your bank has authorized such transfers, then you can request
that a redemption be automatically deposited into your bank account. Proceeds
will be calculated at the net asset value next computed after receipt of your
redemption request in good order and will be automatically deposited in your
bank account approximately two business days after receipt of your redemption
request. To request an application for automated transfers for a regular
account or a retirement account, call 1-800-553-3014. Automated transfer
capabilities normally become effective twenty business days after the Fund
receives the completed application.
If the account is in the form of a book entry, or if certificates for
the shares to be redeemed have been retained by the transfer agent for
safekeeping, to be in good order the written redemption request must identify
the account from which shares are to be redeemed, the dollar value or number
of shares to be redeemed, the address the redemption should be mailed to, the
shareholder's daytime phone number and the request must be signed exactly as
the account is registered, with the signature(s) thereon guaranteed by a
bank, broker-dealer, credit union, national securities exchange or a savings
association. Guarantee by a notary public is not acceptable. The authorized
officer who guarantees the signature(s) must sign in official capacity to
bind the guarantor and the words "Signature Guaranteed" must appear with the
required stamp. The signature guarantee will generally be waived for
redemptions of $25,000 or less provided payment is made to the holder of
record and forwarded to the address of record. However, a signature guarantee
will be required for all redemptions where the address of record has changed
within ten days of the redemption request.
If the certificates for the shares to be redeemed are held by any one
other than the transfer agent, to be in good order the redemption request
must be accompanied by such stock certificates, properly endorsed for
transfer, or if not so endorsed, by the stock certificates and appropriate
properly endorsed stock powers, and, in either case, the signatures must be
guaranteed in proper form by a bank, broker dealer, credit union, national
securities exchange or a savings association.
Certain accounts, such as corporate accounts, trust accounts and
custodial accounts, generally require additional documentation in addition to
the written request. Certain institutional accounts may be eligible for
redemption procedures other than as described above. Contact the Fund at
1-800-448-FUND for the specific documentation required for your account.
If the owner of any IRS recognized retirement account who is at least
59 1/2 years old wants to redeem shares from the account, the written
redemption request must state the account owner's birthdate. If the owner of
any IRS recognized retirement account who is less than 59 1/2 years old wants
to redeem shares from the account, the written redemption request must state:
1) that the owner is aware of the tax consequences and penalties that may be
associated with the redemption and 2) whether or not the 10% tax is to be
withheld on the redemption. The signature on the letter of instruction must
be guaranteed in the same manner as described above.
If a redemption request is sent to the Fund's office, rather than to
the transfer agent's office, the request will be promptly forwarded by the
Fund to the transfer agent. If the Fund has not collected payment on the
purchase of shares which are to be redeemed, no redemption payment will be
made until the purchase has cleared.
The transfer agent reserves the right to charge a nominal fee of
approximately $7, for the wiring of funds. Your bank may charge you for
accepting the wire transfer. The Fund should be contacted at 1-800-448-FUND
for additional information on how to wire funds. If a shareholder requests
delivery of a redemption check via overnight delivery service, the transfer
agent will charge a nominal fee, currently approximately $15, for the
overnight delivery service.
The net asset value of shares, on redemption, may be more or less than
the investor's cost, depending upon the market value of the series'
securities at the time of redemption. Redemptions of the predecessor funds
always were made in cash and the Fund intends to continue this policy as to
the series.
The Fund reserves the right, upon 30 days' prior notice, to redeem
shares in any account if the total value of the shares in the account is less
than a specified minimum (currently $300, or $100 for IRA accounts), which
minimum may be lowered from time to time by the Board of Directors but will
not be raised. An account will be subject to involuntary redemption if the
account value becomes less than the specified minimum because of a
stockholder redemption and not from market action. The Fund further reserves
the right upon 30 days prior notice and Board approval to redeem the account
of any shareholder who has failed to furnish a certified social security or
tax identification number to the Fund.
SHAREHOLDER SERVICES
Mutual Series Fund Inc.
c/o PFPC Inc.
P.O. Box 8901
Wilmington, DE 19899-8901.
A. Reinvestment of Distributions. Shareholders may elect to (a) have all
capital gain distributions and income dividends on a series' shares held by
them automatically reinvested in additional shares of the series, or (b) have
all capital gain distributions automatically reinvested, but receive all
income dividends in cash, or (c) receive all capital gains distributions and
income dividends in cash. Unless an election is made, dividends and
distributions will be automatically reinvested in additional shares or
fractions thereof of the same series by the transfer agent at the net asset
value in effect at the close of the Exchange on the date of distribution. If
one of the cash options above is selected, money can be automatically
transferred to the shareholder's bank account on the payable date by
completing an Automated Transfers application. Please call 1-800-553-3014 for
an application or complete item 6 on the application attached to this
prospectus.
B. Automatic Investment Plan. The Automatic Investing Plan permits an
investor to automatically purchase shares of the Fund on a monthly basis
through an arrangement with the investor's bank and the transfer agent. The
transfer agent will arrange for a predetermined amount of money, selected by
the investor (the minimum per month for Mutual Shares and Beacon is $100 and
is $50 for Qualified, Discovery and European), to be deducted on various
dates of the month from the investor's bank account to purchase shares of the
designated series. The investor will receive a confirmation from the transfer
agent and his bank account will reflect the amount charged. An investor may
utilize this service by completing an Automated Transfers application with
the transfer agent. Please call 1-800-553-3014 to request an application. The
investor's bank must be a member of Automated Clearing House (ACH). The
Automatic Investment Plan normally becomes effective 20 business days after
the application is received.
C. Individual Retirement Account Plan. All persons eligible may establish an
Individual Retirement Account ("IRA") to invest in the Fund. Mutual Shares
and Beacon require a $2,000 minimum initial deposit to an IRA. Qualified,
Discovery and European have a minimum initial deposit of $1,000. All
dividends and distributions on shares held in IRAs are reinvested in
additional shares of the Fund and are not taxed until withdrawn. Please call
the Fund at 1-800-553-3014 for an IRA application. Please consult your tax
advisor regarding the tax treatment of IRAs under the Internal Revenue Code
of 1986 as amended (the "Code").
D. Qualified Retirement Plans. The Fund offers four qualified retirement
plans: the Simplified Standardized Profit Sharing Plan, the Simplified
Standardized Money Purchase Plan, the Standardized Profit Sharing Plan and
the Standardized Money Purchase Plan. For copies of the plan documents, plan
administrators guide and summary plan description booklets call
1-800-533-3014. PNC Bank acts as trustee/custodian, but neither PNC Bank nor
the Fund administers the qualified retirement plans and therefore no
assurance can be given that a particular qualified retirement plan is
properly administered. Please consult your employer or tax advisor if you
have any questions.
E. SEP-IRA. Eligible individuals may establish a SEP-IRA with their
employers. An application form may be obtained from the Fund by calling
1-800-553-3014. If the SEP-IRA is properly established and administered by
the employer, contributions will be tax deductible and income and capital
gain will be tax deferred. PNC Bank acts as trustee/custodian, but neither
PNC Bank nor the Fund administers the SEP-IRA and therefore no assurance can
be given that a particular SEP-IRA is properly administered. Please consult
your employer or tax advisor if you have any questions.
F. Section 403(b)(7) Retirement Plan. Persons who are full or part-time
employees of non-profit tax-exempt organizations or public educational
organizations, such as hospitals, educational institutions, and other
religious, charitable, scientific or literary organizations, are eligible to
establish a retirement plan under Section 403(b)(7) of the Code. An
investor's employer may make direct contributions to the investor's
403(b)(7) Plan account or contributions may be made pursuant to the
investor's agreement to take a reduction in salary or to forego an increase
in salary. Such contributions will be excluded from the investor's gross
income for Federal income tax purposes up to specified limits provided they
do not exceed the investor's "excludable amount" for the taxable year.
Shareholders may call the Fund at 1-800-553-3014 to request an
application and a model 403(b)(7) Plan. The 403(b)(7) Plan was submitted to
the IRS National Office on behalf of a participant and it ruled to the effect
that (i) amounts contributed by an employer (whether or not under a salary
reduction agreement) will be excludible from the participant's gross income
to the extent of his "exclusion allowance" (as defined in Section 403(b) of
the Code) and (ii) the dividends and other income and gains on such account
will be tax-exempt until distribution to the participant and/or his
beneficiary. While this ruling may not be used as precedent by other
participants, it indicates that the form of the 403(b)(7) Plan satisfies the
requirements of Section 403(b) of the Code. Participants who desire the
assurance of a favorable ruling should similarly file a request for a ruling.
G. Systematic Withdrawal Plan. A shareholder owning or purchasing Fund shares
with a current account value of at least $10,000 may open a Systematic
Withdrawal Plan (a "Plan") under which a specified dollar amount (not less
than $50) will be paid to the shareholder from the shareholder's Fund account
on a monthly, quarterly or annual basis on various dates of that month.
Systematic Withdrawal Plan payments can be made automatically into the
shareholder's bank account by completing an Automated Transfers application.
Please call 1-800-553-3014 for an application, and specify if you want an
automated transfer application for a regular or retirement account. A
shareholder may open a Systematic Withdrawal Plan by filing with the transfer
agent an application, together with any certificates for series shares held
by the shareholder. Please call the Fund at 1-800-553-3014 to request a
Systematic Withdrawal Plan application. The Plan will normally become active
within 20 business days after the application is received. Systematic
withdrawals are expected to result in a decrease in aggregate value of the
investment.
H. Fees. As of January 1996 PNC Bank has agreed to waive its annual
maintenance fee (for all or any portion of a year) of $9 per shareholder
account for IRA, Qualified Retirement Plan, SEP-IRA and 403(b)(7) Plans. The
fee and its waiver are subject to adjustment by PNC Bank as trustee/custodian
for the Plans.
I. Transfer of Shares. A shareholder may transfer shares of any series to
another person by writing to the Fund's transfer agent. The shareholder
should clearly identify the series, the account and the number of shares to
be transferred, and include the signature of all registered owners, and all
stock certificates, if any, which are the subject of transfer. The signature
on the letter of instructions, the stock certificates or any stock power must
be guaranteed in the same manner as described under "How to Redeem Shares."
As in the case of redemptions, the written request must be received in good
order before any transfer can be made.
NET ASSET VALUE
For purposes of pricing purchases and redemptions, the net asset value
of each series of the Fund is separately determined by State Street Bank and
Trust Company, the Fund's custodian ("State Street") as of the earlier of
4:00 p.m. or the close of regular trading on the Exchange on each day that
the Exchange is open for business but in no event less often than once each
week. Net asset value per share of each series of the Fund is calculated by
adding the value of all securities and other assets of such series,
subtracting all of the liabilities of such series and dividing the remainder
by the number of shares of such series outstanding at the time the
determination is made.
Securities, including options, and futures traded on an exchange or on
NASDAQ or in the over the counter market are valued at the last reported
sales price on the day of valuation, but if there are no sales on that day,
or if the Adviser determines that the last sale fails to reflect the current
market value, such securities are valued at the mean between the closing bid
and asked prices. Other securities and assets, including restricted and
illiquid securities, are valued at their fair value as determined in good
faith under procedures determined by the Board of Directors. To the extent
consistent with the foregoing fair value standard, securities which are
traded for which market quotations are not readily available are valued at
the mean of the bid and asked prices quoted to the Fund by the principal
market makers of such security. All foreign securities are valued on the date
net asset value is calculated as of the close of each country's respective
exchanges. Foreign currencies are priced at New York market closing prices.
Temporary investments in short-term debt securities are valued at market, or
at amortized cost, which approximates market value.
The net asset value per share of each series appears daily in the The
Wall Street Journal and other newspapers. Shareholders may also call the
Fund's Automated Telephone Inquiry System at 1-800-858-3013 to receive the
most recent net asset value information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each series of the Fund intends to qualify for treatment under
Subchapter M of the Code. Since each series intends to continue to so qualify
and to distribute all of its net investment income and capital gain to
shareholders at least annually, it is expected that each series will not be
required to pay any Federal income taxes. Shareholders generally will have to
pay Federal income taxes on the dividends and distributions they receive from
a series and on gains realized upon redemption of their shares.
Following each calendar year, each shareholder will receive information
for tax purposes on the dividends and capital gain distributions received
during the previous year. The Fund may make distributions from net investment
income or capital gain and may also make distributions in kind. Dividends
from net investment income and any net short-term capital gain will be
taxable as ordinary income whether received in cash or in kind. Any
distributions designated as realized net capital gain (the excess of net
long-term capital gain over net short-term capital loss) will be taxable as
long-term capital gain, regardless of the holding period of the shareholder's
shares of such series. All or a portion of any dividends paid by the Fund to
corporate shareholders may, under certain circumstances, be eligible for the
dividends received deduction. Credit for foreign taxes paid by the Fund have
generally not been available to shareholders.
Dividends or distributions have the effect of reducing the per share
value of shares owned by the shareholder by the per share amount of the
dividends or distributions. Furthermore, such dividends and distributions
paid shortly after the purchase of shares by an investor, although in effect
a return of capital, are subject to income taxes. The Board presently intends
to declare such dividends and distributions from net investment income
semi-annually.
The IRS requires backup withholding of Federal income tax of 31% of the
gross amount of dividends, capital gain distributions, and redemption
proceeds paid or credited to shareholders who do not furnish a valid social
security or taxpayer identification number. Shareholders using the Fund as a
medium for tax qualified retirement plans may be subject to a 20% mandatory
withholding upon withdrawal under certain circumstances.
Redemptions of shares of a series will be taxable transactions for
Federal income tax purposes. Generally, gain or loss will be recognized in an
amount equal to the difference between the shareholder's basis in his shares
and the amount received. Assuming that such shares are held as a capital
asset, such gain or loss will be a capital gain or loss and will be a
long-term capital gain or loss if the shareholder has held his shares for a
period of more than one year. If a shareholder redeems shares of any series
at a loss and makes an additional investment in the same series 30 days
before or after such redemption, the loss may be disallowed under the wash
sale rules.
Income received by European from sources outside the United States may
be subject to withholding and other foreign taxes. As long as more than 50%
of the value of European's assets at the close of any taxable year consists
of stocks or securities of foreign corporations, European intends to elect to
treat any foreign income taxes paid by the series as if it were paid by
shareholders. Accordingly, the amount of foreign income taxes paid by
European will be included in the income of its shareholders and the European
shareholders will be entitled to credit their portions of those amounts
against their United States federal income taxes, if any, or to deduct such
portions from their taxable income. No deduction for foreign taxes may be
claimed by a shareholder who does not itemize deductions. In addition,
certain individual shareholders may be subject to rules that limit or reduce
their ability to deduct fully their pro rata share of foreign taxes. Shortly
after any year for which it makes such an election, European will report to
its shareholders, in writing, the amount per share of any foreign tax that
must be included in each shareholder's gross income and the amount that will
be available for deduction or credit.
In general, a credit for foreign taxes may not exceed the United States
shareholder's United States federal income tax attributable to its foreign
source taxable income. If European elects to treat foreign taxes paid by the
series as paid by the shareholders as described in the preceding paragraph,
the source of European's income will flow through to its shareholders for
purposes of calculating the limitation on foreign tax credits. Dividends and
interest received by the Fund in respect of non-U.S. securities will give
rise to foreign source income to shareholders. Fund shareholders are advised
to consult their tax advisers with respect to the federal, state, local or
foreign tax consequences of the pass-through of foreign tax credits described
above.
The foregoing summary of Federal income tax consequences is included
herein for general informational purposes only. It does not address the tax
consequences to all investors and does not address the tax consequences under
state, local, foreign and other tax laws. Prospective investors are urged to
consult their own tax advisors with respect to the tax consequences of an
investment in a series of the Fund.
FUND OPERATIONS
PORTFOLIO TRANSACTIONS
Franklin Mutual effects portfolio transactions through brokers and
dealers who in its judgment will provide the Fund with the best combination
of price (including brokerage commissions, if any) and execution. The Adviser
may also give consideration to research services in its selection of brokers
and may cause the series to pay higher commissions than might be charged by
some other broker who does not furnish research services if the Adviser
determines in good faith that the commissions being paid are reasonable in
relation to the value of the brokerage and research services provided.
Research services provided by brokers who execute Fund portfolio brokerage
transactions for a series may be utilized by the Adviser for the benefit of
the other series or clients advised by it, just as research services provided
by brokers who execute brokerage transactions for such other series (or
clients) advised by the Adviser may be utilized for the benefit of the other
series (and clients). The Adviser does not know of any way of determining the
value of brokerage and research services provided by such brokers, except to
the extent such services have a determined market value. To the extent such
services are used by the Adviser in advising the Fund, they tend to reduce
the Adviser's expenses. The Adviser may occasionally also take into account
sale of Fund shares when allocating brokerage.
The Adviser generally effects transactions in exchange traded
securities through members of the exchange although it may also effect such
transactions privately or in the so-called "third market." Transactions in
over-the-counter securities will be executed on a principal basis with market
makers unless, in the judgment of the Adviser, the best combination of price
and execution is available by other arrangements including dealing with a
market maker on an agency basis and paying a brokerage commission.
Transactions in unregistered securities are effectuated with broker-dealers
on a principal or agency basis or directly with the issuers or holders of
such securities.
The Adviser will effect portfolio transactions for a series through a
broker which is an affiliated person of the Fund or the Adviser only if in
the Adviser's judgment such broker is able to obtain the best combination of
price and execution. Currently the only broker affiliated with the Fund or
the Adviser is Clearwater Securities Inc. ("Clearwater"). Although an
affiliated broker such as Clearwater is entitled to and is paid a commission
for executing brokerage transactions for the Fund, Clearwater does not act as
a principal for its own account in any portfolio transactions with the Fund.
The Adviser makes its portfolio decisions for each series based on its
judgment as to the best interests of such series, taking into account factors
such as relative size, cash position, investment restrictions and tax
consequences to the client. Securities considered for purchase or sale by a
series are often also appropriate for purchase or sale by the other series
advised by the Adviser. When more than one of such series is purchasing or
selling the same securities at or about the same time, the transactions are
averaged as to price.
The 1995 portfolio turnover rate for Mutual Shares, Qualified, Beacon
and Discovery was 79.32%, 75.59%, 73.18% and 73.23%, respectively.
SHARES OF THE FUND
The Fund has an authorized capital of 1.3 billion shares of stock, par
value $.001 per share, 200 million of which have been allocated to the Mutual
Shares Fund, 200 million of which have been allocated to the Mutual Qualified
Fund, 200 million of which have been allocated to the Mutual Beacon Fund, 300
million of which have been allocated to Mutual Discovery Fund and 400 million
of which have been allocated to Mutual European Fund. The Fund began offering
three classes of shares on November 1, 1996: Mutual Shares Fund - Class Z,
Mutual Shares Fund - Class I, Mutual Shares Fund - Class II, Mutual Qualified
Fund - Class Z, Mutual Qualified Fund - Class I, Mutual Qualified Fund -
Class II, Mutual Beacon Fund - Class Z, Mutual Beacon Fund - Class I, Mutual
Beacon Fund - Class II, Mutual European Fund - Class Z, Mutual European Fund
- - Class I, Mutual European Fund - Class II, Mutual Discovery Fund - Class Z,
Mutual Discovery Fund - Class I, and Mutual Discovery Fund - Class II. All
shares purchased before November 1, 1996, are considered Class Z shares.
Pursuant to Maryland law and the Fund's charter, the Board of Directors may
increase the authorized capital and reclassify unissued shares of any class
(series) to create additional classes of stock with specified rights,
preferences and limitations. Each share is entitled to one vote per share on
all matters subject to shareholder vote. Shares of all classes vote together
as a single class except that where a matter being voted on affects only a
particular class it will be voted on only by that class and where a matter
affects a particular class differently from other classes, that class will
vote separately on such matter. The Fund is not required to hold annual
meetings and does not expect to hold meetings of shareholders as long as
two-thirds of the directors then in office have been elected by the
shareholders. Section 16(c) of the 1940 Act provides certain rights to
shareholders which the Fund will honor regarding the ability to call meetings
of shareholders and to communicate with shareholders. If less than a majority
of the directors have been elected by shareholders, a meeting of shareholders
will be held within sixty days to fill any existing vacancies. Directors may
be removed only for cause by a vote of sixty-seven percent of the outstanding
shares of the Fund. A meeting of shareholders shall be called if the record
holders of ten percent of the shares of the Fund so request in writing. Each
share is entitled to participate equally in dividends and distributions
declared by the Directors with respect to shares of the same class, and in
the net distributable assets allocated to such class on liquidation. When
issued, the shares are fully paid and nonassessable, and have no preemptive,
conversion or exchange rights. Shareholders are entitled to require the Fund
to redeem their shares. The shares are transferable without restriction.
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT. State Street Bank
and Trust Company, Atlantic Division, 225 Franklin Street, Boston, MA 02110
is the principal custodian for the assets of all the series of the Fund. The
transfer and dividend disbursing agent of the Fund's Class Z shares is PFPC
Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809-3710. PNC Bank,
Wilmington, Delaware acts as the trustee/custodian for all Class Z sponsored
retirement accounts .
SHAREHOLDER INQUIRIES. Shareholder inquiries should be directed to the
Fund at the telephone number or address set forth on the cover page of this
Prospectus.
REPORTS. The Fund will issue to its shareholders semiannual reports
containing unaudited financial statements and annual reports containing
financial statements examined by auditors which have been approved by the
shareholders .
EXCHANGE PRIVILEGE. The Fund is considered a part of the Franklin
Templeton Funds (the mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust and the
U.S. registered mutual funds in the Templeton Group of Funds except Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and
Templeton Variable Products Series Fund).
Beginning on or about [May 1, 1997] holders of Mutual Series Z shares
will be allowed to exchange their shares for Class I shares of other Franklin
Templeton Funds, as permitted by the fund's current prospectus, without
paying a sales charge, provided you have held those shares at least six
months prior to the exchange.
INFORMATION. This Prospectus does not contain all the information
included in the Registration Statement filed with the Securities and Exchange
Commission under the Securities Act of 1933 with respect to the securities
offered hereby, certain portions of which have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The
Registration Statement including the exhibits filed therewith may be examined
at the office of the Securities and Exchange Commission in Washington, D.C.
Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement of which this
Prospectus forms a part, each such statement being qualified in all respects
by such reference .
[BACK COVER]
This Prospectus omits certain information contained in the registration
statement on file with the Securities and Exchange Commission. Information
omitted may be obtained from such Commission in Washington, D.C., upon
payment of the fee prescribed by the rules and regulations of the Commission.
CONTENTS PAGE
Series Annual Expense Tables
Performance Information
Condensed Financial Information
The Fund
Management of the Fund
How to Purchase Shares
How to Redeem Shares
Shareholder Serices
Net Asset Value
Dividends, Distributions and Taxes
Fund Operations
Shares of the Fund
Additional Information
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY BY THE FUND IN ANY JURISDICTION IN WHICH
SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT LAWFULLY BE
MADE.
MUTUAL
SERIES
FUND
INC.
AN INVESTMENT COMPANY ORGANIZED IN DIVERSIFIED SERIES
- ----------------------
Investment Adviser
FRANKLIN MUTUAL ADVISERS, INC.
MICHAEL F. PRICE
CHIEF EXECUTIVE OFFICER
Portfolio Manager
- -----------------------
[ LOGO]
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PROSPECTUS
November 1, 1996
MUTUAL SERIES FUND INC.
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1996
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
Investment Objectives and Policies...........................
Restrictions and Limitations.................................
Officers and Directors.......................................
Investment Advisory and Other Services.......................
How Does the Fund Buy Securities For Its Portfolio?..........
How Do I Buy, Sell and Exchange Shares?......................
How Are Fund Shares Valued?..................................
Additional Information on Distributions and Taxes............
The Fund's Underwriter.......................................
How Does the Fund Measure Performance?.......................
Miscellaneous Information....................................
Financial Statements.........................................
Useful Terms and Definitions.................................
Appendix.....................................................
- --------------------------------------------------------------------------
When reading this SAI, you will see certain terms in capital letters. This
means the term is explained under "Useful Terms and Definitions."
- --------------------------------------------------------------------------
The Mutual Series Fund Inc. (the "Fund") is an open-end management investment
company with five separate series which offer two classes of shares.
Mutual Shares Fund - Class I & Class II Mutual Qualified Fund - Class I & Class
II Mutual Beacon Fund - Class I & Class II Mutual European Fund - Class I &
Class II Mutual Discovery Fund - Class I & Class II
Each series may, separately or collectively, be referred to as the "series,"
"Fund" or "Funds."
The Prospectus, dated November 1, 1996, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY
BANK;
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
As described in the Prospectus, the general investment policy of the Fund for
its series is to invest in securities if, in the opinion of Franklin Mutual,
they are available at prices less than their intrinsic value, as determined by
Franklin Mutual after careful analysis and research, taking into account, among
other factors, the relationship of book value to market value of the securities,
cash flow, and multiples of earnings of comparable securities. The Fund reserves
freedom of action for each series to invest in common stock, preferred stock,
debt securities and other securities in such proportions as the management deems
advisable, but, without committing any fixed portion of any series' assets, the
management typically maintains a portion of the assets of each series invested
in debt securities and preferred stocks (which may be convertible). In addition,
the series may also invest in restricted debt and equity securities, in foreign
securities, and in other investment company securities.
REPURCHASE AGREEMENTS AND LOANS OF SECURITIES
Each series may invest in repurchase agreements with domestic banks, brokers or
dealers. Repurchase agreements are considered loans by the series collateralized
by the underlying securities. As with loans of portfolio securities which the
series may make, these transactions must be fully collateralized at all times.
The adviser will monitor the creditworthiness of the other party and will
monitor the value of the collateral by marking to market daily in order to
confirm that its value is at least 100% of the agreed upon sum to be paid to the
series.
Repurchase agreements and lending of portfolio securities involve some credit
risk to the series. If the other party defaults on its obligations, the series
could be delayed or prevented from receiving payment or recovering its
collateral. Even if the series recovers the collateral in such a situation, the
series may receive less than its purchase price upon resale.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have similar structural characteristics
and operational mechanics regardless of the underlying instrument on which they
are purchased or sold. Thus, the following general discussion relates to each of
the particular types of options discussed in greater detail below. In addition,
many Hedging Transactions involving options require segregation of Fund assets
in special accounts, as described below under "Use of Segregated and Other
Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the seller of the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange-listed options and over-the-counter
options ("OTC options"). Exchange-listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as a paradigm, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC-issued and exchange-listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting option transactions.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange-listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms. The hours of trading for
listed options may not coincide with the hours during which the underlying
financial instruments are traded. To the extent that the option markets close
before the markets for the underlying financial instruments, significant price
and rate movements can take place in the underlying markets that cannot be
reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (each a "Counterparty" collectively
"Counterparties") through direct bilateral agreement with the Counter party. In
contrast to exchange-listed options, which generally have standardized terms and
performance mechanics, all the terms of an OTC option, including such terms as
method of settlement, term, exercise price, premium, guarantees and security,
are set by negotiation of the parties. The Fund will only sell OTC options
(other than OTC currency options) that are subject to a buy-back provision
permitting the Fund to require the Counter party to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counter party fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the option, the Fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction.
Accordingly, Franklin Mutual must assess the creditworthiness of each such
Counter party or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligations
of which have received) a short-term credit rating of "A-l" from Standard &
Poor's Corporation ("S&P") or "P-l" from Moody's Investor Services ("Moody's"),
an equivalent rating from any nationally recognized statistical rating
organization ("NRSRO") or which Franklin Mutual determines is of comparable
credit quality. The staff of the SEC currently takes the position that OTC
options purchased by the Fund, and portfolio securities "covering" the amount of
the Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any,) are illiquid, and are subject
to the Fund's limitations on investments in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, corporate debt securities,
equity securities (including convertible securities) and Eurodollar instruments
(whether or not it holds the above securities in its portfolio) and on
securities indices, currencies and futures contracts other than futures on
individual corporate debt and individual equity securities. The Fund will not
sell put options if, as a result, more than 50% of the Fund's assets would be
required to be segregated to cover its potential obligations under such put
options other than those with respect to futures and options thereon. In selling
put options, there is a risk that the Fund may be required to buy the underlying
security at a disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES
The Fund may enter into financial futures contracts or purchase or sell put and
call options on such futures as a hedge against anticipated interest rate,
currency or equity market changes, for duration management and for risk
management purposes. Futures are generally bought and sold on the commodities
exchanges where they are listed with payment of initial and variation margin as
described below. The sale of a futures contract creates a firm obligation by the
Fund, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to index futures and Eurodollar instruments, the net
cash amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right in
return for the premium paid to assume a position in a futures contract and
obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for a bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets ("initial margin") which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets ("variation margin") may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract, it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures positions just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction, but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
The Fund may also purchase and sell call and put options on securities indices
and other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an index
depends on price movements in the instruments making up the market, market
segment, industry or other composite on which the underlying index is based,
rather than price movements in individual securities, as is the case with
respect to options on securities.
CURRENCY TRANSACTIONS
The Fund may engage in currency transactions with Counterparties in order to
hedge the value of portfolio holdings denominated in particular currencies
against fluctuations in relative value. Currency transactions include forward
currency contracts, exchange-listed currency futures, exchange-listed and OTC
options on currencies, and currency swaps. A forward currency contract involves
a privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. A currency swap is an agreement to exchange cash flows
on a notional amount of two or more currencies based on the relative value
differential among them. The Fund will usually enter into swaps on a net basis,
i.e., the two payment streams are netted out in a cash settlement on the payment
date or dates specified in the instrument, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps are entered into for good faith hedging purposes, Franklin Mutual and the
Fund believe such obligations do not constitute senior securities under the 1940
Act and, accordingly, will not treat them as being subject to its borrowing
restrictions. The Fund may enter into currency transactions with Counterparties
which have received (or the guarantors of the obligations of such Counterparties
have received) a credit rating of A-l or P-l by S&P or Moody's, respectively, or
that have an equivalent rating from an NRSRO or (except for OTC currency
options) are determined to be of equivalent credit quality by Franklin Mutual.
If there is a default by the Counter party, the Fund may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to either specific transactions or portfolio positions. Transaction
hedging is entering into a currency transaction with respect to specific assets
or liabilities of the Fund, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended to wholly or partially
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or whose value is based upon foreign currency
or currently convertible into such currency other than with respect to proxy
hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if Franklin Mutual considers the Austrian schilling is
linked to the German deutsche mark (the "D-mark"), the Fund holds securities
denominated in schillings and Franklin Mutual believes that the value of
schillings will decline against the U.S. dollar, Franklin Mutual may enter into
a contract to sell D-marks and buy dollars. Currency hedging involves some of
the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to the Fund if the
currency being hedged fluctuates in value to a degree or in a direction that is
not anticipated. Further, there is the risk that the perceived linkage between
various currencies may not be present during the particular time that the Fund
is engaging in proxy hedging. If the Fund enters into a currency hedging
transaction, the Fund will comply with the asset segregation requirements
described below.
RISKS OF CURRENCY TRANSACTIONS
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Fund if
it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
COMBINED TRANSACTIONS
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts) and any combination of futures, options
and currency transactions ("component" transactions), instead of a single
Hedging Transaction, as part of a single or combined strategy when, in the
opinion of Franklin Mutual, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on Franklin Mutual's judgment that the combined strategies
will reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
RISKS OF HEDGING TRANSACTIONS OUTSIDE THE U.S.
When conducted outside the U.S., Hedging Transactions may not be regulated as
rigorously as in the U.S., may not involve a clearing mechanism and related
guarantees, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii)lesser
availability than in the U.S. of data on which to make trading decisions, (iii)
delays in the Fund's ability to act upon economic events occurring in foreign
markets during nonbusiness hours in the U.S., (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
U.S., and (v) lower trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many Hedging Transactions, in addition to other requirements, require that the
Fund segregate liquid high grade assets with its custodian to the extent Fund
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. In general, either the full amount
of any obligation by the Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restrictions, an amount of cash or
liquid high grade securities at least equal to the current amount of the
obligation must be segregated with the custodian. The segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. For example, a call option
written by the Fund will require the Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by the Fund on an index will require the Fund to own portfolio securities which
correlate with the index or to segregate liquid high grade assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by the Fund requires the Fund to segregate liquid, high grade
assets equal to the exercise price.
A currency contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of the currency or liquid
securities denominated in that currency equal to the Fund's obligations or to
segregate liquid high grade assets equal to the amount of the Fund's obligation.
However, the segregation requirement does not apply to currency contracts which
are entered in order to in effect "lock in" the purchase or sale price of a
trade in a security denominated in a foreign currency pending settlement within
the time customary for such securities.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices and OCC-issued and exchange-listed index
options will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of assets equal to its
accrued net obligations, as there is no requirement for payment or delivery of
amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a noncash settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC-issued and exchange-listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement,
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.
Hedging Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Hedging
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Hedging Transactions may also be offset in combinations. If
the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
DEPOSITORY RECEIPTS
Each series of the Fund may invest in securities commonly known as American
Depository Receipts ("ADRs"), and in European Depository Receipts ("EDRs") or
other securities convertible into securities of foreign issuers. ADRs are
certificates issued by a U.S. bank or trust company and represent the right to
receive securities of a foreign issuer deposited in a domestic bank or foreign
branch of a U.S. bank and traded on a U.S. exchange or in an over-the-counter
market. EDRs are receipts issued in Europe generally by a non-U.S. bank or trust
company that evidence ownership of non-U.S. or domestic securities. Generally,
ADRs are in registered form and EDRs are in bearer form. There are no fees
imposed on the purchase or sale of ADRs or EDRs although the issuing bank or
trust company may impose charges for the collection of dividends and the
conversion of ADRs and EDRs into the underlying securities. Investment in ADRs
has certain advantages over direct investment in the underlying non-U.S.
securities, since: (i) ADRs are U.S. dollar denominated investments which are
easily transferable and for which market quotations are readily available and
(ii) issuers whose securities are represented by ADRs are subject to the same
auditing, accounting and financial reporting standards as domestic issuers. EDRs
are not necessarily denominated in the currency of the underlying security.
MEDIUM AND LOWER RATED CORPORATE DEBT SECURITIES
Each series may invest in securities that are rated in the medium to lowest
rating categories by S&P and Moody's, some of which may be so-called "junk
bonds." The series have historically invested in securities of distressed
issuers when the intrinsic values of such securities have, in the opinion of
Franklin Mutual, warranted such investment. Corporate debt securities rated Baa
are regarded by Moody's as being neither highly protected nor poorly secured.
Interest payments and principal security appears adequate to Moody's for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such securities are
regarded by Moody's as lacking outstanding investment characteristics and having
speculative characteristics. Corporate debt securities rated BBB are regarded by
S&P as having adequate capacity to pay interest and repay principal. Such
securities are regarded by S&P as normally exhibiting adequate protection
parameters, although adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for securities in this rating category than in higher rated categories.
Corporate debt securities which are rated B are regarded by Moody's as generally
lacking characteristics of the desirable investment. In Moody's view, assurance
of interest and principal payments or of maintenance of other terms of the
security over any long period of time may be small. Corporate debt securities
rated BB, B, CCC, CC and C are regarded by S&P on balance as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. In S&P's view, although such
securities likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
BB and B are regarded by S&P as indicating the two lowest degrees of speculation
in this group of ratings. Securities rated D by S&P or C by Moody's are in
default and are not currently performing. The Fund will rely on Franklin
Mutual's judgment, analysis and experience in evaluating such debt securities.
In this evaluation, Franklin Mutual will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic conditions
and trends, its operating history, the quality of the issuer's management and
regulatory matters as well as the price of the security. Franklin Mutual may
also consider, although it does not rely primarily on, the credit ratings of
Moody's and S&P in evaluating lower rated corporate debt securities. Such
ratings evaluate only the safety of principal and interest payments, not market
value risk. Additionally, because the creditworthiness of an issuer may change
more rapidly than is able to be timely reflected in changes in credit ratings,
Franklin Mutual monitors the issuers of corporate debt securities held in the
Fund's portfolio. The credit rating assigned to a security is a factor
considered by Franklin Mutual in selecting a security for a series, but the
intrinsic value in light of market conditions and Franklin Mutual's analysis of
the fundamental values underlying the issuer are of at least equal significance.
Because of the nature of medium and lower rated corporate debt securities,
achievement by each series of its investment objective when investing in such
securities is dependent on the credit analysis of Franklin Mutual. If the series
purchased primarily higher rated debt securities such risks would be
substantially reduced.
A general economic downturn or a significant increase in interest rates could
severely disrupt the market for medium and lower grade corporate debt securities
and adversely affect the market value of such securities. Securities in default
are relatively unaffected by such events or by changes in prevailing interest
rates. In addition, in such circumstances, the ability of issuers of medium and
lower grade corporate debt securities to repay principal and to pay interest, to
meet projected business goals and to obtain additional financing may be
adversely affected. Such consequences could lead to an increased incidence of
default for such securities and adversely affect the value of the corporate debt
securities in the Fund's portfolio. The secondary market prices of medium and
lower grade corporate debt securities are less sensitive to changes in interest
rates than are higher rated debt securities, but are more sensitive to adverse
economic changes or individual corporate developments. Adverse publicity and
investor perceptions, whether or not based on rational analysis, may also affect
the value and liquidity of medium and lower grade corporate debt securities,
although such factors also present investment opportunities when prices fall
below intrinsic values. Yields on debt securities in the series portfolios that
are interest rate sensitive can be expected to fluctuate over time. In addition,
periods of economic uncertainty and changes in interest rates can be expected to
result in increased volatility of market price of any medium to lower grade
corporate debt securities in the series portfolio and thus could have an effect
on the Net Asset Value of the Fund if other types of securities did not show
offsetting changes in values. The secondary market value of corporate debt
securities structured as zero coupon securities or payment in kind securities
may be more volatile in response to changes in interest rates than debt
securities which pay interest periodically in cash. Because such securities do
not pay current interest, but rather, income is accreted, to the extent that a
series does not have available cash to meet distribution requirements with
respect to such income, it could be required to dispose of portfolio securities
that it otherwise would not. Such disposition could be at a disadvantageous
price. Failure to satisfy distribution requirements could result in the series
failing to qualify as a pass-through entity under the Code. Investment in such
securities also involves certain other tax considerations.
Franklin Mutual values the series' investments pursuant to guidelines adopted
and periodically reviewed by the Board. See "Transactions, Procedures and
Special Requirements - The Price We Use When You Buy or Sell Shares" in the
Prospectus. To the extent that there is no established retail market for some of
the medium or low grade corporate debt securities in which the series may
invest, there may be thin or no trading in such securities and the ability of
Franklin Mutual to accurately value such securities may be adversely affected.
Further, it may be more difficult for a series to sell such securities in a
timely manner and at their stated value than would be the case for securities
for which an established retail market did exist. The effects of adverse
publicity and investor perceptions may be more pronounced for securities for
which no established retail market exists as compared with the effects on
securities for which such a market does exist. During periods of reduced market
liquidity and in the absence of readily available market quotations for medium
and lower grade corporate debt securities held in the Fund's portfolio, the
responsibility of Franklin Mutual to value the Fund's securities becomes more
difficult and Franklin Mutual's judgment may play a greater role in the
valuation of the Fund's securities due to a reduced availability of reliable
objective data. To the extent that the Fund purchases illiquid corporate debt
securities or securities which are restricted as to resale, the Fund may incur
additional risks and costs. Illiquid and restricted securities may be
particularly difficult to value and their disposition may require greater effort
and expense than more liquid securities. Further, a series may be required to
incur costs in connection with the registration of restricted securities in
order to dispose of such securities, although under Rule 144A under the
Securities Act of 1933 certain securities may be determined to be liquid
pursuant to procedures adopted by the Board under applicable guidelines.
SHORT SALES
Each series may make short sales of securities. A short sale is a transaction in
which the series sells a security it does not own in anticipation that the
market price of that security will decline. Each series expects to make short
sales as a form of hedging to offset potential declines in long positions in
similar securities, in order to maintain portfolio flexibility and for profit.
When a series makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The series may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The series' obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other high grade liquid securities similar to those borrowed. The
series will also be required to deposit similar collateral with its custodian to
the extent, if any, necessary so that the value of both collateral deposits in
the aggregate is at all times equal to at least 100% of the current market value
of the security sold short.
If the price of the security sold short increases between the time of the short
sale and the time the series replaces the borrowed security, the series will
incur a loss; conversely, if the price declines, the series will realize a gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. Although the series' gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited.
The series will not make a short sale if, after giving effect to such sale, the
market value of all securities sold short exceeds 5% of the value of its total
assets or the series' aggregate short sales of a particular class of securities
exceeds 25% of the outstanding securities of that class. The series may also
make short sales "against the box" without respect to such limitations. In this
type of short sale, at the time of the sale, the series owns or has the
immediate and unconditional right to acquire at no additional cost the identical
security.
RESTRICTIONS AND LIMITATIONS
MUTUAL SHARES, QUALIFIED, BEACON, DISCOVERY AND EUROPEAN FUNDAMENTAL POLICIES
Each of Mutual Shares, Qualified, Beacon and Discovery has adopted the following
fundamental investment restrictions which may not be changed without the
affirmative vote of the holders of a majority of the outstanding voting
securities of such series, which means the lesser of (1) the holders of more
than 50% of the outstanding shares of voting stock of such securities or (2) 67%
of the shares if more than 50% of the shares are present at a meeting of
shareholders in person or by proxy. Unless otherwise noted, all percentage
restrictions are as of the time of investment after giving effect to the
transaction. Pursuant to such restrictions each series may not:
1. Purchase or sell commodities, commodity contracts (except in conformity
with regulations of the Commodities Futures Trading Commission such that the
series would not be considered a commodity pool), or oil and gas interests or
real estate. Securities or other instruments backed by commodities are not
considered commodities or commodity contracts for purposes of this restriction.
Debt or equity securities issued by companies engaged in the oil, gas, or real
estate businesses are not considered oil or gas interests or real estate for
purposes of this restriction. First Mortgage loans and other direct obligations
secured by real estate are not considered real estate for purposes of this
restriction.
2. Make loans, except to the extent the purchase of debt obligations of
any type are considered loans and except that the series may lend portfolio
securities to qualified institutional investors in compliance with requirements
established from time to time by the SEC and the securities exchanges on which
such securities are traded.
3. Issue securities senior to its stock or borrow money or utilize
leverage in excess of the maximum permitted by the 1940 Act which is currently
33 1/3% of total assets (plus 5% for emergency or other short-term purposes)
from banks on a temporary basis from time to time to provide greater liquidity
for redemptions or for special circumstances.
4. Invest more than 25% of the value of its assets in a particular
industry (except that U.S. Government securities are not considered an
industry).
5. Act as an underwriter except to the extent the series may be deemed to
be an underwriter when disposing of securities it owns or when selling its own
shares.
6. Purchase the securities of any one issuer, other than the U.S.
Government or any of its agencies or instrumentalities, if immediately after
such purchase more than 5% of the value of its total assets would be invested in
such issuer, or such series would own more than 10% of the outstanding voting
securities of such issuer, except that up to 25% of the value of such series'
total assets may be invested without regard to such 5% and 10% limitations.
7. Except as may be described in the Prospectus, engage in short sales,
purchase securities on margin or maintain a net short position.
[If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in value of portfolio securities
or the amount of assets will not be considered a violation of any of the
foregoing restrictions.]
NON FUNDAMENTAL POLICIES, ALL SERIES
As a matter of policy that is not fundamental, the Fund has determined that no
series will invest more than 5% of its assets in warrants, and that no more than
2% of such assets may be invested in warrants which are not listed on the New
York or American Stock Exchanges. Also, as a matter of policy, the series will
not purchase securities for purposes of short term trading and will not invest
more than 5% of their assets in securities of issuers (together with any
predecessors) in existence for less than three years, provided that the
aggregate percentage of assets invested in such issuers combined with illiquid
investments does not exceed 15%. The series will not purchase the securities of
any issuer of which any officer or director of the Fund owns more than 1/2 of 1%
of the outstanding securities or in which the officers and directors in the
aggregate own more than 5%. The series do not borrow for leveraging purposes.
In order to permit the sale of shares in certain states, the Fund may make
commitments more restrictive than the operating restrictions described above.
Should the Fund determine that any such commitment is no longer in the best
interests of a particular series and its shareholders, the Fund will revoke the
commitment by terminating sales of such series' shares in the state involved.
OFFICERS AND DIRECTORS
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
Edward I. Altman, Ph D. (55)
New York University
44 West 4th Street
New York, NY 10012
Director
Max L. Heine Professor of Financing and Vice Director of NYU Salomon Center,
Stern School of Business, New York University. Editor and author of numerous
financial publications; financial consultant.
Ann Torre Grant (38)
1225 Eye St., N.W.
Washington, DC 20005
Director
Executive Vice President and Chief Financial Officer, NHP Incorporated (owner
and manager of multifamily housing); prior to March 1995 she was Vice President
and Treasurer, U.S. Air, Inc.
Andrew H. Hines, Jr. (73)
Director
Consultant for the Triangle Consulting Group; chairman of the board and chief
executive officer of Florida Progress Corporation (1982- February, 1990) and
chairman and director of Precise Power Corporation; executive-in- residence of
Eckerd College (1991-present); and a director of Checkers Drive-In Restaurants,
Inc.
*Peter A. Langerman (41)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Director and Executive Vice President
Financial Analyst with Franklin Mutual, 11/96 to present, held the same
position with Heine Securities Corporation, xx to 10/96; Director of Sunbeam
Oster since 1990, Lancer Industries since 1994 and N.M.M. S.p.A. since 1995.
Manager (Director) of MB Motori, L.L.C. since 1994 and MWCR, L.L.C. since
1995.
*William J. Lippman (71)
One Parker Plaza
Fort Lee, NJ 07024
Director
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc.,
Franklin Templeton Distributors, Inc. and Franklin Management, Inc.; officer
and/or director or trustee of six of the investment companies in the Franklin
Group of Funds.
Bruce A. MacPherson (66)
1 Pequot Way
Canton, MA 02021
Director
President of A.A. MacPherson, Inc. Boston, Mass. (representative for
electrical
manufacturers).
Fred R. Millsaps (67)
2665 NE 37th Drive
Fort Lauderdale, FL 33394
Director
Manager of personal investments (1978-present); Chairman and Chief Executive
Officer of Landmark Banking Corporation (1969-1978); financial Vice President of
Florida Power and Light (1965-1969); vice president of The Federal Reserve Bank
of Atlanta (1958-1965); and a director of various other business and nonprofit
organizations.
*Michael F. Price (45)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Chairman of the Board and President
President, Chief Operating Officer, and director of Franklin Mutual, 11/96 to
present; held the same positions with Heine Securities Corporation, xx to 10/96.
Leonard Rubin (71)
Yacht and Racquet Club
2727 North Ocean Boulevard A1A - Apt. 508A
Boca Raton, Florida 33431
Director
President, F.N.C. Textiles, Inc.; Vice President, Trimtex Co. Inc.; and
trustee of three of the investment companies in the Franklin Group of Funds.
Barry F. Schwartz (47)
35 East 62nd Street
New York, NY 10021
Director
Executive Vice President and General Counsel, MacAndrews & Forbes Holdings,
Inc. (a diversified holding company).
Vaughn R. Sturtevant, M.D. (73)
6 Noyes Avenue
Waterville, ME 04901
Director
Practicing physician.
Robert E. Wade (50)
225 Hardwick Street
Belvidere, NJ 07823
Director
Practicing attorney
Jeffrey A. Altman ()
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Analyst and trader with Franklin Mutual, 11/96 to present; was employed by
Heine Securities Corporation, xx to 10/96; Manager (Director) MB Metropolis,
L.L.C. since 1994. Since 1995 Manager (Director) of MB Motori, L.L.C., MWCR,
L.L.C. and S.H. Mortgage. Trustee of Resurgence Properties Inc. and Chairman
of the Board of Trustees, Value Property Trust.
Edward J. Bradley (57)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Treasurer and Chief Financial and Accounting Officer
Treasurer and Chief Financial and Accounting Officer of Franklin Mutual, 11/96
to present; held the same positions with Heine Securities Corporation, xx to
10/96.
Elizabeth N. Cohernour (46)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
General Counsel and Secretary
Secretary of Franklin Mutual, 11/96 to present; held the same position with
Heine Securities Corporation, 5/88 to 10/96.
Robert L. Friedman ()
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Research analyst with Franklin Mutual, 11/96 to present; was employed by Heine
Securities Corporation, xx to 10/96.
Raymond Garea ()
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Research analyst with Franklin Mutual, 11/96 to present; was employed by
Heine Securities Corporation, 3/91 to 10/96. Prior thereto he was a Vice
President and analyst with Donaldson, Lufkin & Jenrette. Manager (Director)
MB Metropolis, L.L.C. and S.H. Mortgage.
Lawrence N. Sondike ()
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Research Analyst with Franklin Mutual, 11/96 to present; was employed by Heine
Securities Corporation xx to 10/96.
The Fund's independent Board members have standing audit, pension, nominating
and director's compensation and performance committees. The audit committee
is composed of Ms. Grant and Messrs. Altman and Wade. The pension committee
is composed of Messrs. Altman, Schwartz and Sturtevant. The nominating
committee is responsible to nominate candidates for independent Board member
positions and is composed of Messrs. [Chasse replacement?,] MacPherson and
Schwartz. The Board members' compensation and performance committee is
composed of Ms. Grant and Messrs. Wade and Sturtevant.
During the fiscal year ended December 31, 1995, the Fund paid its officers
and directors as a group, including reimbursement to the investment adviser for
the expenses of personnel who spend a substantial portion of their time on Fund
operations, aggregate compensation of $839,366. [All Fund officers are also
affiliated with Franklin Mutual. (See "Investment Advisory and Other Services,"
below.) Nonaffiliated Board members are currently paid $15,000 per year plus
$750 per meeting attended. Board members are paid $500 plus out-of-pocket
expenses for each Committee meeting attended. In 1993, the Board members
approved a retirement plan which generally provides payments to directors who
have served 10 years and retire at age 70. At the time of retirement, Directors
are entitled to annual payments equal to one-half of the retainer in effect as
of the time of retirement. As shown above, some of the nonaffiliated Board
members also serve as directors, trustees or managing general partners of
investment companies in the Franklin Templeton Group of Funds. They may receive
fees from these funds for their services. The following table provides the total
fees paid to nonaffiliated Board members by the Fund and by other funds in the
Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
NUMBER OF BOARDS IN
THE FRANKLIN
TOTAL FEES RECEIVED TEMPLETON GROUP OF
FROM THE FRANKLIN FUNDS ON WHICH EACH
TOTAL FEES PENSION RETIREMENT ANNUAL BENEFITS TEMPLETON GROUP OF SERVES**
RECEIVED FROM THE ACCRUED RETIREMENT FUNDS++
NAME FUND+
<S> <C> <C> <C> <C>
Edward I. Altman $20,750 0 $7,500 0 1
Ann Torre Grant* $20,750 0 $7,500 0 1
Bruce A. $18,750 0 $7,500 0 1
MacPherson
Barry F. Schwartz* $18,750 0 $7,500 0 1
Vaughn R. $18,750 0 $7,500 0 1
Sturtevant, M.D.
Robert E. Wade* $25,750 0 $7,500 0 1
Andrew H. Hines, 0 0 0 $106,325 24
Jr.
Fred R. Millsaps 0 0 0 $104,325 24
Leonard Rubin 0 0 0 $15,600 3
</TABLE>
+For fiscal year ended December 31, 1995.
++For calendar 1995.
*Not vested in retirement plan.
**We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes [61] registered investment companies, with approximately [171] U.S.
based funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation, including pension or retirement benefits, directly or indirectly
from the Fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries.
From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of any series' outstanding shares.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. Franklin Mutual, 777 Mariners Island
Boulevard, San Mateo, California, 94404, serves as the Fund's investment
manager. Franklin Mutual, registered with the SEC as an investment advisor in
[August 1996.] is a wholly owned subsidiary of Franklin Resources, Inc.,
("Resources"), a publicly-owned holding company whose principal shareholders are
Charles B. Johnson and Rupert H. Johnson, Jr.. On October xx, 1996, Resources
and Heine Securities, Inc., ("Heine") pursuant to an agreement, transferred the
assets of Heine to Franklin Mutual. The agreement also provided for the
continued employment by Franklin Mutual of certain key personnel of Heine that
were involved in managing the investment portfolios of each series. See "Key
Personnel of the Adviser" below.
Franklin Mutual provides investment research and portfolio management services,
including the selection of securities for the Fund to buy, hold or sell and the
selection of brokers through whom the Fund's portfolio transactions are
executed. Franklin Mutual's activities are subject to the review and supervision
of the Board to whom Franklin Mutual renders periodic reports of the Fund's
investment activities.
Franklin Mutual provides office space and furnishings, facilities and equipment
required for managing the business affairs of the Fund. Franklin Mutual also
maintains all internal bookkeeping, clerical, secretarial and administrative
personnel and services and provides certain telephone and other mechanical
services. Franklin Mutual is covered by fidelity insurance on its officers,
directors and employees for the protection of the Fund.
Adviser and its affiliates act as investment manager or administrator to 37 U.S.
registered investment companies with 129 separate series. They may give advice
and take action with respect to any of the other funds they manage, or for their
own account, that may differ from action taken by them on behalf of the Fund.
Similarly, with respect to the Fund, they are not obligated to recommend, buy or
sell, or to refrain from recommending, buying or selling any security that they
and access persons, as defined by the 1940 Act, may buy or sell for their own
account or for the accounts of any other fund. They are not obligated to refrain
from investing in securities held by the Fund or other funds that they manage or
administer. Of course, any transactions for the their accounts and other access
persons will be made in compliance with the Fund's Code of Ethics.
KEY PERSONNEL OF FRANKLIN MUTUAL. Mr. Michael F. Price, President, Chief
Operating Officer and Chairman of Franklin Mutual, is Chairman of the Board
and President of the Fund and principal executive officer and majority owner
of Compliance Solutions, Inc. ("Compliance Solutions"), a developer of
compliance monitoring software for money managers. The Fund is not charged
for the use of software designed by this company. Additionally, Mr. Price is
the sole director and owner of Clearwater Securities Inc. ("Clearwater"), a
registered securities dealer through which some Fund portfolio securities
transactions are effected. Mr. Edward J. Bradley is Treasurer and Chief
Financial and Accounting Officer of Franklin Mutual and the Fund and is
Treasurer of Compliance Solutions and Clearwater. Ms. Elizabeth N. Cohernour
is the Secretary and General Counsel of Franklin Mutual, the Fund, Compliance
Solutions and Clearwater. Mr. Peter A. Langerman is a Research Analyst with
Franklin Mutual and a director and Executive Vice President of the Fund.
Messrs. Jeffrey A. Altman, Robert L. Friedman, Raymond Garea and Lawrence N.
Sondike, Research Analysts with Franklin Mutual, are Vice Presidents of the
Fund. Mr. Eric LeGoff is Vice President of Franklin Mutual and Compliance
Solutions.
MANAGEMENT FEES. The Adviser serves as investment adviser to each of the series
pursuant to a separate investment advisor agreement. Under the agreements,
Mutual Shares, Qualified Series, Beacon Series, Discovery Series and European
Series pay Advisers a management fee equal to an [annual] rate of 0.60%, 0.60%,
0.60%, 0.80%, and 0.80%, respectively. The fee is computed at the close of
business on the last business day of each month. Each class will pay its
proportionate share of the management fee.
The management fee will be reduced as necessary to comply with the most
stringent limits on Fund expenses of any state where the Fund offers its shares.
Currently, the most restrictive limitation on a fund's allowable expenses for
each fiscal year, as a percentage of its average net assets, is 2.5% of the
first $30 million in assets, 2% of the next $70 million, and 1.5% of assets over
$100 million. Expense reductions have not been necessary based on state
requirements.
MANAGEMENT AGREEMENT. The management agreement is in effect until October 31,
1998. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities, or by Advisers on [] days' written notice, and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.
FUND ADMINISTRATION. Franklin Templeton Services, Inc., a wholly owned
subsidiary of Resources, performs certain administrative functions as Fund
Administrator for the Fund, including:
providing office space, telephone, office equipment and supplies for the
Fund;
paying compensation of the Fund's officers for services rendered as such;
authorizing expenditures and approving bills for payment on behalf of the
Fund;
supervising preparation of annual and semiannual reports to shareholders,
notices of dividends, capital gain distributions and tax credits, and
attending to correspondence and other communications with individual
shareholders;
daily pricing of the Fund's investment portfolio and preparing and
supervising publication of daily quotations of the bid and ask prices of the
Fund's shares, earnings reports and other financial data;
monitoring relationshps with organizations serving the Fund, including
custodians, transfer agents and printers;
providing trading desk facilities for the Fund;
supervising compliance by the Fund with recordkeeping requirements under the
1940 Act and the rules and regulations thereunder and with state regulatory
requirements; maintenance of books and records for the Fund (other than
those maintained by the custodian and transfer agent); and preparing and
filing of tax reports other than the Fund's income tax returns;
monitoring the qualifications of tax deferred retirement plans for the
Fund; and
providig executive, clerical and secretarial personnel needed to carry
out the above responsibilities.
ADMINISTRATION FEES. For its services, the Administrator receives a monthly fee
equal on an annual basis to 0.15% of the first $200,000,000 of the Fund's
average daily net assets, reduced to 0.135% annually of such assets in excess of
$200,000,000, further reduced to 0.1% annually of such net assets in excess of
$700,000,000, and further reduced to 0.075% annually of such net assets in
excess of $1,200,000,000. Each class of shares pays a portion of the fee,
determined by the proportion of the Fund that it represents. Since the
Administrator's fee covers services often provided by investment advisers to
other funds, the Fund's combined expenses for advisory and administrative
services may be higher than those of other investment companies.
ADMINISTRATION AGREEMENT. The Administrator is relieved of liability to the Fund
for any act or omission in the course of its performance under the
Administration Agreement, in the absence of willful misfeasance, bad faith or
gross negligence. The Administration Agreement may be terminated by the Fund at
any tie on 60 days' written notice without payment of penalty, provided that
such termination by the Fund shall be directed or approved by a vote of a
majority of the Directors of the Fund in office at the time or by vote of a
majority of the outstanding voting securities of the Fund and shall terminate
automatically and immediately in the event of its assignment.
PRIOR SERVICES. Before November 1, 1996, Heine served as the investment manager
under separate investment advisory agreements substantially the same in terms as
the agreements currently in effect with Franklin Mutual. During the fiscal year
ended December 31, 1995, an aggregate of $3,392,294 of administrative expenses
was incurred by the Mutual Shares Fund, $720,315 by the Mutual Qualified Fund,
$886,843 by the Mutual Beacon Fund and $412,166 by the Mutual Discovery Fund.
Heine's net fee for the fiscal years ended December 31, 1995, 1994 and 1993, was
$27,500,952, $21,795,512 and $19,507,048, respectively for Mutual Shares Fund,
$14,607,723, $9,766,052 and $8,434,525, respectively for Mutual Qualified Fund,
$17,720,127, $9,511,199 and $4,848,218, respectively for Mutual Beacon Fund,
$7,930,967, $5,737,128 and $2,294,912, respectively for Mutual Discovery Fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly-owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
CUSTODIANS. State Street Bank and Trust Company, Atlantic Division, 225 Franklin
Street, Boston, MA 02110, is the principal custodian for the assets of all the
series of the Fund.
AUDITORS. Ernst & Young LLP, Boston, Massachusetts, are the Fund's
independent auditors.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
The selection of brokers and dealers to execute transactions in the Fund's
portfolio is made by Franklin Mutual in accordance with criteria set forth in
the management agreement and any directions that the Board may give.
When placing a portfolio transaction, Franklin Mutual seeks to obtain prompt
execution of orders at the most favorable net price. When portfolio transactions
are done on a securities exchange, the amount of commission paid by the Fund is
negotiated between Franklin Mutual and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage commissions
paid in connection with portfolio transactions are based to a large degree on
the professional opinions of the persons responsible for the placement and
review of the transactions. These opinions are based on, among others, the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. Franklin Mutual will ordinarily
place orders to buy and sell over-the-counter securities on a principal rather
than agency basis with a principal market maker unless, in the opinion of
Franklin Mutual, a better price and execution can otherwise be obtained.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask price.
The amount of commission is not the only factor Franklin Mutual considers in the
selection of a broker to execute a trade. If Franklin Mutual believes it is in
the Fund's best interest, Franklin Mutual may place portfolio transactions with
brokers who provide the types of services described below, even if it means the
Fund will pay a higher commission than if no weight were given to the broker's
furnishing of these services. This will be done only if, in the opinion of
Franklin Mutual, the amount of any additional commission is reasonable in
relation to the value of the services. Higher commissions will be paid only when
the brokerage and research services received are bona fide and produce a direct
benefit to the Fund or assist Franklin Mutual in carrying out its
responsibilities to the Fund, or when it is otherwise in the best interest of
the Fund to do so, whether or not such services may also be useful to Franklin
Mutual in advising other clients.
When Franklin Mutual believes several brokers are equally able to provide the
best net price and execution, it may decide to execute transactions through
brokers who provide quotations and other services to the Fund, in an amount of
total brokerage as may reasonably be required in light of these services.
Specifically, these services may include providing the quotations necessary to
determine the Fund's Net Asset Value, as well as research, statistical and other
data.
It is not possible to place a dollar value on the special executions or on the
research services received by Franklin Mutual from dealers effecting
transactions in portfolio securities. The allocation of transactions in order to
obtain additional research services permits Franklin Mutual to supplement its
own research and analysis activities and to receive the views and information of
individuals and research staff of other securities firms. As long as it is
lawful and appropriate to do so, Franklin Mutual and its affiliates may use this
research and data in their investment advisory capacities with other clients. If
the Fund's officers are satisfied that the best execution is obtained, the sale
of Fund shares may also be considered a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
["SOFT DOLLAR" ARRANGEMENTS. The Fund receives research services from persons
who act as brokers or dealers for the Fund. The discussion below relates in
general to these brokers or dealers who pursuant to various arrangements pay for
certain computer hardware and software and other research and brokerage services
to the [Franklin Mutual] and/or the Fund for transactions effected by it for the
Fund. Commission "soft dollars" may be used only for "brokerage and research
services" provided by brokers to whom commissions are paid and under no
circumstances will cash payments be made by any such broker to [Franklin
Mutual]. To the extent that commission "soft dollars" do not result in the
provision of any "brokerage and research services" by brokers to whom such
commissions are paid, the commissions, nevertheless, are the property of such
broker. Although, potentially, [Franklin Mutual] could be influenced to place
Fund brokerage transactions with a broker in order to generate "soft dollars"
for Franklin Mutual's benefit, [Franklin Mutual] believes that the requirement
that it achieve best execution on Fund portfolio transactions, and the Fund's
negotiated commission structure with brokers, mitigate these concerns as the
cost of transactions effected through brokers, before consideration of any "soft
dollar" benefits that may be received, generally will be comparable to that
available elsewhere. During fiscal 1995, 1994 and 1993 the Fund paid brokerage
commissions of $3,355,180, $2,267,683 and $1,640,278, respectively, to brokers
who provided research services. This amount represented 14.90%, 19.45% and
17.75%, respectively, of total commissions paid for the periods.]
Because Distributors is a member of the National Association of Securities
Dealers, it may sometimes receive certain fees when the Fund tenders portfolio
securities pursuant to a tender-offer solicitation. As a means of recapturing
brokerage for the benefit of the Fund, any portfolio securities tendered by the
Fund will be tendered through Distributors if it is legally permissible to do
so. In turn, the next management fee payable to Franklin Mutual will be reduced
by the amount of any fees received by Distributors in cash, less any costs and
expenses incurred in connection with the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Franklin Mutual are considered at or about
the same time, transactions in these securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
Franklin Mutual, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. In some cases this procedure could
have a detrimental effect on the price or volume of the security so far as the
Fund is concerned. In other cases it is possible that the ability to participate
in volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal year ended December 31, 1995, Mutual Shares, Qualified, Beacon
and Discovery paid brokerage commissions totally $8,018,205, $5,182,736,
$6,269,829 and $3,040,751, respectively.
[Clearwater, a newly formed affiliate of Franklin Mutual, is a registered
securities dealer and a member of the National Association of Securities Dealers
("NASD"). Transactions in some Fund portfolio securities (particularly
transactions involving floor brokers) are effected through Clearwater. During
1995, Mutual Shares paid brokerage commissions to Clearwater of $1,192,230;
Mutual Qualified paid $640,588; Mutual Beacon paid $764,323 and Mutual Discovery
paid $217,609. The transactions constituted for Mutual Shares 13.2%; Mutual
Qualified 14.1%; Mutual Beacon 14.5% and Mutual Discovery 7.7% of the aggregate
dollar amount of brokerage transactions effected during 1995. These commissions
constituted for Mutual Shares 14.9%, for Mutual Qualified 12.4%, for Mutual
Beacon 12.2% and for Mutual Discovery 7.2% of the total commissions paid in
1995.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? Purchase
Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE
- ------------------------------- ------------
Under $30,000 3.0%
$30,000 but less than $50,000 2.5%
$50,000 but less than $100,000 2.0%
$100,000 but less than $200,000 1.5%
$200,000 but less than $400,000 1.0%
$400,000 or more 0%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors will pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 1% on
sales of $1 million to $2 million, plus 0.80% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales
over $50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans pursuant to a sales
charge waiver, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds, including Class II shares, acquired more than 90 days before the Letter
is filed, will be counted towards completion of the Letter but will not be
entitled to a retroactive downward adjustment in the sales charge. Any
redemptions you make during the 13 month period, except in the case of certain
retirement plans, will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the Letter have been completed. If
the Letter is not completed within the 13 month period, there will be an upward
adjustment of the sales charge, depending on the amount actually purchased (less
redemptions) during the period. The upward adjustment does not apply to certain
retirement plans. If you execute a Letter prior to a change in the sales charge
structure of the Fund, you may complete the Letter at the lower of the new sales
charge structure or the sales charge structure in effect at the time the Letter
was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If total purchases, less redemptions, equal
the amount specified under the Letter, the reserved shares will be deposited to
an account in your name or delivered to you or as you direct. If total
purchases, less redemptions, exceed the amount specified under the Letter and is
an amount that would qualify for a further quantity discount, a retroactive
price adjustment will be made by Distributors and the Securities Dealer through
whom purchases were made pursuant to the Letter (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, you will remit to Distributors an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge that
would have applied to the aggregate purchases if the total of the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account prior to fulfillment of the Letter, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objectives exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the first business day of the month in
which a payment is scheduled.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share of each class as of the scheduled
close of the Exchange, generally 1:00 p.m. Pacific time, each day that the
Exchange is open for trading. As of the date of this SAI, the Fund is informed
that the Exchange observes the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by Franklin Mutual.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange prior to the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value. The value of a foreign security is
determined as of the close of trading on the foreign exchange on which it is
traded or as of the scheduled close of trading on the Exchange, if that is
earlier. The value is then converted into its U.S. dollar equivalent at the
foreign exchange rate in effect at noon, New York time, on the day the value of
the foreign security is determined. If no sale is reported at that time, the
mean between the current bid and ask prices is used. Occasionally events that
affect the values of foreign securities and foreign exchange rates may occur
between the times at which they are determined and the close of the exchange and
will, therefore, not be reflected in the computation of the Net Asset Value of
each class. If events materially affecting the values of these foreign
securities occur during this period, the securities will be valued in accordance
with procedures established by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the Exchange. The value of these securities used in
computing the Net Asset Value of each class is determined as of such times.
Occasionally, events affecting the values of these securities may occur between
the times at which they are determined and the scheduled close of the Exchange
that will not be reflected in the computation of the Net Asset Value of each
class. If events materially affecting the values of these securities occur
during this period, the securities will be valued at their fair value as
determined in good faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. INCOME DIVIDENDS. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post October
loss deferral) may generally be made twice each year. One distribution may be
made in December to reflect any net short-term and net long-term capital gains
realized by the Fund as of October 31 of that year. Any net short-term and net
long-term capital gains realized by the Fund during the remainder of the fiscal
year may be distributed following the end of the fiscal year. The Fund may make
one distribution derived from net short-term and net long-term capital gains in
any year or adjust the timing of its distributions for operational or other
reasons.
TAXES
As stated in the Prospectus, each series has elected to be treated as a
regulated investment company ("RIC") under Subchapter M of the Code. The Board
reserves the right not to maintain the qualification of a series as a regulated
investment company if it determines this course of action to be beneficial to
shareholders. In that case, the series will be subject to federal and possibly
state corporate taxes on its taxable income and gains, and distributions to
shareholders will be taxable to the extent of the series' available earnings and
profits.
Because each series intends to qualify and to distribute all of its net
investment income and capital gain to shareholders, it is expected that each
series will not be required to pay Federal income taxes.
A series normally will distribute substantially all of its net investment income
and net realized capital gain, if any, to shareholders in the form of dividends
to be paid from time to time as determined by the Board. Such dividends are
taxable whether paid in cash or additional shares of such series.
Dividends or distributions have the effect of reducing the per share value of
the shares owned by the investor by the per share amount of the dividends or
distributions. Furthermore, such dividends and distributions paid shortly after
the purchase of shares by an investor, although in effect a return of capital,
are subject to income taxes.
In the event that total distributions (including distributed or designated net
capital gain) for a taxable year exceed its investment company taxable income
and net capital gain, a portion of each distribution generally will be treated
as a return of capital. Distributions treated as a return of capital reduce a
shareholder's basis in its shares and could result in a capital gain tax either
when a distribution is in excess of basis or, more likely, when a shareholder
redeems its shares.
Shareholders of a series will be notified annually by the Fund as to the Federal
tax treatment of dividends and distributions paid during the calendar year.
Dividends and distributions may also be subject to state and local taxes. State
and local tax treatment may vary according to applicable laws. You can elect to
receive distributions in cash or in additional shares of such series. The price
of the additional shares is determined as of the date for the dividend payment.
[(See "What Distributions Might I Receive From the Fund?" in Prospectus.)]
To maintain qualification as a RIC under the Code, each series of the Fund must
limit gains from the sale or other disposition of its portfolio securities
(including options, futures and forward contracts) held for less than three
months to less than 30% of its annual gross income. Generally, gains on foreign
currencies (and gains on options, futures, or forward contracts with respect to
foreign currencies) are not subject to this 30% short-short rule if directly
related to regular investments by a series in equity or debt securities.
Each series intends to declare and pay dividends and capital gain distributions
so as to avoid imposition of a 4% Federal excise tax. To do so, each series
expects to distribute during the calendar year an amount at least equal to (i)
98% of its calendar year net investment income, (ii) 98% of its realized capital
gain (the excess of short and long-term capital gain over short and long-term
capital loss) for each one-year period ending October 31, and (iii) 100% of any
undistributed net investment income or realized capital gain from the prior
calendar year which has not been distributed by such series. Dividends declared
in October, November, or December and made payable to shareholders of record in
such a month would be deemed paid by the Series and taxable to shareholders on
December 31 of such year provided that such dividends are actually paid during
January of the following year. A series may make a deemed distribution with
respect to its net capital gain by paying the tax with respect to the net
capital gain and then designating, but not distributing, all or a portion of
such gain as a capital gain dividend. Such series' shareholders will treat such
designated amounts as a capital gain on their income tax returns, but they will
receive a credit or refund equal to Federal income taxes paid by such series
with respect to such capital gain. In addition, shareholders will increase their
basis in the series' shares by 65% of the amount subject to tax. If a capital
gain dividend is paid with respect to any shares of a series which are sold at a
loss after being held for less than six months, any loss realized upon the sale
of such shares will be treated as a long-term capital loss to the extent of such
capital gain dividend. There are special rules for determining holding periods
for the purpose of the preceding sentence.
Dividends distributed by a series will only be eligible for the
dividends-received deduction available to corporate shareholders to the extent
of the portion of a series' gross income which consists of dividends received on
equity securities issued by domestic corporations with respect to which such
series meets the same holding period, risk of loss, and borrowing limitations
applicable to the series' shareholders. Section 246 of the Code permits the
dividends-received deduction to corporate shareholders only if the shares with
respect to which the dividends were paid have been held for more than 45 days.
If the holding period is not satisfied, the dividends-received deduction is
disallowed, regardless of whether the shares with respect to which the dividends
were paid have been sold or otherwise disposed of. The holding period
requirements are separately applicable to each block of shares acquired,
including each block of shares received in payment of the Fund's dividends. For
purposes of determining whether this holding period requirement has been met,
the day of acquisition and any day after the first 45 days after the date on
which such shares become ex-dividend must be disregarded. In addition, the
holding period is suspended during periods in which the stock is subject to
diminished risk of loss including, for example, because the holder has acquired
a put option or sold a call option (other than certain covered call options
where the exercise price is not substantially below the selling price) or
otherwise hedged his position.
The dividends-received deduction will also be reduced, for shareholders who
incur indebtedness in order to purchase shares of a series of the Fund, by the
percentage of the cost of such series' shares that is debt- financed. Generally,
this limitation applies only if the debt is directly attributable to the
purchase of shares. Whether debt is directly attributable to the purchase of
shares depends on the particular facts and circumstances of each situation and
accordingly shareholders are urged to consult their tax advisors.
Under section 1059 of the Code, a corporation which receives an "extraordinary
dividend" and disposes of the stock with respect to which such dividend was
paid, provided generally that such stock has not been held for at least two
years prior to the date of declaration, announcement or agreement about the
extraordinary dividend, is required to reduce its basis in such stock (but not
below zero) by the amount of the dividend which was not taxed because of the
dividends-received deduction with such basis reduction generally being treated
as having occurred immediately before the sale or disposition of such stock. To
the extent such untaxed amount exceeds the shareholder's basis, such excess will
be taxed as gain upon a sale or disposition of such stock. An extraordinary
dividend generally is any dividend that equals or exceeds 10% of the
shareholder's basis in the stock (5% in the case of preferred stock). For this
purpose, generally, all dividends within any 85-day period and if such dividends
total more than 20% of the shareholder's basis in its stock, all dividends
within one year, must be aggregated for purposes of determining whether such
dividends constitute extraordinary dividends. The shareholder may elect to
determine the status of extraordinary dividends by reference to the fair market
value of the stock as of the date before the ex-dividend date, rather than by
reference to the adjusted basis of such stock (provided the shareholder
establishes the fair market value to the satisfaction of the Commissioner of the
IRS). In determining whether the above-mentioned two-year holding period has
been met, the same rules apply as are applicable to the 45-day holding period
requirement for the dividends received deduction.
Corporations should note that 75 percent of the untaxed portion of the Fund's
dividends could be taken into account for purposes of the alternative minimum
tax imposed on corporations.
A series may in the future engage in various defensive hedging transactions.
Under various Code provisions such transactions might change the character of
recognized gains and losses, accelerate the recognition of certain gains and
losses, and defer the recognition of certain losses or deductions.
If more than 50% of the assets of a series of the Fund at the close of any
taxable year consists of stocks or securities of foreign corporations, the Fund
may elect to treat any foreign income taxes, such as withholding taxes on
interest or dividends, that are paid by the Fund with respect to the series as
paid by the shareholders of such series. If the Fund makes this election with
respect to a series, the series shareholders will be entitled to credit their
pro rata share of the foreign taxes paid by the series against their U.S.
federal income tax liability, or to deduct such amounts from their U.S. taxable
income. No deduction for foreign taxes may be claimed by a shareholder who does
not itemize deductions. In addition, certain individual shareholders may be
subject to rules that limit or reduce their ability to deduct fully their pro
rata share of foreign taxes paid by the Fund. Since the Fund anticipates that
more than 50% of the value of the total assets of European will consist of
non-U.S. equity and debt securities, European shareholders are expected to be
eligible for a pass through of the foreign taxes paid by the Fund. Shareholders
of Shares, Qualified, Beacon and Discovery are not expected to be eligible for a
pass through of the foreign taxes paid by the Fund.
Treasury regulations provide that the dividends paid deduction attributable to
an in-kind distribution of property is equal to the adjusted basis of such
property.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for both classes of the Fund's
shares. The underwriting agreement will continue in effect for successive annual
periods if its continuance is specifically approved at least annually by a vote
of the Board or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Board members
who are not parties to the underwriting agreement or interested persons of any
such party (other than as members of the Board), cast in person at a meeting
called for that purpose. The underwriting agreement terminates automatically in
the event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
THE RULE 12B-1 PLANS
Each class has adopted a distribution plan or "Rule 12b-1 plan" pursuant to Rule
12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan, the Fund may pay up to a maximum of
0.25% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares. In
addition, the Fund is permitted to pay Distributors up to an additional .10% per
year of Class I's average daily net assets for reimbursement of distribution
expenses.
THE CLASS II PLAN. Under the Class II plan, the Fund pays Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the Fund.
Under the Class II plan, the Fund also pays an additional 0.25% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
During the first year after a purchase of Class II shares, Distributors may keep
this portion of the Rule 12b-1 fees associated with the Class II purchase.
THE CLASS I AND CLASS II PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the Fund, Franklin Mutual or Distributors or other parties on behalf of
the Fund, Franklin Mutual or Distributors make payments that are deemed to be
for the financing of any activity primarily intended to result in the sale of
shares of each class within the context of Rule 12b-1 under the 1940 Act, then
such payments shall be deemed to have been made pursuant to the plan. The terms
and provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
management agreement with Franklin Mutual or by vote of a majority of the
outstanding shares of the class. Distributors or any dealer or other firm may
also terminate their respective distribution or service agreement at any time
upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Current yield and average annual total return quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance for each class follows. Regardless of
the method used, past performance is not necessarily indicative of future
results, but is an indication of the return to shareholders only for the limited
historical period used.
Because these shares were not offered prior to November 1, 1995, no performance
data is available for these shares. After a sufficient period of time has
passed, Class I and Class II performance data will be available.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over one-, five- and ten-year
periods, or fractional portion thereof, that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes the maximum front-end sales charge is deducted from the initial $1,000
purchase, and income dividends and capital gain distributions are reinvested at
Net Asset Value. The quotation assumes the account was completely redeemed at
the end of each one-, five- and ten-year period and the deduction of all
applicable charges and fees. If a change is made to the sales charge structure,
historical performance information will be restated to reflect the maximum
front-end sales charge currently in effect.
These figures will be calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-, five-
or ten-year periods (or fractional portion thereof)
CUMULATIVE TOTAL RETURN. The Fund may also quote the cumulative total return for
each class, in addition to the average annual total return. These quotations are
computed the same way, except the cumulative total return will be based on the
actual return for each class for a specified period rather than on the average
return over one-, five- and ten-year periods, or fractional portion thereof.
YIELD
CURRENT YIELD. Current yield of each class shows the income per share earned by
the Fund. It is calculated by dividing the net investment income per share of
each class earned during a 30-day base period by the applicable maximum Offering
Price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders of
the class during the base period.
These figures will be obtained using the following SEC formula:
Yield = 2 [(A-B + 1)6 - 1]
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders of a
class. Amounts paid to shareholders are reflected in the quoted current
distribution rate. The current distribution rate is usually computed by
annualizing the dividends paid per share by a class during a certain period and
dividing that amount by the current maximum Offering Price. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gains and is calculated over a different period of time.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
For investors who are permitted to buy Class I shares without a sales charge,
sales literature about Class I may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax
applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Templeton Group of Funds. Resources is the parent company of the advisors and
underwriter of both the Franklin Group of Funds and Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of each class' performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the New York Stock Exchange.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for equity funds.
h) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
m) Standard & Poor's 100 Stock Index - an unmanaged index based on the prices of
100 blue-chip stocks, including 92 industrials, one utility, two transportation
companies, and 5 financial institutions. The S&P 100 Stock Index is a smaller
more flexible index for options trading.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk adjusted performance of a fund over specified
time periods relative to other funds within its class.
[Bond Fund Comparisons?]
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare a class' performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, if any, as well as the value of its shares that are
based upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 48 years and
now services more than 2.5 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Together, the Franklin Templeton Group has over
[$145] billion in assets under management for more than [4.1] million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers [120] U.S. based mutual funds to the public. The Fund may identify
itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one
in service quality for five of the past eight years.
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the Fund's outstanding shares.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, prior to
executing instructions regarding the account; (b) interplead disputed funds or
accounts with a court of competent jurisdiction; or (c) surrender ownership of
all or a portion of the account to the IRS in response to a Notice of Levy.
[SUMMARY OF CODE OF ETHICS. Employees of Resources or its subsidiaries who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed within 24 hours after clearance; (ii) copies of all brokerage
confirmations must be sent to a compliance officer and, within 10 days after the
end of each calendar quarter, a report of all securities transactions must be
provided to the compliance officer; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and inform
the compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they are
recommending a security in which they have an ownership interest for purchase or
sale by a fund or other client.]
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of each series for the fiscal year ended December 31, 1995, including the
auditors' report, and the unaudited financial statements contained in the
Semi-Annual Report to Shareholders of each series for the period ended June 30,
1996, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
FRANKLIN MUTUAL - Franklin Mutual Advisers, Inc., the Fund's investment
manager
BOARD - The Board of Directors of the Fund
CD - Certificate of deposit
CLASS I AND CLASS II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
EXCHANGE - New York Stock Exchange
FRANKLIN FUNDS - The mutual funds in the Franklin Group of FundsAE except
Franklin Valuemark Funds and the Franklin Government Securities Trust
FRANKLIN TEMPLETON FUNDS - The Franklin Funds and the Templeton Funds
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered mutual funds in the
Franklin Group of FundsAE and the Templeton Group of Funds
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
PROSPECTUS - The prospectus for the Fund dated November 1, 1996, as may be
amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution which, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TEMPLETON FUNDS - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or another
wholly-owned subsidiary of Resources.
MUTUAL SERIES FUND INC.
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1996
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus of Mutual Series Fund Inc. (the
"Fund") dated November 1, 1996. Copies of the Prospectus and the most recent
Annual Report of each series of the Fund can be obtained without charge by
calling the Fund at 1-800-553-3014 or by writing to Mutual Series Fund Inc., 51
John F. Kennedy Parkway, Short Hills, NJ 07078, Attention: Shareholder Services.
TABLE OF CONTENTS
PAGE
Investment Objectives and Policies.....................
Restrictions and Limitations...........................
Management of the Fund.................................
Investment Adviser.....................................
Redemption of Shares...................................
Investment Advisory Agreements.........................
Portfolio Brokerage....................................
Taxes..................................................
Calculation of Performance Data........................
Custodian, Transfer Agent and Auditors.................
[Code of Ethics........................................]
Financial Information..................................
INVESTMENT OBJECTIVES AND POLICIES
As described in the Prospectus, the general investment policy of the
Fund for its series is to invest in securities if, in the opinion of Franklin
Mutual Advisers, Inc., the series' investment adviser ("Franklin Mutual" or
"Adviser"), they are available at prices less than their intrinsic value, as
determined by the Adviser after careful analysis and research, taking into
account, among other factors, the relationship of book value to market value of
the securities, cash flow, and multiples of earnings of comparable securities.
The Fund reserves freedom of action for each series to invest in common stock,
preferred stock, debt securities and other securities in such proportions as the
management deems advisable, but, without committing any fixed portion of any
series' assets, the management typically maintains a portion of the assets of
each series invested in debt securities and preferred stocks (which may be
convertible). In addition, the series may also invest in restricted debt and
equity securities, in foreign securities, and in other investment company
securities.
REPURCHASE AGREEMENTS AND LOANS OF SECURITIES
Each series may invest in repurchase agreements with domestic banks,
brokers or dealers. Repurchase agreements are considered loans by the series
collateralized by the underlying securities. As with loans of portfolio
securities which the series may make, these transactions must be fully
collateralized at all times. The adviser will monitor the creditworthiness of
the other party and will monitor the value of the collateral by marking to
market daily in order to confirm that its value is at least 100% of the agreed
upon sum to be paid to the series.
Repurchase agreements and lending of portfolio securities involve some
credit risk to the series. If the other party defaults on its obligations, the
series could be delayed or prevented from receiving payment or recovering its
collateral. Even if the series recovers the collateral in such a situation, the
series may receive less than its purchase price upon resale.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Hedging Transactions involving options
require segregation of Fund assets in special accounts, as described below under
"Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the seller of the obligation to buy, the
underlying security, commodity, index, currency or other instrument at the
exercise price. For instance, the Fund's purchase of a put option on a security
might be designed to protect its holdings in the underlying instrument (or, in
some cases, a similar instrument) against a substantial decline in the market
value by giving the Fund the right to sell such instrument at the option
exercise price. A call option, upon payment of a premium, gives the purchaser of
the option the right to buy, and the seller the obligation to sell, the
underlying instrument at the exercise price. The Fund's purchase of a call
option on a security, financial future, index, currency or other instrument
might be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase such instrument. An American style put or call
option may be exercised at any time during the option period while a European
style put or call option may be exercised only upon expiration or during a fixed
period prior thereto. The Fund is authorized to purchase and sell
exchange-listed options and over-the-counter options ("OTC options").
Exchange-listed options are issued by a regulated intermediary such as the
Options Clearing Corporation ("OCC"), which guarantees the performance of the
obligations of the parties to such options. The discussion below uses the OCC as
a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC-issued and exchange-listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the- money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting option transactions.
The Fund's ability to close out its position as a purchaser or seller of
an OCC or exchange-listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms. The hours of trading for
listed options may not coincide with the hours during which the underlying
financial instruments are traded. To the extent that the option markets close
before the markets for the underlying financial instruments, significant price
and rate movements can take place in the underlying markets that cannot be
reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (each a "Counterparty" collectively
"Counterparties") through direct bilateral agreement with the Counter party. In
contrast to exchange-listed options, which generally have standardized terms and
performance mechanics, all the terms of an OTC option, including such terms as
method of settlement, term, exercise price, premium, guarantees and security,
are set by negotiation of the parties. The Fund will only sell OTC options
(other than OTC currency options) that are subject to a buy-back provision
permitting the Fund to require the Counter party to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counter party fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counter party or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with United
States government securities dealers recognized by the Federal Reserve Bank of
New York as "primary dealers" or broker dealers, domestic or foreign banks or
other financial institutions which have received (or the guarantors of the
obligations of which have received) a short-term credit rating of "A-l" from
Standard & Poor's Corporation ("S&P") or "P-l" from Moody's Investor Services
("Moody's"), an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or which the Adviser determines is of comparable
credit quality. The staff of the SEC currently takes the position that OTC
options purchased by the Fund, and portfolio securities "covering" the amount of
the Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any,) are illiquid, and are subject
to the Fund's limitations on investments in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase the Fund's income.
The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including
U.S. Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments (whether or not it holds the above securities in its portfolio) and
on securities indices, currencies and futures contracts other than futures on
individual corporate debt and individual equity securities. The Fund will not
sell put options if, as a result, more than 50% of the Fund's assets would be
required to be segregated to cover its potential obligations under such put
options other than those with respect to futures and options thereon. In selling
put options, there is a risk that the Fund may be required to buy the underlying
security at a disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES
The Fund may enter into financial futures contracts or purchase or sell
put and call options on such futures as a hedge against anticipated interest
rate, currency or equity market changes, for duration management and for risk
management purposes. Futures are generally bought and sold on the commodities
exchanges where they are listed with payment of initial and variation margin as
described below. The sale of a futures contract creates a firm obligation by the
Fund, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to index futures and Eurodollar instruments, the net
cash amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right in
return for the premium paid to assume a position in a futures contract and
obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading Commission and will
be entered into only for a bona fide hedging, risk management (including
duration management) or other portfolio management purposes. Typically,
maintaining a futures contract or selling an option thereon requires the Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets ("initial margin") which initially is
typically 1% to 10% of the face amount of the contract (but may be higher in
some circumstances). Additional cash or assets ("variation margin") may be
required to be deposited thereafter on a daily basis as the mark to market value
of the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of the Fund. If the Fund exercises an option on a futures contract, it
will be obligated to post initial margin (and potential subsequent variation
margin) for the resulting futures positions just as it would for any position.
Futures contracts and options thereon are generally settled by entering into an
offsetting transaction, but there can be no assurance that the position can be
offset prior to settlement at an advantageous price nor that delivery will
occur.
The Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
The Fund may also purchase and sell call and put options on securities
indices and other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an index
depends on price movements in the instruments making up the market, market
segment, industry or other composite on which the underlying index is based,
rather than price movements in individual securities, as is the case with
respect to options on securities.
CURRENCY TRANSACTIONS
The Fund may engage in currency transactions with Counterparties in
order to hedge the value of portfolio holdings denominated in particular
currencies against fluctuations in relative value. Currency transactions include
forward currency contracts, exchange-listed currency futures, exchange-listed
and OTC options on currencies, and currency swaps. A forward currency contract
involves a privately negotiated obligation to purchase or sell (with delivery
generally required) a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. A currency swap is an agreement to
exchange cash flows on a notional amount of two or more currencies based on the
relative value differential among them. The Fund will usually enter into swaps
on a net basis, i.e., the two payment streams are netted out in a cash
settlement on the payment date or dates specified in the instrument, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these swaps are entered into for good faith hedging
purposes, the Adviser and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations of such Counterparties have received) a credit rating of A-l or P-l
by S&P or Moody's, respectively, or that have an equivalent rating from an NRSRO
or (except for OTC currency options) are determined to be of equivalent credit
quality by the Adviser. If there is a default by the Counter party, the Fund may
have contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to either specific transactions or portfolio positions. Transaction
hedging is entering into a currency transaction with respect to specific assets
or liabilities of the Fund, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to
an extent greater, after netting all transactions intended to wholly or
partially offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or whose value is based upon foreign
currency or currently convertible into such currency other than with respect to
proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if the Adviser considers the Austrian schilling is
linked to the German deutsche mark (the "D-mark"), the Fund holds securities
denominated in schillings and the Adviser believes that the value of schillings
will decline against the U.S. dollar, the Adviser may enter into a contract to
sell D-marks and buy dollars. Currency hedging involves some of the same risks
and considerations as other transactions with similar instruments. Currency
transactions can result in losses to the Fund if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived linkage between various currencies
may not be present during the particular time that the Fund is engaging in proxy
hedging. If the Fund enters into a currency hedging transaction, the Fund will
comply with the asset segregation requirements described below.
RISKS OF CURRENCY TRANSACTIONS
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Fund if
it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
COMBINED TRANSACTIONS
The Fund may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and any combination of
futures, options and currency transactions ("component" transactions), instead
of a single Hedging Transaction, as part of a single or combined strategy when,
in the opinion of the Adviser, it is in the best interests of the Fund to do so.
A combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
RISKS OF HEDGING TRANSACTIONS OUTSIDE THE UNITED STATES
When conducted outside the United States, Hedging Transactions may not
be regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) other complex foreign political, legal and economic factors,
(ii)lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during nonbusiness hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lower
trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many Hedging Transactions, in addition to other requirements, require
that the Fund segregate liquid high grade assets with its custodian to the
extent Fund obligations are not otherwise "covered" through ownership of the
underlying security, financial instrument or currency. In general, either the
full amount of any obligation by the Fund to pay or deliver securities or assets
must be covered at all times by the securities, instruments or currency required
to be delivered, or, subject to any regulatory restrictions, an amount of cash
or liquid high grade securities at least equal to the current amount of the
obligation must be segregated with the custodian. The segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. For example, a call option
written by the Fund will require the Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by the Fund on an index will require the Fund to own portfolio securities which
correlate with the index or to segregate liquid high grade assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by the Fund requires the Fund to segregate liquid, high grade
assets equal to the exercise price.
A currency contract which obligates the Fund to buy or sell currency
will generally require the Fund to hold an amount of the currency or liquid
securities denominated in that currency equal to the Fund's obligations or to
segregate liquid high grade assets equal to the amount of the Fund's obligation.
However, the segregation requirement does not apply to currency contracts which
are entered in order to in effect "lock in" the purchase or sale price of a
trade in a security denominated in a foreign currency pending settlement within
the time customary for such securities.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices and OCC-issued and exchange-listed
index options will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a noncash settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC-issued and exchange-listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement,
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
Hedging Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Hedging
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Hedging Transactions may also be offset in combinations. If
the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
DEPOSITORY RECEIPTS
Each series of the Fund may invest in securities commonly known as
American Depository Receipts ("ADRs"), and in European Depository Receipts
("EDRs") or other securities convertible into securities of foreign issuers.
ADRs are certificates issued by a United States bank or trust company and
represent the right to receive securities of a foreign issuer deposited in a
domestic bank or foreign branch of a United States bank and traded on a United
States exchange or in an over-the-counter market. EDRs are receipts issued in
Europe generally by a non-U.S. bank or trust company that evidence ownership of
non-U.S. or domestic securities. Generally, ADRs are in registered form and EDRs
are in bearer form. There are no fees imposed on the purchase or sale of ADRs or
EDRs although the issuing bank or trust company may impose charges for the
collection of dividends and the conversion of ADRs and EDRs into the underlying
securities. Investment in ADRs has certain advantages over direct investment in
the underlying non-U.S. securities, since: (i) ADRs are U.S. dollar denominated
investments which are easily transferable and for which market quotations are
readily available and (ii) issuers whose securities are represented by ADRs are
subject to the same auditing, accounting and financial reporting standards as
domestic issuers. EDRs are not necessarily denominated in the currency of the
underlying security.
MEDIUM AND LOWER RATED CORPORATE DEBT SECURITIES
Each series may invest in securities that are rated in the medium to
lowest rating categories by S&P and Moody's, some of which may be so-called
"junk bonds." The series have historically invested in securities of distressed
issuers when the intrinsic values of such securities have, in the opinion of the
Adviser, warranted such investment. Corporate debt securities rated Baa are
regarded by Moody's as being neither highly protected nor poorly secured.
Interest payments and principal security appears adequate to Moody's for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such securities are
regarded by Moody's as lacking outstanding investment characteristics and having
speculative characteristics. Corporate debt securities rated BBB are regarded by
S&P as having adequate capacity to pay interest and repay principal. Such
securities are regarded by S&P as normally exhibiting adequate protection
parameters, although adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for securities in this rating category than in higher rated categories.
Corporate debt securities which are rated B are regarded by Moody's as
generally lacking characteristics of the desirable investment. In Moody's view,
assurance of interest and principal payments or of maintenance of other terms of
the security over any long period of time may be small. Corporate debt
securities rated BB, B, CCC, CC and C are regarded by S&P on balance as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. In S&P's view,
although such securities likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. BB and B are regarded by S&P as indicating the
two lowest degrees of speculation in this group of ratings. Securities rated D
by S&P or C by Moody's are in default and are not currently performing. The Fund
will rely on the Adviser's judgment, analysis and experience in evaluating such
debt securities. In this evaluation, the Adviser will take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters as well as the price of the security.
The Adviser may also consider, although it does not rely primarily on, the
credit ratings of Moody's and S&P in evaluating lower rated corporate debt
securities. Such ratings evaluate only the safety of principal and interest
payments, not market value risk. Additionally, because the creditworthiness of
an issuer may change more rapidly than is able to be timely reflected in changes
in credit ratings, the Adviser monitors the issuers of corporate debt securities
held in the Fund's portfolio. The credit rating assigned to a security is a
factor considered by the Adviser in selecting a security for a series, but the
intrinsic value in light of market conditions and the Adviser's analysis of the
fundamental values underlying the issuer are of at least equal significance.
Because of the nature of medium and lower rated corporate debt securities,
achievement by each series of its investment objective when investing in such
securities is dependent on the credit analysis of the Adviser. If the series
purchased primarily higher rated debt securities such risks would be
substantially reduced.
A general economic downturn or a significant increase in interest rates
could severely disrupt the market for medium and lower grade corporate debt
securities and adversely affect the market value of such securities. Securities
in default are relatively unaffected by such events or by changes in prevailing
interest rates. In addition, in such circumstances, the ability of issuers of
medium and lower grade corporate debt securities to repay principal and to pay
interest, to meet projected business goals and to obtain additional financing
may be adversely affected. Such consequences could lead to an increased
incidence of default for such securities and adversely affect the value of the
corporate debt securities in the Fund's portfolio. The secondary market prices
of medium and lower grade corporate debt securities are less sensitive to
changes in interest rates than are higher rated debt securities, but are more
sensitive to adverse economic changes or individual corporate developments.
Adverse publicity and investor perceptions, whether or not based on rational
analysis, may also affect the value and liquidity of medium and lower grade
corporate debt securities, although such factors also present investment
opportunities when prices fall below intrinsic values. Yields on debt securities
in the series portfolios that are interest rate sensitive can be expected to
fluctuate over time. In addition, periods of economic uncertainty and changes in
interest rates can be expected to result in increased volatility of market price
of any medium to lower grade corporate debt securities in the series portfolio
and thus could have an effect on the net asset value of the Fund if other types
of securities did not show offsetting changes in values. The secondary market
value of corporate debt securities structured as zero coupon securities or
payment in kind securities may be more volatile in response to changes in
interest rates than debt securities which pay interest periodically in cash.
Because such securities do not pay current interest, but rather, income is
accreted, to the extent that a series does not have available cash to meet
distribution requirements with respect to such income, it could be required to
dispose of portfolio securities that it otherwise would not. Such disposition
could be at a disadvantageous price. Failure to satisfy distribution
requirements could result in the series failing to qualify as a pass- through
entity under the Internal Revenue Code. Investment in such securities also
involves certain other tax considerations.
The Adviser values the series' investments pursuant to guidelines
adopted and periodically reviewed by the Board of Directors of the Fund (the
"Board"). See "Determination of Net Asset Value" in the Prospectus. To the
extent that there is no established retail market for some of the medium or low
grade corporate debt securities in which the series may invest, there may be
thin or no trading in such securities and the ability of the Adviser to
accurately value such securities may be adversely affected. Further, it may be
more difficult for a series to sell such securities in a timely manner and at
their stated value than would be the case for securities for which an
established retail market did exist. The effects of adverse publicity and
investor perceptions may be more pronounced for securities for which no
established retail market exists as compared with the effects on securities for
which such a market does exist. During periods of reduced market liquidity and
in the absence of readily available market quotations for medium and lower grade
corporate debt securities held in the Fund's portfolio, the responsibility of
the Adviser to value the Fund's securities becomes more difficult and the
Adviser's judgment may play a greater role in the valuation of the Fund's
securities due to a reduced availability of reliable objective data. To the
extent that the Fund purchases illiquid corporate debt securities or securities
which are restricted as to resale, the Fund may incur additional risks and
costs. Illiquid and restricted securities may be particularly difficult to value
and their disposition may require greater effort and expense than more liquid
securities. Further, a series may be required to incur costs in connection with
the registration of restricted securities in order to dispose of such
securities, although under Rule 144A under the Securities Act of 1933 certain
securities may be determined to be liquid pursuant to procedures adopted by the
Board under applicable guidelines.
SHORT SALES
Each series may make short sales of securities. A short sale is a
transaction in which the series sells a security it does not own in anticipation
that the market price of that security will decline. Each series expects to make
short sales as a form of hedging to offset potential declines in long positions
in similar securities, in order to maintain portfolio flexibility and for
profit.
When a series makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The series may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The series' obligation to replace the borrowed security will be secured
by collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other high grade liquid securities similar to those borrowed. The
series will also be required to deposit similar collateral with its custodian to
the extent, if any, necessary so that the value of both collateral deposits in
the aggregate is at all times equal to at least 100% of the current market value
of the security sold short.
If the price of the security sold short increases between the time of
the short sale and the time the series replaces the borrowed security, the
series will incur a loss; conversely, if the price declines, the series will
realize a gain. Any gain will be decreased, and any loss increased, by the
transaction costs described above. Although the series' gain is limited to the
price at which it sold the security short, its potential loss is theoretically
unlimited.
The series will not make a short sale if, after giving effect to such
sale, the market value of all securities sold short exceeds 5% of the value of
its total assets or the series' aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The series
may also make short sales "against the box" without respect to such limitations.
In this type of short sale, at the time of the sale, the series owns or has the
immediate and unconditional right to acquire at no additional cost the identical
security.
RESTRICTIONS AND LIMITATIONS
MUTUAL SHARES, QUALIFIED, BEACON, DISCOVERY AND EUROPEAN FUNDAMENTAL POLICIES
Each of Mutual Shares, Qualified, Beacon, Discovery and European has
adopted the following fundamental investment restrictions which may not be
changed without the affirmative vote of the holders of a majority of the
outstanding voting securities of such series, which means the lesser of (1) the
holders of more than 50% of the outstanding shares of voting stock of such
securities or (2) 67% of the shares if more than 50% of the shares are present
at a meeting of shareholders in person or by proxy. Unless otherwise noted, all
percentage restrictions are as of the time of investment after giving effect to
the transaction. Pursuant to such restrictions each series may not:
1. Purchase or sell commodities, commodity contracts (except in
conformity with regulations of the Commodities Futures Trading Commission such
that the series would not be considered a commodity pool), or oil and gas
interests or real estate. Securities or other instruments backed by commodities
are not considered commodities or commodity contracts for purposes of this
restriction. Debt or equity securities issued by companies engaged in the oil,
gas, or real estate businesses are not considered oil or gas interests or real
estate for purposes of this restriction. First Mortgage loans and other direct
obligations secured by real estate are not considered real estate for purposes
of this restriction.
2. Make loans, except to the extent the purchase of debt obligations of
any type are considered loans and except that the series may lend portfolio
securities to qualified institutional investors in compliance with requirements
established from time to time by the Securities and Exchange Commission and the
securities exchanges on which such securities are traded.
3. Issue securities senior to its stock or borrow money or utilize
leverage in excess of the maximum permitted by the Investment Company Act of
1940 which is currently 33 1/3% of total assets (plus 5% for emergency or other
short-term purposes) from banks on a temporary basis from time to time to
provide greater liquidity for redemptions or for special circumstances.
4. Invest more than 25% of the value of its assets in a particular
industry (except that U.S. Government securities are not considered an
industry).
5. Act as an underwriter except to the extent the series may be deemed
to be an underwriter when disposing of securities it owns or when selling its
own shares.
6. Purchase the securities of any one issuer, other than the U.S.
Government or any of its agencies or instrumentalities, if immediately after
such purchase more than 5% of the value of its total assets would be invested in
such issuer, or such series would own more than 10% of the outstanding voting
securities of such issuer, except that up to 25% of the value of such series'
total assets may be invested without regard to such 5% and 10% limitations.
7. Except as may be described in the prospectus, engage in short sales,
purchase securities on margin or maintain a net short position.
NON FUNDAMENTAL POLICIES, ALL SERIES
As a matter of policy that is not fundamental, the Fund has determined
that no series will invest more than 5% of its assets in warrants, and that no
more than 2% of such assets may be invested in warrants which are not listed on
the New York or American Stock Exchanges. Also, as a matter of policy, the
series will not purchase securities for purposes of short term trading and will
not invest more than 5% of their assets in securities of issuers (together with
any predecessors) in existence for less than three years, provided that the
aggregate percentage of assets invested in such issuers combined with illiquid
investments does not exceed 15%. The series will not purchase the securities of
any issuer of which any officer or director of the Fund owns more than 1/2 of 1%
of the outstanding securities or in which the officers and directors in the
aggregate own more than 5%. The series do not borrow for leveraging purposes.
The Fund has registered some or all of the shares intended to be sold
pursuant to the Fund's Prospectus and this Statement of Additional Information
under the securities laws of all states. Some states, as conditions of
registration, among other things, require that the Fund limit its investments in
or abstain from investing in certain kinds or classes of securities.
In order to permit the sale of shares in certain states, the Fund may
make commitments more restrictive than the operating restrictions described
above. Should the Fund determine that any such commitment is no longer in the
best interests of a particular series and its shareholders, the Fund will revoke
the commitment by terminating sales of such series' shares in the state
involved.
MANAGEMENT OF THE FUND
The executive officers and directors of the Fund, their positions with
the Fund and their principal occupations during the past five years are as
follows:
Edward I. Altman, Ph D. (55)
New York University
44 West 4th Street
New York, NY 10012
Director
Max L. Heine Professor of Financing and Vice Director of NYU Salomon Center,
Stern School of Business, New York University. Editor and author of numerous
financial publications; financial consultant.
Ann Torre Grant (38)
1225 Eye St., N.W.
Washington, DC 20005
Director
Executive Vice President and Chief Financial Officer, NHP Incorporated (owner
and manager of multifamily housing); prior to March 1995 she was Vice President
and Treasurer, U.S. Air, Inc.
Andrew H. Hines, Jr. (73)
Director
Consultant for the Triangle Consulting Group; chairman of the board and chief
executive officer of Florida Progress Corporation (1982- February, 1990) and
chairman and director of Precise Power Corporation; executive-in- residence of
Eckerd College (1991-present); and a director of Checkers Drive-In Restaurants,
Inc.
*Peter A. Langerman (41)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Director and Executive Vice President
Financial Analyst with Franklin Mutual, 11/96 to present, held the same position
with Heine Securities Corporation, xx to 10/96; Director of Sunbeam Oster since
1990, Lancer Industries since 1994 and N.M.M. S.p.A. since 1995. Manager
(Director) of MB Motori, L.L.C. since 1994 and MWCR, L.L.C. since 1995.
*William J. Lippman (71)
One Parker Plaza
Fort Lee, NJ 07024
Director
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc.,
Franklin Templeton Distributors, Inc. and Franklin Management, Inc.; officer
and/or director or trustee of six of the investment companies in the Franklin
Group of Funds.
Bruce A. MacPherson (66)
1 Pequot Way
Canton, MA 02021
Director
President of A.A. MacPherson, Inc. Boston, Mass. (representative for electrical
manufacturers).
Fred R. Millsaps (67)
2665 NE 37th Drive
Fort Lauderdale, FL 33394
Director
Manager of personal investments (1978-present); Chairman and Chief Executive
Officer of Landmark Banking Corporation (1969-1978); financial Vice President of
Florida Power and Light (1965-1969); vice president of The Federal Reserve Bank
of Atlanta (1958-1965); and a director of various other business and nonprofit
organizations.
*Michael F. Price (45)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Chairman of the Board and President
President, Chief Operating Officer, and director of Franklin Mutual, 11/96 to
present; held the same positions with Heine Securities Corporation, xx to 10/96.
Leonard Rubin (71)
Yacht and Racquet Club
2727 North Ocean Boulevard A1A - Apt. 508A
Boca Raton, Florida 33431
Director
President, F.N.C. Textiles, Inc.; Vice President, Trimtex Co. Inc.; and trustee
of three of the investment companies in the Franklin Group of Funds.
Barry F. Schwartz (47)
35 East 62nd Street
New York, NY 10021
Director
Executive Vice President and General Counsel, MacAndrews & Forbes Holdings, Inc.
(a diversified holding company).
Vaughn R. Sturtevant, M.D. (73)
6 Noyes Avenue
Waterville, ME 04901
Director
Practicing physician.
Robert E. Wade (50)
225 Hardwick Street
Belvidere, NJ 07823
Director
Practicing attorney
Jeffrey A. Altman ()
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Analyst and trader with Franklin Mutual, 11/96 to present; was employed by Heine
Securities Corporation, xx to 10/96; Manager (Director) MB Metropolis, L.L.C.
since 1994. Since 1995 Manager (Director) of MB Motori, L.L.C., MWCR, L.L.C. and
S.H. Mortgage. Trustee of Resurgence Properties Inc. and Chairman of the Board
of Trustees, Value Property Trust.
Edward J. Bradley (57)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Treasurer and Chief Financial and Accounting Officer
Treasurer and Chief Financial and Accounting Officer of Franklin Mutual, 11/96
to present; held the same positions with Heine Securities Corporation, xx to
10/96.
Elizabeth N. Cohernour (46)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
General Counsel and Secretary
Secretary of Franklin Mutual, 11/96 to present; held the same position with
Heine Securities Corporation, 5/88 to 10/96.
Robert L. Friedman ()
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Research analyst with Franklin Mutual, 11/96 to present; was employed by Heine
Securities Corporation, xx to 10/96.
Raymond Garea ()
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Research analyst with Franklin Mutual, 11/96 to present; was employed by Heine
Securities Corporation, 3/91 to 10/96. Prior thereto he was a Vice President and
analyst with Donaldson, Lufkin & Jenrette. Manager (Director) MB Metropolis,
L.L.C. and S.H. Mortgage.
Lawrence N. Sondike ()
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Research Analyst with Franklin Mutual, 11/96 to present; was employed by Heine
Securities Corporation xx to 10/96.
The Fund's independent Board members have standing audit, pension, nominating
and director's compensation and performance committees. The audit committee is
composed of Ms. Grant and Messrs. Altman and Wade. The pension committee is
composed of Messrs. Altman, Schwartz and Sturtevant. The nominating committee is
responsible to nominate candidates for independent Board member positions and is
composed of Messrs. [Chasse replacement?,] MacPherson and Schwartz. The Board
members' compensation and performance committee is composed of Ms. Grant and
Messrs. Wade and Sturtevant.
As of August 16, 1996, the officers and Board members, as a group, owned of
record and beneficially 65,233,180 shares of Mutual Shares; 121,090,365 shares
of Mutual Qualified; 114,798,200 shares of Mutual Beacon; 139,375,636 shares of
Mutual Discovery; and 10,813,206 shares of Mutual European, or less than 1% of
the total outstanding shares. Some of the Board members also own shares in other
funds in the Franklin Templeton Group of Funds.
From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of any series' outstanding shares.
REMUNERATION OF OFFICERS AND DIRECTORS
During the fiscal year ended December 31, 1995, the Fund paid its
officers and directors as a group, including reimbursement to the investment
adviser for the expenses of personnel who spend a substantial portion of their
time on Fund operations, aggregate compensation of $839,366. [All Fund officers
are also affiliated with the Adviser. (See "Investment Adviser," below.)
Nonaffiliated Board members are currently paid $15,000 per year plus $750 per
meeting attended. Board members are paid $500 plus out-of-pocket expenses for
each Committee meeting attended. In 1993, the Board members approved a
retirement plan which generally provides payments to directors who have served
10 years and retire at age 70. At the time of retirement, Directors are entitled
to annual payments equal to one-half of the retainer in effect as of the time of
retirement. As shown above, some of the nonaffiliated Board members also serve
as directors, trustees or managing general partners of investment companies in
the Franklin Templeton Group of Funds. They may receive fees from these funds
for their services. The following table provides the total fees paid to
nonaffiliated Board members by the Fund and by other funds in the Franklin
Templeton Group of Funds.
<TABLE>
<CAPTION>
NUMBER OF BOARDS IN
ANNUAL THE FRANKLIN TEMPLETON
BENEFITS TOTAL FEES RECEIVED GROUP OF FUNDS ON
RETIREMENT FROM THE FRANKLIN WHICH EACH SERVES**
TOTAL FEES RECEIVED PENSION RETIREMENT TEMPLETON GROUP OF
FROM THE FUND+ ACCRUED FUNDS++
NAME
<S> <C> <C> <C> <C> <C>
Edward I. Altman $20,750 0 $7,500 0 1
Ann Torre Grant* $20,750 0 $7,500 0 1
Bruce A. MacPherson $18,750 0 $7,500 0 1
Barry F. Schwartz* $18,750 0 $7,500 0 1
Vaughn R. Sturtevant, $18,750 0 $7,500 0 1
M.D.
Robert E. Wade* $25,750 0 $7,500 0 1
Andrew H. Hines, Jr. 0 0 0 $106,325 24
Fred R. Millsaps 0 0 0 $104,325 24
Leonard Rubin 0 0 0 $15,600 3
</TABLE>
+For fiscal year ended December 31, 1995.
++For calendar 1995.
*Not vested in retirement plan.
**We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes [61] registered investment companies, with approximately [171] U.S.
based funds or series. Nonaffiliated members of the Board are reimbursed for
expenses incurred in connection with attending board meetings, paid pro rata by
each fund in the Franklin Templeton Group of Funds for which they serve as
director, trustee or managing general partner. No officer or Board member
received any other compensation, including pension or retirement benefits,
directly or indirectly from the Fund or other funds in the Franklin Templeton
Group of Funds. Certain officers or Board members who are shareholders of
Resources may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
INVESTMENT ADVISER
INVESTMENT MANAGER AND SERVICES PROVIDED. Franklin Mutual, 51 John F. Kennedy
Parkway, Short Hills, New Jersey 07078, serves as the Fund's investment manager.
Franklin Mutual, registered with the SEC as an investment advisor in [August
1996.] is a wholly owned subsidiary of Franklin Resources, Inc., ("Resources"),
a publicly-owned holding company whose principal shareholders are Charles B.
Johnson and Rupert H. Johnson, Jr. On October xx, 1996, Resources and Heine
Securities, Inc., ("Heine") pursuant to an agreement, transferred the assets of
Heine to Franklin Mutual. The agreement also provided for the continued
employment by Franklin Mutual of certain key personnel of Heine that were
involved in managing the investment portfolios of each series. See "Key
Personnel of the Adviser" below.
Franklin Mutual provides investment research and portfolio management services,
including the selection of securities for the Fund to buy, hold or sell and the
selection of brokers through whom the Fund's portfolio transactions are
executed. Franklin Mutual's activities are subject to the review and supervision
of the Board to whom Franklin Mutual renders periodic reports of the Fund's
investment activities.
Franklin Mutual provides office space and furnishings, facilities and equipment
required for managing the business affairs of the Fund. Franklin Mutual also
maintains all internal bookkeeping, clerical, secretarial and administrative
personnel and services and provides certain telephone and other mechanical
services. Franklin Mutual is covered by fidelity insurance on its officers,
directors and employees for the protection of the Fund.
Adviser and its affiliates act as investment manager or administrator to 37 U.S.
registered investment companies with 129 separate series. They may give advice
and take action with respect to any of the other funds they manage, or for their
own account, that may differ from action taken by them on behalf of the Fund.
Similarly, with respect to the Fund, they are not obligated to recommend, buy or
sell, or to refrain from recommending, buying or selling any security that they
and access persons, as defined by the 1940 Act, may buy or sell for their own
account or for the accounts of any other fund. They are not obligated to refrain
from investing in securities held by the Fund or other funds that they manage or
administer. Of course, any transactions for the their accounts and other access
persons will be made in compliance with the Fund's Code of Ethics.
KEY PERSONNEL OF THE ADVISER. Mr. Michael F. Price, President, Chief Operating
Officer and Chairman of the Adviser, is Chairman of the Board and President of
the Fund and principal executive officer and majority owner of Compliance
Solutions, Inc. ("Compliance Solutions"), a developer of compliance monitoring
software for money managers. The Fund is not charged for the use of software
designed by this company. Additionally, Mr. Price is the sole director and owner
of Clearwater Securities Inc. ("Clearwater"), a registered securities dealer
through which some Fund portfolio securities transactions are effected. Mr.
Edward J. Bradley is Treasurer and Chief Financial and Accounting Officer of the
Adviser and the Fund and is Treasurer of Compliance Solutions and Clearwater.
Ms. Elizabeth N. Cohernour is the Secretary and General Counsel of the Adviser,
the Fund, Compliance Solutions and Clearwater. Mr. Peter A. Langerman is a
Research Analyst with the Adviser and a director and Executive Vice President of
the Fund. Messrs. Jeffrey A. Altman, Robert L. Friedman, Raymond Garea and
Lawrence N. Sondike, Research Analysts with the Adviser, are Vice Presidents of
the Fund. Mr. Eric LeGoff is Vice President of the Adviser and Compliance
Solutions.
REDEMPTION OF SHARES
The Fund reserves the right to suspend the right of redemption and to
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange is closed (other than weekend and holiday closings) or
trading on the New York Stock Exchange is restricted or during which (as
determined by the SEC by rule or regulation) an emergency exists as a result of
which disposal or evaluation of the Fund's portfolio securities is not
reasonably practicable, or for such other periods as the SEC by order permits.
The Fund will use its best efforts to pay in cash for all shares
redeemed, but under abnormal conditions which make payment in cash impractical
or unwise, the Fund may make payment wholly or partly in portfolio securities at
their then market value which, when added to any cash payment, equals the
redemption price. In such cases an investor may incur brokerage costs in
converting such securities to cash.
Net asset value per share will not be calculated on days the New York
Stock Exchange is not open, currently including the holidays of New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas.
INVESTMENT ADVISORY AGREEMENTS
MANAGEMENT FEES. The Adviser serves as investment adviser to each of the series
pursuant to a separate investment advisor agreement. Under the agreements,
Mutual Shares, Qualified Series, Beacon Series, Discovery Series and European
Series pay Advisers a management fee equal to an [annual] rate of 0.60%, 0.60%,
0.60%, 0.80%, and 0.80%, respectively. The fee is computed at the close of
business on the last business day of each month. Each class will pay its
proportionate share of the management fee.
The management fee will be reduced as necessary to comply with the most
stringent limits on Fund expenses of any state where the Fund offers its shares.
Currently, the most restrictive limitation on a fund's allowable expenses for
each fiscal year, as a percentage of its average net assets, is 2.5% of the
first $30 million in assets, 2% of the next $70 million, and 1.5% of assets over
$100 million. Expense reductions have not been necessary based on state
requirements.
MANAGEMENT AGREEMENT. The management agreement is in effect until October 31,
1998. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board of directors
of the Fund or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Board members
who are not parties to the management agreement or interested persons of any
such party (other than as members of the Board), cast in person at a meeting
called for that purpose. The management agreement may be terminated without
penalty at any time by the Board or by a vote of the holders of a majority of
the Fund's outstanding voting securities, or by Advisers on [] days' written
notice, and will automatically terminate in the event of its assignment, as
defined in the 1940 Act.
[FUND ADMINISTRATION. Franklin Templeton Services, Inc. performs certain
administrative functions as Fund Administrator for the Fund, including:
...
15bp up to $200 mil, 13.5bp up to $700 mil, 10bp up to $1.2 bil, and 7.5bp
thereafter.]
PRIOR SERVICES. Before November 1, 1996, Heine served as the investment manager
under separate investment advisory agreements substantially the same in terms as
the agreements currently in effect with Franklin Mutual. During the fiscal year
ended December 31, 1995, an aggregate of $3,392,294 of administrative expenses
was incurred by the Mutual Shares Fund, $720,315 by the Mutual Qualified Fund,
$886,843 by the Mutual Beacon Fund and $412,166 by the Mutual Discovery Fund.
Heine's net fee for the fiscal years ended December 31, 1995, 1994 and 1993, was
$27,500,952, $21,795,512 and $19,507,048, respectively for Mutual Shares Fund,
$14,607,723, $9,766,052 and $8,434,525, respectively for Mutual Qualified Fund,
$17,720,127, $9,511,199 and $4,848,218, respectively for Mutual Beacon Fund,
$7,930,967, $5,737,128 and $2,294,912, respectively for Mutual Discovery Fund.
PORTFOLIO BROKERAGE
PLACEMENT OF PORTFOLIO BROKERAGE. As a general matter, purchases and
sales of portfolio securities of the Fund are placed by the Adviser with brokers
and dealers who in its opinion will provide the Fund with the best combination
of price (inclusive of brokerage commissions) and execution for its orders.
However, pursuant to the Fund's [Advisory Agreement], consideration may be given
in the selection of broker-dealers to research provided and payment may be made
of a commission higher than that charged by another broker-dealer which does not
furnish research services or which furnishes research services deemed to be of
lesser value, so long as the criteria of Section 28(e) of the Securities
Exchange Act of 1934, as amended (the "1934 Act") are met. Section 28(e) of the
1934 Act was adopted in 1975 and specifies that a person with investment
discretion shall not be "deemed to have acted unlawfully or to have breached a
fiduciary duty" solely because such person has caused the account to pay a
higher commission than the lowest available under certain circumstances. To
obtain the benefit of Section 28(e), the person so exercising investment
discretion must make a good faith determination that the commissions paid are
"reasonable in relation to the value of the brokerage and research services
provided ... viewed in terms of either that particular transaction or his
overall responsibilities with respect to the accounts as to which he exercises
investment discretion."
Currently, it is not possible to determine the extent to which
commissions that reflect an element of value for research services might exceed
commissions that would be payable for execution services alone, nor generally
can the value of research services to the Fund be measured, except to the extent
such services have a readily ascertainable market value. Research services
furnished might be useful and of value to the Adviser in serving other clients
as well as the Fund, but on the other hand any research service obtained by the
Adviser from the placement of portfolio brokerage of other clients might be
useful and of value to the Adviser in carrying out its obligation to the Fund.
"SOFT DOLLAR" ARRANGEMENTS. The Fund receives research services from
persons who act as brokers or dealers for the Fund. The discussion below relates
in general to these brokers or dealers who pursuant to various arrangements pay
for certain computer hardware and software and other research and brokerage
services to the Adviser and/or the Fund for transactions effected by it for the
Fund. Commission "soft dollars" may be used only for "brokerage and research
services" provided by brokers to whom commissions are paid and under no
circumstances will cash payments be made by any such broker to the Adviser. To
the extent that commission "soft dollars" do not result in the provision of any
"brokerage and research services" by brokers to whom such commissions are paid,
the commissions, nevertheless, are the property of such broker. Although,
potentially, the Adviser could be influenced to place Fund brokerage
transactions with a broker in order to generate "soft dollars" for the Adviser's
benefit, the Adviser believes that the requirement that it achieve best
execution on Fund portfolio transactions, and the Fund's negotiated commission
structure with brokers, mitigate these concerns as the cost of transactions
effected through brokers, before consideration of any "soft dollar" benefits
that may be received, generally will be comparable to that available elsewhere.
During fiscal 1995, 1994 and 1993 the Fund paid brokerage commissions of
$3,355,180, $2,267,683 and $1,640,278, respectively, to brokers who provided
research services. This amount represented 14.90%, 19.45% and 17.75%,
respectively, of total commissions paid for the periods.
As stated in the Prospectus, the Fund generally executes purchases and
sales of non-U.S. securities through market makers acting as principals or
through brokers on the exchanges or in markets in which they are principally
traded. Over-the-counter purchases and sales are normally made with principal
market makers except where, in the opinion of the Adviser, the best executions
are available elsewhere.
The Fund from time to time allocates brokerage commissions to firms
which furnish research and statistical information to the Adviser. The
supplementary research supplied by such firms is useful in varying degrees and
is of indeterminable value. Such research may, among other things, include
advice regarding economic factors and trends, advice as to occasional
transactions in specific securities, and similar information relating to
securities.
The Adviser will effect portfolio transactions through a broker which is
an affiliated person of the Fund or the Adviser only if in the Adviser's
judgment such broker is able to obtain the best combination of price and
execution.
Although an affiliated broker is entitled to be paid a commission for executing
brokerage transactions for the Fund, the 1940 Act prohibits any such broker from
acting as a principal for its own account in any portfolio transaction with the
Fund without prior approval from the SEC.
A portion of the Fund's brokerage commissions are paid with respect to
agency over-the-counter securities transactions. The Fund effects
over-the-counter securities transactions on either a principal or agency basis.
All transactions effected on a principal basis include a mark-up but no
commission. In fiscal 1995 total brokerage commissions of $8,028,205,
$5,182,736, $6,269,829 and $3,040,751 were paid by Mutual Shares, Qualified,
Beacon and Discovery, respectively.
[Clearwater Securities Inc. ("Clearwater"), a newly formed affiliate of
the Adviser, is a registered securities dealer and a member of the National
Association of Securities Dealers ("NASD"). Transactions in some Fund portfolio
securities (particularly transactions involving floor brokers) are effected
through Clearwater. During 1995, Mutual Shares paid brokerage commissions to
Clearwater Securities of $1,192,230; Mutual Qualified paid $640,588; Mutual
Beacon paid $764,323 and Mutual Discovery paid $217,609. The transactions
constituted for Mutual Shares 13.2%; Mutual Qualified 14.1%; Mutual Beacon 14.5%
and Mutual Discovery 7.7% of the aggregate dollar amount of brokerage
transactions effected during 1995. These commissions constituted for Mutual
Shares 14.9%, for Mutual Qualified 12.4%, for Mutual Beacon 12.2% and for Mutual
Discovery 7.2% of the total commissions paid in 1995.]
TAXES
The Fund intends that each of its series will meet the requirements for
qualification as a regulated investment company ("RIC") under the Internal
Revenue Code of 1986, as amended (the "Code"). Because each series intends to
qualify and to distribute all of its net investment income and capital gain to
shareholders, it is expected that each series will not be required to pay
Federal income taxes.
A series normally will distribute substantially all of its net
investment income and net realized capital gain, if any, to shareholders in the
form of dividends to be paid from time to time as determined by the Board. Such
dividends are taxable whether paid in cash or additional shares of such series.
The Board presently intends to declare such dividends and distributions from
earnings semi-annually.
Dividends or distributions have the effect of reducing the per share
value of the shares owned by the investor by the per share amount of the
dividends or distributions. Furthermore, such dividends and distributions paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are subject to income taxes.
In the event that total distributions (including distributed or
designated net capital gain) for a taxable year exceed its investment company
taxable income and net capital gain, a portion of each distribution generally
will be treated as a return of capital. Distributions treated as a return of
capital reduce a shareholder's basis in its shares and could result in a capital
gain tax either when a distribution is in excess of basis or, more likely, when
a shareholder redeems its shares.
Shareholders of a series will be notified annually by the Fund as to the
Federal tax treatment of dividends and distributions paid during the calendar
year. Dividends and distributions may also be subject to state and local taxes.
State and local tax treatment may vary according to applicable laws.
Shareholders can elect to receive distributions in cash or in additional shares
of such series. The price of the additional shares is determined as of the date
for the dividend payment. (See "Shareholder Services -- Reinvestment of
Distributions," in Prospectus.)
To maintain qualification as a RIC under the Code, each series of the
Fund must limit gains from the sale or other disposition of its portfolio
securities (including options, futures and forward contracts) held for less than
three months to less than 30% of its annual gross income. Generally, gains on
foreign currencies (and gains on options, futures, or forward contracts with
respect to foreign currencies) are not subject to this 30% short- short rule if
directly related to regular investments by a series in equity or debt
securities.
Each series intends to declare and pay dividends and capital gain
distributions so as to avoid imposition of a 4% Federal excise tax. To do so,
each series expects to distribute during the calendar year an amount at least
equal to (i) 98% of its calendar year net investment income, (ii) 98% of its
realized capital gain (the excess of short and long-term capital gain over short
and long-term capital loss) for each one-year period ending October 31, and
(iii) 100% of any undistributed net investment income or realized capital gain
from the prior calendar year which has not been distributed by such series.
Dividends declared in October, November, or December and made payable to
shareholders of record in such a month would be deemed paid by the Series and
taxable to its shareholders on December31 of such year provided that such
dividends are actually paid during January of the following year. A series may
make a deemed distribution with respect to its net capital gain by paying the
tax with respect to the net capital gain and then designating, but not
distributing, all or a portion of such gain as a capital gain dividend. Such
series' shareholders will treat such designated amounts as a capital gain on
their income tax returns, but they will receive a credit or refund equal to
Federal income taxes paid by such series with respect to such capital gain. In
addition, shareholders will increase their basis in the series' shares by 65% of
the amount subject to tax. If a capital gain dividend is paid with respect to
any shares of a series which are sold at a loss after being held for less than
six months, any loss realized upon the sale of such shares will be treated as a
long-term capital loss to the extent of such capital gain dividend. There are
special rules for determining holding periods for the purpose of the preceding
sentence.
Dividends distributed by a series will only be eligible for the
dividends-received deduction available to corporate shareholders to the extent
of the portion of a series' gross income which consists of dividends received on
equity securities issued by domestic corporations with respect to which such
series meets the same holding period, risk of loss, and borrowing limitations
applicable to the series' shareholders. Section 246 of the Code permits the
dividends-received deduction to corporate shareholders only if the shares with
respect to which the dividends were paid have been held for more than 45 days.
If the holding period is not satisfied, the dividends-received deduction is
disallowed, regardless of whether the shares with respect to which the dividends
were paid have been sold or otherwise disposed of. The holding period
requirements are separately applicable to each block of shares acquired,
including each block of shares received in payment of the Fund's dividends. For
purposes of determining whether this holding period requirement has been met,
the day of acquisition and any day after the first 45 days after the date on
which such shares become ex-dividend must be disregarded. In addition, the
holding period is suspended during periods in which the stock is subject to
diminished risk of loss including, for example, because the holder has acquired
a put option or sold a call option (other than certain covered call options
where the exercise price is not substantially below the selling price) or
otherwise hedged his position.
The dividends-received deduction will also be reduced, for shareholders
who incur indebtedness in order to purchase shares of a series of the Fund, by
the percentage of the cost of such series' shares that is debt- financed.
Generally, this limitation applies only if the debt is directly attributable to
the purchase of shares. Whether debt is directly attributable to the purchase of
shares depends on the particular facts and circumstances of each situation and
accordingly shareholders are urged to consult their tax advisors.
Under section 1059 of the Code, a corporation which receives an
"extraordinary dividend" and disposes of the stock with respect to which such
dividend was paid, provided generally that such stock has not been held for at
least two years prior to the date of declaration, announcement or agreement
about the extraordinary dividend, is required to reduce its basis in such stock
(but not below zero) by the amount of the dividend which was not taxed because
of the dividends-received deduction with such basis reduction generally being
treated as having occurred immediately before the sale or disposition of such
stock. To the extent such untaxed amount exceeds the shareholder's basis, such
excess will be taxed as gain upon a sale or disposition of such stock. An
extraordinary dividend generally is any dividend that equals or exceeds 10% of
the shareholder's basis in the stock (5% in the case of preferred stock). For
this purpose, generally, all dividends within any 85-day period and if such
dividends total more than 20% of the shareholder's basis in its stock, all
dividends within one year, must be aggregated for purposes of determining
whether such dividends constitute extraordinary dividends. The shareholder may
elect to determine the status of extraordinary dividends by reference to the
fair market value of the stock as of the date before the ex-dividend date,
rather than by reference to the adjusted basis of such stock (provided the
shareholder establishes the fair market value to the satisfaction of the
Commissioner of the IRS). In determining whether the above-mentioned two-year
holding period has been met, the same rules apply as are applicable to the
45-day holding period requirement for the dividends received deduction.
Corporations should note that 75 percent of the untaxed portion of the
Fund's dividends could be taken into account for purposes of the alternative
minimum tax imposed on corporations.
A series may in the future engage in various defensive hedging
transactions. Under various Code provisions such transactions might change the
character of recognized gains and losses, accelerate the recognition of certain
gains and losses, and defer the recognition of certain losses or deductions.
If more than 50% of the assets of a series of the Fund at the close of
any taxable year consists of stocks or securities of foreign corporations, the
Fund may elect to treat any foreign income taxes, such as withholding taxes on
interest or dividends, that are paid by the Fund with respect to the series as
paid by the shareholders of such series. If the Fund makes this election with
respect to a series, the series shareholders will be entitled to credit their
pro rata share of the foreign taxes paid by the series against their United
States federal income tax liability, or to deduct such amounts from their United
States taxable income. No deduction for foreign taxes may be claimed by a
shareholder who does not itemize deductions. In addition, certain individual
shareholders may be subject to rules that limit or reduce their ability to
deduct fully their pro rata share of foreign taxes paid by the Fund. Since the
Fund anticipates that more than 50% of the value of the total assets of European
will consist of non-U.S. equity and debt securities, European shareholders are
expected to be eligible for a pass through of the foreign taxes paid by the
Fund. Shareholders of Shares, Qualified, Beacon and Discovery are not expected
to be eligible for a pass through of the foreign taxes paid by the Fund.
Treasury regulations provide that the dividends paid deduction
attributable to an in-kind distribution of property is equal to the adjusted
basis of such property.
CALCULATION OF PERFORMANCE DATA
The Fund's average annual total return is computed according to the
following formula:
n
P(1+T) =ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1,000 payment made at the
beginning of the 1, 5, or 10 year
periods at the end of the 1, 5, or 10
year periods.
In making the computation described above, the Fund will assume that all
dividends and distributions by the Fund are reinvested at the Fund's net asset
value per share on the reinvestment date. The computation will also reflect any
charges made to all shareholder accounts, if any, during the computation period.
CUSTODIAN, TRANSFER AGENT AND AUDITORS
State Street Bank and Trust Company, Atlantic Division, 225 Franklin
Street, Boston, MA 02110, is the principal custodian for the assets of all the
series of the Fund. PFPC Inc., 400 Bellevue Parkway, Wilmington, DE 19809-3710
[and Franklin Templeton Investors Services, Inc., 777 Mariners Island Blvd., San
Mateo, CA 94404, [are] is the [co-]transfer agent[s] for all of the series of
the Fund. Ernst & Young LLP, Boston, Massachusetts, are the Fund's independent
auditors.
[SUMMARY OF CODE OF ETHICS
Employees of Resources or its subsidiaries who are access persons under the 1940
Act are permitted to engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed within 24
hours after clearance; (ii) copies of all brokerage confirmations must be sent
to a compliance officer and, within 10 days after the end of each calendar
quarter, a report of all securities transactions must be provided to the
compliance officer; and (iii) access persons involved in preparing and making
investment decisions must, in addition to (i) and (ii) above, file annual
reports of their securities holdings each January and inform the compliance
officer (or other designated personnel) if they own a security that is being
considered for a fund or other client transaction or if they are recommending a
security in which they have an ownership interest for purchase or sale by a fund
or other client.]
FINANCIAL INFORMATION
The Annual and Semi-Annual Reports to Shareholders contain the following
financial information which is incorporated herein by reference:
Audited Financial Statements as of and for the year ended December 31,
1995 for Mutual Shares Fund;
Audited Financial Statements as of and for the year ended December 31,
1995 for Mutual Qualified Fund;
Audited Financial Statements as of and for the year ended December 31,
1995 for Mutual Beacon Fund;
Audited Financial Statements as of and for the year ended December 31,
1995 for Mutual Discovery Fund.
Unaudited Financial Statements as of and for the 6-month period ended
June 30, 1996, for Mutual Shares Fund;
Unaudited Financial Statements as of and for the 6-month period ended
June 30, 1996, for Mutual Qualified Fund;
Unaudited Financial Statements as of and for the 6-month period ended
June 30, 1996, for Mutual Beacon Fund;
Unaudited Financial Statements as of and for the 6-month period ended
June 30, 1996, for Mutual Discovery Fund.
MUTUAL SHARES FUND INC.
File Nos.
33-18516
811-5387
FORM N-1A
PART C
OTHER INFORMATION
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements
(1) Unaudited Financial Statements incorporated herein by reference to
the Mutual Shares Fund's Semi-Annual Report to Shareholders dated
June 30, 1996, as filed with the SEC electronically on Form Type
N-30D on August 29, 1996
(i) Schedule of Investments - June 30, 1996
(ii) Statement of Assets and Liabilities - June 30, 1996
(iii)Statement of Operations - June 30, 1996
(iv) Statement of Changes in Net Assets - for the six months ended
June 30, 1996 and the Year ended December 31, 1995
(v) Notes to Financial Statements
(2) Unaudited Financial Statements incorporated herein by reference to
the Mutual Qualified Fund's Semi-Annual Report to Shareholders dated
June 30, 1996, as filed with the SEC electronically on Form Type
N-30D on August 29, 1996
(i) Schedule of Investments - June 30, 1996
(ii) Statement of Assets and Liabilities - June 30, 1996
(iii)Statement of Operations - June 30, 1996
(iv) Statement of Changes in Net Assets - for the six months ended
June 30, 1996 and the Year ended December 31, 1995
(v) Notes to Financial Statements
(3) Unaudited Financial Statements incorporated herein by reference to
the Mutual Discovery Fund's Semi-Annual Report to Shareholders dated
June 30, 1996, as filed with the SEC electronically on Form Type
N-30D on August 29, 1996
(i) Schedule of Investments - June 30, 1996
(ii) Statement of Assets and Liabilities - June 30, 1996
(iii)Statement of Operations - June 30, 1996
(iv) Statement of Changes in Net Assets - for the six months ended
June 30, 1996 and the Year ended December 31, 1995
(v) Notes to Financial Statements
(4) Unaudited Financial Statements incorporated herein by reference to
the Mutual Beacon Fund's Semi-Annual Report to Shareholders dated
June 30, 1996, as filed with the SEC electronically on Form Type
N-30D on August 29, 1996
(i) Schedule of Investments - June 30, 1996
(ii) Statement of Assets and Liabilities - June 30, 1996
(iii)Statement of Operations - June 30, 1996
(iv) Statement of Changes in Net Assets - for the six months ended
June 30, 1996 and the Year ended December 31, 1995
(v) Notes to Financial Statements
(5) Audited Financial Statements incorporated herein by reference to the
Mutual Shares Fund's Annual Report to Shareholders dated December 31,
1995, as filed with the SEC electronically on Form Type N-30D on
February 29, 1996
(i) Schedule of Investments - December 31, 1995
(ii) Statement of Assets and Liabilities - December 31, 1995
(iii)Statements of Operations - for the year months ended
December 31, 1995
(iv) Statements of Changes in Net Assets - for the years ended December
31, 1995 and the year ended December 31, 1994
(v) Notes to Financial Statements
(vi) Report of Independent Auditors - February 9, 1996
(6) Audited Financial Statements incorporated herein by reference to the
Mutual Qualified Fund's Annual Report to Shareholders dated December
31, 1995 as filed with the SEC electronically on Form Type N-30D on
February 29, 1996
(i) Schedule of Investments - December 31, 1995
(ii) Statement of Assets and Liabilities - December 31, 1995
(iii)Statement of Operations - for the year ended December
31, 1995
(iv) Statements of Changes in Net Assets - for the years ended December
31, 1995 and December 31, 1994
(v) Notes to Financial Statements
(vi) Report of Independent Auditors - February 9, 1996
(7) Audited Financial Statements incorporated herein by reference to the
Mutual Discovery Fund's Annual Report to Shareholders dated December
31, 1995 as filed with the SEC electronically on Form Type N-30D on
February 29, 1996
(i) Schedule of Investments - December 31, 1995
(ii) Statement of Assets and Liabilities - December 31, 1995
(iii)Statement of Operations - for the year ended December
31, 1995
(iv) Statements of Changes in Net Assets - for the years ended December
31, 1995 and December 31, 1994
(v) Notes to Financial Statements
(vi) Report of Independent Auditors - February 9, 1996
(8) Audited Financial Statements incorporated herein by reference to the
Mutual Beacon Fund's Annual Report to Shareholders dated December
31, 1995 as filed with the SEC electronically on Form Type N-30D on
February 29, 1996
(i) Schedule of Investments - December 31, 1995
(ii) Statement of Assets and Liabilities - December 31, 1995
(iii)Statement of Operations - for the Year ended December 31, 1995
(iv) Statements of Changes in Net Assets - for the Years ended December
31, 1995 and December 31, 1994
(v) Notes to Financial Statements
(vi) Report of Independent Auditors - February 9, 1996
b) Exhibits:
(1) copies of the charter as now in effect;
(i) *Form of Amendment to Articles of Incorporation
(ii) *Articles Supplementary Creating Mutual Discovery Fund
(iii)*Articles Supplementary Increasing Authorized Shares
(iv) *Articles Supplementary Increasing Authorized Shares and Creating
Mutual European Fund
(2) copies of the existing By-Laws or instruments
corresponding thereto;
(i) *By-Laws
(3) copies of any voting trust agreement with respect to more than five percent
of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant, including
copies of all constituent instruments, defining the rights of the holders
of such securities, and copies of each security being registered;
Not Applicable
(5) copies of all investment advisory contracts relating to
the management of the assets of the Registrant;
(i) *Investment Advisory Agreement between Heine Securities Corporation
and the Registrant on behalf of Mutual Shares Fund
(ii) *Investment Advisory Agreement between Heine Securities Corporation
and the Registrant on behalf of Mutual Qualified Fund
(iii)*Investment Advisory Agreement between Heine Securities Corporation
and the Registrant on behalf of Mutual Beacon Fund
(iv) *Investment Advisory Agreement between Heine Securities Corporation
and the Registrant on behalf of Mutual Discovery Fund
(v) *Investment Advisory Agreement between Heine Securities Corporation
and the Registrant on behalf of Mutual European Fund
(6) copies of each underwriting or distribution contract between the Registrant
and a principal underwriter, and specimens or copies of all agreements
between principal underwriters and dealers;
(i) **Form of Distribution Agreement between Registrant and
Franklin/Templeton Distributors, Inc.
(ii) Form of Dealer Agreement between the Registrant and
Franklin/Templeton Distributors, Inc., incorporated by reference to:
Registrant: Franklin Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to the Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(7) copies of all bonus, profit sharing, pension or other similar contracts or
arrangements wholly or partly for the benefit of directors or officers of
the Registrant in their capacity as such; any such plan that is not set
forth in a formal document, furnish a reasonably detailed description
thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under Section
17(f) of the 1940 Act, with respect to securities and similar investments
of the Registrant, including the schedule of remuneration;
(i) *Custodian Agreement between the Registrant and State Street Bank
(ii) *Transfer Agent Agreement and Service Agreement between the
Registrant and PFPC Inc.
(9) copies of all other material contracts not made in the ordinary course of
business which are to be performed in whole or in part at or after the date
of filing the Registration Statement;
Not Applicable
(10) an opinion and consent of counsel as to the legality of the securities
being registered, indicating whether they will when sold be legally
issued, fully paid and nonassessable;
(i) *Form of Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
as to Tax Matters
(ii) *Opinion and Consent of Miles and Stockbridge as to legality
(iii)*Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom as to Tax
Matters
(11) copies of any other opinions, appraisals or rulings and consents to the
use thereof relied on in the preparation of this Registration Statement
and required by Section 7 of the 1933 Act;
(i) **Consent of Ernst & Young LLP dated August 27, 1996
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, adviser, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their purchases
were made for investment purposes without any present intention of
redeeming or reselling;
(i) *Form of Subscription by Sole Shareholder
(14) copies of the model plan used in the establishment of any retirement plan
in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model plan.
Such form(s) should disclose the costs and fees charged in connection
therewith;
(i) Copy of Model Retirement Plan incorporated by reference to:
Registrant: AGE High Income Fund, Inc.
Filing: Post-Effective Amendment No. 26 to
Registration Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(ii) *Model 403 (b) (7) Plan
(iii)*Model SEP-IRA Plan
(iv) *Model Fund Sponsored Plan
(v) *Model IRA Plan
(vi) *Model IRA Plan Amendment
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-1 under
the 1940 Act, which describes all material aspects of the financing of
distribution of Registrant's shares, and any agreements with any person
relating to implementation of such plan.
(i) **Form of Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Mutual Shares Fund
(ii) **Form of Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Mutual Qualified Fund
(iii)**Form of Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Mutual Beacon Fund
(iv) **Form of Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Mutual Discovery Fund
(v) **Form of Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Mutual European Fund
(vi) **Form of Class II Distribution Plan pursuant to Rule 12b-1 between
the Registrant on behalf of Mutual Shares Fund
(vii)**Form of Class II Distribution Plan pursuant to Rule 12b-1 between
the Registrant on behalf of Mutual Qualified Fund
(viii)**Form of Class II Distribution Plan pursuant to Rule 12b-1 between
the Registrant on behalf of Mutual Beacon Fund
(ix) **Form of Class II Distribution Plan pursuant to Rule 12b-1 between
the Registrant on behalf of Mutual Discovery Fund
(x) **Form of Class II Distribution Plan pursuant to Rule 12b-1 between
the Registrant on behalf of Mutual European Fund
(16) Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 (which need not be audited).
(i) **Schedule for Computation of Performance quotations
(18) Copies of any plan entered into by Registrant pursuant to Rule 18f-3 under
the 1940 Act.
(i) **Form of Multiple Class Plan
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of July 31, 1996 the number of record holders of each series of the
Registrant was as follows:
NUMBER OF RECORD HOLDERS
CLASS Z CLASS I CLASS II
Mutual Shares Fund 142,984 N/A N/A
Mutual Qualified Fund 162,364 N/A N/A
Mutual Discovery Fund 116,590 N/A N/A
Mutual Beacon Fund 80,083 N/A N/A
Mutual European Fund 6,156 N/A N/A
ITEM 27 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court or appropriate
jurisdiction the question whether such indemnification is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
a) Franklin Mutual Advisers, Inc.
See "Investment Advisers" in the Class Z Statement of Additional Information and
"Management of the Fund" in the Class Z Prospectus.
ITEM 29 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
AGE High Income Fund, Inc.
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Gold Fund
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund, Inc.
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Advantaged High Yield Securities Fund
Franklin Tax-Advantaged International Bond Fund
Franklin Tax-Advantaged U.S. Government Securities Fund
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Franklin Templeton Japan Fund
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Securities Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
b) The information required by this item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889)
c) Not applicable. Registrant's principal underwriter is an affiliated person of
an affiliated person of the Registrant.
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules thereunder will be
maintained at the offices of Mutual Series Fund Inc., located at 51 John F
Kennedy Parkway, Short Hills, New Jersey 07078, or at the State Street Bank and
Trust Company, 1776 Heritage Drive, John Adams Building #2, North Quincy,
Massachusetts 02171 or PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware
19809-3710 or at Franklin/Templeton Investor Services, Inc., 777 Mariners Island
Blvd., San Mateo, California 94404.
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32 UNDERTAKINGS
(a) The Registrant hereby undertakes to file a Post-Effective Amendment on
behalf of Mutual European Series using Financial Statements which need not be
certified, within four to six months from the effective date of Registrant's
Registration Statement under the Securities Act of 1933.
(b) The Registrant hereby undertakes to promptly call a meeting of shareholders
for the purpose of voting upon the question of removal of any director or
directors when requested in writing to do so by the record holders of not less
than 10 percent of the Registrant's outstanding shares to assist its
shareholders in accordance with the requirements of Section 16(c) of the
Investment Company Act of 1940.
(c) The Registrant hereby undertakes to comply with the information requirement
in Item 5A of the Form N-1A by including the required information in the Fund's
Annual Report to Shareholders and to furnish each person to whom a prospectus is
delivered a copy of the Annual Report upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of San Mateo and the State of California, on the
29th day of August, 1996.
MUTUAL SERIES FUND INC.
(Registrant)
By: /S/MICHAEL F. PRICE*
Michael F. Price
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
/S/MICHAEL F. PRICE* President and Chairman of the
Michael F. Price Board (Chief Executive Officer)
Dated: August 29, 1996
/S/EDWARD J. BRADLEY* Treasurer and Chief Financial and
Edward J. Bradley Accounting Officer
Dated August 29, 1996
/S/EDWARD I. ALTMAN* Director
Edward I. Altman Dated: August 29, 1996
/S/RICHARD L. CHASSE, M.D.* Director
Richard L. Chasse, M.D. Dated: August 29, 1996
/S/ANN TORRE GRANT* Director
Ann Torre Grant Dated: August 29, 1996
/S/PETER A. LANGERMAN* Director
Peter A. Langerman Dated: August 29, 1996
/S/BRUCE A. MACPHERSON* Director
Bruce A. MacPherson Dated: August 29, 1996
/S/BARRY F. SCHWARTZ* Director
Barry F. Schwartz Dated: August 29, 1996
/S/VAUGHN R. STURTEVANT, M.D.* Director
Vaughn R. Sturtevant, M.D. Dated: August 29, 1996
/S/ROBERT E. WADE* Director
Robert E. Wade Dated: August 29, 1996
*By /s/Elizabeth N. Cohernour
Elizabeth N. Cohernour, Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
MUTUAL SERIES FUND INC.
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1(i) Form of Amendment to Articles of *
Incorporation
EX-99.B1(ii) Articles Supplementary Creating Mutual *
Discovery Fund
EX-99.B1(iii) Articles Supplementary Increasing Authorized *
Shares
EX-99.B2(i) By-Laws *
EX-99.B5(i) Investment Advisory Agreement between Heine *
Securities Corporation and the Registrant on
behalf of Mutual Shares Fund
EX-99.B5(ii) Investment Advisory Agreement between Heine *
Securities Corporation and the Registrant on
behalf of Mutual Qualified Fund
EX-99.B5(iii) Investment Advisory Agreement between Heine *
Securities Corporation and the Registrant on
behalf of Mutual Beacon Fund
EX-99.B5(iv) Investment Advisory Agreement between Heine *
Securities Corporation and the Registrant on
behalf of Mutual Discovery Fund dated
EX-99.B5(v) Investment Advisory Agreement between Heine *
Securities Corporation and the Registrant on
behalf of Mutual European Fund dated
EX-99.6(i) Form of Distribution Agreement between **
Registrant and Franklin/Templeton
Distributors, Inc.
EX-99.6(ii) Form of Dealer Agreement between the ***
Registrant and Franklin/Templeton
Distributors, Inc.
EX-99.B8(i) Custodian Agreement between the Registrant *
and State Street Bank
EX-99.B8(ii) Transfer Agent Agreement and Service *
Agreement between the Registrant and PFPC Inc.
EX-99.B10(i) Form of Opinion and Consent of Skadden, *
Arps, Slate, Meagher & Flom as to Tax Matters
EX-99.B10(ii) Opinion and Consent of Miles and Stockbridge *
as to legality
EX-99.B10(iii) Opinion and Consent of Skadden, Arps, Slate, *
Meagher & Flom as to Tax Matters
EX-99.B11(i) Consent of Ernst & Young LLP **
EX-99.B13(i) Form of Letter of Understanding regarding *
Mutual Shares Fund Inc.
EX-99.B14(i) Copy of Model Retirement Plan ***
EX-99.B14(ii) Model 403(b)(7) Plan *
EX-99.B14(iii) Model SEP-IRA Plan *
EX-99.B14(iv) Model Fund Sponsored Plan *
EX-99.B14(v) Model IRA Plan *
EX-99.B14(vi) Model IRA Plan Amendment *
EX-99.B15(i) Form of Distribution Plan pursuant to Rule **
12b-1 between the Registrant on behalf of
Mutual Shares Fund
EX-99.B15(ii) Form of Distribution Plan pursuant to Rule **
12b-1 between the Registrant on behalf of
Mutual Qualified Fund
EX-99.B15(iii) Form of Distribution Plan pursuant to Rule **
12b-1 between the Registrant on behalf of
Mutual Beacon Fund
EX-99.B15(iv) Form of Distribution Plan pursuant to Rule **
12b-1 between the Registrant on behalf of
Mutual Discovery Fund
EX-99.B15(v) Form of Distribution Plan pursuant to Rule **
12b-1 between the Registrant on behalf of
Mutual European Fund
EX-99.B15(vi) Form on Class II Distribution Plan pursuant ** to Rule
12b-1 between the Registrant on behalf of Mutual Shares
Fund
EX-99.B15(vii) Form on Class II Distribution Plan pursuant ** to Rule
12b-1 between the Registrant on behalf of Mutual Qualified
Fund
EX-99.B15(viii) Form on Class II Distribution Plan pursuant ** to Rule
12b-1 between the Registrant on behalf of Mutual Beacon
Fund
EX-99.B15(ix) Form on Class II Distribution Plan pursuant ** to Rule
12b-1 between the Registrant on behalf of Mutual Discovery
Fund
EX-99.B15(x) Form on Class II Distribution Plan pursuant ** to Rule
12b-1 between the Registrant on behalf of Mutual European
Fund
EX-99.B16(i) Form of Mutual Shares Merger Agreement **
EX-99.B18(i) Form of Multiple Class Plan **
* Previously filed
** Attached
***Incorporated by reference
MUTUAL SERIES FUND INC.
51 John F. Kennedy Park Way
Short Hills, New Jersey
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404
Re: Distribution Agreement
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund", which is registered under the
Investment Company Act of 1940 (the "1940 Act") and whose shares are registered
under the Securities Act of 1933 (the "1933 Act"). We desire to issue one or
more series or classes of our authorized but unissued shares of capital stock or
beneficial interest (the "Shares") to authorized persons in accordance with
applicable Federal and State securities laws. The Fund's Shares may be made
available in one or more separate series, each of which may have one or more
classes.
You have informed us that your company is registered as a broker-dealer under
the provisions of the Securities Exchange Act of 1934 and that your company is a
member of the National Association of Securities Dealers, Inc. You have
indicated your desire to act as the exclusive selling agent and distributor for
the Shares. We have been authorized to execute and deliver this Distribution
Agreement ("Agreement") to you by a resolution of our Board of Directors or
Trustees ("Board") passed at a meeting at which a majority of Board members,
including a majority who are not otherwise interested persons of the Fund and
who are not interested persons of our investment adviser, its related
organizations or with you or your related organizations, were present and voted
in favor of the said resolution approving this Agreement.
1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and in
consideration of the agreements on your part herein expressed and upon the terms
and conditions set forth herein, we hereby appoint you as the exclusive sales
agent for our Shares and agree that we will deliver such Shares as you may sell.
You agree to use your best efforts to promote the sale of Shares, but are not
obligated to sell any specific number of Shares.
However, the Fund and each series retain the right to make direct sales of
its Shares without sales charges consistent with the terms of the then current
prospectus and applicable law, and to engage in other legally authorized
transactions in its Shares which do not involve the sale of Shares to the
general public. Such other transactions may include, without limitation,
transactions between the Fund or any series or class and its shareholders only,
transactions involving the reorganization of the Fund or any series, and
transactions involving the merger or combination of the Fund or any series with
another corporation or trust.
2. INDEPENDENT CONTRACTOR. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no authority
or power to obligate or bind us by your actions, conduct or contracts except
that you are authorized to promote the sale of Shares. You may appoint
sub-agents or distribute through dealers or otherwise as you may determine from
time to time, but this Agreement shall not be construed as authorizing any
dealer or other person to accept orders for sale or repurchase on our behalf or
otherwise act as our agent for any purpose.
3. OFFERING PRICE. Shares shall be offered for sale at a price equivalent
to the net asset value per share of that series and class plus any applicable
percentage of the public offering price as sales commission or as otherwise set
forth in our then current prospectus. On each business day on which the New York
Stock Exchange is open for business, we will furnish you with the net asset
value of the Shares of each available series and class which shall be determined
in accordance with our then effective prospectus. All Shares will be sold in the
manner set forth in our then effective prospectus and statement of additional
information, and in compliance with applicable law.
4. COMPENSATION.
A. SALES COMMISSION. You shall be entitled to charge a sales
commission on the sale or redemption, as appropriate, of each series and class
of each Fund's Shares in the amount of any initial, deferred or contingent
deferred sales charge as set forth in our then effective prospectus. You may
allow any sub-agents or dealers such commissions or discounts from and not
exceeding the total sales commission as you shall deem advisable, so long as any
such commissions or discounts are set forth in our current prospectus to the
extent required by the applicable Federal and State securities laws. You may
also make payments to sub-agents or dealers from your own resources, subject to
the following conditions: (a) any such payments shall not create any obligation
for or recourse against the Fund or any series or class, and (b) the terms and
conditions of any such payments are consistent with our prospectus and
applicable federal and state securities laws and are disclosed in our prospectus
or statement of additional information to the extent such laws may require.
B. DISTRIBUTION PLANS. You shall also be entitled to
compensation for your services as provided in any Distribution Plan adopted
as to any series and class of any Fund's Shares pursuant to Rule 12b-1 under
the 1940 Act.
5. TERMS AND CONDITIONS OF SALES. Shares shall be offered for sale only in
those jurisdictions where they have been properly registered or are exempt from
registration, and only to those groups of people which the Board may from time
to time determine to be eligible to purchase such shares.
6. ORDERS AND PAYMENT FOR SHARES. Orders for Shares shall be directed to
the Fund's shareholder services agent, for acceptance on behalf of the Fund. At
or prior to the time of delivery of any of our Shares you will pay or cause to
be paid to the custodian of the Fund's assets, for our account, an amount in
cash equal to the net asset value of such Shares. Sales of Shares shall be
deemed to be made when and where accepted by the Fund's shareholder services
agent. The Fund's custodian and shareholder services agent shall be identified
in its prospectus.
7. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase our Shares for
your own account for purposes of resale to the public, but you may purchase
Shares for your own investment account upon your written assurance that the
purchase is for investment purposes and that the Shares will not be resold
except through redemption by us.
8. SALE OF SHARES TO AFFILIATES. You may sell our Shares at net asset
value to certain of your and our affiliated persons pursuant to the applicable
provisions of the federal securities statutes and rules or regulations
thereunder (the "Rules and Regulations"), including Rule 22d-1 under the 1940
Act, as amended from time to time.
9. ALLOCATION OF EXPENSES. We will pay the expenses:
(a) Of the preparation of the audited and certified financial
statements of our company to be included in any Post-Effective
Amendments ("Amendments") to our Registration Statement under
the 1933 Act or 1940 Act, including the prospectus and
statement of additional information included therein;
(b) Of the preparation, including legal fees, and printing of
all Amendments or supplements filed with the Securities and
Exchange Commission, including the copies of the
prospectuses included in the Amendments and the first 10
copies of the definitive prospectuses or supplements
thereto, other than those necessitated by your (including
your "Parent's") activities or Rules and Regulations
related to your activities where such Amendments or
supplements result in expenses which we would not otherwise
have incurred;
(c) Of the preparation, printing and distribution of any
reports or communications which we send to our existing
shareholders; and
(d) Of filing and other fees to Federal and State securities
regulatory authorities necessary to continue offering our
Shares.
You will pay the expenses:
(a) Of printing the copies of the prospectuses and any supplements
thereto and statements of additional information which are
necessary to continue to offer our Shares;
(b) Of the preparation, excluding legal fees, and printing of all
Amendments and supplements to our prospectuses and statements
of additional information if the Amendment or supplement
arises from your (including your "Parent's") activities or
Rules and Regulations related to your activities and those
expenses would not otherwise have been incurred by us;
(c) Of printing additional copies, for use by you as sales
literature, of reports or other communications which we have
prepared for distribution to our existing shareholders; and
(d) Incurred by you in advertising, promoting and selling our
Shares.
10. FURNISHING OF INFORMATION. We will furnish to you such information
with respect to each series and class of Shares, in such form and signed by such
of our officers as you may reasonably request, and we warrant that the
statements therein contained, when so signed, will be true and correct. We will
also furnish you with such information and will take such action as you may
reasonably request in order to qualify our Shares for sale to the public under
the Blue Sky Laws of jurisdictions in which you may wish to offer them. We will
furnish you with annual audited financial statements of our books and accounts
certified by independent public accountants, with semi-annual financial
statements prepared by us, with registration statements and, from time to time,
with such additional information regarding our financial condition as you may
reasonably request.
11. CONDUCT OF BUSINESS. Other than our currently effective prospectus,
you will not issue any sales material or statements except literature or
advertising which conforms to the requirements of Federal and State securities
laws and regulations and which have been filed, where necessary, with the
appropriate regulatory authorities. You will furnish us with copies of all such
materials prior to their use and no such material shall be published if we shall
reasonably and promptly object.
You shall comply with the applicable Federal and State laws and
regulations where our Shares are offered for sale and conduct your affairs with
us and with dealers, brokers or investors in accordance with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
12. REDEMPTION OR REPURCHASE WITHIN SEVEN DAYS. If Shares are tendered to
us for redemption or repurchase by us within seven business days after your
acceptance of the original purchase order for such Shares, you will immediately
refund to us the full sales commission (net of allowances to dealers or brokers)
allowed to you on the original sale, and will promptly, upon receipt thereof,
pay to us any refunds from dealers or brokers of the balance of sales
commissions reallowed by you. We shall notify you of such tender for redemption
within 10 days of the day on which notice of such tender for redemption is
received by us.
13. OTHER ACTIVITIES. Your services pursuant to this Agreement shall
not be deemed to be exclusive, and you may render similar services and act as
an underwriter, distributor or dealer for other investment companies in the
offering of their shares.
14. TERM OF AGREEMENT. This Agreement shall become effective on the date
of its execution, and shall remain in effect for a period of two (2) years. The
Agreement is renewable annually thereafter, with respect to the Fund or, if the
Fund has more than one series, with respect to each series, for successive
periods not to exceed one year (i) by a vote of (a) a majority of the
outstanding voting securities of the Fund or, if the Fund has more than one
series, of each series, or (b) by a vote of the Board, AND (ii) by a vote of a
majority of the members of the Board who are not parties to the Agreement or
interested persons of any parties to the Agreement (other than as members of the
Board), cast in person at a meeting called for the purpose of voting on the
Agreement.
This Agreement may at any time be terminated by the Fund or by any
series without the payment of any penalty, (i) either by vote of the Board or by
vote of a majority of the outstanding voting securities of the Fund or any
series on 90 days' written notice to you; or (ii) by you on 90 days' written
notice to the Fund; and shall immediately terminate with respect to the Fund and
each series in the event of its assignment.
15. SUSPENSION OF SALES. We reserve the right at all times to
suspend or limit the public offering of Shares upon two days' written notice
to you.
16. MISCELLANEOUS. This Agreement shall be subject to the laws of the
State of California and shall be interpreted and construed to further promote
the operation of the Fund as an open-end investment company. This Agreement
shall supersede all Distribution Agreements and Amendments previously in effect
between the parties. As used herein, the terms "Net Asset Value," "Offering
Price," "Investment Company," "Open-End Investment Company," "Assignment,"
"Principal Underwriter," "Interested Person," "Parent," "Affiliated Person," and
"Majority of the Outstanding Voting Securities" shall have the meanings set
forth in the 1933 Act or the 1940 Act and the Rules and Regulations thereunder.
Nothing herein shall be deemed to protect you against any liability to us or to
our securities holders to which you would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of your
duties hereunder, or by reason of your reckless disregard of your obligations
and duties hereunder.
If the foregoing meets with your approval, please acknowledge your acceptance by
signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
MUTUAL SERIES FUND INC.
By:_______________________________
Accepted:
Franklin/Templeton Distributors, Inc.
By:__________________________________
DATED: [Date]
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Condensed Financial
Information" in the Class Z Prospectus, "Financial Highlights" in the Class I
and II Prospectus, "Custodian, Transfer Agent and Auditors" in the Class Z
Statement of Additional Information and to the incorporation by reference in
this Post-Effective Amendment No. 20 to Registration Statement Number 33-18516
on Form N-1A of our reports dated February 9, 1996, on the financial statements
and financial highlights of Mutual Shares Fund, Mutual Qualified Fund, Mutual
Beacon Fund and Mutual Discovery Fund (each a portfolio of Mutual Series Fund
Inc.) included in the 1995 Annual Reports to Shareholders.
/s/Ernst & Young LLP
ERNST & YOUNG LLP
Boston, Massachusetts
August 27, 1996
MUTUAL SHARES FUND
a series of
Mutual Series Fund Inc.
Preamble to Distribution Plan
Class I Shares
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by Mutual Shares
Fund, a series of Mutual Series Fund Inc. (the "Fund"), which Plan shall take
effect on the , 1996 (the "Effective Date of the Plan"). The Plan has been
approved by a majority of the Board of Directors of the Fund (the "Board of
Directors"), including a majority of the directors who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Plan (the "non-interested directors"), cast in person at a
meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Directors considered the schedule and
nature of payments and terms of the Management Agreement between the Fund and
Franklin Advisers, Inc. ("Advisers") and the terms of the Underwriting Agreement
between the Fund and Franklin/Templeton Distributors, Inc. ("Distributors"). The
Board of Directors concluded that the compensation of Advisers, under the
Management Agreement, and of Distributors, under the Underwriting Agreement, was
fair and not excessive; however, the Board of Directors also recognized that
uncertainty may exist from time to time with respect to whether payments to be
made by the Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution expenses of the
Fund. Accordingly, the Board of Directors determined that the Plan should
provide for such payments and that adoption of the Plan would be prudent and in
the best interest of the Fund and its shareholders. Such approval included a
determination that in the exercise of their reasonable business judgment and in
light of their fiduciary duties, there is a reasonable likelihood that the Plan
will benefit the Fund and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all expenses incurred by
Distributors or others in the promotion and distribution of the shares of the
Fund, including but not limited to, the printing of prospectuses and reports
used for sales purposes, expenses of preparing and distributing sales literature
and related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead expenses attributable to
the distribution of Fund shares, as well as any distribution or service fees
paid to securities dealers or their firms or others who have executed a
servicing agreement with the Fund, Distributors or its affiliates, which form of
agreement has been approved from time to time by the directors, including the
non-interested directors.
2. The maximum amount which may be reimbursed by the Fund to Distributors or
others pursuant to Paragraph 1 herein shall be 0.25% per annum of the average
daily net assets of the Fund. Said reimbursement shall be made quarterly by the
Fund to Distributors or others.
3. In addition to the payments which the Fund is authorized to make pursuant to
paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers, Distributors
or other parties on behalf of the Fund, Advisers or Distributors make payments
that are deemed to be payments by the Fund for the financing of any activity
primarily intended to result in the sale of shares issued by the Fund within the
context of Rule 12b-1 under the Act, then such payments shall be deemed to have
been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Directors, for their review, on a
quarterly basis, a written report of the monies reimbursed to it and to others
under the Plan, and shall furnish the Board of Directors with such other
information as the Board of Directors may reasonably request in connection with
the payments made under the Plan in order to enable the Board of Directors to
make an informed determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year only so
long as such continuance is specifically approved at least annually by a vote of
the Board of Directors, including the non-interested directors, cast in person
at a meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested directors, on not more than sixty (60) days' written notice, or
by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent for distribution pursuant
to Paragraph 2 hereof without approval by a majority of the Fund's outstanding
voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested directors cast
in person at a meeting called for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and nomination of the Fund's
non-interested directors shall be committed to the discretion of such
non-interested directors.
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by the Fund and Distributors as evidenced by their execution hereof.
MUTUAL SERIES FUND INC.
By:
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:
MUTUAL QUALIFIED FUND
a series of
Mutual Series Fund Inc.
Preamble to Distribution Plan
Class I Shares
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by Mutual
Qualified Fund, series of Mutual Series Fund Inc. (the "Fund"), which Plan shall
take effect on the , 1996 (the "Effective Date of the Plan"). The Plan has been
approved by a majority of the Board of Directors of the Fund (the "Board of
Directors"), including a majority of the directors who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Plan (the "non-interested directors"), cast in person at a
meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Directors considered the schedule and
nature of payments and terms of the Management Agreement between the Fund and
Franklin Advisers, Inc. ("Advisers") and the terms of the Underwriting Agreement
between the Fund and Franklin/Templeton Distributors, Inc. ("Distributors"). The
Board of Directors concluded that the compensation of Advisers, under the
Management Agreement, and of Distributors, under the Underwriting Agreement, was
fair and not excessive; however, the Board of Directors also recognized that
uncertainty may exist from time to time with respect to whether payments to be
made by the Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution expenses of the
Fund. Accordingly, the Board of Directors determined that the Plan should
provide for such payments and that adoption of the Plan would be prudent and in
the best interest of the Fund and its shareholders. Such approval included a
determination that in the exercise of their reasonable business judgment and in
light of their fiduciary duties, there is a reasonable likelihood that the Plan
will benefit the Fund and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all expenses incurred by
Distributors or others in the promotion and distribution of the shares of the
Fund, including but not limited to, the printing of prospectuses and reports
used for sales purposes, expenses of preparing and distributing sales literature
and related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead expenses attributable to
the distribution of Fund shares, as well as any distribution or service fees
paid to securities dealers or their firms or others who have executed a
servicing agreement with the Fund, Distributors or its affiliates, which form of
agreement has been approved from time to time by the directors, including the
non-interested directors.
2. The maximum amount which may be reimbursed by the Fund to Distributors or
others pursuant to Paragraph 1 herein shall be 0.25% per annum of the average
daily net assets of the Fund. Said reimbursement shall be made quarterly by the
Fund to Distributors or others.
3. In addition to the payments which the Fund is authorized to make pursuant to
paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers, Distributors
or other parties on behalf of the Fund, Advisers or Distributors make payments
that are deemed to be payments by the Fund for the financing of any activity
primarily intended to result in the sale of shares issued by the Fund within the
context of Rule 12b-1 under the Act, then such payments shall be deemed to have
been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Directors, for their review, on a
quarterly basis, a written report of the monies reimbursed to it and to others
under the Plan, and shall furnish the Board of Directors with such other
information as the Board of Directors may reasonably request in connection with
the payments made under the Plan in order to enable the Board of Directors to
make an informed determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year only so
long as such continuance is specifically approved at least annually by a vote of
the Board of Directors, including the non-interested directors, cast in person
at a meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested directors, on not more than sixty (60) days' written notice, or
by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent for distribution pursuant
to Paragraph 2 hereof without approval by a majority of the Fund's outstanding
voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested directors cast
in person at a meeting called for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and nomination of the Fund's
non-interested directors shall be committed to the discretion of such
non-interested directors.
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by the Fund and Distributors as evidenced by their execution hereof.
MUTUAL SERIES FUND INC.
By:
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:
MUTUAL BEACON FUND
a series of
Mutual Series Fund Inc.
Preamble to Distribution Plan
Class I Shares
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by Mutual Beacon
Fund, a series of Mutual Series Trust Inc. (the "Fund"), which Plan shall take
effect on the , 1996 (the "Effective Date of the Plan"). The Plan has been
approved by a majority of the Board of Directors of the Fund (the "Board of
Directors"), including a majority of the directors who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Plan (the "non-interested directors"), cast in person at a
meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Directors considered the schedule and
nature of payments and terms of the Management Agreement between the Fund and
Franklin Advisers, Inc. ("Advisers") and the terms of the Underwriting Agreement
between the Fund and Franklin/Templeton Distributors, Inc. ("Distributors"). The
Board of Directors concluded that the compensation of Advisers, under the
Management Agreement, and of Distributors, under the Underwriting Agreement, was
fair and not excessive; however, the Board of Directors also recognized that
uncertainty may exist from time to time with respect to whether payments to be
made by the Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution expenses of the
Fund. Accordingly, the Board of Directors determined that the Plan should
provide for such payments and that adoption of the Plan would be prudent and in
the best interest of the Fund and its shareholders. Such approval included a
determination that in the exercise of their reasonable business judgment and in
light of their fiduciary duties, there is a reasonable likelihood that the Plan
will benefit the Fund and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all expenses incurred by
Distributors or others in the promotion and distribution of the shares of the
Fund, including but not limited to, the printing of prospectuses and reports
used for sales purposes, expenses of preparing and distributing sales literature
and related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead expenses attributable to
the distribution of Fund shares, as well as any distribution or service fees
paid to securities dealers or their firms or others who have executed a
servicing agreement with the Fund, Distributors or its affiliates, which form of
agreement has been approved from time to time by the directors, including the
non-interested directors.
2. The maximum amount which may be reimbursed by the Fund to Distributors or
others pursuant to Paragraph 1 herein shall be 0.25% per annum of the average
daily net assets of the Fund. Said reimbursement shall be made quarterly by the
Fund to Distributors or others.
3. In addition to the payments which the Fund is authorized to make pursuant to
paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers, Distributors
or other parties on behalf of the Fund, Advisers or Distributors make payments
that are deemed to be payments by the Fund for the financing of any activity
primarily intended to result in the sale of shares issued by the Fund within the
context of Rule 12b-1 under the Act, then such payments shall be deemed to have
been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Directors, for their review, on a
quarterly basis, a written report of the monies reimbursed to it and to others
under the Plan, and shall furnish the Board of Directors with such other
information as the Board of Directors may reasonably request in connection with
the payments made under the Plan in order to enable the Board of Directors to
make an informed determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year only so
long as such continuance is specifically approved at least annually by a vote of
the Board of Directors, including the non-interested directors, cast in person
at a meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested directors, on not more than sixty (60) days' written notice, or
by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent for distribution pursuant
to Paragraph 2 hereof without approval by a majority of the Fund's outstanding
voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested directors cast
in person at a meeting called for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and nomination of the Fund's
non-interested directors shall be committed to the discretion of such
non-interested directors.
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by the Fund and Distributors as evidenced by their execution hereof.
MUTUAL SERIES FUND INC.
By:
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:
MUTUAL DISCOVERY FUND
a series of
Mutual Series Fund Inc.
Preamble to Distribution Plan
Class I Shares
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by Mutual
Discovery Fund, a series of Mutual Series Fund Inc. (the "Fund"), which Plan
shall take effect on the , 1996 (the "Effective Date of the Plan"). The Plan has
been approved by a majority of the Board of Directors of the Fund (the "Board of
Directors"), including a majority of the directors who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Plan (the "non-interested directors"), cast in person at a
meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Directors considered the schedule and
nature of payments and terms of the Management Agreement between the Fund and
Franklin Advisers, Inc. ("Advisers") and the terms of the Underwriting Agreement
between the Fund and Franklin/Templeton Distributors, Inc. ("Distributors"). The
Board of Directors concluded that the compensation of Advisers, under the
Management Agreement, and of Distributors, under the Underwriting Agreement, was
fair and not excessive; however, the Board of Directors also recognized that
uncertainty may exist from time to time with respect to whether payments to be
made by the Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution expenses of the
Fund. Accordingly, the Board of Directors determined that the Plan should
provide for such payments and that adoption of the Plan would be prudent and in
the best interest of the Fund and its shareholders. Such approval included a
determination that in the exercise of their reasonable business judgment and in
light of their fiduciary duties, there is a reasonable likelihood that the Plan
will benefit the Fund and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all expenses incurred by
Distributors or others in the promotion and distribution of the shares of the
Fund, including but not limited to, the printing of prospectuses and reports
used for sales purposes, expenses of preparing and distributing sales literature
and related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead expenses attributable to
the distribution of Fund shares, as well as any distribution or service fees
paid to securities dealers or their firms or others who have executed a
servicing agreement with the Fund, Distributors or its affiliates, which form of
agreement has been approved from time to time by the directors, including the
non-interested directors.
2. The maximum amount which may be reimbursed by the Fund to Distributors or
others pursuant to Paragraph 1 herein shall be 0.25% per annum of the average
daily net assets of the Fund. Said reimbursement shall be made quarterly by the
Fund to Distributors or others.
3. In addition to the payments which the Fund is authorized to make pursuant to
paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers, Distributors
or other parties on behalf of the Fund, Advisers or Distributors make payments
that are deemed to be payments by the Fund for the financing of any activity
primarily intended to result in the sale of shares issued by the Fund within the
context of Rule 12b-1 under the Act, then such payments shall be deemed to have
been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Directors, for their review, on a
quarterly basis, a written report of the monies reimbursed to it and to others
under the Plan, and shall furnish the Board of Directors with such other
information as the Board of Directors may reasonably request in connection with
the payments made under the Plan in order to enable the Board of Directors to
make an informed determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year only so
long as such continuance is specifically approved at least annually by a vote of
the Board of Directors, including the non-interested directors, cast in person
at a meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested directors, on not more than sixty (60) days' written notice, or
by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent for distribution pursuant
to Paragraph 2 hereof without approval by a majority of the Fund's outstanding
voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested directors cast
in person at a meeting called for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and nomination of the Fund's
non-interested directors shall be committed to the discretion of such
non-interested directors.
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by the Fund and Distributors as evidenced by their execution hereof.
MUTUAL SERIES FUND INC.
By:
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:
MUTUAL EUROPEAN FUND
a series of
Mutual Series Fund Inc.
Preamble to Distribution Plan
Class I Shares
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by Mutual
European Fund, a series of Mutual Series Fund Inc. (the "Fund"), which Plan
shall take effect on the , 1996 (the "Effective Date of the Plan"). The Plan has
been approved by a majority of the Board of Directors of the Fund (the "Board of
Directors"), including a majority of the directors who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Plan (the "non-interested directors"), cast in person at a
meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Directors considered the schedule and
nature of payments and terms of the Management Agreement between the Fund and
Franklin Advisers, Inc. ("Advisers") and the terms of the Underwriting Agreement
between the Fund and Franklin/Templeton Distributors, Inc. ("Distributors"). The
Board of Directors concluded that the compensation of Advisers, under the
Management Agreement, and of Distributors, under the Underwriting Agreement, was
fair and not excessive; however, the Board of Directors also recognized that
uncertainty may exist from time to time with respect to whether payments to be
made by the Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution expenses of the
Fund. Accordingly, the Board of Directors determined that the Plan should
provide for such payments and that adoption of the Plan would be prudent and in
the best interest of the Fund and its shareholders. Such approval included a
determination that in the exercise of their reasonable business judgment and in
light of their fiduciary duties, there is a reasonable likelihood that the Plan
will benefit the Fund and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all expenses incurred by
Distributors or others in the promotion and distribution of the shares of the
Fund, including but not limited to, the printing of prospectuses and reports
used for sales purposes, expenses of preparing and distributing sales literature
and related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead expenses attributable to
the distribution of Fund shares, as well as any distribution or service fees
paid to securities dealers or their firms or others who have executed a
servicing agreement with the Fund, Distributors or its affiliates, which form of
agreement has been approved from time to time by the directors, including the
non-interested directors.
2. The maximum amount which may be reimbursed by the Fund to Distributors or
others pursuant to Paragraph 1 herein shall be 0.25% per annum of the average
daily net assets of the Fund. Said reimbursement shall be made quarterly by the
Fund to Distributors or others.
3. In addition to the payments which the Fund is authorized to make pursuant to
paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers, Distributors
or other parties on behalf of the Fund, Advisers or Distributors make payments
that are deemed to be payments by the Fund for the financing of any activity
primarily intended to result in the sale of shares issued by the Fund within the
context of Rule 12b-1 under the Act, then such payments shall be deemed to have
been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Directors, for their review, on a
quarterly basis, a written report of the monies reimbursed to it and to others
under the Plan, and shall furnish the Board of Directors with such other
information as the Board of Directors may reasonably request in connection with
the payments made under the Plan in order to enable the Board of Directors to
make an informed determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year only so
long as such continuance is specifically approved at least annually by a vote of
the Board of Directors, including the non-interested directors, cast in person
at a meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested directors, on not more than sixty (60) days' written notice, or
by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent for distribution pursuant
to Paragraph 2 hereof without approval by a majority of the Fund's outstanding
voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested directors cast
in person at a meeting called for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and nomination of the Fund's
non-interested directors shall be committed to the discretion of such
non-interested directors.
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by the Fund and Distributors as evidenced by their execution hereof.
MUTUAL SERIES FUND INC.
By:
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:
CLASS II DISTRIBUTION PLAN
I. Investment Company: Mutual Series Fund Inc.
II. Fund: Mutual Shares Fund
III. Maximum Per Annum Rule 12b-1 Fees for Class II Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS II DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class II shares
(the "Class") of each Fund named above ("Fund"), which Plan shall take effect as
of the date class II shares are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Directors of
the Investment Company (the "Board"), including a majority of the Board members
who are not interested persons of the Investment Company and who have no direct,
or indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. and the terms of the Underwriting Agreement between
the Investment Company and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the Underwriting Agreement,
was fair and not excessive. The approval of the Plan included a determination
that in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed the
above-stated maximum distribution fee per annum of the Class' average daily net
assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall
pay (i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Fund's Board from time to time, as a service fee
pursuant to servicing agreements which have been approved from time to time by
the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to Paragraph
1(a) above to assist in the distribution and promotion of shares of the Class.
Payments made to Distributors under the Plan may be used for, among other
things, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a pro-rated
portion of Distributors' overhead expenses attributable to the distribution of
Class shares, as well as for additional distribution fees paid to securities
dealers or their firms or others who have executed agreements with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Trustees, including the non-interested
trustees. In addition, such fees may be used to pay for advancing the commission
costs to dealers or others with respect to the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be
used to pay dealers or others for, among other things, furnishing personal
services and maintaining shareholder accounts, which services include, among
other things, assisting in establishing and maintaining customer accounts and
records; assisting with purchase and redemption requests; arranging for bank
wires; monitoring dividend payments from the Fund on behalf of customers;
forwarding certain shareholder communications from the Fund to customers;
receiving and answering correspondence; and aiding in maintaining the investment
of their respective customers in the Class. Any amounts paid under this
paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which
form of agreement has been approved from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested Board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may
not be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date:__________________
MUTUAL SERIES FUND INC.
By:_________________________
Franklin/Templeton Distributors, Inc.
By:_________________________
CLASS II DISTRIBUTION PLAN
I. Investment Company: Mutual Series Fund Inc.
II. Fund: Mutual Qualified Fund
III. Maximum Per Annum Rule 12b-1 Fees for Class II Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS II DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class II shares
(the "Class") of each Fund named above ("Fund"), which Plan shall take effect as
of the date class II shares are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Directors of
the Investment Company (the "Board"), including a majority of the Board members
who are not interested persons of the Investment Company and who have no direct,
or indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. and the terms of the Underwriting Agreement between
the Investment Company and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the Underwriting Agreement,
was fair and not excessive. The approval of the Plan included a determination
that in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed the
above-stated maximum distribution fee per annum of the Class' average daily net
assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall
pay (i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Fund's Board from time to time, as a service fee
pursuant to servicing agreements which have been approved from time to time by
the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to Paragraph
1(a) above to assist in the distribution and promotion of shares of the Class.
Payments made to Distributors under the Plan may be used for, among other
things, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a pro-rated
portion of Distributors' overhead expenses attributable to the distribution of
Class shares, as well as for additional distribution fees paid to securities
dealers or their firms or others who have executed agreements with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Trustees, including the non-interested
trustees. In addition, such fees may be used to pay for advancing the commission
costs to dealers or others with respect to the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be
used to pay dealers or others for, among other things, furnishing personal
services and maintaining shareholder accounts, which services include, among
other things, assisting in establishing and maintaining customer accounts and
records; assisting with purchase and redemption requests; arranging for bank
wires; monitoring dividend payments from the Fund on behalf of customers;
forwarding certain shareholder communications from the Fund to customers;
receiving and answering correspondence; and aiding in maintaining the investment
of their respective customers in the Class. Any amounts paid under this
paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which
form of agreement has been approved from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested Board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may
not be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: __________________
MUTUAL SERIES FUND INC.
By:_________________________
Franklin/Templeton Distributors, Inc.
By:_________________________
3
agree\notebk95\dawn\mbfcls2.doc
CLASS II DISTRIBUTION PLAN
I. Investment Company: Mutual Series Fund Inc.
II. Fund: Mutual Beacon Fund
III. Maximum Per Annum Rule 12b-1 Fees for Class II Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS II DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class II shares
(the "Class") of each Fund named above ("Fund"), which Plan shall take effect as
of the date class II shares are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Directors of
the Investment Company (the "Board"), including a majority of the Board members
who are not interested persons of the Investment Company and who have no direct,
or indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. and the terms of the Underwriting Agreement between
the Investment Company and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the Underwriting Agreement,
was fair and not excessive. The approval of the Plan included a determination
that in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed the
above-stated maximum distribution fee per annum of the Class' average daily net
assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall pay
(i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Fund's Board from time to time, as a service fee
pursuant to servicing agreements which have been approved from time to time by
the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to Paragraph
1(a) above to assist in the distribution and promotion of shares of the Class.
Payments made to Distributors under the Plan may be used for, among other
things, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a pro-rated
portion of Distributors' overhead expenses attributable to the distribution of
Class shares, as well as for additional distribution fees paid to securities
dealers or their firms or others who have executed agreements with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Trustees, including the non-interested
trustees. In addition, such fees may be used to pay for advancing the commission
costs to dealers or others with respect to the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be used to
pay dealers or others for, among other things, furnishing personal services and
maintaining shareholder accounts, which services include, among other things,
assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; arranging for bank wires;
monitoring dividend payments from the Fund on behalf of customers; forwarding
certain shareholder communications from the Fund to customers; receiving and
answering correspondence; and aiding in maintaining the investment of their
respective customers in the Class. Any amounts paid under this paragraph 2(b)
shall be paid pursuant to a servicing or other agreement, which form of
agreement has been approved from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested Board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not
be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: __________________
MUTUAL SERIES FUND INC.
By:_________________________
Franklin/Templeton Distributors, Inc.
By:_________________________
3
agree\notebk95\dawn\mdfcls2.doc
CLASS II DISTRIBUTION PLAN
I. Investment Company: Mutual Series Fund Inc.
II. Fund: Mutual Discovery Fund
III. Maximum Per Annum Rule 12b-1 Fees for Class II Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS II DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class II shares
(the "Class") of each Fund named above ("Fund"), which Plan shall take effect as
of the date class II shares are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Directors of
the Investment Company (the "Board"), including a majority of the Board members
who are not interested persons of the Investment Company and who have no direct,
or indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. and the terms of the Underwriting Agreement between
the Investment Company and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the Underwriting Agreement,
was fair and not excessive. The approval of the Plan included a determination
that in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed the
above-stated maximum distribution fee per annum of the Class' average daily net
assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall pay
(i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Fund's Board from time to time, as a service fee
pursuant to servicing agreements which have been approved from time to time by
the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to Paragraph
1(a) above to assist in the distribution and promotion of shares of the Class.
Payments made to Distributors under the Plan may be used for, among other
things, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a pro-rated
portion of Distributors' overhead expenses attributable to the distribution of
Class shares, as well as for additional distribution fees paid to securities
dealers or their firms or others who have executed agreements with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Trustees, including the non-interested
trustees. In addition, such fees may be used to pay for advancing the commission
costs to dealers or others with respect to the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be used to
pay dealers or others for, among other things, furnishing personal services and
maintaining shareholder accounts, which services include, among other things,
assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; arranging for bank wires;
monitoring dividend payments from the Fund on behalf of customers; forwarding
certain shareholder communications from the Fund to customers; receiving and
answering correspondence; and aiding in maintaining the investment of their
respective customers in the Class. Any amounts paid under this paragraph 2(b)
shall be paid pursuant to a servicing or other agreement, which form of
agreement has been approved from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested Board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not
be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: __________________
MUTUAL SERIES FUND INC.
By:_________________________
Franklin/Templeton Distributors, Inc.
By:_________________________
3
agree\notebk95\dawn\mefcls2.doc
CLASS II DISTRIBUTION PLAN
I. Investment Company: Mutual Series Fund Inc.
II. Fund: Mutual European Fund
III. Maximum Per Annum Rule 12b-1 Fees for Class II Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS II DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class II shares
(the "Class") of each Fund named above ("Fund"), which Plan shall take effect as
of the date class II shares are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Directors of
the Investment Company (the "Board"), including a majority of the Board members
who are not interested persons of the Investment Company and who have no direct,
or indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. and the terms of the Underwriting Agreement between
the Investment Company and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the Underwriting Agreement,
was fair and not excessive. The approval of the Plan included a determination
that in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed the
above-stated maximum distribution fee per annum of the Class' average daily net
assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall pay
(i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Fund's Board from time to time, as a service fee
pursuant to servicing agreements which have been approved from time to time by
the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to Paragraph
1(a) above to assist in the distribution and promotion of shares of the Class.
Payments made to Distributors under the Plan may be used for, among other
things, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a pro-rated
portion of Distributors' overhead expenses attributable to the distribution of
Class shares, as well as for additional distribution fees paid to securities
dealers or their firms or others who have executed agreements with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Trustees, including the non-interested
trustees. In addition, such fees may be used to pay for advancing the commission
costs to dealers or others with respect to the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be used to
pay dealers or others for, among other things, furnishing personal services and
maintaining shareholder accounts, which services include, among other things,
assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; arranging for bank wires;
monitoring dividend payments from the Fund on behalf of customers; forwarding
certain shareholder communications from the Fund to customers; receiving and
answering correspondence; and aiding in maintaining the investment of their
respective customers in the Class. Any amounts paid under this paragraph 2(b)
shall be paid pursuant to a servicing or other agreement, which form of
agreement has been approved from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested Board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not
be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: __________________
MUTUAL SERIES FUND INC.
By:_________________________
Franklin/Templeton Distributors, Inc.
By:_________________________
MUTUAL SERIES FUND INC.
51 John F. Kennedy Park Way
Short Hills, New Jersey
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404
Re: Distribution Agreement
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund", which is registered under the
Investment Company Act of 1940 (the "1940 Act") and whose shares are registered
under the Securities Act of 1933 (the "1933 Act"). We desire to issue one or
more series or classes of our authorized but unissued shares of capital stock or
beneficial interest (the "Shares") to authorized persons in accordance with
applicable Federal and State securities laws. The Fund's Shares may be made
available in one or more separate series, each of which may have one or more
classes.
You have informed us that your company is registered as a broker-dealer under
the provisions of the Securities Exchange Act of 1934 and that your company is a
member of the National Association of Securities Dealers, Inc. You have
indicated your desire to act as the exclusive selling agent and distributor for
the Shares. We have been authorized to execute and deliver this Distribution
Agreement ("Agreement") to you by a resolution of our Board of Directors or
Trustees ("Board") passed at a meeting at which a majority of Board members,
including a majority who are not otherwise interested persons of the Fund and
who are not interested persons of our investment adviser, its related
organizations or with you or your related organizations, were present and voted
in favor of the said resolution approving this Agreement.
1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and in
consideration of the agreements on your part herein expressed and upon the terms
and conditions set forth herein, we hereby appoint you as the exclusive sales
agent for our Shares and agree that we will deliver such Shares as you may sell.
You agree to use your best efforts to promote the sale of Shares, but are not
obligated to sell any specific number of Shares.
However, the Fund and each series retain the right to make direct sales of
its Shares without sales charges consistent with the terms of the then current
prospectus and applicable law, and to engage in other legally authorized
transactions in its Shares which do not involve the sale of Shares to the
general public. Such other transactions may include, without limitation,
transactions between the Fund or any series or class and its shareholders only,
transactions involving the reorganization of the Fund or any series, and
transactions involving the merger or combination of the Fund or any series with
another corporation or trust.
2. INDEPENDENT CONTRACTOR. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no authority
or power to obligate or bind us by your actions, conduct or contracts except
that you are authorized to promote the sale of Shares. You may appoint
sub-agents or distribute through dealers or otherwise as you may determine from
time to time, but this Agreement shall not be construed as authorizing any
dealer or other person to accept orders for sale or repurchase on our behalf or
otherwise act as our agent for any purpose.
3. OFFERING PRICE. Shares shall be offered for sale at a price equivalent
to the net asset value per share of that series and class plus any applicable
percentage of the public offering price as sales commission or as otherwise set
forth in our then current prospectus. On each business day on which the New York
Stock Exchange is open for business, we will furnish you with the net asset
value of the Shares of each available series and class which shall be determined
in accordance with our then effective prospectus. All Shares will be sold in the
manner set forth in our then effective prospectus and statement of additional
information, and in compliance with applicable law.
4. COMPENSATION.
A. SALES COMMISSION. You shall be entitled to charge a sales
commission on the sale or redemption, as appropriate, of each series and class
of each Fund's Shares in the amount of any initial, deferred or contingent
deferred sales charge as set forth in our then effective prospectus. You may
allow any sub-agents or dealers such commissions or discounts from and not
exceeding the total sales commission as you shall deem advisable, so long as any
such commissions or discounts are set forth in our current prospectus to the
extent required by the applicable Federal and State securities laws. You may
also make payments to sub-agents or dealers from your own resources, subject to
the following conditions: (a) any such payments shall not create any obligation
for or recourse against the Fund or any series or class, and (b) the terms and
conditions of any such payments are consistent with our prospectus and
applicable federal and state securities laws and are disclosed in our prospectus
or statement of additional information to the extent such laws may require.
B. DISTRIBUTION PLANS. You shall also be entitled to
compensation for your services as provided in any Distribution Plan adopted
as to any series and class of any Fund's Shares pursuant to Rule 12b-1 under
the 1940 Act.
5. TERMS AND CONDITIONS OF SALES. Shares shall be offered for sale only in
those jurisdictions where they have been properly registered or are exempt from
registration, and only to those groups of people which the Board may from time
to time determine to be eligible to purchase such shares.
6. ORDERS AND PAYMENT FOR SHARES. Orders for Shares shall be directed to
the Fund's shareholder services agent, for acceptance on behalf of the Fund. At
or prior to the time of delivery of any of our Shares you will pay or cause to
be paid to the custodian of the Fund's assets, for our account, an amount in
cash equal to the net asset value of such Shares. Sales of Shares shall be
deemed to be made when and where accepted by the Fund's shareholder services
agent. The Fund's custodian and shareholder services agent shall be identified
in its prospectus.
7. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase our Shares for
your own account for purposes of resale to the public, but you may purchase
Shares for your own investment account upon your written assurance that the
purchase is for investment purposes and that the Shares will not be resold
except through redemption by us.
8. SALE OF SHARES TO AFFILIATES. You may sell our Shares at net asset
value to certain of your and our affiliated persons pursuant to the applicable
provisions of the federal securities statutes and rules or regulations
thereunder (the "Rules and Regulations"), including Rule 22d-1 under the 1940
Act, as amended from time to time.
9. ALLOCATION OF EXPENSES. We will pay the expenses:
(a) Of the preparation of the audited and certified financial
statements of our company to be included in any Post-Effective
Amendments ("Amendments") to our Registration Statement under
the 1933 Act or 1940 Act, including the prospectus and
statement of additional information included therein;
(b) Of the preparation, including legal fees, and printing of
all Amendments or supplements filed with the Securities and
Exchange Commission, including the copies of the
prospectuses included in the Amendments and the first 10
copies of the definitive prospectuses or supplements
thereto, other than those necessitated by your (including
your "Parent's") activities or Rules and Regulations
related to your activities where such Amendments or
supplements result in expenses which we would not otherwise
have incurred;
(c) Of the preparation, printing and distribution of any
reports or communications which we send to our existing
shareholders; and
(d) Of filing and other fees to Federal and State securities
regulatory authorities necessary to continue offering our
Shares.
You will pay the expenses:
(a) Of printing the copies of the prospectuses and any supplements
thereto and statements of additional information which are
necessary to continue to offer our Shares;
(b) Of the preparation, excluding legal fees, and printing of all
Amendments and supplements to our prospectuses and statements
of additional information if the Amendment or supplement
arises from your (including your "Parent's") activities or
Rules and Regulations related to your activities and those
expenses would not otherwise have been incurred by us;
(c) Of printing additional copies, for use by you as sales
literature, of reports or other communications which we have
prepared for distribution to our existing shareholders; and
(d) Incurred by you in advertising, promoting and selling our
Shares.
10. FURNISHING OF INFORMATION. We will furnish to you such information
with respect to each series and class of Shares, in such form and signed by such
of our officers as you may reasonably request, and we warrant that the
statements therein contained, when so signed, will be true and correct. We will
also furnish you with such information and will take such action as you may
reasonably request in order to qualify our Shares for sale to the public under
the Blue Sky Laws of jurisdictions in which you may wish to offer them. We will
furnish you with annual audited financial statements of our books and accounts
certified by independent public accountants, with semi-annual financial
statements prepared by us, with registration statements and, from time to time,
with such additional information regarding our financial condition as you may
reasonably request.
11. CONDUCT OF BUSINESS. Other than our currently effective prospectus,
you will not issue any sales material or statements except literature or
advertising which conforms to the requirements of Federal and State securities
laws and regulations and which have been filed, where necessary, with the
appropriate regulatory authorities. You will furnish us with copies of all such
materials prior to their use and no such material shall be published if we shall
reasonably and promptly object.
You shall comply with the applicable Federal and State laws and
regulations where our Shares are offered for sale and conduct your affairs with
us and with dealers, brokers or investors in accordance with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
12. REDEMPTION OR REPURCHASE WITHIN SEVEN DAYS. If Shares are tendered to
us for redemption or repurchase by us within seven business days after your
acceptance of the original purchase order for such Shares, you will immediately
refund to us the full sales commission (net of allowances to dealers or brokers)
allowed to you on the original sale, and will promptly, upon receipt thereof,
pay to us any refunds from dealers or brokers of the balance of sales
commissions reallowed by you. We shall notify you of such tender for redemption
within 10 days of the day on which notice of such tender for redemption is
received by us.
13. OTHER ACTIVITIES. Your services pursuant to this Agreement shall
not be deemed to be exclusive, and you may render similar services and act as
an underwriter, distributor or dealer for other investment companies in the
offering of their shares.
14. TERM OF AGREEMENT. This Agreement shall become effective on the date
of its execution, and shall remain in effect for a period of two (2) years. The
Agreement is renewable annually thereafter, with respect to the Fund or, if the
Fund has more than one series, with respect to each series, for successive
periods not to exceed one year (i) by a vote of (a) a majority of the
outstanding voting securities of the Fund or, if the Fund has more than one
series, of each series, or (b) by a vote of the Board, AND (ii) by a vote of a
majority of the members of the Board who are not parties to the Agreement or
interested persons of any parties to the Agreement (other than as members of the
Board), cast in person at a meeting called for the purpose of voting on the
Agreement.
This Agreement may at any time be terminated by the Fund or by any
series without the payment of any penalty, (i) either by vote of the Board or by
vote of a majority of the outstanding voting securities of the Fund or any
series on 90 days' written notice to you; or (ii) by you on 90 days' written
notice to the Fund; and shall immediately terminate with respect to the Fund and
each series in the event of its assignment.
15. SUSPENSION OF SALES. We reserve the right at all times to
suspend or limit the public offering of Shares upon two days' written notice
to you.
16. MISCELLANEOUS. This Agreement shall be subject to the laws of the
State of California and shall be interpreted and construed to further promote
the operation of the Fund as an open-end investment company. This Agreement
shall supersede all Distribution Agreements and Amendments previously in effect
between the parties. As used herein, the terms "Net Asset Value," "Offering
Price," "Investment Company," "Open-End Investment Company," "Assignment,"
"Principal Underwriter," "Interested Person," "Parent," "Affiliated Person," and
"Majority of the Outstanding Voting Securities" shall have the meanings set
forth in the 1933 Act or the 1940 Act and the Rules and Regulations thereunder.
Nothing herein shall be deemed to protect you against any liability to us or to
our securities holders to which you would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of your
duties hereunder, or by reason of your reckless disregard of your obligations
and duties hereunder.
If the foregoing meets with your approval, please acknowledge your acceptance by
signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
MUTUAL SERIES FUND INC.
By:_______________________________
Accepted:
Franklin/Templeton Distributors, Inc.
By:__________________________________
DATED: [Date]
3
agree\dawn\msfimult.doc
MUTUAL SERIES FUND INC.
Multiple Class Plan
This Multiple Class Plan (the "Plan") has been adopted by a majority of the
Board of Directors of Mutual Series Fund Inc. (the "Investment Company") for its
five series, Mutual Shares Fund, Mutual Qualified Fund, Mutual Beacon Fund,
Mutual Discovery Fund and Mutual European Fund (the "Funds"). The Board has
determined that the Plan is in the best interests of each class of the Fund and
the Investment Company as a whole. The Plan sets forth the provisions relating
to the establishment of multiple classes of shares of the Fund.
1. The Fund shall offer three classes of shares, to be known as Class I,
Class II shares and Class Z shares.
2. Class I Shares shall carry a front-end sales charge ranging from 0% -
4.50 %, and Class II Shares shall carry a front-end sales charge of 1.00%. Class
Z Shares shall not be subject to any front-end sales charges.
3. Class I Shares shall not be subject to a contingent deferred sales
charge ("CDSC") except in the following limited circumstances. On investments of
$1 million or more, a contingent deferred sales charge of 1.00% of the lesser of
the then-current net asset value or the original net asset value at the time of
purchase applies to redemptions of those investments within the contingency
period of 12 months from the calendar month following their purchase. The CDSC
is waived in certain circumstances, as described in the Fund's prospectus.
Class II Shares redeemed within 18 months of their purchase shall be
assessed a CDSC of 1.00% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase. The CDSC is waived in
certain circumstances as described in the Fund's prospectus.
Class Z Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Investment Company pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended, (the "Rule 12b-1
Plan") associated with the Class I Shares may be used to reimburse Franklin
Templeton Distributors, Inc. (the "Distributor") or others for expenses incurred
in the promotion and distribution of the Class I Shares. Such expenses include,
but are not limited to, the printing of prospectuses and reports used for sales
purposes, expenses of preparing and distributing sales literature and related
expenses, advertisements, and other distribution-related expenses, including a
prorated portion of the Distributor's overhead expenses attributable to the
distribution of the Class I Shares, as well as any distribution or service fees
paid to securities dealers of their firms or others who have executed a
servicing agreement with the Investment Company for the Class I Shares, the
Distributor or its affiliates.
The Rule 12b-1 Plan associated with the Class II Shares has two components.
The first component is a shareholder servicing fee, to be paid to
broker-dealers, banks, trust companies and others who provide personal
assistance to shareholders in servicing their accounts. The second component is
an asset-based sales charge to be retained by the Distributor during the first
year after the sale of shares, and in subsequent years, to be paid to dealers or
retained by the Distributor to be used in the promotion and distribution of
Class II Shares, in a manner similar to that described above for Class I Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Class Z Shares, and
therefore, the Class Z Shares shall not be subject to deductions relating to
rule 12b-1 fees.
The Rule 12b-1 Plans for the Class I and Class II Shares shall operate in
accordance with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, section 26(d).
6. The only difference in expenses as between Class I, Class II, and Class
Z Shares shall relate to differences in Rule 12b-1 plan expenses, as described
in the applicable Rule 12b-1 Plans.
7. There shall be no conversion features associated with the Class I, Class
II, and Class Z Shares.
8. Shares of Class I, Class II and Class Z may be exchanged for shares of
another investment company within the Franklin Templeton Group of Funds
according to the terms and conditions stated in each fund's prospectus, as it
may be amended from time to time, to the extent permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder.
9. Each class will vote separately with respect to any Rule 12b-1 Plan
related to that class.
10. On an ongoing basis, the Board members, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund for the
existence of any material conflicts between the Board members interests of the
various classes of shares. The Board members, including a majority of the
independent Board members, shall take such action as is reasonably necessary to
eliminate any such conflict that may develop. Franklin Advisers, Inc. and
Franklin Templeton Distributors, Inc. shall be responsible for alerting the
Board to any material conflicts that arise.
11. All material amendments to this Plan must be approved by a majority of
the Board members, including a majority of the Board members who are not
interested persons of the Investment Company.
12. I, Deborah R. Gatzek, Secretary of the Franklin Templeton Group of
Funds, do hereby certify that this Multiple Class Plan was adopted by Franklin
Templeton International Trust, on behalf of its series Templeton Pacific Growth
Fund, by a majority of the Trustees of the Trust on June 18, 1996.
--------------------
Deborah R. Gatzek
Secretary
