SUPPLEMENT DATED
NOVEMBER 1, 1996
TO THE PROSPECTUS OF
FRANKLIN MUTUAL SERIES FUND INC. - CLASS Z SHARES
Dated November 1, 1996
The discussion regarding the timing of pricing foreign currencies in the second
paragraph of the section titled "Net Asset Value" is revised to read as follows:
Foreign currencies are priced at noon Eastern time.
MAIL THIS COMPLETED APPLICATION
TO THE FUND'S TRANSFER AGENT:
FRANKLIN 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:
FRANKLIN MUTUAL SERIES FUND INC.
C/O PFPC INC.
400 BELLEVUE PARKWAY, SUITE 108
WILMINGTON, DE 19809-3710
FRANKLIN
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 8:00 A.M. TO 8:00 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 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 representative will be happy to send you a 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
FRANKLIN MUTUAL SERIES FUND INC.
51 JOHN F. KENNEDY PARKWAY
SHORT HILLS, NJ 07078
Franklin Mutual Series Fund Inc. (the "Fund," "Mutual Series Fund," or "Mutual
Series") 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 with the following exceptions:
1) Existing shareholders of any series as of October 31, 1996 and their
immediate family members residing at the same address may purchase additional Z
shares subject to the other terms and conditions as set forth in this
prospectus.
2) Redemption proceeds from a sale of Class Z shares of the Fund may be
reinvested in the same class of shares of any series within 365 days of the
redemption date.
3) Accounts managed by the Franklin Templeton Group (Franklin Resources, Inc.
and its various subsidiaries).
4) The Franklin Templeton Group's 401(k) Plan.
5) Employer stock, bonus, pension or profit sharing plans that meet the
requirements for qualification under Section 401 of the Internal Revenue Code of
1986, as amended (the "Code"), including salary reduction plans qualified under
Section 401(k) of the Code may purchase Class Z shares if the number of
employees is equal to 500 or the plan has assets of $25 million or more.
6) Employees of a company with a non-custodial pension plan set up as an
omnibus account on October 31, 1996 may complete a direct rollover to an IRA.
7) Partnership shareholders who have an account on October 31, 1996 will be
able to open new accounts whether or not they are listed on the registration.
8) A registered investment advisor ("RIA") or registered certified financial
planner ("CFP") who has clients invested in the Fund on October 31, 1996 will be
able to purchase additional Class Z shares or open new Class Z individual client
or omnibus accounts.
9) A RIA or CFP who does not have clients invested in the Fund on October 31,
1996 will be able to purchase Class Z shares through a broker-dealer or service
agent after he or she has entered into an agreement with Franklin/Templeton
Distributors, Inc. ("Distributors"), the Fund's principal underwriter.
10) Broker-dealers, qualified registered investment advisors and certified
financial planners who have entered into a special agreement with Distributors
for their clients who are participating in comprehensive fee programs.
11) 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.
12) Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under Section 501 of the Code are subject to a $1
million initial investment or an investment of $1 million over the subsequent
13-month period in any of the funds in the Franklin Templeton Group of Funds.
13) Members of qualified groups as defined under "Additional Information."
14) Officers, trustees, directors and full-time employees of Franklin Resources,
Inc. and its subsidiaries and their family members.
15) Mutual Shares and Discovery may be purchased by the three funds within the
Franklin Templeton Fund Allocator Series after those funds become available for
sale to the public.
16) Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition, or exchange offer or other business combination
transaction.
17) Employer-sponsored retirement plans invested in the Fund as of October 31,
1996 will be able to add new participants and accounts. In addition employees
who own Fund shares through an employer-sponsored retirement plan as of October
31, 1996, may open new individual Class Z accounts in their own names.
18) Individual investors who invest $5 million or more, or $5 million over the
subsequent 13-month period in any of the funds in the Franklin Templeton Group
of Funds.
19) Corporate shareholders invested in the Fund as of October 31, 1996, may open
new accounts using the same registration or if the corporation is reorganized
into smaller, independent companies, the new companies will be able to purchase
Class Z shares.
20) Shareholders who owned shares of the Fund through a broker-dealer or service
agent omnibus account on October 31, 1996.
Anyone who is not a shareholder of record, but is eligible to purchase shares
under any of the various provisions set forth in the forepart of this prospectus
must include a written statement with each purchase order explaining which
exception applies to the purchase. If the purchase order is not accompanied by
this statement, the Fund cannot guarantee that the purchase will be accepted.
Employees covered under employer-sponsored retirement plans must supply
documentation to prove they owned shares of the Fund through the
employer-sponsored retirement account on October 31, 1996 (or within the prior
three months if their most recent statement does not go through October 31,
1996). Shareholders who owned shares through a broker-dealer or service agent
omnibus account will also be required to submit documentation to prove they
owned shares of the Fund on October 31, 1996.
Mutual Shares Fund ("Mutual Shares") originally organized in 1949, Mutual
Qualified Fund ("Qualified"), Mutual Beacon Fund ("Beacon") and Mutual European
Fund ("European"), each 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 concisely sets forth 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. A Statement of
Additional Information, dated November 1, 1996, containing additional and more
detailed information about the Fund and the Class Z shares has been filed with
the Securities and Exchange Commission and is incorporated herein by reference.
The Statement 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, fees for certain administrative facilities
or services, pursuant to an administration agreement with Franklin Templeton
Services, Inc. ("FT Services"), and other expenses of operating the Fund and the
series. 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 of Directors determines that
such expenses also would have been higher (based upon such considerations as the
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, or portion thereof, ended June 30, 1996, respectively, are as follows:
1 YEAR 5 YEARS 10 YEARS
------ ------- -------
Mutual Shares 21.95% 17.83% 14.16%
Qualified 21.51% 18.43% 14.59%
Beacon 22.52% 18.23% 15.20%
Discovery 25.55% N/A* 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.
CONDENSED FINANCIAL INFORMATION
MUTUAL SHARES FUND - CLASS Z
FINANCIAL HIGHLIGHTS
(Selected data for a share of capital stock outstanding throughout each year)
<TABLE>
<CAPTION>
(Unaudited)
For the Six
Months Ended
June 30, Year Ended December 31,
----- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
--- --- --- --- --- --- --- --- --- --- ---
Net Asset Value,
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 Period $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 Period (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>
*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.
**Annualized.
***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.
+Average commission rate is calculated for the periods beginning on or after
January 1, 1996.
CONDENSED FINANCIAL INFORMATION
MUTUAL QUALIFIED FUND - CLASS Z
FINANCIAL HIGHLIGHTS
(Selected data for a share of capital stock outstanding throughout each year)
<TABLE>
<CAPTION>
(Unaudited)
For the Six
Months Ended
June 30, Year Ended December 31,
---- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
--- --- --- --- --- --- --- --- --- --- ---
Net Asset Value,
Beginning of Year $29.74 $26.67 $27.00 $24.43 $21.18 $18.37 $22.21 $22.71 $19.37 $20.06 $19.15
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
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 Period $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
Period (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>
*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.
**Annualized.
***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.
+Average commission rate is calculated for the periods beginning on or after
January 1, 1996.
CONDENSED FINANCIAL INFORMATION
MUTUAL BEACON FUND - CLASS Z
FINANCIAL HIGHLIGHTS
(Selected data for a share of capital stock outstanding throughout each period)
<TABLE>
<CAPTION>
(Unaudited)
For the Six Sept. 1,
Months Ended 1987 to Year Ended
June 30, Year Ended December 31, Dec. 31, August 31,
----- ------------------------------------------------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1987 1986
--- --- --- --- --- --- --- --- --- --- --- ---
Net Asset Value,
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 $38.46 $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 Net Assets 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>
*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.
**Annualized.
***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.
+Average commission rate is calculated for the periods beginning on or after
January 1, 1996.
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 Ended
June 30, Year Ended December 31,
---- ------------------------------
1996 1995 1994 1993
--- --- --- ---
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 Period $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 Period (millions) $2,263 $1,370 $725 $548
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 - - -
*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.
**Annualized.
***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 Qualified, since September 1, 1987
for Beacon and for 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.
CONDENSED FINANCIAL INFORMATION
THE FUND
Franklin Mutual Series Fund Inc. is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940 Act")
and 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 of each is income. Discovery has long-term capital
appreciation as its objective. It will seek to achieve by including investments
in small capitalization companies. These objectives are fundamental. 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 investments in
other countries. 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 in its portfolio 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 its 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).
An investor 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.") The Adviser 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. The Adviser'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 the Adviser examines each security separately; the Adviser has
no general criteria as to asset size, earnings or industry type which would make
a security unsuitable for purchase by a series. Although each series 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, the NASDAQ national
market system or in the over-the-counter market. Each 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. Securities rated D are in default
as to the payments of principal and interest. 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 Adviser's
opinion, at prices less than their intrinsic value. Consequently, the Adviser'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 the Adviser 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 and offer the potential for certain investment opportunities. 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 by Franklin Mutual. 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, the Federal Deposit
Insurance Corporation, or the Pension Benefit Guaranty Corporation or may
include supranational organizations such as The 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 the Adviser 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. The Adviser 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. Other
securities which may be considered to be illiquid but in which the series may
invest include 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 of 1933 ("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
illiquidity 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. Investing in smaller capitalized companies may
involve greater risks than investing in securities of larger companies. The
smaller companies in which Discovery invests often are not well known, often may
trade at a discount and may not be followed by established financial
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 to do so when
circumstances dictate. In addition, each 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 Depositary
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. Depositary Receipts can be
sponsored by the issuer of the underlying securities or the issuing bank or
trust company or unsponsored. Holders of unsponsored Depositary 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
including tri-party 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 risks related to fluctuations in 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
changes in 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 it is able to close out a transaction 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.
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 the discussion of investment policies above) 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 intended 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 Advisers, Inc. ("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 L. Friedman since
1988, Raymond Garea since 1991, Peter A. Langerman since 1986 and Lawrence N.
Sondike since 1984.
Michael F. Price
Chief Executive Officer and President of Adviser
Mr. Price has a Bachelor of Arts degree in business administration from the
University of Oklahoma. Prior to November 1996, Mr. Price was President and
Chairman of Heine Securities Corporation, the former investment adviser for the
Fund. He became Chief Executive Officer of Franklin Mutual in November 1996. He
is Chairman of the Board and President of the Fund.
Jeffrey A. Altman
Senior Vice President of Adviser
Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
November 1996, Mr. Altman was employed as a Research Analyst and Trader for
Heine Securities Corporation, the former investment adviser for the Fund. He
joined Franklin Mutual in November 1996. He is a Vice President of the Fund.
Robert L. Friedman
Senior Vice President of Adviser
Mr. Friedman has a Bachelor of Arts degree in humanities from Johns Hopkins
University and a Masters in Business Administration from the Wharton School,
University of Pennsylvania. Prior to November 1996, Mr. Friedman was a Research
Analyst for Heine Securities Corporation, the former investment adviser for the
Fund. He joined Franklin Mutual in November 1996. He is a Vice President of the
Fund.
Raymond Garea
Senior Vice President of Adviser
Mr. Garea has a Bachelor of Science degree in engineering from Case Institute of
Technology and a Masters in Business Administration from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, the former investment adviser for the Fund. He joined Franklin
Mutual in November 1996. He is a Vice President of the Fund.
Peter A. Langerman
Senior Vice President of Adviser
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 Stanford University Law School. Prior to November 1996, he was a Research
Analyst for Heine Securities Corporation, the former investment adviser for the
Fund. He joined Franklin Mutual in November 1996. Mr. Langerman is a director
and Executive Vice President of the Fund.
Lawrence N. Sondike
Senior Vice President of Adviser
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 adviser for the Fund. He joined Franklin
Mutual in October 1996. He is a Vice President of the Fund.
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS
Franklin Mutual (the "Adviser") serves as investment adviser to each series
pursuant to an investment advisory agreement with each series (collectively,
"the Advisory Agreement") which was approved by the shareholders of each such
series at a meeting held on October 25, 1996. Under the Advisory Agreements
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 Agreements was in effect during the preceding month.
Each class will pay its proportionate share of its series' management fee.
The Adviser 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 this Agreement
each series acknowledges that the Adviser may and does perform advisory services
for others, that officers and employees of the Adviser 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 the Adviser, to obtain the benefit of
investment opportunities developed by the Adviser, or such officers and
employees, but in which the Adviser does not cause such series to invest.
FT Services, the Fund's business manager, provides certain administrative
facilities and services for each series. FT Services is paid a fee of .15% of
each series' average daily net assets up to $200 million, .135% of average daily
net assets over $200 million up to $700 million, and .10% of average daily net
assets over $700 million up to $1.2 billion, and .075% on assets in excess of
$1.2 billion.
The Adviser and its agents, officers and directors are generally indemnified
under this agreement against liabilities and expenses reasonably incurred in
connection with acts taken while acting in the capacities enumerated in the
Advisory Agreement, 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 Agreement of Mutual Shares, Qualified, Beacon, Discovery and
European continue in effect until November 1, 1997. The Advisory Agreement 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
with respect to any series, by a vote of a majority of the outstanding voting
securities of such series or by the Adviser, each on 60 days' written notice to
the other. The Advisory Agreement automatically terminates 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.
PRIOR SERVICES. Before November 1, 1996, Heine served as the investment manager
under separate investment management agreements that were substantially the same
as the agreement currently in effect with Franklin Mutual. During the fiscal
year ended December 31, 1995, management fees totaling 0.60%, 0.60%, 0.60% and
0.80% of the average daily net assets of the Mutual Shares, Qualified, Beacon,
and Discovery, respectively, were paid to Heine. Total expenses for Class Z for
the fiscal year ended December 31, 1995, including fees paid to Heine, for the
same period were 0.69%, 0.72%, 0.72% and 0.99% of the average daily net assets
of Mutual Shares, Qualified, Beacon, and Discovery, respectively.
HOW TO PURCHASE SHARES
Class Z shares of the Fund are available to the entities listed on the first
two pages of this prospectus 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 the Fund's transfer agent ("transfer agent"). See
"Additional Information." 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 $25
Discovery $1,000 $25
European $1,000 $25
Mutual Shares $1,000 $25
Qualified $1,000 $25
In exceptional cases the Fund may, in its sole discretion, waive these
amounts. The Fund may also establish in its discretion different minimum
investment amounts with respect to investments in the Fund by employees of the
Franklin Templeton Group.
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. Eastern time 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 entities described on the first two pages of this
prospectus) 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 Franklin
Mutual Series Fund Inc., subject to the eligibility criteria, discussed in the
forepart of this prospectus. All written subscriptions must specify the series
and class to be purchased, identify the family member or other entity who
qualifies you as a subscriber and must be accompanied by payment.
New account applications should be sent to:
Franklin Mutual Series Fund Inc.
c/o PFPC Inc.
P.O. Box 8901
Wilmington, DE 19899-8901.
Existing shareholders should mail additional investments to:
Franklin 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:
Franklin 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 7 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 the transfer
agent 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.
INSTITUTIONAL INVESTORS
Institutional investors will likely be required to complete an institutional
account application. There may be additional methods of opening accounts and
purchasing, redeeming or exchanging shares of the Fund available for
institutional accounts. To obtain an institutional account application or
additional information regarding institutional accounts, contact Franklin
Templeton Institutional Services at 1-800-321-8563 Monday through Friday, from
9:00 a.m. EST to 8:00 p.m. EST.
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
A signature guarantee must accompany a redemption request. This requirement
will generally be waived if all of the following circumstances apply:
1. If the redemption is $50,000 or less,
2. Payment is going to the address of record (provided that the address has
not changed within 10 days of the request),
3. Payment is being made to the holder(s) of record, and
4. The redemption request is signed by the holder(s) of record
The signature guarantee will generally be waived if the redemption is a
transfer of assets or direct rollover out of a Franklin Mutual Series Fund
account being directly sent to another financial institution.
IMPORTANT: A Signature Guarantee must be executed by banks, broker-dealers,
credit unions, national securities exchanges, 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.
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:
Franklin 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:
Franklin 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.Eastern time 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 7 on the enclosed application to authorize
automated transfers to your bank account (retirement accounts have a 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 20 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. (See "Signature
Guarantee.")
If the certificates for the shares to be redeemed are held by anyone 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. Signature(s) must be guaranteed when applicable. (See "Signature
Guarantee.")
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. (See "Signature Guarantee.")
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 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.
Proceeds from a Class Z redemption may be reinvested in a Class Z account in
any series within 365 days of the redemption date. After that time the account
will be closed and the shareholder will not be able to open a Class Z account
unless they meet the eligibility criteria listed in the forepart of this
prospectus.
SHAREHOLDER SERVICES
Franklin 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, (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 7 on the
application attached to this prospectus.
B. AUTOMATIC INVESTMENT PLAN. The Automatic Investment 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 is $25 for Mutual Shares, Beacon, 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. If the Automatic Investment
Plan is initiated at the time the account is opened, the Fund's initial
investment amount is reduced and the account may be opened with an investment of
$500 or more. 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 eligible persons may establish an
Individual Retirement Account ("IRA") to invest in the Fund. 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 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 excludable 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. Existing shareholders
may give their shares as a gift to another person or entity which would create a
new account in the name of that person or entity even though that person or
entity was not as shareholder as of October 31, 1996. 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. (See "Signature Guarantee.")
NET ASSET VALUE
For purposes of pricing purchases and redemptions, the net asset value of each
series of the Fund is separately determined as of the earlier of 4:00 p.m.
Eastern time 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 for which market quotations are not
readily available are valued within the range of the bid and ask 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 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 and to distribute all of its net investment income and capital gain to
shareholders at least annually. Consequently 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.
The Board presently intends to declare dividends and distributions from net
investment income semi-annually. The distributions are frequently declared at
mid-year and during late December. If you are considering buying Fund shares
shortly before a distribution, you should consider that such distribution will
result in a decrease in the value of Fund shares equal to the per share amount
of the distribution, because the value of Fund shares is based directly on the
amount of the Fund's net assets, rather than on the principle of supply and
demand. The effect of this decrease may be particularly significant for shares
purchased prior to the ex-dividend date of any distribution made in December
1996, since the Fund is generally required to make a distribution in December to
avoid excise tax. Further, this distribution will be fully taxable to
shareholders even though the receipt of such distribution shortly after
purchasing shares represents in effect, a return of a portion of your
investment.
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 each series 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 a particular series' assets at the close of any taxable year consists
of stocks or securities of foreign corporations, as is anticipated for European,
such series 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
The Adviser 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 does not intend to effect portfolio transactions for a series
through a broker which is an affiliated person of the Fund or the Adviser.
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 the Mutual Discovery Fund and 400 million of which
have been allocated to the Mutual European Fund. The Fund began offering three
classes of shares of each series 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 that time 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 60 days to fill any existing vacancies.
Directors may be removed only for cause by a vote of 67% of the outstanding
shares of the Fund. A meeting of shareholders shall be called if the record
holders of 10% 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, AND TRANSFER AND DIVIDEND DISBURSING AGENT. State Street Bank and
Trust Company, 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 sub-agent of the Fund's Class Z shares is PFPC Inc., 400 Bellevue
Parkway, Wilmington, Delaware 19809-3710, through a subcontract with the Fund's
transfer agent and shareholder servicing agent, Franklin Templeton Investor
Services, Inc., PNC Bank, Wilmington, Delaware acts as the trustee/custodian for
all Class Z sponsored retirement accounts; the Fund anticipates that Franklin
Templeton Trust Company may become trustee/custodian of these retirement
accounts, but not before December 31, 1996.
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.
QUALIFIED GROUP. For purposes of investing in the Fund a qualified group is one
that:
o Invests a minimum of $5 million in the Fund,
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between representatives of the Franklin Templeton
Group and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
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 at net asset value of other
Franklin Templeton Funds, as permitted by each fund's current prospectus,
without paying a sales charge, provided those shares have been held at least six
consecutive 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.
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
Annual Expense Tables 4
Performance Information 5
Condensed Financial Information 7
The Fund 11
Management of the Fund 17
How to Purchase Shares 19
How to Redeem Shares 21
Shareholder Services 24
Net Asset Value 26
Dividends, Distributions and Taxes 26
Fund Operations 28
Shares of the Fund 28
Additional Information 29
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.
FRANKLIN
MUTUAL
SERIES
FUND
INC.
AN INVESTMENT COMPANY ORGANIZED IN DIVERSIFIED SERIES
INVESTMENT ADVISER
FRANKLIN MUTUAL ADVISERS, INC.
MICHAEL F. PRICE
CHIEF EXECUTIVE OFFICER AND PRESIDENT
PROSPECTUS
NOVEMBER 1, 1996
PROSPECTUS & APPLICATION
NOVEMBER 1, 1996
Mutual
Series
Fund Inc
INVESTMENT STRATEGIES
Mutual Shares Fund GROWTH AND INCOME o VALUE
Mutual Qualified Fund GROWTH AND INCOME o VALUE
Mutual Beacon Fund GROWTH AND INCOME o VALUE
Mutual European Fund GLOBAL o VALUE
Mutual Discovery Fund GROWTH o VALUE
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." This prospectus
contains information you should know before investing in the Fund. Please keep
it for future reference.
The Fund's Class I and Class II SAI, dated November 1, 1996, as may be amended
from time to time, includes more information about the Fund's procedures and
policies. It has been filed with the SEC and is 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.
MUTUAL SERIES FUND INC.
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.
Mutual Series Fund Inc.
November 1, 1996
When reading this prospectus, you will see certain terms that are capitalized.
This means the term is explained in our glossary section.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary................. 2
Investment Objectives and Policies and Risks 3
Who Manages the Fund?........... 11
How does the Fund Measure Performance? 14
How Taxation Affects You and the Fund 15
How is the Fund Organized?...... 17
ABOUT YOUR ACCOUNT
How Do I Buy Shares?............ 18
May I Exchange Shares for Shares of Another Fund? 24
How Do I Sell Shares?........... 26
What Distributions Might I Receive from the Fund? 29
Transaction Procedures and Special Requirements 30
Services to Help You Manage Your Account 34
GLOSSARY
Useful Terms and Definitions.... 37
51 John F. Kennedy Parkway
Short Hills, NJ 07078
1-800/DIAL BEN
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.
A. Shareholder Transaction Expenses+
Mutual
Shares Qualified Beacon European Discovery
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
This chart assumes 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
Shares 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
Mutual
Shares Qualified Beacon European Discovery
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
For the same Class II investment, you would pay projected expenses of $27
(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.
++There is no front-end sales charge if you invest $1 million or more in Class I
shares.
+++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. 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.
INVESTMENT OBJECTIVES AND POLICIES AND RISKS
Mutual Shares Fund ("Mutual Shares"), Mutual Qualified Fund ("Qualified"),
Mutual Beacon Fund ("Beacon") and Mutual European Fund ("European") each has as
its principal objective capital appreciation, which may occasionally be
short-term. A secondary objective of each is income. Mutual Discovery Fund
("Discovery") has long-term capital appreciation as its objective. It will seek
to achieve its objective by including investments in small capitalization
companies. These objectives are fundamental.
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 investments in other countries. 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 in its portfolio 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 securities of foreign corporations at the close of each
taxable year.
Each series pursues its 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
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 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
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 series 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, the NASDAQ national market system or in the over-the-counter market.
Each 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 or 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. Securities rated D are
in default as to the payments of principal and interest. 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 and offer the potential for certain investmnet opportunities. 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 by Franklin Mutual.
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, the Federal Deposit Insurance Corporation or the Pension
Benefit Guaranty Corporation, or may include supranational organizations such as
the 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. Other
securities which may be considered to be illiquid but in which the series may
invest include 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 of 1933 ("144A securities"). The Board 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 illiquidity 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 Franklin Mutual
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. Investing in smaller capitalized companies may involve
greater risks than investing in securities of larger companies. The smaller
companies in which Discovery invests often are not well known, often may trade
at a discount and may not be followed by established financial institutions.
Each series may invest in common stock, preferred stock and corporate debt
securities in such proportions as Franklin Mutual 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 to do
so when circumstances dictate. In addition, each 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 Depositary
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. Depositary Receipts can be
sponsored by the issuer of the underlying securities or the issuing bank or
trust company or unsponsored. Holders of unsponsored Depositary 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
including tri-party 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 risks related to fluctuations in 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 changes in 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 Franklin Mutual'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 it is able to close out a transaction 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 and the primary and secondary objectives described above, 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, Franklin Mutual 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 the discussion of investment policies above) 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 intended 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
three 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. Franklin Mutual serves as each series' investment adviser.
It is 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 1988, Raymond Garea since 1991, Peter A. Langerman
since 1986 and Lawrence N. Sondike since 1984.
Michael F. Price
Chief Executive Officer and President of Franklin Mutual
Mr. Price has a Bachelor of Arts degree in business administration from the
University of Oklahoma. Prior to November 1996, Mr. Price was President and
Chairman of Heine, the former investment adviser for the Fund. He became Chief
Executive Officer of Franklin Mutual in November 1996. He is Chairman of the
Board and President of the Fund.
Jeffrey A. Altman
Senior Vice President of Franklin Mutual
Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
November 1996, Mr. Altman was employed as a Research Analyst and Trader for
Heine, the former investment adviser for the Fund. He joined Franklin Mutual in
November 1996. He is a Vice President of the Fund.
Robert L. Friedman
Senior Vice President of Franklin Mutual
Mr. Friedman has a Bachelor of Arts degree in humanities from Johns Hopkins
University and a Masters in Business Administration from the Wharton School,
University of Pennsylvania. Prior to November 1996, Mr. Friedman was a Research
Analyst for Heine, the former investment adviser for the Fund. He joined
Franklin Mutual in November 1996. He is a Vice President of the Fund.
Raymond Garea
Senior Vice President of Franklin Mutual
Mr. Garea has a Bachelor of Science degree in engineering from Case Institute of
Technology and a Masters in Business Administration from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine, the
former investment adviser for the Fund. He joined Franklin Mutual in November
1996. He is a Vice President of the Fund.
Peter A. Langerman
Senior Vice President 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 Stanford University Law School. Prior to November 1996, he was a Research
Analyst for Heine, the former investment adviser for the Fund. He joined
Franklin Mutual in November 1996. Mr. Langerman is a director and Executive Vice
President of the Fund.
Lawrence N. Sondike
Senior Vice President 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 November 1996, he was a Research Analyst for Heine, the former
investment adviser for the Fund. He joined Franklin Mutual in November 1996. He
is a 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, the Fund's
administrator, provides certain administrative facilities and services for each
series. Please see "Investment Management and Other Services" and "Miscellaneous
Information" in the SAI for information on securities transactions and a summary
of the Fund's Code of Ethics.
Investment Management and Administration Fees. Under its management agreement
with Franklin Mutual, Mutual Shares, Qualified, Beacon, Discovery and 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.
FT Services is paid a fee of .15% of each series' average daily net assets up to
$200 million, .135% of average daily net assets over $200 million up to $700
million, and .10% of average daily net assets over $700 million 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 Franklin Mutual 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.
Prior Services. Before November 1, 1996, Heine served as the investment manager
under separate investment management agreements that were substantially the same
as the agreement currently in effect with Franklin Mutual. During the fiscal
year ended December 31, 1995, management fees totaling 0.60%, 0.60%, 0.60% and
0.80% of the average daily net assets of Mutual Shares, Qualified, Beacon, and
Discovery, respectively, were paid to Heine. No fees were earned by European for
the previous fiscal year because European did not become operational until July
1996. Total expenses for Class Z for the fiscal year ended December 31, 1995,
including fees paid to Heine, for the same period were 0.69%, 0.72%, 0.72% and
0.99% of the average daily net assets of Mutual Shares, Qualified, Beacon, and
Discovery, respectively.
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. Covered 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.
The amount which the Fund may reimburse Distributors or others for distribution
expenses is 0.25% per annum of its average daily net assets, payable on a
quarterly basis. The Fund is also permitted to pay Distributors up to an
additional 0.10% per annum of its average daily net assets for reimbursement of
distribution expenses. All expenses of distribution in excess of 0.35% per annum
will be borne by Distributors, or others who have incurred them, without
reimbursement from the Fund. During the first year after certain Class I
purchases made without a sales charge, Distributors may keep the Rule 12b-1 fees
associated with the purchase.
Under the Class II plan for each series, 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 each series'
Class II shares' 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 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 you 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.
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 and generally be subject to tax.
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 your basis in your 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 redeem
shares of any series at a loss and make an additional investment in the same
series 30 days before or after your redemption, the loss may be disallowed under
the wash sale rules.
Income received by each series from sources outside the U.S. may be subject to
withholding and other foreign taxes. As long as more than 50% of the value of a
particular series' assets at the close of any taxable year consists of
securities of foreign corporations, as is anticipated for European, such series
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 U.S. 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 U.S. 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 your tax advisors 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. You are urged to consult your own tax advisors with
respect to the tax consequences of an investment in a series of the Fund.
HOW IS THE FUND ORGANIZED?
Each series is a 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 that time are considered Class Z shares. Class Z shares of the
five series are described in a separate prospectus. Additional series or 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 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 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.
As of the date of this prospectus, Resources owned substantially all of the
outstanding Class I and Class II shares 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 $ 25
*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.
**$500 for accounts opened pursuant to an automatic investment plan.
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:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o 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
AS A PERCENTAGE OF TO 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:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o 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.
o 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:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o 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, the 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:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o 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, registered investment advisors or certified financial
planners, who have entered into a supplemental agreement with Distributors for
clients participating in comprehensive 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 or other business combination transactions
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 these 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"). An exchange, because it is technically
a sale and a purchase of shares, is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund Trust ("Money Fund Trust"). Money Fund Trust is
the only money fund exchange option available to certain shareholders. Unlike
our other money funds, shares of Money Fund Trust may generally not be purchased
directly and no drafts (checks) may be written on Money Fund Trust 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.
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 Trust, 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:
o You may only exchange shares within the same class. Beginning 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 each fund's current prospectus, if you
have held the shares in your Mutual Series Class Z account for at least six
consecutive months.
o 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."
o 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.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
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?
You may sell (redeem) your shares at any time.
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.
METHOD STEPS TO FOLLOW
BY PHONE
(Only available if Call Shareholder Services
you have completed
and sent to us the Telephone requests will be accepted:
telephone redemption o If the request is $50,000 or less. Institutional
agreement included accounts may exceed $50,000 by completing a
with this prospectus) separate agreement. Call Institutional Services
to receive a copy.
o If there are no share certificates issued for the
shares you want to sell or you have already
returned them to the Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by
phone within the last 30 days
Through Your Dealer Call your investment representative
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:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o 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.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o 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. The
distributions are frequently declared at mid-year and during late December.
Capital gains, if any, will be distributed at least annually.
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 are considering buying Fund shares shortly before a distribution, you
should consider that such distribution will result in a decrease in the value of
Fund shares equal to the per share amount of the distribution, because the value
of Fund shares is based directly on the amount of the Fund's net assets, rather
than on the principle of supply and demand. The effect of this decrease may
particularly be significant for shares purchased prior to the ex-dividend date
of any distribution made in December 1996, since the Fund is generally required
to make a distribution in this month to avoid excise tax. Further, this
distribution will be fully taxable to shareholders even though the receipt of
such distribution shortly after purchasing shares represents in effect, a return
of a portion of your investment.
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, dividend distributions,
or both. 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 and/or 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.
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:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o 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.
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
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 application included with this prospectus
or contact your investment representative. If the Automatic Investment Plan is
initiated at the time you open your account, the Fund's initial investment
amount is reduced and the account may be opened with an investment of $500 or
more. Existing account holders may choose any amount, starting with the $25
minimum subsequent amount, for investment in their Fund Account from their bank
account. 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.
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 last 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:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o 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:
CODE NUMBER
FUND NAME CLASSI CLASS II
Mutual Shares 474 574
Qualified 475 575
Beacon 476 576
Discovery 477 577
European 478 578
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o 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.
o 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 P.O. Box 33030, 700 Central Avenue, St. Petersburg, Florida 33733-8030. The
Fund, Distributors and FT Services are also located at this address. Franklin
Mutual is located at 51 John F. Kennedy Parkway, Short Hills, New Jersey 07078.
You may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (EASTERN TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 8:30 a.m. to 8:00 p.m.
Dealer Services 1-800/524-4040 8:30 a.m. to 8:00 p.m.
Fund Information 1-800/DIAL BEN 8:30 a.m. to 11:00 p.m.
(1-800/342-5236) 9:30 a.m. to 5:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 8:30 a.m. to 8:00 p.m.
Institutional Services 1-800/321-8563 9:00 a.m. to 8:00 p.m.
TDD (hearing impaired) 1-800/851-0637 8:30 a.m. to 8:00 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 - Each series offers three classes of shares,
designated "Class I," "Class II" and "Class Z." The three classes have
proportionate interests in the respective series' 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., the Fund's administrator
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, 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 manager that
was acquired by Resources on 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.
Moody's - Moody's Investors Service, Inc.
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.
OTC - Over-the-counter
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
S&P - Standard & Poor's Corporation
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 other wholly owned
subsidiaries of Resources.
