As filed with the Securities and Exchange Commission February 3, 1997
File Nos.
33-18516
811-5387
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post Effective Amendment No. 21 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 22 (X)
FRANKLIN MUTUAL SERIES FUND INC.
(Exact Name of Registrant as Specified in Charter)
51 JOHN F. KENNEDY PARKWAY, SHORT HILLS, NJ 07078
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (201) 912-2100
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate
box)
[ ]immediately upon filing pursuant to paragraph (b)
[x]on February 12, 1997 pursuant to paragraph (b)
[ ]60 days after filing pursuant to paragraph (a)(i)
[ ]on (date) pursuant to paragraph (a)(i)
[ ]75 days after filing pursuant to paragraph (a)(ii)
[ ]on (date) pursuant to paragraph (a)(ii)of rule 485
if appropriate, check the following box:
[ ]This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
DECLARATION PURSUANT TO RULE 24F-2. The Registrant has registered an indefinite
number or amount of securities under the Securities Act of 1933 pursuant to Rule
24f-2 under the Investment Company Act of 1940. The Rule 24f-2 Notice for the
issuer's most recent fiscal year was filed on February 27, 1996.
FRANKLIN MUTUAL SERIES FUND INC.
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
(All Series Prospectus - Class I and Class II Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Expense Summary
3. Condensed Financial "Condensed Financial Information"
Information
4. General Description of "How is the Fund Organized?";
Registrant "Investment Objectives and
Policies and Risks"
5. Management of the Fund "Who Manages the Fund?"
6. Capital Stock and Other "How is the Fund Organized?";
Securities "Services to Help You Manage
Your Account"; "What
Distributions Might I Receive
from the Fund?"; "How Taxation
Affects the Fund and its
Shareholders"
7. Purchase of Securities "How Do I Buy Shares?"; "May I
Being Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"
8. Redemption or Repurchase "May I Exchange Shares for
Shares of Another Fund?"; "How
Do I Sell Shares?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"
9. Pending Legal Proceedings Not Applicable
FRANKLIN MUTUAL SERIES FUND INC.
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
(All Series Prospectus - Class Z Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Annual Expense Tables
3. Condensed Financial "Condensed Financial
Information Information"
4. General Description of Cover Page; "The Fund";
Registrant "Additional Information"
5. Management of the Fund "Management of the Fund";
"Additional Information"
5A. Management's Discussion Contained in Registrant's
of Fund Performance Annual Report to Shareholders
6. Capital Stock and Other Cover Page; "Dividends,
Securities Distributions and Taxes";
"Shares of the Fund";
"Additional Information"
7. Purchase of Securities "How to Purchase Shares";
Being Offered "Shareholder Services"; "Net
Asset Value"
8. Redemption or Repurchase "How to Redeem Shares"
9. Pending Legal Proceedings Not Applicable
FRANKLIN MUTUAL SERIES FUND INC.
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in the
STATEMENT OF ADDITIONAL INFORMATION
(All Series - Class I and Class II Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and See "Expense Summary" in the
History Prospectus
13. Investment Objectives and "Investment Objectives and
Policies Policies"; "Restrictions and
Limitations"
14. Management of the Fund "Officers and Directors";
"Investment Advisory and Other
Services"
15. Control Persons and "Officers and Directors";
Principal Holders of "Investment Advisory and Other
Securities Services"; "Miscellaneous
Information"
16. Investment Advisory and "Investment Advisory and Other
Other Services Services"; "The Fund's
Underwriter"
17. Brokerage Allocation and "How does the Fund Buy
Other Practices Securities for its Portfolio?"
18. Capital Stock and Other See Prospectus "How is the Fund
Securities Organized?"
19. Purchase, Redemption and "How Do I Buy, Sell and
Pricing of Securities Exchange Shares?"; "How are
Being Offered Fund Shares Valued?";
"Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance "How does the Fund Measure
Data Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN MUTUAL SERIES FUND INC.
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in the
STATEMENT OF ADDITIONAL INFORMATION
(All Series - Class Z Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Cover Page
12. General Information and See "Series Annual Expense
History Tables" in the Prospectus
13. Investment Objectives and "Investment Objectives and
Policies Policies"; "Restrictions and
Limitations"
14. Management of the Fund "Management of the Fund"
15. Control Persons and "Management of the Fund"
Principal Holders of
Securities
16. Investment Advisory and "Investment Adviser";
Other Services "Investment Advisory
Agreements"; "Custodian,
Transfer Agent and Auditors"
17. Brokerage Allocation and "Investment Adviser";
Other Practices "Portfolio Brokerage"
18. Capital Stock and Other See Prospectus "How to Purchase
Securities Shares"; "Net Asset Value";
"Shares of the Fund"
19. Purchase, Redemption and "Redemption of Shares"
Pricing of Securities
Being Offered
20. Tax Status "Taxes"
21. Underwriters Not Applicable
22. Calculation of Performance "Calculation of Performance
Data Data"
23. Financial Statements "Financial Information"
PROSPECTUS & APPLICATION
FRANKLIN MUTUAL SERIES FUND INC.
NOVEMBER 1, 1996
AS AMENDED FEBRUARY 12, 1997
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
Franklin Mutual Series Fund Inc. (the "Fund" or "Mutual Series") 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 currently offers another class of shares with different sales charge
and expense structure, which affects performance. This class is described in a
separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Class I and
Class II, dated November 1, 1996, as amended February 12, 1997, which may be
amended from time to time. It 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.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY 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.
FRANKLIN MUTUAL SERIES FUND INC.
November 1, 1996
as amended February 12, 1997
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary
How does the Fund Invest its Assets?
What are the Fund's Potential Risks?
Who Manages the Fund?
How does the Fund Measure Performance?
How Taxation Affects the Fund and its Shareholders
How is the Fund Organized?
ABOUT YOUR ACCOUNT
How Do I Buy Shares?
May I Exchange Shares for Shares of Another Fund?
How Do I Sell Shares?
What Distributions Might I Receive from the Fund?
Transaction Procedures and Special Requirements
Services to Help You Manage Your Account
GLOSSARY
Useful Terms and Definitions
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 management fees and other expenses of the
Class Z shares of each series, except European, for the fiscal year ended
December 31, 1995, and the maximum Class I or Class II Rule 12b-1 contractual
fees. Expenses for European are based on estimated expenses for the fiscal year
ended December 31, 1996. The Fund's actual expenses may vary.
<TABLE>
<CAPTION>
A. SHAREHOLDER TRANSACTION EXPENSES+
MUTUAL SHARES QUALIFIED BEACON DISCOVERY EUROPEAN
CLASS I
Maximum Sales Charge (as a
<S> <C> <C> <C> <C> <C>
percentage of Offering Price) 4.50% 4.50% 4.50% 4.50% 4.50%
Paid at time of purchase++ 4.50% 4.50% 4.50% 4.50% 4.50%
Paid at redemption None None None None None
CLASS II
Maximum Sales Charge (as a
percentage of Offering Price) 1.99% 1.99% 1.99% 1.99% 1.99%
Paid at time of purchase+++ 1.00% 1.00% 1.00% 1.00% 1.00%
Paid at redemption++++ 0.99% 0.99% 0.99% 0.99% 0.99%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
MUTUAL SHARES QUALIFIED BEACON DISCOVERY EUROPEAN
CLASS I
<S> <C> <C> <C> <C> <C>
Management Fees 0.60%* 0.60%* 0.60%* 0.80%* 0.80%*
Rule 12b-1 Fees** 0.35% 0.35% 0.35% 0.35% 0.35%
Other Expenses 0.09% 0.12% 0.12% 0.19% 0.20%
----- ----- ----- ----- -----
Total Fund Operating
Expenses 1.04% 1.07% 1.07% 1.34% 1.35%
===== ===== ===== ===== =====
CLASS II
Management Fees 0.60%* 0.60%* 0.60%* 0.80%* 0.80%*
Rule 12b-1 Fees** 1.00% 1.00% 1.00% 1.00% 1.00%
Other Expenses 0.09% 0.12% 0.12% 0.19% 0.20%
----- ----- ----- ----- -----
Total Fund Operating
Expenses 1.69% 1.72% 1.72% 1.99% 2.00%
===== ===== ===== ===== =====
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest
in the Fund.
MUTUAL SHARES QUALIFIED BEACON DISCOVERY EUROPEAN
CLASS I
<S> <C> <C> <C> <C> <C>
1 Year*** $ 55 $ 55 $ 55 $ 58 $ 58
3 Years $ 77 $ 78 $ 78 $ 86 $ 86
5 Years $100 $101 $101 $115 $116
10 Years $166 $170 $170 $199 $200
CLASS II
1 Year $ 37 $ 37 $ 37 $ 40 $ 40
3 Years $ 63 $ 64 $ 64 $ 72 $ 72
5 Years $101 $102 $102 $116 $117
10 Years $208 $211 $211 $239 $240
</TABLE>
For the same Class II investment, you would pay projected expenses of $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 MAY APPLY TO ANY CLASS II PURCHASE IF YOU
SELL THE SHARES WITHIN 18 MONTHS AND TO CLASS I PURCHASES OF $1 MILLION OR MORE
IF YOU SELL THE SHARES WITHIN ONE YEAR. THE CHARGE IS 1% OF THE VALUE OF THE
SHARES SOLD OR THE NET ASSET VALUE AT THE TIME OF PURCHASE, WHICHEVER IS LESS.
THE NUMBER IN THE TABLE SHOWS THE CHARGE AS A PERCENTAGE OF OFFERING PRICE.
WHILE THE PERCENTAGE IS DIFFERENT DEPENDING ON WHETHER THE CHARGE IS SHOWN BASED
ON THE NET ASSET VALUE OR THE OFFERING PRICE, THE DOLLAR AMOUNT PAID BY YOU
WOULD BE THE SAME. SEE "HOW DO I SELL SHARES? - CONTINGENT DEFERRED SALES
CHARGE" FOR DETAILS.
*IN CONNECTION WITH THE TRANSACTION WHICH RESULTED IN FRANKLIN MUTUAL BECOMING
THE FUND'S INVESTMENT MANAGER, FRANKLIN MUTUAL HAS MADE A COMMITMENT TO THE
FUND'S BOARD NOT TO SEEK AN INCREASE IN THE RATE OF INVESTMENT ADVISORY FEES FOR
A THREE YEAR PERIOD BEGINNING NOVEMBER 1, 1996, AND HAS FURTHER AGREED TO LIMIT
THE FUND'S OPERATING EXPENSES, BUT NOT ITS RULE 12B-1 FEES, SO THAT EACH
SERIES'S OPERATING EXPENSES DO NOT EXCEED WHAT SUCH ORDINARY EXPENSES WOULD HAVE
BEEN HAD FRANKLIN MUTUAL NOT BECOME THE FUND'S INVESTMENT MANAGER.
**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.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
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 investing up to 50% or more of its assets in foreign
investments and including proportionately more investments in smaller
capitalization companies than the other series. These objectives are
fundamental.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
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 $1 billion 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 OTC 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 investment 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 up to 50% or more of its assets in foreign companies
and to invest proportionately more of its assets in smaller capitalized
companies than the other series. 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 50% or more 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 remaining series expect to invest a lesser percentage in securities
of non-U.S. issuers than Discovery, with Beacon investing the next largest
percentage, followed by Qualified, and finally with Mutual Shares holding the
smallest percentage of these securities. 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.
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 33 1/3% 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.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in the value or liquidity of portfolio securities or the
amount of net assets will not be considered a violation of any of the foregoing
policies.
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 among the
classes of shares of each series. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Franklin Mutual manages the Fund's assets and makes its
investment decisions. 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.
Together, Franklin Mutual and its affiliates manage over $179 billion in assets.
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.
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 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.
MANAGEMENT FEES. Under its management agreement, the Fund pays Franklin Mutual a
management fee equal to an annual rate of 0.60% of the average daily net assets
of Mutual Shares, Qualified and Beacon and 0.80% of the average daily net assets
of Discovery and European. The fee is computed at the close of business on the
last business day of each month.
PORTFOLIO TRANSACTIONS. Franklin Mutual tries to obtain the best execution on
all transactions. If Franklin Mutual believes more than one broker or dealer can
provide the best execution, consistent with internal policies it may consider
research and related services and the sale of Fund shares, as well as shares of
other funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How does the Fund Buy Securities for its Portfolio?" in the
SAI for more information.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative services
and facilities for the Fund. Under its administration agreement, the Fund pays
FT Services a monthly administration fee equal to an annual rate of 0.15% of
each series' average daily net assets up to $200 million, 0.135% of average
daily net assets over $200 million up to $700 million, 0.10% of average daily
net assets over $700 million up to $1.2 billion, and 0.075% of average daily net
assets over $1.2 billion. Please see "Investment Management and Other Services"
in the SAI for more information.
PRIOR SERVICES. Before November 1, 1996, Heine managed the Fund's assets and
made its investment decisions under separate investment management agreements
that were substantially the same as the management 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 Heine with respect to European for the fiscal year
ended December 31, 1995 because European did not become operational until July
1996. Total expenses for the fiscal year ended December 31, 1995, including fees
paid to Heine, were 0.69%, 0.72%, 0.72% and 0.99% of the average daily net
assets of Mutual Shares, 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. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the Class I plan may not exceed 0.35% per year of
Class I's average daily net assets. Of this amount, the Fund may reimburse up to
0.25% to Distributors or others and may reimburse an additional 0.10% to
Distributors for distribution expenses. All distribution expenses over this
amount will be borne by those who have incurred them. During the first year
after certain Class I purchases made without a sales charge, Distributors may
keep the Rule 12b-1 fees associated with the purchase.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. 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 charges, but certain figures may not include sales charges.
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 guarantee 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 THE FUND AND ITS SHAREHOLDERS
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.
The Fund has elected and 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, the Fund 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 Franklin 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 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. Class Z shares of the five series are described in a separate
prospectus. Additional series and 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 any other class of
the Fund for 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 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
removing members of the Board.
As of January 28, 1997, Michael F. Price owned of record and beneficially more
than 25% of the outstanding shares of Class Z of European.
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.
<TABLE>
<CAPTION>
TOTAL SALES CHARGE AMOUNT PAID TO
AS A PERCENTAGE OF DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I
<S> <C> <C> <C>
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%
</TABLE>
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
SALES CHARGE REDUCTIONS AND WAIVERS
IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't
include this statement, we cannot guarantee that you will receive the
sales charge reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your Class I and Class II
shares in the Franklin Templeton Funds, as well as those of your spouse,
children under the age of 21 and grandchildren under the age of 21. If you are
the sole owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
You authorize Distributors to reserve 5% of your total intended purchase
in Class I shares registered in your name until you fulfill your Letter.
You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans. If you would like more information about the Letter of
Intent privilege, please see "How Do I Buy, Sell and Exchange Shares? - Letter
of Intent" in the SAI or call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
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,
Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
SALES CHARGE WAIVERS. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, 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:
Originally paid a sales charge on the shares, Reinvest the
money within 365 days of the redemption date, and Reinvest the
money in the SAME CLASS of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares 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. Any retirement plan, however,
that does not meet these requirements and that was a shareholder of the
Fund on or before February 1, 1995, may buy shares of the Fund subject to a
sales charge of 4% of the Offering Price, 3.2% of which will be retained by
Securities Dealers.
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 an 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
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 described below may be made 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 are subject to the sole discretion of Distributors, and are paid by
Distributors or one of its affiliates, 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 may receive up to 1% of the purchase price for Class I
purchases of $1 million or more.
3. Securities Dealers may 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, 9 and 10 above.
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI FOR ANY BREAKPOINTS THAT MAY APPLY.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. Securities Dealers may not use sales of the Fund's shares to qualify for
this compensation if prohibited by the laws of any state or self-regulatory
agency, such as the NASD.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, 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.
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METHOD STEPS TO FOLLOW
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<S> <C>
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
- ------------------------- --------------------------------------------------------------------------------------------
</TABLE>
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
Contingent Deferred Sales Charge, such as shares from the reinvestment of
dividends and capital gains ("free shares"), $2,000 in shares that are no longer
subject to a Contingent Deferred Sales Charge because you have held them for
longer than 18 months ("matured shares"), and $3,000 in shares that are still
subject to a Contingent Deferred Sales Charge ("CDSC liable shares"). If you
exchange $3,000 into a new fund, $500 will be exchanged from free shares, $1,000
from matured shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
You may only exchange shares within the SAME CLASS.
The accounts must be identically registered. You may exchange shares
from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature
for all transactions. PLEASE NOTIFY US IN WRITING IF YOU DO NOT
WANT THIS OPTION TO BE AVAILABLE ON YOUR ACCOUNT(S). Additional
procedures may apply. Please see "Transaction Procedures and Special
Requirements."
Trust Company IRA or 403(b) retirement plan accounts may exchange shares
as described above. Restrictions may apply to other types of retirement
plans. Please contact our Retirement Plans Department for information on
exchanges within these plans.
The fund you are exchanging into must be eligible for sale in your state.
We may modify or discontinue our exchange policy if we give you 60 days'
written notice. Currently, the Fund does not allow investments by Market
Timers.
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.
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METHOD STEPS TO FOLLOW
- -------------------------------------------- --------------------------------------------------------------------------------------
<S> <C>
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may have
additional requirements.
- -------------------------------------------- --------------------------------------------------------------------------------------
- -------------------------------------------- --------------------------------------------------------------------------------------
BY PHONE Call Shareholder Services
(Only available if you have completed and Telephone requests will be accepted:
sent to us the telephone redemption
agreement included with this prospectus) If the request is
$50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
If there are no share certificates issued for the
shares you want to sell or you have already returned
them to the Fund] Unless you are selling
shares in a Trust Company retirement plan account
Unless the address on your account was changed by phone
within the last 30 days
- -------------------------------------------- --------------------------------------------------------------------------------------
- -------------------------------------------- --------------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- -------------------------------------------- --------------------------------------------------------------------------------------
</TABLE>
Beginning on or about May 1, 1997, you will automatically be able to redeem
shares by telephone without completing a telephone redemption agreement. PLEASE
NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR
ACCOUNT. If you later decide you would like this option, send us written
instructions signed by all account owners.
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 recently 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. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares 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 on or 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, may be distributed twice a year and 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 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 you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, 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 capital gain distributions,
dividend distributions or both 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 before
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 NYSE is open. We determine the Net
Asset Value per share of each class as of the scheduled close of the NYSE,
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.
The Net Asset Value we use when you buy or sell shares is the one 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 BEFORE 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.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the 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. We cannot accept instructions to 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, we need you 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, we cannot accept
instructions 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. You should register your account as a trust only if you have a valid
written trust document. This avoids 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.
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TYPE OF ACCOUNT DOCUMENTS REQUIRED
- ------------------------------------ ----------------------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- ------------------------------------ ----------------------------------------------------------------------------------------------
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<S> <C>
PARTNERSHIP 1. The pages from the partnership agreement that identify the general partners, or
2. A certification for a partnership agreement
- ------------------------------------ ----------------------------------------------------------------------------------------------
- ------------------------------------ ----------------------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the trustees, or
2. A certification for trust
- ------------------------------------ ----------------------------------------------------------------------------------------------
</TABLE>
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot 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 will 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
The IRS requires us to 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 shareholder application included with this
prospectus or contact your investment representative. If you start the automatic
investment plan when you open your account, your initial investment amount may
be as little as $500. 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 end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
obtain information about your account;
obtain price and performance information about any Franklin Templeton Fund;
exchange shares between identically registered Franklin accounts; and
request duplicate statements and deposit slips for Franklin accounts.
You will need the code number for each class to use TeleFACTS. The code numbers
for Class I and Class II are as follows:
CODE NUMBER
FUND NAME CLASS I 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:
Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
Financial reports of the Fund will be sent every six months. To reduce
Fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if you
would like an additional free copy of the Fund's financial reports or an
interim quarterly report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more 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 and Distributors 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 - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Class Z." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
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.
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 Franklin Funds and the Templeton Funds
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
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
NYSE - New York Stock Exchange
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
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TEMPLETON FUNDS - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
- ---------------------------------------------------------------------------
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, as amended February 12, 1997
- -------------------------------------------------------------------------------
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:
Franklin Mutual Series Fund Inc.
c/o PFPC Inc.
P.O. Box 8901
Wilmington, DE 19899-8901
PLEASE MAIL ADDITIONAL INVESTMENTS FOR EXISTING ACCOUNTS TO:
Franklin Mutual Series Fund Inc.
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:
Franklin Mutual Series Fund Inc.
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:
Franklin Mutual Series Fund Inc.
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, AS AMENDED FEBRUARY 12, 1997
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 began offering 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 Profit Sharing 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, and (i) are sponsored by an employer with at least
5,000 employees, or (ii) have plan assets of $50 million or more. There are no
minimum purchase requirements for investments by these entities.
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, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs.
11) Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds 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) Defined benefit plans or governments, municipalities, and tax-exempt
entities that meet the requirements for qualification under Section 501 of the
Code, subject to a $1 million initial investment.
13) Members of qualified groups as defined under "Additional Information."
14) Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their immediate family
members.
15) Mutual Shares Fund and Mutual Discovery Fund may be purchased by the three
funds within the Franklin Templeton Fund Allocator Series that invest $1,000 or
more.
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 in the Franklin Templeton
Funds, if at least $1 million of that amount is invested in Class Z or Advisor
Class shares of any of the Franklin Templeton Funds. To determine if these
requirements are met, the amount of the current purchase is added to the cost or
current value, whichever is higher, of the investor's existing shares in the
Franklin Templeton 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 above 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 investing up to
50% or more of its assets in foreign investments and including proportionately
more investments in smaller capitalization companies than the other series.
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, as amended February 12, 1997,
and as may be amended from time to time, 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)
<TABLE>
<CAPTION>
<S> <C>
Management Fees .60%
Other Expenses .09%
Total Fund Operating Expenses .69%
----
<S> <C> <C> <C> <C>
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)
<S> <C>
Management Fees .60%
Other Expenses .12%
Total Fund Operating Expenses .72%
<S> <C> <C> <C> <C>
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)
<S> <C>
Management Fees .60%
Other Expenses .12%
Total Fund Operating Expenses .72%
<S> <C> <C> <C> <C>
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)
<S> <C>
Management Fees .80%
Other Expenses .19%
Total Fund Operating Expenses .99%
<S> <C> <C> <C> <C>
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)
<S> <C>
Management Fees .80%
Other Expenses .20%
Total Fund Operating Expenses 1.00%
<S> <C> <C> <C> <C>
Example* 1 year 3 years 5 years 10 years
$11 $33 $57 $126
-----------------------------------------------------
</TABLE>
*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 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,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---- --- ---- --- ---- ---- ---- ---- ---- ---- ----
NET ASSET VALUE,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Year $86.45 $78.69 $80.97 $73.36 $64.49 $56.39 $67.16 $67.77 $57.83 $60.43 $57.57
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 1.49 1.99 1.34 1.41 1.55 2.04 3.32 4.03 2.64 2.23 2.43
Net Gains or Losses
on Securities
(realized and unrealized) 5.64 20.51 2.28 13.89 12.07 9.69 (9.86) 6.00 14.98 1.78 7.29
---- ----- ---- ----- ----- ---- ------ ---- ----- ---- ----
Total from Investment Operations 7.13 22.50 3.62 15.30 13.62 11.73 (6.54) 10.03 17.62 4.01 9.72
---- ----- ---- ----- ----- ----- ------ ----- ----- ---- ----
LESS DISTRIBUTIONS:
Dividends (from net investment
income) .10 1.93 1.34 1.38 1.59 2.00 3.34 4.09 2.63 2.52 2.34
Distributions
(from capital gains) 2.90 12.81 4.56 6.31 3.16 1.63 .89 6.55 5.05 4.09 4.52
---- ----- ---- ---- ---- ---- --- ---- ---- ---- ----
Total Distributions 3.00 14.74 5.90 7.69 4.75 3.63 4.23 10.64 7.68 6.61 6.86
---- ----- ---- ---- ---- ---- ---- ----- ---- ---- ----
NET ASSET VALUE,
End of 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
<TABLE>
<CAPTION>
(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 1992 1991 1990 1989 1988 1987 1986
--- --- --- --- --- --- --- --- --- --- ---
NET ASSET VALUE,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Year $29.74 $26.67 $27.00 $24.43 $21.18 $18.37 $22.21 $22.71 $19.37 $20.06 $19.15
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
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
<TABLE>
<CAPTION>
(Selected data for a share of capital stock outstanding throughout each period)
(Unaudited)
For the Six Sept. 1,
Months Ended 1987 to Year Ended
June 30, Year Ended December 31, Dec. 31, August 31,
----- ------------------------------------------------- ----- -----------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1987 1986
--- --- --- --- --- --- --- --- --- --- --- ---
NET ASSET VALUE,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Period $35.94 $31.03 $31.09 $27.10 $23.36 $20.80 $24.09 $22.85 $19.49 $24.78 $19.27 $15.73
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
INCOME FROM INVESTMENT
OPERATIONS:
Net Investment Income .70 .87 .46 .37 .45 .75 1.08 1.12 .77 .22 .37 .28
Net Gains or Losses on
Securities (realized
and unrealized) 3.02 7.09 1.28 5.81 4.85 2.88 (3.03) 2.84 4.80 (3.96) 6.39 3.51
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total from Investment
Operations 3.72 7.96 1.74 6.18 5.30 3.63 (1.95) 3.96 5.57 (3.74) 6.76 3.79
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
LESS DISTRIBUTIONS:
Dividends (from net
investment income) .05 .84 .44 .37 .46 .74 1.08 1.17 .80 .51 .31 .25
Distributions (from
capital gains) 1.15 2.21 1.36 1.82 1.10 .33 .26 1.55 1.41 1.04 .94 -0-
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total Distributions 1.20 3.05 1.80 2.19 1.56 1.07 1.34 2.72 2.21 1.55 1.25 .25
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
NET ASSET VALUE,
End of Period $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)
<TABLE>
<CAPTION>
(Unaudited)
For the Six
Months Ended
June 30, Year Ended December 31,
---- ------------------------------
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $15.16 $12.55 $13.05 $10.00
----- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .13 .17 .15 .10
Net Gain on Securities (realized and unrealized) 1.82 3.40 .32 3.48
---- ---- --- ----
Total from Investment Operations 1.95 3.57 .47 3.58
---- ---- --- ----
LESS DISTRIBUTIONS:
Dividends (from net investment income) .02 .14 .16 .09
Distributions (from capital gains) .33 .82 .81 .44
--- --- --- ---
Total Distributions .35 .96 .97 .53
------ ------ ------ ------
NET ASSET VALUE, END OF 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 - - -
</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.
***Average commission rate is calculated for the periods beginning on or after
January 1, 1996.
CONDENSED FINANCIAL INFORMATION
MUTUAL EUROPEAN FUND - CLASS Z
FINANCIAL HIGHLIGHTS
(Selected data for a share of capital stock outstanding throughout each period)
(Unaudited)
For the period
July 3, 1996 (a)
to December 31,
1996
------------------
NET ASSET VALUE,
Beginning of Period $10.00
-------------
INCOME FROM INVESTMENT
OPERATIONS:
Net Investment Income .06
Net Gains or Losses on Securities
(realized and unrealized) 1.40
-------------
Total from Investment Operations 1.46
-------------
LESS DISTRIBUTIONS:
Dividends (from net investment
income) .05
Distributions (from capital gains) .02
-------------
Total Distributions .07
-------------
NET ASSET VALUE,
End of Year $ 11.39
=============
TOTAL RETURN 14.61% +
=============
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Year (millions) $ 450
Ratio of Expenses to Average Net Assets 1.14% *
Ratio of Expenses, net of reimbursement, to average 1.09% *
net assets
Ratio of Net Investment Income to
Average Net Assets 1.84% *
Portfolio Turnover Rate 26.76%
Average Commission Per Share $.023
+NOT ANNUALIZED FOR PERIODS OF LESS THAN ONE YEAR.
*ANNUALIZED.
(A)COMMENCEMENT OF OPERATIONS.
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.
With the exception of Mutual European 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.
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 its objective by
including up to 50% or more of its investments in foreign companies and
investing proportionately more of its assets in small capitalization companies
than the other series. 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). 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 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 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 $1 billion 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 remaining series expect to invest a lesser percentage in
securities of non-U.S. issuers than Discovery, with Beacon investing the next
largest percentage, followed by Qualified, and finally with Mutual Shares
holding the smallest percentage of these securities. 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 repurchase agreements. Each series may also loan its
portfolio securities in order to realize additional income. Repurchase and
tri-party agreements are generally agreements under which the series obtains
money market instruments subject to resale to the seller at an agreed upon price
and date. Any loans of portfolio securities which the series may make must be
fully collateralized at all times by securities with a value at least equal to
100% of the current market value of the loaned securities. The series presently
do not anticipate loaning more than 5% of their respective portfolio securities.
There are certain risks associated with such transactions which are described
under "Investment Objectives and Policies" in the Statement of Additional
Information.
HEDGING AND INCOME TRANSACTIONS
The series may utilize various investment strategies as described below to
hedge various market risks (such as 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 33 1/3% 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, 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 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 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 the Advisory 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 June 30, 1998. 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. 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.
Currently, the Fund does not allow investment by Market Timers. Market Timers
generally include market timings or allocations 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.
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 Mutual
Series Fund 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. Eastern time 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 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 1-800-553-3014. Franklin Templeton
Trust Company ("Trust Company") acts as trustee/custodian, but neither Trust
Company 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. Trust Company acts as trustee/custodian, but neither Trust Company 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. 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 noon
Eastern time. 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 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. Additional series or classes of shares may be
offered in the future. The Fund has an authorized capital of 4.65 billion shares
of stock, par value $.001 per share, 1.5 billion of which have been allocated to
the Mutual Shares Fund, 900 million of which have been allocated to the Mutual
Qualified Fund, 1.35 billion of which have been allocated to the Mutual Beacon
Fund, 500 million of which have been allocated to the Mutual Discovery Fund and
400 million of which have been allocated to the Mutual European Fund. 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.
As of January 28, 1997, Michael F. Price owned of record and beneficially more
than 25% of the outstanding shares of Class Z of European.
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. Franklin Templeton Trust Company, 777 Mariners Island Blvd., San
Mateo, CA 94404, acts as the trustee/custodian for all Class Z sponsored
retirement accounts.
SHAREHOLDER INQUIRIES. Shareholder inquiries should be directed to the Fund
at the telephone number or address set forth on the cover page of this
Prospectus.
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 as follows 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.
Currently, the Fund does not allow investments by Market Timers.
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
AS AMENDED FEBRUARY 12, 1997
FRANKLIN
MUTUAL SERIES
FUND INC.
STATEMENT OF
ADDITIONAL INFORMATION
NOVEMBER 1, 1996
AS AMENDED FEBRUARY 12, 1997
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
Investment Objectives and Policies
Restrictions and Limitations
Officers and Directors
Investment Management
and Other Services
How does the Fund Buy Securities for its Portfolio?
How Do I Buy, Sell and
Exchange Shares?
How are Fund Shares Valued?
Additional Information on
Distributions and Taxes
The Fund's Underwriter
How does the Fund Measure Performance?
Miscellaneous Information
Useful Terms and Definitions
Financial Statements
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and
Definitions."
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The Franklin Mutual Series Fund Inc. (the "Fund") is an open-end management
investment company with five separate diversified series. This SAI relates to
the following classes of shares:
Mutual Shares Fund - Class I & Class II Mutual Qualified Fund - Class I & Class
II Mutual Beacon Fund - Class I & Class II Mutual European Fund - Class I &
Class II Mutual Discovery Fund - Class I & Class II
Each series may, separately or collectively, be referred to as the "series,"
"Fund" or "Funds."
The Fund's Class I and Class II Prospectus, dated November 1, 1996, as amended
February 12, 1997, and as may be amended from time to time, contains the basic
information you should know before investing in the Fund. For a free copy, call
1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
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ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
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ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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INVESTMENT OBJECTIVES AND POLICIES
As described in the Prospectus, the general investment policy of the Fund for
its series, Mutual Shares Fund ("Mutual Shares"), Mutual Qualified Fund
("Qualified"), Mutual Beacon Fund ("Beacon"), Mutual Discovery Fund
("Discovery"), and Mutual European Fund ("European"), is to invest in securities
if, in the opinion of Franklin Mutual, they are available at prices less than
their intrinsic value, as determined by Franklin Mutual after careful analysis
and research, taking into account, among other factors, the relationship of book
value to market value of the securities, cash flow, and multiples of earnings of
comparable securities. The Fund reserves freedom of action for each series to
invest in common stock, preferred stock, debt securities and other securities in
such proportions as the management deems advisable, but, without committing any
fixed portion of any series' assets, the management typically maintains a
portion of the assets of each series invested in debt securities and preferred
stocks (which may be convertible). In addition, the series may also invest in
restricted debt and equity securities, in foreign securities, and in other
investment company securities.
REPURCHASE AGREEMENTS
AND LOANS OF SECURITIES
Each series may invest in repurchase agreements with domestic banks or
broker-dealers. Repurchase agreements are considered loans by the series
collateralized by the underlying securities. As with loans of portfolio
securities which the series may make, these transactions must be fully
collateralized at all times. Franklin Mutual will monitor the creditworthiness
of the other party and will monitor the value of the collateral by marking to
market daily in order to confirm that its value is at least 100% of the agreed
upon sum to be paid to the series.
Repurchase agreements and lending of portfolio securities involve some credit
risk to the series. If the other party defaults on its obligations, the series
could be delayed or prevented from receiving payment or recovering its
collateral. Even if the series recovers the collateral in such a situation, the
series may receive less than its purchase price upon resale.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have similar structural characteristics
and operational mechanics regardless of the underlying instrument on which they
are purchased or sold. Thus, the following general discussion relates to each of
the particular types of options discussed in greater detail below. In addition,
many hedging transactions involving options require segregation of Fund assets
in special accounts, as described below under "Use of Segregated and Other
Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the seller of the option, the obligation to buy, the
underlying security, commodity, index, currency or other instrument at the
exercise price. For instance, the Fund's purchase of a put option on a security
might be designed to protect its holdings in the underlying instrument (or, in
some cases, a similar instrument) against a substantial decline in the market
value by giving the Fund the right to sell such instrument at the option
exercise price. A call option, upon payment of a premium, gives the purchaser of
the option the right to buy, and the seller the obligation to sell, the
underlying instrument at the exercise price. The Fund's purchase of a call
option on a security, financial future, index, currency or other instrument
might be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase such instrument.
An American style put or call option may be exercised at any time during the
option period while a European style put or call option may be exercised only
upon expiration or during a fixed period prior thereto. The Fund is authorized
to purchase and sell exchange-listed options and over-the-counter options ("OTC
options"). Exchange-listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC-issued and exchange-listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting option transactions.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange-listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (each a "Counterparty," and collectively,
"Counterparties") through direct bilateral agreement with the Counterparty. In
contrast to exchange-listed options, which generally have standardized terms and
performance mechanics, all the terms of an OTC option, including such terms as
method of settlement, term, exercise price, premium, guarantees and security,
are set by negotiation of the parties. The Fund will only sell OTC options
(other than OTC currency options) that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the option, the Fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction.
Accordingly, Franklin Mutual must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with U.S. government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers" or broker-dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligations
of which have received) a short-term credit rating of "A-l" from Standard &
Poor's Corporation ("S&P") or "P-l" from Moody's Investor Services ("Moody's"),
an equivalent rating from any nationally recognized statistical rating
organization ("NRSRO") or which Franklin Mutual determines is of comparable
credit quality. The staff of the SEC currently takes the position that OTC
options purchased by the Fund, and portfolio securities "covering" the amount of
the Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any,) are illiquid, and are subject
to the Fund's limitations on investments in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, corporate debt securities,
equity securities (including convertible securities) and Eurodollar instruments
(whether or not it holds the above securities in its portfolio) and on
securities indices, currencies and futures contracts other than futures on
individual corporate debt and individual equity securities. The Fund will not
sell put options if, as a result, more than 50% of the Fund's assets would be
required to be segregated to cover its potential obligations under such put
options other than those with respect to futures and options thereon. In selling
put options, there is a risk that the Fund may be required to buy the underlying
security at a disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES
The Fund may enter into financial futures contracts or purchase or sell put and
call options on such futures as a hedge against anticipated interest rate,
currency or equity market changes, for duration management and for risk
management purposes. Futures are generally bought and sold on the commodities
exchanges where they are listed with payment of initial and variation margin as
described below. The sale of a futures contract creates a firm obligation by the
Fund, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to index futures and Eurodollar instruments, the net
cash amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right in
return for the premium paid to assume a position in a futures contract and
obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for a bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets ("initial margin") which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets ("variation margin") may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract, it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures positions just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction, but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
OPTIONS ON SECURITIES INDICES
AND OTHER FINANCIAL INDICES
The Fund may also purchase and sell call and put options on securities indices
and other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an index
depends on price movements in the instruments making up the market, market
segment, industry or other composite on which the underlying index is based,
rather than price movements in individual securities, as is the case with
respect to options on securities.
CURRENCY TRANSACTIONS
The Fund may engage in currency transactions with Counterparties in order to
hedge the value of portfolio holdings denominated in particular currencies
against fluctuations in relative value between those currencies and the U.S.
dollar. Currency transactions include forward currency contracts,
exchange-listed currency futures, exchange-listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps are entered
into for good faith hedging purposes, Franklin Mutual and the Fund believe such
obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to its borrowing restrictions.
The Fund may enter into currency transactions with Counterparties which have
received (or the guarantors of the obligations of such Counterparties have
received) a credit rating of A-l or P-l by S&P or Moody's, respectively, or that
have an equivalent rating from an NRSRO or (except for OTC currency options) are
determined to be of equivalent credit quality by Franklin Mutual. If there is a
default by the Counterparty, the Fund may have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to either specific transactions or portfolio positions. Transaction
hedging is entering into a currency transaction with respect to specific assets
or liabilities of the Fund, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended to wholly or partially
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or whose value is based upon such foreign
currency or currently convertible into such currency other than with respect to
proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the U.S. dollar.
Proxy hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if Franklin Mutual considers the Austrian schilling to
be linked to the German deutsche mark (the "D-mark"), the Fund holds securities
denominated in schillings and Franklin Mutual believes that the value of
schillings will decline against the U.S. dollar, Franklin Mutual may enter into
a contract to sell D-marks and buy dollars. Currency hedging involves some of
the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to the Fund if the
currency being hedged fluctuates in value to a degree or in a direction that is
not anticipated. Further, there is the risk that the perceived linkage between
various currencies may not be present during the particular time that the Fund
is engaging in proxy hedging. If the Fund enters into a currency hedging
transaction, the Fund will comply with the asset segregation requirements
described below.
RISKS OF CURRENCY TRANSACTIONS
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Fund if
it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
COMBINED TRANSACTIONS
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts) and any combination of futures, options
and currency transactions ("component transactions"), instead of a single
hedging Transaction, as part of a single or combined strategy when, in the
opinion of Franklin Mutual, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on Franklin Mutual's judgment that the combined strategies
will reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
RISKS OF HEDGING TRANSACTIONS
OUTSIDE THE U.S.
When conducted outside the U.S., hedging transactions may not be regulated as
rigorously as in the U.S., may not involve a clearing mechanism and related
guarantees, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the U.S. of data on which to make trading decisions, (iii)
delays in the Fund's ability to act upon economic events occurring in foreign
markets during nonbusiness hours in the U.S., (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
U.S., and (v) lower trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many hedging transactions, in addition to other requirements, require that the
Fund segregate liquid high grade assets with its custodian to the extent Fund
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. In general, either the full amount
of any obligation by the Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restrictions, an amount of cash or
liquid high grade securities at least equal to the current amount of the
obligation must be segregated with the custodian. The segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. For example, a call option
written by the Fund will require the Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by the Fund on an index will require the Fund to own portfolio securities which
correlate with the index or to segregate liquid high grade assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by the Fund requires the Fund to segregate liquid high grade
assets equal to the exercise price.
A currency contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of the currency or liquid
securities denominated in that currency equal to the Fund's obligations or to
segregate liquid high grade assets equal to the amount of the Fund's obligation.
However, the segregation requirement does not apply to currency contracts which
are entered in order to "lock in" the purchase or sale price of a trade in a
security denominated in a foreign currency pending settlement within the time
customary for such securities.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices and OCC-issued and exchange-listed index
options will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of assets equal to its
accrued net obligations, as there is no requirement for payment or delivery of
amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a noncash settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC-issued and exchange-listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement,
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.
Hedging transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and hedging
transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other hedging transactions may also be offset in combinations. If
the offsetting transaction terminates at the time of or after the primary
transaction, no segregation is required, but if it terminates prior to such
time, assets equal to any remaining obligation would need to be segregated.
DEPOSITARY RECEIPTS
Each series of the Fund may invest in securities commonly known as American
Depositary Receipts ("ADRs"), and in European Depositary Receipts ("EDRs") or
other securities representing interests in securities of foreign issuers. ADRs
are certificates issued by a U.S. bank or trust company and represent the right
to receive securities of a foreign issuer deposited in a domestic bank or
foreign branch of a U.S. bank and traded on a U.S. exchange or in an
over-the-counter market. EDRs are receipts issued in Europe generally by a
non-U.S. bank or trust company that evidence ownership of non-U.S. or domestic
securities. Generally, ADRs are in registered form and EDRs are in bearer form.
There are no fees imposed on the purchase or sale of ADRs or EDRs although the
issuing bank or trust company may impose charges for the collection of dividends
and the conversion of ADRs and EDRs into the underlying securities. Investment
in ADRs has certain advantages over direct investment in the underlying non-U.S.
securities, since: (i) ADRs are U.S. dollar denominated investments which are
easily transferable and for which market quotations are readily available and
(ii) issuers whose securities are represented by ADRs are subject to the same
auditing, accounting and financial reporting standards as domestic issuers. EDRs
are not necessarily denominated in the currency of the underlying security.
MEDIUM AND LOWER RATED
CORPORATE DEBT SECURITIES
Each series may invest in securities that are rated in the medium to lowest
rating categories by S&P and Moody's, some of which may be so-called "junk
bonds." The series have historically invested in securities of distressed
issuers when the intrinsic values of such securities have, in the opinion of
Franklin Mutual, warranted such investment. Corporate debt securities rated Baa
are regarded by Moody's as being neither highly protected nor poorly secured.
Interest payments and principal security appears adequate to Moody's for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such securities are
regarded by Moody's as lacking outstanding investment characteristics and having
speculative characteristics. Corporate debt securities rated BBB are regarded by
S&P as having adequate capacity to pay interest and repay principal. Such
securities are regarded by S&P as normally exhibiting adequate protection
parameters, although adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for securities in this rating category than in higher rated categories.
Corporate debt securities which are rated B are regarded by Moody's as generally
lacking characteristics of the desirable investment. In Moody's view, assurance
of interest and principal payments or of maintenance of other terms of the
security over any long period of time may be small. Corporate debt securities
rated BB, B, CCC, CC and C are regarded by S&P on balance as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. In S&P's view, although such
securities likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
BB and B are regarded by S&P as indicating the two lowest degrees of speculation
in this group of ratings. Securities rated D by S&P or C by Moody's are in
default and are not currently performing. The Fund will rely on Franklin
Mutual's judgment, analysis and experience in evaluating such debt securities.
In this evaluation, Franklin Mutual will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic conditions
and trends, its operating history, the quality of the issuer's management and
regulatory matters as well as the price of the security. Franklin Mutual may
also consider, although it does not rely primarily on, the credit ratings of
Moody's and S&P in evaluating lower rated corporate debt securities. Such
ratings evaluate only the safety of principal and interest payments, not market
value risk. Additionally, because the creditworthiness of an issuer may change
more rapidly than is able to be timely reflected in changes in credit ratings,
Franklin Mutual monitors the issuers of corporate debt securities held in the
Fund's portfolio. The credit rating assigned to a security is a factor
considered by Franklin Mutual in selecting a security for a series, but the
intrinsic value in light of market conditions and Franklin Mutual's analysis of
the fundamental values underlying the issuer are of at least equal significance.
Because of the nature of medium and lower rated corporate debt securities,
achievement by each series of its investment objective when investing in such
securities is dependent on the credit analysis of Franklin Mutual. If the series
purchased primarily higher rated debt securities, such risks would be
substantially reduced.
A general economic downturn or a significant increase in interest rates could
severely disrupt the market for medium and lower grade corporate debt securities
and adversely affect the market value of such securities. Securities in default
are relatively unaffected by such events or by changes in prevailing interest
rates. In addition, in such circumstances, the ability of issuers of medium and
lower grade corporate debt securities to repay principal and to pay interest, to
meet projected business goals and to obtain additional financing may be
adversely affected. Such consequences could lead to an increased incidence of
default for such securities and adversely affect the value of the corporate debt
securities in the Fund's portfolio. The secondary market prices of medium and
lower grade corporate debt securities are less sensitive to changes in interest
rates than are higher rated debt securities, but are more sensitive to adverse
economic changes or individual corporate developments. Adverse publicity and
investor perceptions, whether or not based on rational analysis, may also affect
the value and liquidity of medium and lower grade corporate debt securities,
although such factors also present investment opportunities when prices fall
below intrinsic values. Yields on debt securities in a series' portfolio that
are interest rate sensitive can be expected to fluctuate over time. In addition,
periods of economic uncertainty and changes in interest rates can be expected to
result in increased volatility of market price of any medium to lower grade
corporate debt securities in the series' portfolios and thus could have an
effect on the Net Asset Value of the series if other types of securities did not
show offsetting changes in values. The secondary market value of corporate debt
securities structured as zero coupon securities or payment in kind securities
may be more volatile in response to changes in interest rates than debt
securities which pay interest periodically in cash. Because such securities do
not pay current interest, but rather, income is accreted, to the extent that a
series does not have available cash to meet distribution requirements with
respect to such income, it could be required to dispose of portfolio securities
that it otherwise would not. Such disposition could be at a disadvantageous
price. Failure to satisfy distribution requirements could result in the series
failing to qualify as a pass-through entity under the Code.
Investment in such securities also involves certain other tax considerations.
Franklin Mutual values the series' investments pursuant to guidelines adopted
and periodically reviewed by the Board. See "Transactions, Procedures and
Special Requirements - The Price We Use When You Buy or Sell Shares" in the
Prospectus. To the extent that there is no established retail market for some of
the medium or low grade corporate debt securities in which the series may
invest, there may be thin or no trading in such securities and the ability of
Franklin Mutual to accurately value such securities may be adversely affected.
Further, it may be more difficult for a series to sell such securities in a
timely manner and at their stated value than would be the case for securities
for which an established retail market did exist. The effects of adverse
publicity and investor perceptions may be more pronounced for securities for
which no established retail market exists as compared with the effects on
securities for which such a market does exist. During periods of reduced market
liquidity and in the absence of readily available market quotations for medium
and lower grade corporate debt securities held in the Fund's portfolio, the
responsibility of Franklin Mutual to value the Fund's securities becomes more
difficult and Franklin Mutual's judgment may play a greater role in the
valuation of the Fund's securities due to a reduced availability of reliable
objective data. To the extent that the Fund purchases illiquid corporate debt
securities or securities which are restricted as to resale, the Fund may incur
additional risks and costs. Illiquid and restricted securities may be
particularly difficult to value and their disposition may require greater effort
and expense than more liquid securities. Further, a series may be required to
incur costs in connection with the registration of restricted securities in
order to dispose of such securities, although under Rule 144A under the
Securities Act of 1933 certain securities may be determined to be liquid
pursuant to procedures adopted by the Board under applicable guidelines.
SHORT SALES
Each series may make short sales of securities. A short sale is a transaction in
which the series sells a security it does not own in anticipation that the
market price of that security will decline. Each series expects to make short
sales as a form of hedging to offset potential declines in long positions in
similar securities, in order to maintain portfolio flexibility and for profit.
When a series makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The series may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The series' obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other high grade liquid securities similar to those borrowed. The
series will also be required to deposit similar collateral with its custodian to
the extent, if any, necessary so that the value of both collateral deposits in
the aggregate is at all times equal to at least 100% of the current market value
of the security sold short.
If the price of the security sold short increases between the time of the short
sale and the time the series replaces the borrowed security, the series will
incur a loss; conversely, if the price declines, the series will realize a gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. Although the series' gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited.
The series will not make a short sale if, after giving effect to such sale, the
market value of all securities sold short exceeds 5% of the value of its total
assets or the series' aggregate short sales of a particular class of securities
exceeds 25% of the outstanding securities of that class. The series may also
make short sales "against the box" without respect to such limitations. In this
type of short sale, at the time of the sale, the series owns or has the
immediate and unconditional right to acquire at no additional cost the identical
security.
RESTRICTIONS AND LIMITATIONS
MUTUAL SHARES, QUALIFIED, BEACON, DISCOVERY
AND EUROPEAN FUNDAMENTAL POLICIES
Mutual Shares, Qualified, Beacon, Discovery and European have each adopted the
following fundamental investment restrictions which may not be changed without
the affirmative vote of the holders of a majority of the outstanding voting
securities of such series, which means the lesser of (1) the holders of more
than 50% of the outstanding shares of voting stock of such securities or (2) 67%
of the shares if more than 50% of the shares are present at a meeting of
shareholders in person or by proxy. Unless otherwise noted, all percentage
restrictions are as of the time of investment after giving effect to the
transaction. Pursuant to such restrictions each series may not:
1. Purchase or sell commodities, commodity contracts (except in conformity with
regulations of the Commodities Futures Trading Commission such that the series
would not be considered a commodity pool), or oil and gas interests or real
estate. Securities or other instruments backed by commodities are not considered
commodities or commodity contracts for purposes of this restriction. Debt or
equity securities issued by companies engaged in the oil, gas, or real estate
businesses are not considered oil or gas interests or real estate for purposes
of this restriction. First mortgage loans and other direct obligations secured
by real estate are not considered real estate for purposes of this restriction.
2. Make loans, except to the extent the purchase of debt obligations of any type
are considered loans and except that the series may lend portfolio securities to
qualified institutional investors in compliance with requirements established
from time to time by the SEC and the securities exchanges on which such
securities are traded.
3. Issue securities senior to its stock or borrow money or utilize leverage in
excess of the maximum permitted by the 1940 Act which is currently 33 1/3% of
total assets (plus 5% for emergency or other short-term purposes) from banks on
a temporary basis from time to time to provide greater liquidity for redemptions
or for special circumstances.
4. Invest more than 25% of the value of its assets in a particular industry
(except that U.S. government securities are not considered an industry).
5. Act as an underwriter except to the extent the series may be deemed to be an
underwriter when disposing of securities it owns or when selling its own shares.
6. Purchase the securities of any one issuer, other than the U.S. government or
any of its agencies or instrumentalities, if immediately after such purchase
more than 5% of the value of its total assets would be invested in such issuer,
or such series would own more than 10% of the outstanding voting securities of
such issuer, except that up to 25% of the value of such series' total assets may
be invested without regard to such 5% and 10% limitations.
7. Except as may be described in the Prospectus, engage in short sales, purchase
securities on margin or maintain a net short position.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value of portfolio
securities or the amount of assets will not be considered a violation of any of
the foregoing restrictions.
NON FUNDAMENTAL POLICIES, ALL SERIES
As a matter of policy that is not fundamental, the Fund has determined that no
series will invest more than 5% of its assets in warrants, and that no more than
2% of such assets may be invested in warrants which are not listed on the New
York or American Stock Exchanges. Also, as a matter of policy, the series will
not purchase securities for purposes of short term trading and will not invest
more than 5% of their assets in securities of issuers (together with any
predecessors) in existence for less than three years, provided that the
aggregate percentage of assets invested in such issuers, combined with illiquid
investments, does not exceed 15%. The series will not purchase the securities of
any issuer of which any officer or director of the Fund owns more than 1/2 of 1%
of the outstanding securities or in which the officers and directors in the
aggregate own more than 5%. The series do not borrow for leveraging purposes.
In order to permit the sale of shares in certain states, the Fund may make
commitments more restrictive than the operating restrictions described above.
Should the Fund determine that any such commitment is no longer in the best
interests of a particular series and its shareholders, the Fund will revoke the
commitment by terminating sales of such series' shares in the state involved.
OFFICERS AND DIRECTORS
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS WITH REGISTRANT DURING PAST 5 YEARS
- -------------------------------------------------------------------------------
Edward I. Altman, Ph.D. (55)
New York University
44 West 4th Street
New York, NY 10012
Director
Max L. Heine Professor of Financing and Vice Director of NYU Salomon Center,
Stern School of Business, New York University. Editor and author of numerous
financial publications; financial consultant.
Ann Torre Grant (38)
8065 Leesburg Pike
Suite 400
Vienna, VA 22182
Director
Executive Vice President and Chief Financial Officer, NHP Incorporated (owner
and manager of multifamily housing); prior to March 1995 she was Vice President
and Treasurer, U.S. Air, Inc.
Andrew H. Hines, Jr. (74)
150 2nd Avenue N.
St. Petersburg, FL 33701
Director
Consultant for the Triangle Consulting Group; Chairman of the Board and Chief
Executive Officer of Florida Progress Corporation (1982-February, 1990) and
Chairman and Director of Precise Power Corporation; Executive-in-Residence of
Eckerd College (1991-present); and a Director of Checkers Drive-In Restaurants,
Inc.
*Peter A. Langerman (41)
51 John F. Kennedy Pkwy
Short Hills, NJ 07078
Director and Executive Vice President
Financial Analyst with Franklin Mutual; held the same position with Heine
Securities Corporation, 6/86 to 10/96; Director of Sunbeam Oster since 1990,
Lancer Industries since 1994; Manager (Director) of MB Motori, L.L.C. since 1994
and MWCR, L.L.C. since 1995.
*William J. Lippman (71)
One Parker Plaza
Fort Lee, NJ 07024
Director
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc.,
Franklin Templeton Distributors, Inc. and Franklin Management, Inc.; President
and Director Franklin Advisory Services, Inc.; and officer and/or director or
trustee of seven of the investment companies in the Franklin Group of Funds.
Bruce A. MacPherson (66)
1 Pequot Way
Canton, MA 02021
Director
President of A.A. MacPherson, Inc. Boston, MA (representative for electrical
manufacturers).
Fred R. Millsaps (67)
2665 NE 37th Drive
Fort Lauderdale, FL 33394
Director
Manager of Personal Investments (1978-present); Chairman and Chief Executive
Officer of Landmark Banking Corporation (1969-1978); Financial Vice President of
Florida Power and Light (1965-1969); Vice President of The Federal Reserve Bank
of Atlanta (1958-1965); and a director of various other business and nonprofit
organizations.
*Michael F. Price (45)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Chairman of the Board and President
President, Chief Executive Officer, and director of Franklin Mutual; held the
same positions with Heine Securities Corporation, 1/87 to 10/96; Principal
Executive Officer and majority owner of Compliance Solutions, Inc. ("Compliance
Solutions") (a developer of compliance monitoring software for money managers);
director and owner of Clearwater Securities, Inc. ("Clearwater") (a registered
securities dealer).
Leonard Rubin (71)
Yacht and Racquet Club
2727 North Ocean Boulevard A1A
Apt. 508A
Boca Raton, FL 33431
Director
President, F.N.C. Textiles, Inc.; Vice President, Trimtex Co. Inc.; and trustee
of four of the investment companies in the Franklin Group of Funds.
Barry F. Schwartz (47)
35 East 62nd Street
New York, NY 10021
Director
Executive Vice President and General Counsel, MacAndrews & Forbes Holdings, Inc.
(a diversified holding company).
Vaughn R. Sturtevant, M.D. (73)
6 Noyes Avenue
Waterville, ME 04901
Director
Practicing physician.
Robert E. Wade (50)
225 Hardwick Street
Belvidere, NJ 07823
Director
Practicing attorney.
Jeffrey A. Altman (30)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Analyst and trader with Franklin Mutual; was employed by Heine Securities
Corporation, 8/88 to 10/96; Manager (Director) MB Metropolis, L.L.C. since 1994.
Since 1995 Manager (Director) of MB Motori, L.L.C., MWCR, L.L.C. and S.H.
Mortgage Acquisition L.L.C. Trustee of Resurgence Properties Inc. and Chairman
of the Board of Trustees, Value Property Trust.
James R. Baio (42)
500 East Broward Blvd.
Fort Lauderdale, Florida 33701
Treasurer
Certified public accountant; treasurer of the Templeton Funds; senior vice
president of Templeton Worldwide, Inc., Templeton Global Investors, Inc., and
Templeton Funds Trust Company.
Elizabeth N. Cohernour (46)
51 John F. Kennedy Pkwy
Short Hills, NJ 07078
General Counsel and Secretary
Vice President and Assistant Secretary of Franklin Mutual; formerly Secretary
and General Counsel of Heine Securities Corporation, 5/88 to 10/96; Secretary
and General Counsel of Compliance Solutions and Clearwater.
Robert L. Friedman (37)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Research analyst with Franklin Mutual; was employed by Heine Securities
Corporation, 8/88 to 10/96.
Raymond Garea (47)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Research analyst with Franklin Mutual; was employed by Heine Securities
Corporation, 3/91 to 10/96. Prior thereto he was a Vice President and analyst
with Donaldson, Lufkin & Jenrette. Manager (Director) MB Metropolis, L.L.C. and
S.H. Mortgage Acquisition L.L.C.
Lawrence N. Sondike (39)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Research Analyst with Franklin Mutual; was employed by Heine Securities
Corporation 3/84 to 10/96.
The Fund's independent Board members have standing audit, pension, nominating
and director's compensation and performance committees. The audit committee is
composed of Ms. Grant and Messrs. Altman and Wade. The pension committee is
composed of Messrs. Altman, Schwartz and Sturtevant. The nominating committee is
responsible for nominating candidates for independent Board member positions and
is composed of Messrs. MacPherson and Schwartz. The Board members' compensation
and performance committee is composed of Ms. Grant and Messrs. Wade and
Sturtevant.
During the fiscal year ended December 31, 1995, the Fund paid its officers and
directors as a group, including reimbursement to the investment adviser for the
expenses of personnel who spend a substantial portion of their time on Fund
operations, aggregate compensation of $839,366. Nonaffiliated Board members are
currently paid $15,000 per year plus $750 per meeting attended. Board members
are paid $500 plus out-of-pocket expenses for each Committee meeting attended.
In 1993, the Board members approved a retirement plan which generally provides
payments to directors who have served 10 years and retire at age 70. At the time
of retirement, Directors are entitled to annual payments equal to one-half of
the retainer in effect as of the time of retirement. As shown above, some of the
nonaffiliated Board members also serve as directors, trustees or managing
general partners of investment companies in the Franklin Templeton Group of
Funds. They may receive fees from these funds for their services. The following
table provides the total fees paid to nonaffiliated Board members by the Fund
and by other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
NUMBER OF
TOTAL FEES BOARDS IN
RECEIVED FROM THE FRANKLIN
TOTAL FEES PENSION ANNUAL THE FRANKLIN TEMPLETON GROUP
RECEIVED FROM RETIREMENT BENEFITS TEMPLETON GROUP OF FUNDS ONWHICH
NAME THE FUND+ ACCRUED RETIREMENT OF FUNDS++ EACH SERVES**
<S> <C> <C> <C> <C> <C>
Edward I. Altman......................... $20,750 0 $7,500 0 1
Ann Torre Grant*......................... $20,750 0 $7,500 0 1
Bruce A. MacPherson...................... $18,750 0 $7,500 0 1
Barry F. Schwartz*....................... $18,750 0 $7,500 0 1
Vaughn R. Sturtevant,
M.D..................................... $18,750 0 $7,500 0 1
Robert E. Wade*.......................... $25,750 0 $7,500 0 1
Andrew H. Hines, Jr...................... 0 0 0 $106,325 25
Fred R. Millsaps......................... 0 0 0 $104,325 25
Leonard Rubin............................ 0 0 0 $ 15,600 4
</TABLE>
+For the fiscal year ended December 31, 1995.
++For the calendar year ended December 31, 1995.
*Not vested in retirement plan.
**We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, with approximately 171 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation, including pension or retirement benefits, directly or indirectly
from the Fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries. Certain officers and Board members of the Fund
are also officers of Compliance Solutions. The Fund is not charged for the use
of software designed by Compliance Solutions.
As of January 30, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: 68,536 shares of
Mutual Shares - Class Z; 51,529 shares of Qualified - Class Z; 225,070 shares of
Beacon - Class Z; 390,105 shares of Discovery - Class Z, or less than 1% of the
total outstanding Class Z shares of that series. As of January 30, 1997, the
officers and board members, as a group, owned of record and beneficially
14,130,248 shares of European - Class Z, which is 34% of the total outstanding
shares Class Z shares of that series. Some of the Board members also own shares
in other funds in the Franklin Templeton Group of Funds.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. Franklin Mutual, 51 John F. Kennedy
Parkway, Short Hills, New Jersey 07078, serves as the Fund's investment manager.
Franklin Mutual, registered with the SEC as an investment advisor in October
1996, is a wholly owned subsidiary of Resources, a publicly-owned holding
company whose principal shareholders are Charles B. Johnson and Rupert H.
Johnson, Jr. On October 31, 1996, pursuant to an agreement between Resources and
Heine Securities, Inc. ("Heine"), the assets of Heine were transferred to
Franklin Mutual (the "Transaction") and the Fund's name was changed from Mutual
Series Fund Inc. to Franklin Mutual Series Fund Inc.
Franklin Mutual provides investment research and portfolio management services,
including the selection of securities for the Fund to buy, hold or sell and the
selection of brokers through whom the Fund's portfolio transactions are
executed. Franklin Mutual's activities are subject to the review and supervision
of the Board to whom Franklin Mutual renders periodic reports of the Fund's
investment activities. Franklin Mutual is covered by fidelity insurance on its
officers, directors and employees for the protection of the Fund.
Franklin Mutual and its affiliates act as investment manager to numerous other
investment companies and accounts. They may give advice and take action with
respect to any of the other funds they manage, or for their own account, that
may differ from action taken by them on behalf of the Fund. Similarly, with
respect to the Fund, they are not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that they and access
persons, as defined by the 1940 Act, may buy or sell for their own account or
for the accounts of any other fund. They are not obligated to refrain from
investing in securities held by the Fund or other funds that they manage or
administer. Of course, any transactions for their accounts and other access
persons will be made in compliance with the Fund's Code of Ethics. (Please see
"Miscellaneous Information - Summary of Code of Ethics.")
MANAGEMENT AGREEMENT. The management agreement is in effect until June 30, 1998.
It may continue in effect for successive annual periods if its continuance is
specifically approved at least annually by a vote of the Board or by a vote of
the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities, or by Franklin Mutual on 60 days' written notice, and will
automatically terminate in the event of its assignment, as defined in the 1940
Act.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative services
and facilities for the Fund. These include preparing and maintaining books,
records, and tax and financial reports, and monitoring compliance with
regulatory requirements. FT Services is a wholly owned subsidiary of Resources.
PRIOR SERVICES. Before November 1, 1996, Heine served as the investment manager
under separate investment management agreements substantially the same in terms
as the agreements currently in effect with Franklin Mutual. During the fiscal
year ended December 31, 1995, an aggregate of $1,392,294 of administrative
expenses was incurred by Mutual Shares, $720,315 by Qualified, $886,843 by
Beacon and $412,166 by Discovery. Heine's net fee for the fiscal years ended
December 31, 1995, 1994 and 1993, was $27,500,952, $21,795,512 and $19,507,048,
respectively, for Mutual Shares; $14,607,723, $9,766,052 and $8,434,525,
respectively, for Qualified; $17,720,127, $9,511,199 and $4,848,218,
respectively, for Beacon; and $7,930,967, $5,737,128 and $2,294,912,
respectively, for Discovery.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly-owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
CUSTODIAN. 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 custodian does not participate in decisions relating to the purchase and
sale of portfolio securities.
AUDITORS. Ernst & Young LLP, Boston, MA, are the Fund's independent auditors.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
The selection of brokers and dealers to execute transactions in each series'
portfolio is made by Franklin Mutual in accordance with criteria set forth in
the management agreement and any directions that the Board may give.
When placing a portfolio transaction, Franklin Mutual seeks to obtain prompt
execution of orders at the most favorable net price. When portfolio transactions
are done on a securities exchange, the amount of commission paid by the series
is negotiated between Franklin Mutual and the broker executing the transaction.
The determination and evaluation of the reasonableness of the brokerage
commissions paid in connection with portfolio transactions are based to a large
degree on the professional opinions of the persons responsible for the placement
and review of the transactions. These opinions are based on the experience of
these individuals in the securities industry and information available to them
about the level of commissions being paid by other institutional investors of
comparable size. Franklin Mutual will ordinarily place orders to buy and sell
over-the-counter securities on a principal rather than agency basis with a
principal market maker unless, in the opinion of Franklin Mutual, a better price
and execution can otherwise be obtained. Purchases of portfolio securities from
underwriters will include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers will include a spread between the bid
and ask price.
The amount of commission is not the only factor Franklin Mutual considers in the
selection of a broker to execute a trade. If Franklin Mutual believes it is in
the series' best interest, Franklin Mutual may place portfolio transactions with
brokers who provide the types of services described below, even if it means the
series will pay a higher commission than if no weight were given to the broker's
furnishing of these services. This will be done only if, in the opinion of
Franklin Mutual, the amount of any additional commission is reasonable in
relation to the value of the services. Higher commissions will be paid only when
the brokerage and research services received are bona fide and produce a direct
benefit to the Fund or assist Franklin Mutual in carrying out its
responsibilities to the Fund, or when it is otherwise in the best interest of
the Fund to do so, whether or not such services may also be useful to Franklin
Mutual in advising other clients.
When Franklin Mutual believes several brokers are equally able to provide the
best net price and execution, it may decide to execute transactions through
brokers who provide quotations and other services to the Fund, in an amount of
total brokerage as may reasonably be required in light of these services.
Specifically, these services may include providing the quotations necessary to
determine the Fund's Net Asset Value, as well as research, statistical and other
data.
It is not possible to place a dollar value on the special executions or on the
research services received by Franklin Mutual from dealers effecting
transactions in portfolio securities. The allocation of transactions in order to
obtain additional research services permits Franklin Mutual to supplement its
own research and analysis activities and to receive the views and information of
individuals and research staff of other securities firms. As long as it is
lawful and appropriate to do so, Franklin Mutual and its affiliates may use this
research and data in their investment advisory capacities with other clients. If
the Fund's officers are satisfied that the best execution is obtained,
consistent with internal policies, the sale of Fund shares, as well as shares of
other funds in the Franklin Templeton Group of Funds, may also be considered a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions.
"SOFT DOLLAR" ARRANGEMENTS. The Fund receives research services from persons who
act as brokers or dealers for the Fund. The discussion below relates in general
to these brokers or dealers who pursuant to various arrangements pay for certain
computer hardware and software and other research and brokerage services to
Franklin Mutual and/or the Fund for transactions effected by it for the Fund.
Commission "soft dollars" may be used only for "brokerage and research services"
provided by brokers to whom commissions are paid and under no circumstances will
cash payments be made by any such broker to Franklin Mutual. To the extent that
commission "soft dollars" do not result in the provision of any "brokerage and
research services" by brokers to whom such commissions are paid, the
commissions, nevertheless, are the property of such broker. Although,
potentially, Franklin Mutual could be influenced to place Fund brokerage
transactions with a broker in order to generate "soft dollars" for Franklin
Mutual's benefit, Franklin Mutual believes that the requirement that it achieve
best execution on Fund portfolio transactions, and the Fund's negotiated
commission structure with brokers, mitigate these concerns as the cost of
transactions effected through brokers, before consideration of any "soft dollar"
benefits that may be received, generally will be comparable to that available
elsewhere. During fiscal 1995, 1994 and 1993, the Fund paid brokerage
commissions of $3,355,180, $2,267,683 and $1,640,278, respectively, to brokers
who provided research services. This amount represented 14.90%, 19.45% and
17.75%, respectively, of total commissions paid for the periods.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to Franklin Mutual will be reduced by the amount of any fees
received by Distributors in cash, less any costs and expenses incurred in
connection with the tender.
During the fiscal year ended December 31, 1995, Mutual Shares, Qualified, Beacon
and Discovery paid brokerage commissions totaling $8,028,205, $5,182,736,
$6,269,829 and $3,040,751, respectively.
Clearwater, an indirect affiliate of Franklin Mutual, is a registered securities
dealer and a member of the NASD. Transactions in some Fund portfolio securities
(particularly transactions involving floor brokers) were effected through
Clearwater prior to the Transaction. During 1995, Mutual Shares paid brokerage
commissions to Clearwater of $1,192,230; Qualified paid $640,588; Beacon paid
$764,323 and Discovery paid $217,609. The transactions constituted for Mutual
Shares 13.2%; Qualified 14.1%; Beacon 14.5% and Discovery 7.7% of the aggregate
dollar amount of brokerage transactions effected during 1995. These commissions
constituted for Mutual Shares 14.9%, for Qualified 12.4%, for Beacon 12.2% and
for Discovery 7.2% of the total commissions paid in 1995.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
- -------------------------------------------------------
Under $30,000.................................. 3.0%
$30,000 but less than $50,000.................. 2.5%
$50,000 but less than $100,000................. 2.0%
$100,000 but less than $200,000................ 1.5%
$200,000 but less than $400,000................ 1.0%
$400,000 or more............................... 0%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 1% on
sales of $1 million to $2 million, plus 0.80% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales
over $50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans pursuant to a sales
charge waiver, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds, including Class II shares, acquired more than 90 days before the Letter
is filed, will be counted towards completion of the Letter but will not be
entitled to a retroactive downward adjustment in the sales charge. Any
redemptions you make during the 13 month period, except in the case of certain
retirement plans, will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the Letter have been completed. If
the Letter is not completed within the 13 month period, there will be an upward
adjustment of the sales charge, depending on the amount actually purchased (less
redemptions) during the period. The upward adjustment does not apply to certain
retirement plans. If you execute a Letter before a change in the sales charge
structure of the Fund, you may complete the Letter at the lower of the new sales
charge structure or the sales charge structure in effect at the time the Letter
was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If total purchases, less redemptions, equal
the amount specified under the Letter, the reserved shares will be deposited to
an account in your name or delivered to you or as you direct. If total
purchases, less redemptions, exceed the amount specified under the Letter and is
an amount that would qualify for a further quantity discount, a retroactive
price adjustment will be made by Distributors and the Securities Dealer through
whom purchases were made pursuant to the Letter (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, you will remit to Distributors an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge that
would have applied to the aggregate purchases if the total of the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account before fulfillment of the Letter, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objectives exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share of each class as of the scheduled
close of the NYSE, generally 4:00 p.m. Eastern time, each day that the NYSE is
open for trading. As of the date of this SAI, the Fund is informed that the NYSE
observes the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by Franklin Mutual.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the NYSE, if that is earlier. The value is then converted into its U.S.
dollar equivalent at the foreign exchange rate in effect at noon, New York time,
on the day the value of the foreign security is determined. If no sale is
reported at that time, the mean between the current bid and ask prices is used.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and the
close of the exchange and will, therefore, not be reflected in the computation
of the Net Asset Value of each class. If events materially affecting the values
of these foreign securities occur during this period, the securities will be
valued in accordance with procedures established by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of each class is determined as of such times. Occasionally,
events affecting the values of these securities may occur between the times at
which they are determined and the scheduled close of the NYSE that will not be
reflected in the computation of the Net Asset Value of each class. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith by
the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. INCOME DIVIDENDS. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post October
loss deferral) may generally be made twice each year. One distribution may be
made in December to reflect any net short-term and net long-term capital gains
realized by the Fund as of October 31 of that year. Any net short-term and net
long-term capital gains realized by the Fund during the remainder of the fiscal
year may be distributed following the end of the fiscal year. The Fund may make
one distribution derived from net short-term and net long-term capital gains in
any year or adjust the timing of its distributions for operational or other
reasons.
TAXES
As stated in the Prospectus, each series has elected and qualified to be treated
as a regulated investment company ("RIC") under Subchapter M of the Code. The
Board reserves the right not to maintain the qualification of a series as a RIC
if it determines this course of action to be beneficial to shareholders. In that
case, the series will be subject to federal and possibly state corporate taxes
on its taxable income and gains, and distributions to shareholders will be
taxable to the extent of the series' available earnings and profits.
Because each series intends to qualify and to distribute all of its net
investment income and capital gain to shareholders, it is expected that each
series will not be required to pay Federal income taxes.
A series normally will distribute substantially all of its net investment income
and net realized capital gain, if any, to shareholders in the form of dividends
to be paid from time to time as determined by the Board. Such dividends are
taxable whether paid in cash or additional shares of such series.
In the event that total distributions (including distributed or designated net
capital gain) for a taxable year exceed its investment company taxable income
and net capital gain, a portion of each distribution generally will be treated
as a return of capital. Distributions treated as a return of capital reduce a
shareholder's basis in its shares and could result in a capital gain tax either
when a distribution is in excess of basis or, more likely, when a shareholder
redeems its shares.
Shareholders of a series will be notified annually by the Fund as to the Federal
tax treatment of dividends and distributions paid during the calendar year.
Dividends and distributions may also be subject to state and local taxes. State
and local tax treatment may vary according to applicable laws. You can elect to
receive distributions in cash or in additional shares of such series. The price
of the additional shares is determined as of the date for the dividend payment.
(See "What Distributions Might I Receive from the Fund?" in the Prospectus.)
To maintain qualification as a RIC under the Code, each series of the Fund must
limit gains from the sale or other disposition of its portfolio securities
(including options, futures and forward contracts) held for less than three
months to less than 30% of its annual gross income. Generally, gains on foreign
currencies (and gains on options, futures, or forward contracts with respect to
foreign currencies) are not subject to this 30% short-short rule if directly
related to regular investments by a series in equity or debt securities.
Each series intends to declare and pay dividends and capital gain distributions
so as to avoid imposition of a 4% federal excise tax. To do so, each series
expects to distribute during the calendar year an amount at least equal to (i)
98% of its calendar year net investment income, (ii) 98% of its realized capital
gain (the excess of short and long-term capital gain over short and long-term
capital loss) for each one-year period ending October 31, and (iii) 100% of any
undistributed net investment income or realized capital gain from the prior
calendar year which has not been distributed by such series. Dividends declared
in October, November, or December and made payable to shareholders of record in
such a month would be deemed paid by the Series and taxable to shareholders on
December 31 of such year provided that such dividends are actually paid during
January of the following year. A series may make a deemed distribution with
respect to its net capital gain by paying the tax with respect to the net
capital gain and then designating, but not distributing, all or a portion of
such gain as a capital gain dividend. Such series' shareholders will treat such
designated amounts as a capital gain on their income tax returns, but they will
receive a credit or refund equal to federal income taxes paid by such series
with respect to such capital gain. In addition, shareholders will increase their
basis in the series' shares by 65% of the amount subject to tax. If a capital
gain dividend is paid with respect to any shares of a series which are sold at a
loss after being held for less than six months, any loss realized upon the sale
of such shares will be treated as a long-term capital loss to the extent of such
capital gain dividend. There are special rules for determining holding periods
for the purpose of the preceding sentence.
Dividends distributed by a series will only be eligible for the
dividends-received deduction available to corporate shareholders to the extent
of the portion of a series' gross income which consists of dividends received on
equity securities issued by domestic corporations with respect to which such
series meets the same holding period, risk of loss, and borrowing limitations
applicable to the series' shareholders. Section 246 of the Code permits the
dividends-received deduction to corporate shareholders only if the shares with
respect to which the dividends were paid have been held for more than 45 days.
If the holding period is not satisfied, the dividends-received deduction is
disallowed, regardless of whether the shares with respect to which the dividends
were paid have been sold or otherwise disposed of. The holding period
requirements are separately applicable to each block of shares acquired,
including each block of shares received in payment of the Fund's dividends. For
purposes of determining whether this holding period requirement has been met,
the day of acquisition and any day after the first 45 days after the date on
which such shares become ex-dividend must be disregarded. In addition, the
holding period is suspended during periods in which the stock is subject to
diminished risk of loss including, for example, because the holder has acquired
a put option or sold a call option (other than certain covered call options
where the exercise price is not substantially below the selling price) or
otherwise hedged his position.
The dividends-received deduction will also be reduced, for shareholders who
incur indebtedness in order to purchase shares of a series of the Fund, by the
percentage of the cost of such series' shares that is debt-financed. Generally,
this limitation applies only if the debt is directly attributable to the
purchase of shares. Whether debt is directly attributable to the purchase of
shares depends on the particular facts and circumstances of each situation and
accordingly shareholders are urged to consult their tax advisors.
Under section 1059 of the Code, a corporation which receives an "extraordinary
dividend" and disposes of the stock with respect to which such dividend was
paid, provided generally that such stock has not been held for at least two
years prior to the date of declaration, announcement or agreement about the
extraordinary dividend, is required to reduce its basis in such stock (but not
below zero) by the amount of the dividend which was not taxed because of the
dividends-received deduction with such basis reduction generally being treated
as having occurred immediately before the sale or disposition of such stock. To
the extent such untaxed amount exceeds the shareholder's basis, such excess will
be taxed as gain upon a sale or disposition of such stock. An extraordinary
dividend generally is any dividend that equals or exceeds 10% of the
shareholder's basis in the stock (5% in the case of preferred stock). For this
purpose, generally, all dividends within any 85-day period, and if such
dividends total more than 20% of the shareholder's basis in its stock, all
dividends within one year, must be aggregated for purposes of determining
whether such dividends constitute extraordinary dividends. The shareholder may
elect to determine the status of extraordinary dividends by reference to the
fair market value of the stock as of the date before the ex-dividend date,
rather than by reference to the adjusted basis of such stock (provided the
shareholder establishes the fair market value to the satisfaction of the
Commissioner of the IRS). In determining whether the above-mentioned two-year
holding period has been met, the same rules apply as are applicable to the
45-day holding period requirement for the dividends received deduction.
Corporations should note that 75% of the untaxed portion of the Fund's dividends
could be taken into account for purposes of the alternative minimum tax imposed
on corporations.
A series may in the future engage in various defensive hedging transactions.
Under various Code provisions such transactions might change the character of
recognized gains and losses, accelerate the recognition of certain gains and
losses, and defer the recognition of certain losses or deductions.
If more than 50% of the assets of a series of the Fund at the close of any
taxable year consists of stocks or securities of foreign corporations, the Fund
may elect to treat any foreign income taxes, such as withholding taxes on
interest or dividends, that are paid by the Fund with respect to the series as
paid by the shareholders of such series. If the Fund makes this election with
respect to a series, the series' shareholders will be entitled to credit their
pro rata share of the foreign taxes paid by the series against their U.S.
federal income tax liability, or to deduct such amounts from their U.S. taxable
income. No deduction for foreign taxes may be claimed by a shareholder who does
not itemize deductions. In addition, certain individual shareholders may be
subject to rules that limit or reduce their ability to deduct fully their pro
rata share of foreign taxes paid by the Fund. Since the Fund anticipates that
more than 50% of the value of the total assets of European will consist of
non-U.S. equity and debt securities, European shareholders are expected to be
eligible for a pass through of the foreign taxes paid by the Fund. Shareholders
of Mutual Shares, Qualified, Beacon and Discovery are not expected to be
eligible for a pass through of the foreign taxes paid by the Fund.
Treasury regulations provide that the dividends paid-deduction attributable to
an in-kind distribution of property is equal to the adjusted basis of such
property.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for both classes of the Fund's
shares. The underwriting agreement will continue in effect for successive annual
periods if its continuance is specifically approved at least annually by a vote
of the Board or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Board members
who are not parties to the underwriting agreement or interested persons of any
such party (other than as members of the Board), cast in person at a meeting
called for that purpose. The underwriting agreement terminates automatically in
the event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
THE RULE 12B-1 PLANS
Each class has adopted a distribution plan or "Rule 12b-1 plan" pursuant to Rule
12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan for each series, the Fund may pay up to
a maximum of 0.25% per year of Class I's average daily net assets, payable
quarterly, for expenses incurred in the promotion and distribution of Class I
shares. In addition, the Fund is permitted to pay Distributors up to an
additional 0.10% per year of Class I's average daily net assets for
reimbursement of distribution expenses.
THE CLASS II PLAN. Under the Class II plan for each series, the Fund pays
Distributors up to 0.75% per year of Class II's average daily net assets,
payable quarterly, for distribution and related expenses. These fees may be used
to compensate Distributors or others for providing distribution and related
services and bearing certain Class II expenses. All distribution expenses over
this amount will be borne by those who have incurred them without reimbursement
by the Fund.
Under the Class II plan, the Fund also pays an additional 0.25% per year of each
series' Class II shares' average daily net assets, payable quarterly, as a
servicing fee.
THE CLASS I AND CLASS II PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the Fund, Franklin Mutual or Distributors or other parties on behalf of
the Fund, Franklin Mutual or Distributors make payments that are deemed to be
for the financing of any activity primarily intended to result in the sale of
shares of each class within the context of Rule 12b-1 under the 1940 Act, then
such payments shall be deemed to have been made pursuant to the plan. The terms
and provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
management agreement with Franklin Mutual or by vote of a majority of the
outstanding shares of the class. Distributors or any dealer or other firm may
also terminate their respective distribution or service agreement at any time
upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
HOW DOES THE FUND
MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance for each class follows. Regardless of
the method used, past performance does not guarantee future results, and is an
indication of the return to shareholders only for the limited historical period
used.
Standardized historical performance data for Class I and Class II shares will be
restated to reflect the maximum initial front-end sales charge currently in
effect. For Class II shares such performance data will also take into account
the applicable contingent deferred sales charge in connection with redemptions
within eighteen months. Each class adopted a Plan of Distribution under Rule
12b-1, effective November 1, 1996, which will affect subsequent performance.
Historical performance data will not be restated to include Rule 12b-1 fees,
which will only be taken into account from the effective date of the Rule 12b-1
plan.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over one-, five- and ten-year
periods, or fractional portion thereof, that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes the maximum front-end sales charge is deducted from the initial $1,000
purchase, and income dividends and capital gain distributions are reinvested at
Net Asset Value. The quotation assumes the account was completely redeemed at
the end of each one-, five- and ten-year period and the deduction of all
applicable charges and fees. If a change is made to the sales charge structure,
historical performance information will be restated to reflect the maximum
front-end sales charge currently in effect. The restated average annual total
returns for each class for the one-, five- and ten- year periods ended June 30,
1996, are:
CLASS I1 1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Mutual Shares.......... 15.49% 16.77% 13.65%
Qualified ............. 16.10% 17.37% 14.05%
Beacon ................ 17.06% 17.17% 14.69%
Discovery ............. 20.00% * N/A
European** ............ N/A N/A N/A
CLASS II2 1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Mutual Shares ......... 18.73% 17.61% 14.06%
Qualified ............. 19.36% 18.22% 14.47%
Beacon ................ 20.36% 18.01% 15.10%
Discovery ............. 23.36% * N/A
European** ............ N/A N/A N/A
1Includes the maximum front-end sales charge.
2Includes the maximum front-end sales charge and the contingent deferred sales
charge in connection with redemption within 18 months. *Discovery commenced
operations on December 31, 1992. The restated average annual returns for the
three year period ended June 30, 1996, are 19.23% for Class I and 20.65% for
Class II. **European commenced operations on July 3, 1996.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the
one-, five- or ten-year periods (or fractional portion thereof)
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, will be based
on the actual return for each class for a specified period rather than on the
average return over one-, five- and ten-year periods, or fractional portion
thereof. The restated cumulative total returns for each class for the one-,
five- and ten-year periods ended June 30, 1996, are:
CLASS I1 1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Mutual Shares......... 15.49% 117.07% 259.57%
Qualified ............ 16.10% 122.70% 272.35%
Beacon ............... 17.06% 120.82% 293.66%
Discovery ............ 20.00% * N/A
European** ........... N/A N/A N/A
CLASS II2 1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Mutual Shares ........ 18.73% 125.02% 272.77%
Qualified ............ 19.36% 130.89% 286.06%
Beacon ............... 20.36% 128.84% 308.08%
Discovery ............ 23.36% * N/A
European** ........... N/A N/A N/A
1Includes the maximum front-end sales charge.
2Includes the maximum front-end sales charge and the contingent deferred sales
charge in connection with redemption within 18 months. *Discovery commenced
operations on December 31, 1992. The restated cumulative total returns for the
three year period ended June 30, 1996, are 69.43% for Class I and 75.54% for
Class II. **European commenced operations on July 3, 1996.
YIELD
CURRENT YIELD. Current yield of each class shows the income per share earned by
the Fund. It is calculated by dividing the net investment income per share of
each class earned during a 30-day base period by the applicable maximum Offering
Price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders of
the class during the base period.
These figures will be obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
----
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders of a
class. Amounts paid to shareholders are reflected in the quoted current
distribution rate. The current distribution rate is usually computed by
annualizing the dividends paid per share by a class during a certain period and
dividing that amount by the current maximum Offering Price. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gains and is calculated over a different period of time.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of both the Franklin Group of Funds and Templeton Group
of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of each class' performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's 100 Stock Index - an unmanaged index based on the prices of
100 blue-chip stocks, including 92 industrials, one utility, two transportation
companies, and 5 financial institutions. The S&P 100 Stock Index is a smaller,
more flexible index for options trading.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk adjusted performance of a fund over specified
time periods relative to other funds within its category.
o) Salomon Brothers Broad Bond Index or its component indices - measures yield,
price, and total return for Treasury, agency, corporate and mortgage bonds.
p) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
r) Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare a class' performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, if any, as well as the value of its shares that are
based upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years and
now services more than 2.5 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. The Fund, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $171 billion in assets under
management for more than 4.8 million U.S. based mutual fund shareholder and
other accounts. The Franklin Templeton Group of Funds offers 121 U.S. based
open-end investment companies to the public. The Fund may identify itself by its
NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight years.
As of January 30, 1997, the principal shareholder of the Fund, beneficial or of
record, was as follows:
Name and Address Share Amount Percentage
European - Class Z
Michael F. Price
51 John F. Kennedy Pkwy
Short Hills, NJ 07078o 13,923,586 shares 33.29%
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Franklin Mutual and the Fund have adopted Codes of
Ethics and related internal procedures (together referred to as the "Code of
Ethics") which govern the personal investing practices of Franklin Mutual's
employees. The Code of Ethics generally incorporates the recommendation of the
Investment Company Institute contained in the Report of the Advisory Group on
Personal Investing dated May 9, 1994. Specifically, employees of Franklin Mutual
may buy and sell securities for themselves as long as their trades have been
pre-cleared in accordance with the Code of Ethics. Transactions by Franklin
Mutual's employees which comply with the substantive and procedural provisions
of the Code of Ethics are permitted even if the security being purchased is one
of limited availability (such as investments in private placements), and is one
in which any particular series would be financially and legally able to invest.
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
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
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 Franklin Funds and the Templeton Funds
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
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.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
PROSPECTUS - The prospectus for the Fund dated November 1, 1996, as amended
February 12, 1997, and as may be further amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution which, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TEMPLETON FUNDS - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
FINANCIAL STATEMENTS
Except for the European Fund, the audited financial statements contained in the
Annual Report to Shareholders of each series for the fiscal year ended December
31, 1995, including the auditors' report, and the unaudited financial statements
contained in the Semi-Annual Report to Shareholders of each series for the
period ended June 30, 1996, are incorporated herein by reference. The financial
statements do not include information for Class I and Class II shares as these
shares were not publicly offered prior to the date of the financial statements.
The unaudited financial statements for the European Fund for the period ended
December 31, 1996, are as follows:
FRANKLIN MUTUAL SERIES FUND INC.
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1996
AS AMENDED FEBRUARY 12, 1997
This Class Z Statement of Additional Information is not a prospectus
and should be read in conjunction with the Class Z Prospectus of Franklin Mutual
Series Fund Inc. (the "Fund") dated November 1, 1996, as amended February 12,
1997. Copies of the Prospectus and the most recent Annual Report of each series
of the Fund can be obtained without charge by calling the Fund at 1-800-553-3014
or by writing to Franklin Mutual Series Fund Inc., 51 John F. Kennedy Parkway,
Short Hills, NJ 07078, Attention: Shareholder Services.
TABLE OF CONTENTS
PAGE
Investment Objectives and Policies........................... B-2
Restrictions and Limitations................................. B-11
Management of the Fund....................................... B-13
Investment Adviser........................................... B-16
Redemption of Shares......................................... B-17
Investment Advisory and Administration Agreements............ B-17
Portfolio Brokerage.......................................... B-18
Taxes........................................................ B-20
Calculation of Performance Data.............................. B-22
Custodian, Transfer Agent and Auditors....................... B-22
Code of Ethics............................................... B-23
Financial Information........................................ B-23
INVESTMENT OBJECTIVES AND POLICIES
As described in the Prospectus, the general investment policy of the
Fund for its series, Mutual Shares Fund ("Mutual Shares"), Mutual Qualified Fund
("Qualified"), Mutual Beacon Fund ("Beacon"), Mutual Discovery Fund
("Discovery") and Mutual European Fund ("European"), is to invest in securities
if, in the opinion of Franklin Mutual Advisers, Inc., the series' investment
adviser ("Franklin Mutual" or the "Adviser"), they are available at prices less
than their intrinsic value, as determined by the Adviser after careful analysis
and research, taking into account, among other factors, the relationship of book
value to market value of the securities, cash flow, and multiples of earnings of
comparable securities. The Fund reserves freedom of action for each series to
invest in common stock, preferred stock, debt securities and other securities in
such proportions as the management deems advisable, but, without committing any
fixed portion of any series' assets, the management typically maintains a
portion of the assets of each series invested in debt securities and preferred
stocks (which may be convertible). In addition, the series may also invest in
restricted debt and equity securities, in foreign securities, and in other
investment company securities.
REPURCHASE AGREEMENTS AND LOANS OF SECURITIES
Each series may invest in repurchase agreements with domestic banks or
broker-dealers. Repurchase agreements are considered loans by the series
collateralized by the underlying securities. As with loans of portfolio
securities which the series may make, these transactions must be fully
collateralized at all times. The Adviser will monitor the creditworthiness of
the other party and will monitor the value of the collateral by marking to
market daily in order to confirm that its value is at least 100% of the agreed
upon sum to be paid to the series.
Repurchase agreements and lending of portfolio securities involve some
credit risk to the series. If the other party defaults on its obligations, the
series could be delayed or prevented from receiving payment or recovering its
collateral. Even if the series recovers the collateral in such a situation, the
series may receive less than its purchase price upon resale.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Hedging Transactions involving options
require segregation of Fund assets in special accounts, as described below under
"Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the seller of the option, the obligation to buy,
the underlying security, commodity, index, currency or other instrument at the
exercise price. For instance, the Fund's purchase of a put option on a security
might be designed to protect its holdings in the underlying instrument (or, in
some cases, a similar instrument) against a substantial decline in the market
value by giving the Fund the right to sell such instrument at the option
exercise price. A call option, upon payment of a premium, gives the purchaser of
the option the right to buy, and the seller the obligation to sell, the
underlying instrument at the exercise price. The Fund's purchase of a call
option on a security, financial future, index, currency or other instrument
might be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase such instrument.
An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange-listed options and over-the-counter
options ("OTC options"). Exchange-listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as a paradigm, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC-issued and exchange-listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting option transactions.
The Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange-listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (each a "Counterparty," and collectively,
"Counterparties") through direct bilateral agreement with the Counterparty. In
contrast to exchange-listed options, which generally have standardized terms and
performance mechanics, all the terms of an OTC option, including such terms as
method of settlement, term, exercise price, premium, guarantees and security,
are set by negotiation of the parties. The Fund will only sell OTC options
(other than OTC currency options) that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker-dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligations
of which have received) a short-term credit rating of "A-l" from Standard &
Poor's Corporation ("S&P") or "P-l" from Moody's Investor Services ("Moody's"),
an equivalent rating from any nationally recognized statistical rating
organization ("NRSRO") or which the Adviser determines is of comparable credit
quality. The staff of the SEC currently takes the position that OTC options
purchased by the Fund, and portfolio securities "covering" the amount of the
Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any,) are illiquid, and are subject
to the Fund's limitations on investments in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including
U.S. Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments (whether or not it holds the above securities in its portfolio) and
on securities indices, currencies and futures contracts other than futures on
individual corporate debt and individual equity securities. The Fund will not
sell put options if, as a result, more than 50% of the Fund's assets would be
required to be segregated to cover its potential obligations under such put
options other than those with respect to futures and options thereon. In selling
put options, there is a risk that the Fund may be required to buy the underlying
security at a disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES
The Fund may enter into financial futures contracts or purchase or sell
put and call options on such futures as a hedge against anticipated interest
rate, currency or equity market changes, for duration management and for risk
management purposes. Futures are generally bought and sold on the commodities
exchanges where they are listed with payment of initial and variation margin as
described below. The sale of a futures contract creates a firm obligation by the
Fund, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to index futures and Eurodollar instruments, the net
cash amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right in
return for the premium paid to assume a position in a futures contract and
obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading Commission and will
be entered into only for a bona fide hedging, risk management (including
duration management) or other portfolio management purposes. Typically,
maintaining a futures contract or selling an option thereon requires the Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets ("initial margin") which initially is
typically 1% to 10% of the face amount of the contract (but may be higher in
some circumstances). Additional cash or assets ("variation margin") may be
required to be deposited thereafter on a daily basis as the mark to market value
of the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of the Fund. If the Fund exercises an option on a futures contract, it
will be obligated to post initial margin (and potential subsequent variation
margin) for the resulting futures positions just as it would for any position.
Futures contracts and options thereon are generally settled by entering into an
offsetting transaction, but there can be no assurance that the position can be
offset prior to settlement at an advantageous price nor that delivery will
occur.
The Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
The Fund may also purchase and sell call and put options on securities
indices and other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an index
depends on price movements in the instruments making up the market, market
segment, industry or other composite on which the underlying index is based,
rather than price movements in individual securities, as is the case with
respect to options on securities.
CURRENCY TRANSACTIONS
The Fund may engage in currency transactions with Counterparties in
order to hedge the value of portfolio holdings denominated in particular
currencies against fluctuations in relative value between those currencies and
the U.S. dollar. Currency transactions include forward currency contracts,
exchange-listed currency futures, exchange-listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps are entered
into for good faith hedging purposes, the Adviser and the Fund believe such
obligations do not constitute senior securities under the Investment Company Act
of 1940, as amended ("1940 Act"), and, accordingly, will not treat them as being
subject to its borrowing restrictions. The Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations of such Counterparties have received) a credit rating of A-l or P-l
by S&P or Moody's, respectively, or that have an equivalent rating from an NRSRO
or (except for OTC currency options) are determined to be of equivalent credit
quality by the Adviser. If there is a default by the Counterparty, the Fund may
have contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to either specific transactions or portfolio positions. Transaction
hedging is entering into a currency transaction with respect to specific assets
or liabilities of the Fund, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended to wholly or
partially offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or whose value is based upon such
foreign currency or currently convertible into such currency other than with
respect to proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the U.S. dollar.
Proxy hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if the Adviser considers the Austrian schilling to be
linked to the German deutsche mark (the "D-mark"), the Fund holds securities
denominated in schillings and the Adviser believes that the value of schillings
will decline against the U.S. dollar, the Adviser may enter into a contract to
sell D-marks and buy dollars. Currency hedging involves some of the same risks
and considerations as other transactions with similar instruments. Currency
transactions can result in losses to the Fund if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived linkage between various currencies
may not be present during the particular time that the Fund is engaging in proxy
hedging. If the Fund enters into a currency hedging transaction, the Fund will
comply with the asset segregation requirements described below.
RISKS OF CURRENCY TRANSACTIONS
Currency transactions are subject to risks different from those of
other portfolio transactions. Because currency control is of great importance to
the issuing governments and influences economic planning and policy, purchases
and sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Fund if
it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
COMBINED TRANSACTIONS
The Fund may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and any combination of
futures, options and currency transactions ("component transactions"), instead
of a single Hedging Transaction, as part of a single or combined strategy when,
in the opinion of the Adviser, it is in the best interests of the Fund to do so.
A combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
RISKS OF HEDGING TRANSACTIONS OUTSIDE THE UNITED STATES
When conducted outside the United States, Hedging Transactions may not
be regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) other complex foreign political, legal and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during nonbusiness hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lower
trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many Hedging Transactions, in addition to other requirements, require
that the Fund segregate liquid high grade assets with its custodian to the
extent Fund obligations are not otherwise "covered" through ownership of the
underlying security, financial instrument or currency. In general, either the
full amount of any obligation by the Fund to pay or deliver securities or assets
must be covered at all times by the securities, instruments or currency required
to be delivered, or, subject to any regulatory restrictions, an amount of cash
or liquid high grade securities at least equal to the current amount of the
obligation must be segregated with the custodian. The segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. For example, a call option
written by the Fund will require the Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by the Fund on an index will require the Fund to own portfolio securities which
correlate with the index or to segregate liquid high grade assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by the Fund requires the Fund to segregate liquid high grade
assets equal to the exercise price.
A currency contract which obligates the Fund to buy or sell currency
will generally require the Fund to hold an amount of the currency or liquid
securities denominated in that currency equal to the Fund's obligations or to
segregate liquid high grade assets equal to the amount of the Fund's obligation.
However, the segregation requirement does not apply to currency contracts which
are entered in order to "lock in" the purchase or sale price of a trade in a
security denominated in a foreign currency pending settlement within the time
customary for such securities.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices and OCC-issued and exchange-listed
index options will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a noncash settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC-issued and exchange-listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement,
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
Hedging Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Hedging
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Hedging Transactions may also be offset in combinations. If
the offsetting transaction terminates at the time of or after the primary
transaction, no segregation is required, but if it terminates prior to such
time, assets equal to any remaining obligation would need to be segregated.
DEPOSITARY RECEIPTS
Each series of the Fund may invest in securities commonly known as
American Depositary Receipts ("ADRs"), and in European Depositary Receipts
("EDRs") or other securities representing interests in securities of foreign
issuers. ADRs are certificates issued by a United States bank or trust company
and represent the right to receive securities of a foreign issuer deposited in a
domestic bank or foreign branch of a United States bank and traded on a United
States exchange or in an over-the-counter market. EDRs are receipts issued in
Europe generally by a non-U.S. bank or trust company that evidence ownership of
non-U.S. or domestic securities. Generally, ADRs are in registered form and EDRs
are in bearer form. There are no fees imposed on the purchase or sale of ADRs or
EDRs although the issuing bank or trust company may impose charges for the
collection of dividends and the conversion of ADRs and EDRs into the underlying
securities. Investment in ADRs has certain advantages over direct investment in
the underlying non-U.S. securities, since: (i) ADRs are U.S. dollar denominated
investments which are easily transferable and for which market quotations are
readily available and (ii) issuers whose securities are represented by ADRs are
subject to the same auditing, accounting and financial reporting standards as
domestic issuers. EDRs are not necessarily denominated in the currency of the
underlying security.
MEDIUM AND LOWER RATED CORPORATE DEBT SECURITIES
Each series may invest in securities that are rated in the medium to
lowest rating categories by S&P and Moody's, some of which may be so-called
"junk bonds." The series have historically invested in securities of distressed
issuers when the intrinsic values of such securities have, in the opinion of the
Adviser, warranted such investment. Corporate debt securities rated Baa are
regarded by Moody's as being neither highly protected nor poorly secured.
Interest payments and principal security appears adequate to Moody's for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such securities are
regarded by Moody's as lacking outstanding investment characteristics and having
speculative characteristics. Corporate debt securities rated BBB are regarded by
S&P as having adequate capacity to pay interest and repay principal. Such
securities are regarded by S&P as normally exhibiting adequate protection
parameters, although adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for securities in this rating category than in higher rated categories.
Corporate debt securities which are rated B are regarded by Moody's as
generally lacking characteristics of the desirable investment. In Moody's view,
assurance of interest and principal payments or of maintenance of other terms of
the security over any long period of time may be small. Corporate debt
securities rated BB, B, CCC, CC and C are regarded by S&P on balance as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. In S&P's view,
although such securities likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. BB and B are regarded by S&P as indicating the
two lowest degrees of speculation in this group of ratings. Securities rated D
by S&P or C by Moody's are in default and are not currently performing. The Fund
will rely on the Adviser's judgment, analysis and experience in evaluating such
debt securities. In this evaluation, the Adviser will take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters as well as the price of the security.
The Adviser may also consider, although it does not rely primarily on, the
credit ratings of Moody's and S&P in evaluating lower rated corporate debt
securities. Such ratings evaluate only the safety of principal and interest
payments, not market value risk. Additionally, because the creditworthiness of
an issuer may change more rapidly than is able to be timely reflected in changes
in credit ratings, the Adviser monitors the issuers of corporate debt securities
held in the Fund's portfolio. The credit rating assigned to a security is a
factor considered by the Adviser in selecting a security for a series, but the
intrinsic value in light of market conditions and the Adviser's analysis of the
fundamental values underlying the issuer are of at least equal significance.
Because of the nature of medium and lower rated corporate debt securities,
achievement by each series of its investment objective when investing in such
securities is dependent on the credit analysis of the Adviser. If the series
purchased primarily higher rated debt securities, such risks would be
substantially reduced.
A general economic downturn or a significant increase in interest rates
could severely disrupt the market for medium and lower grade corporate debt
securities and adversely affect the market value of such securities. Securities
in default are relatively unaffected by such events or by changes in prevailing
interest rates. In addition, in such circumstances, the ability of issuers of
medium and lower grade corporate debt securities to repay principal and to pay
interest, to meet projected business goals and to obtain additional financing
may be adversely affected. Such consequences could lead to an increased
incidence of default for such securities and adversely affect the value of the
corporate debt securities in the Fund's portfolio. The secondary market prices
of medium and lower grade corporate debt securities are less sensitive to
changes in interest rates than are higher rated debt securities, but are more
sensitive to adverse economic changes or individual corporate developments.
Adverse publicity and investor perceptions, whether or not based on rational
analysis, may also affect the value and liquidity of medium and lower grade
corporate debt securities, although such factors also present investment
opportunities when prices fall below intrinsic values. Yields on debt securities
in a series' portfolio that are interest rate sensitive can be expected to
fluctuate over time. In addition, periods of economic uncertainty and changes in
interest rates can be expected to result in increased volatility of market price
of any medium to lower grade corporate debt securities in the series' portfolios
and thus could have an effect on the net asset value of the series if other
types of securities did not show offsetting changes in values. The secondary
market value of corporate debt securities structured as zero coupon securities
or payment in kind securities may be more volatile in response to changes in
interest rates than debt securities which pay interest periodically in cash.
Because such securities do not pay current interest, but rather, income is
accreted, to the extent that a series does not have available cash to meet
distribution requirements with respect to such income, it could be required to
dispose of portfolio securities that it otherwise would not. Such disposition
could be at a disadvantageous price. Failure to satisfy distribution
requirements could result in the series failing to qualify as a pass- through
entity under the Internal Revenue Code. Investment in such securities also
involves certain other tax considerations.
The Adviser values the series' investments pursuant to guidelines
adopted and periodically reviewed by the Board of Directors of the Fund (the
"Board"). See "Determination of Net Asset Value" in the Prospectus. To the
extent that there is no established retail market for some of the medium or low
grade corporate debt securities in which the series may invest, there may be
thin or no trading in such securities and the ability of the Adviser to
accurately value such securities may be adversely affected. Further, it may be
more difficult for a series to sell such securities in a timely manner and at
their stated value than would be the case for securities for which an
established retail market did exist. The effects of adverse publicity and
investor perceptions may be more pronounced for securities for which no
established retail market exists as compared with the effects on securities for
which such a market does exist. During periods of reduced market liquidity and
in the absence of readily available market quotations for medium and lower grade
corporate debt securities held in the Fund's portfolio, the responsibility of
the Adviser to value the Fund's securities becomes more difficult and the
Adviser's judgment may play a greater role in the valuation of the Fund's
securities due to a reduced availability of reliable objective data. To the
extent that the Fund purchases illiquid corporate debt securities or securities
which are restricted as to resale, the Fund may incur additional risks and
costs. Illiquid and restricted securities may be particularly difficult to value
and their disposition may require greater effort and expense than more liquid
securities. Further, a series may be required to incur costs in connection with
the registration of restricted securities in order to dispose of such
securities, although under Rule 144A under the Securities Act of 1933 certain
securities may be determined to be liquid pursuant to procedures adopted by the
Board under applicable guidelines.
SHORT SALES
Each series may make short sales of securities. A short sale is a
transaction in which the series sells a security it does not own in anticipation
that the market price of that security will decline. Each series expects to make
short sales as a form of hedging to offset potential declines in long positions
in similar securities, in order to maintain portfolio flexibility and for
profit.
When a series makes a short sale, it must borrow the security sold
short and deliver it to the broker-dealer through which it made the short sale
as collateral for its obligation to deliver the security upon conclusion of the
sale. The series may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The series' obligation to replace the borrowed security will be secured
by collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other high grade liquid securities similar to those borrowed. The
series will also be required to deposit similar collateral with its custodian to
the extent, if any, necessary so that the value of both collateral deposits in
the aggregate is at all times equal to at least 100% of the current market value
of the security sold short.
If the price of the security sold short increases between the time of
the short sale and the time the series replaces the borrowed security, the
series will incur a loss; conversely, if the price declines, the series will
realize a gain. Any gain will be decreased, and any loss increased, by the
transaction costs described above. Although the series' gain is limited to the
price at which it sold the security short, its potential loss is theoretically
unlimited.
The series will not make a short sale if, after giving effect to such
sale, the market value of all securities sold short exceeds 5% of the value of
its total assets or the series' aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The series
may also make short sales "against the box" without respect to such limitations.
In this type of short sale, at the time of the sale, the series owns or has the
immediate and unconditional right to acquire at no additional cost the identical
security.
RESTRICTIONS AND LIMITATIONS
MUTUAL SHARES, QUALIFIED, BEACON, DISCOVERY AND EUROPEAN FUNDAMENTAL POLICIES
Each of Mutual Shares, Qualified, Beacon, Discovery and European has
adopted the following fundamental investment restrictions which may not be
changed without the affirmative vote of the holders of a majority of the
outstanding voting securities of such series, which means the lesser of (1) the
holders of more than 50% of the outstanding shares of voting stock of such
securities or (2) 67% of the shares if more than 50% of the shares are present
at a meeting of shareholders in person or by proxy. Unless otherwise noted, all
percentage restrictions are as of the time of investment after giving effect to
the transaction. Pursuant to such restrictions each series may not:
1. Purchase or sell commodities, commodity contracts (except in
conformity with regulations of the Commodities Futures Trading Commission such
that the series would not be considered a commodity pool), or oil and gas
interests or real estate. Securities or other instruments backed by commodities
are not considered commodities or commodity contracts for purposes of this
restriction. Debt or equity securities issued by companies engaged in the oil,
gas, or real estate businesses are not considered oil or gas interests or real
estate for purposes of this restriction. First mortgage loans and other direct
obligations secured by real estate are not considered real estate for purposes
of this restriction.
2. Make loans, except to the extent the purchase of debt obligations of
any type are considered loans and except that the series may lend portfolio
securities to qualified institutional investors in compliance with requirements
established from time to time by the Securities and Exchange Commission and the
securities exchanges on which such securities are traded.
3. Issue securities senior to its stock or borrow money or utilize
leverage in excess of the maximum permitted by the Investment Company Act of
1940 which is currently 33 1/3% of total assets (plus 5% for emergency or other
short-term purposes) from banks on a temporary basis from time to time to
provide greater liquidity for redemptions or for special circumstances.
4. Invest more than 25% of the value of its assets in a particular
industry (except that U.S. government securities are not considered an
industry).
5. Act as an underwriter except to the extent the series may be deemed
to be an underwriter when disposing of securities it owns or when selling its
own shares.
6. Purchase the securities of any one issuer, other than the U.S.
government or any of its agencies or instrumentalities, if immediately after
such purchase more than 5% of the value of its total assets would be invested in
such issuer, or such series would own more than 10% of the outstanding voting
securities of such issuer, except that up to 25% of the value of such series'
total assets may be invested without regard to such 5% and 10% limitations.
7. Except as may be described in the prospectus, engage in short sales,
purchase securities on margin or maintain a net short position.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value of portfolio
securities or the amount of assets will not be considered a violation of any of
the foregoing restrictions.
NON FUNDAMENTAL POLICIES, ALL SERIES
As a matter of policy that is not fundamental, the Fund has determined that
no series will invest more than 5% of its assets in warrants, and that no more
than 2% of such assets may be invested in warrants which are not listed on the
New York or American Stock Exchanges. Also, as a matter of policy, the series
will not purchase securities for purposes of short term trading and will not
invest more than 5% of their assets in securities of issuers (together with any
predecessors) in existence for less than three years, provided that the
aggregate percentage of assets invested in such issuers, combined with illiquid
investments, does not exceed 15%. The series will not purchase the securities of
any issuer of which any officer or director of the Fund owns more than 1/2 of 1%
of the outstanding securities or in which the officers and directors in the
aggregate own more than 5%. The series do not borrow for leveraging purposes.
The Fund has registered some or all of the shares intended to be sold
pursuant to the Class Z Prospectus and this Statement of Additional Information
under the securities laws of all states. Some states, as conditions of
registration, among other things, require that the Fund limit its investments in
or abstain from investing in certain kinds or classes of securities.
In order to permit the sale of shares in certain states, the Fund may
make commitments more restrictive than the operating restrictions described
above. Should the Fund determine that any such commitment is no longer in the
best interests of a particular series and its shareholders, the Fund will revoke
the commitment by terminating sales of such series' shares in the state
involved.
MANAGEMENT OF THE FUND
The executive officers and directors of the Fund, their positions with
the Fund and their principal occupations during the past five years are shown
below. Members of the Board who are considered "interested persons" of the Fund
under the 1940 Act are indicated by an asterisk (*).
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS WITH REGISTRANT DURING PAST 5 YEARS
- -------------------------------------------------------------------------------
Edward I. Altman, Ph.D. (55)
New York University
44 West 4th Street
New York, NY 10012
Director
Max L. Heine Professor of Financing and Vice Director of NYU Salomon Center,
Stern School of Business, New York University. Editor and author of numerous
financial publications; financial consultant.
Ann Torre Grant (38)
8065 Leesburg Pike
Suite 400
Vienna, VA 22182
Director
Executive Vice President and Chief Financial Officer, NHP Incorporated (owner
and manager of multifamily housing); prior to March 1995, she was Vice President
and Treasurer, U.S. Air, Inc.
Andrew H. Hines, Jr. (74)
150 2nd Avenue N.
St. Petersburg, FL 33701
Director
Consultant for the Triangle Consulting Group; Chairman of the Board and Chief
Executive Officer of Florida Progress Corporation (1982-February, 1990) and
Chairman and Director of Precise Power Corporation; Executive-in-Residence of
Eckerd College (1991-present); and a Director of Checkers Drive-In Restaurants,
Inc.
Peter A. Langerman* (41)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Director and
Executive
Vice President
Financial Analyst with Franklin Mutual; held the same position with Heine
Securities Corporation, 6/86 to 10/96; Director of Sunbeam Oster since 1990,
Lancer Industries since 1994; Manager (Director) of MB Motori, L.L.C. since 1994
and MWCR, L.L.C. since 1995.
William J. Lippman* (71)
One Parker Plaza
Fort Lee, NJ 07024
Director
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc.,
Franklin Templeton Distributors, Inc. and Franklin Management, Inc.; President
and Director Franklin Advisory Services, Inc.; and officer and/or director or
trustee of seven of the investment companies in the Franklin Group of Funds.
Bruce A. MacPherson (66)
1 Pequot Way
Canton, MA 02021
Director
President of A.A. MacPherson, Inc. Boston, MA (representative for electrical
manufacturers).
Fred R. Millsaps (67)
2665 NE 37th Drive
Fort Lauderdale, FL 33394
Director
Manager of Personal Investments (1978-present); Chairman and Chief Executive
Officer of Landmark Banking Corporation (1969-1978); Financial Vice President of
Florida Power and Light (1965-1969); Vice President of The Federal Reserve Bank
of Atlanta (1958-1965); and a director of various other business and nonprofit
organizations.
Michael F. Price* (45)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Chairman of the Board
and President
President, Chief Executive Officer, and director of Franklin Mutual; held the
same positions with Heine Securities Corporation, 1/87 to 10/96; Principal
Executive Officer and majority owner of Compliance Solutions, Inc. ("Compliance
Solutions") (a developer of compliance monitoring software for money managers);
director and owner of Clearwater Securities, Inc. ("Clearwater") (a registered
securities dealer).
Leonard Rubin (71)
Yacht and Racquet Club
2727 North Ocean Boulevard A1A Apt. 508A
Boca Raton, FL 33431
Director
President, F.N.C. Textiles, Inc.; Vice President, Trimtex Co. Inc.; and trustee
of four of the investment companies in the Franklin Group of Funds.
Barry F. Schwartz (47)
35 East 62nd Street
New York, NY 10021
Director
Executive Vice President and General Counsel, MacAndrews & Forbes Holdings, Inc.
(a diversified holding company).
Vaughn R. Sturtevant, M.D. (73)
6 Noyes Avenue
Waterville, ME 04901
Director
Practicing physician.
Robert E. Wade (50)
225 Hardwick Street
Belvidere, NJ 07823
Director
Practicing attorney.
Jeffrey A. Altman (30)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Analyst and trader with Franklin Mutual; was employed by Heine Securities
Corporation, 8/88 to 10/96; Manager (Director) MB Metropolis, L.L.C. since 1994.
Since 1995 Manager (Director) of MB Motori, L.L.C., MWCR, L.L.C. and S.H.
Mortgage Acquisition L.L.C. Trustee of Resurgence Properties Inc. and Chairman
of the Board of Trustees, Value Property Trust.
James R. Baio (42)
500 East Broward Blvd.
Fort Lauderdale, Florida
Treasurer
Certified public accountant; treasurer of the Templeton Funds; senior vice
president of Templeton Worldwide, Inc., Templeton Global Investors, Inc., and
Templeton Funds Trust Company.
Elizabeth N. Cohernour (46)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
General Counsel
and Secretary
Vice President and Assistant Secretary of Franklin Mutual; formerly Secretary
and General Counsel of Heine Securities Corporation, 5/88 to 10/96; Secretary
and General Counsel of Compliance Solutions and Clearwater.
Robert L. Friedman (37)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Research analyst with Franklin Mutual; was employed by Heine Securities
Corporation, 8/88 to 10/96.
Raymond Garea (47)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Research analyst with Franklin Mutual; was employed by Heine Securities
Corporation, 3/91 to 10/96. Prior thereto he was a Vice President and analyst
with Donaldson, Lufkin & Jenrette. Manager (Director) MB Metropolis, L.L.C.
and S.H. Mortgage Acquisition L.L.C.
Lawrence N. Sondike (39)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Research Analyst with Franklin Mutual; was employed by Heine Securities
Corporation 3/84 to 10/96.
The Fund's independent Board members have standing audit, pension,
nominating and director's compensation and performance committees. The audit
committee is composed of Ms. Grant and Messrs. Altman and Wade. The pension
committee is composed of Messrs. Altman, Schwartz and Sturtevant. The nominating
committee is responsible for nominating candidates for independent Board member
positions and is composed of Messrs. MacPherson and Schwartz. The Board members'
compensation and performance committee is composed of Ms. Grant and Messrs. Wade
and Sturtevant.
As of January 30, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: 68,536 shares of
Mutual Shares - Class Z; 51,529 shares of Qualified - Class Z; 225,070 shares of
Beacon - Class Z; 390,105 shares of Discovery - Class Z, or less than 1% of the
total outstanding Class Z shares of that series. As of January 30, 1997, the
officers and board members, as a group, owned of record and beneficially
14,130,248 shares of European - Class Z, which is 34% of the total outstanding
shares Class Z shares of that series. Some of the Board members also own shares
in other funds in the Franklin Templeton Group of Funds.
As of January 30, 1997, the principal shareholder of the Fund, beneficial or of
record, was as follows:
Name and Address Share Amount Percentage
European - Class Z
Michael F. Price
51 John F. Kennedy Pkwy
Short Hills, NJ 07078o 13,923,586 shares 33.29%
From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
REMUNERATION OF OFFICERS AND DIRECTORS
During the fiscal year ended December 31, 1995, the Fund paid its
officers and directors as a group, including reimbursement to the investment
adviser for the expenses of personnel who spend a substantial portion of their
time on Fund operations, aggregate compensation of $839,366. Nonaffiliated Board
members are currently paid $15,000 per year plus $750 per meeting attended.
Board members are paid $500 plus out-of-pocket expenses for each Committee
meeting attended. In 1993, the Board members approved a retirement plan which
generally provides payments to directors who have served 10 years and retire at
age 70. At the time of retirement, Board members are entitled to annual payments
equal to one-half of the retainer in effect as of the time of retirement. As
shown above, some of the nonaffiliated Board members also serve as directors,
trustees or managing general partners of investment companies in the Franklin
Templeton Group of Funds (all U.S. registered investment companies in the
Franklin Group of Funds(R) and the Templeton Group of Funds). They may receive
fees from these funds for their services. The following table provides the total
fees paid to nonaffiliated Board members by the Fund and by other funds in the
Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
TOTAL FEE NUMBER OF
RECEIVED FROM BOARDS IN THE
TOTAL FEES PENSION ANNUAL THE FRANKLIN FRANKLIN TEMPLETON
RECEIVED FROM RETIREMENT BENEFITS TEMPLETON GROUP OF FUNDS ON
NAME THE FUND+ ACCRUED RETIREMENT GROUP OF FUNDS++ WHICH EACH SERVES**
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Edward I. Altman $20,750 0 $7,500 0 1
Ann Torre Grant* $20,750 0 $7,500 0 1
Bruce A. MacPherson $18,750 0 $7,500 0 1
Barry F. Schwartz* $18,750 0 $7,500 0 1
Vaughn R. Sturtevant, M.D. $18,750 0 $7,500 0 1
Robert E. Wade* $25,750 0 $7,500 0 1
Andrew H. Hines, Jr. 0 0 0 $106,325 25
Fred R. Millsaps 0 0 0 $104,325 25
LEONARD RUBIN 0 0 0 $ 15,600 4
- -------------
</TABLE>
+For fiscal year ended December 31, 1995.
++For the calendar year ended December 31, 1995.
*Not vested in retirement plan.
**We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, with approximately 171 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred
in connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation, including pension or retirement benefits, directly or indirectly
from the Fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Franklin Resources, Inc.
("Resources"), may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries. Certain officers
and Board members of the Fund are also officers of Compliance Solutions. The
Fund is not charged for the use of software designed by Compliance Solutions.
INVESTMENT ADVISER
INVESTMENT MANAGER AND SERVICES PROVIDED. Franklin Mutual, 51 John F.
Kennedy Parkway, Short Hills, New Jersey 07078, serves as the Fund's investment
manager. Franklin Mutual, registered with the SEC as an investment advisor in
October 1996, is a wholly owned subsidiary of Resources, a publicly-owned
holding company whose principal shareholders are Charles B. Johnson and Rupert
H. Johnson, Jr. On October 31, 1996, pursuant to an agreement between Resources
and Heine Securities, Inc., ("Heine"), the assets of Heine were transferred to
Franklin Mutual (the "Transaction") and the Fund's name was changed from Mutual
Series Fund Inc. to Franklin Mutual Series Fund Inc.
The Adviser provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. The Adviser's activities are subject to the review and supervision
of the Board to whom the Adviser renders periodic reports of the Fund's
investment activities. The Adviser is covered by fidelity insurance on its
officers, directors and employees for the protection of the Fund.
The Adviser and its affiliates act as investment manager to numerous
other investment companies and accounts. They may give advice and take action
with respect to any of the other funds they manage, or for their own account,
that may differ from action taken by them on behalf of the Fund. Similarly, with
respect to the Fund, they are not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that they and access
persons, as defined by the 1940 Act, may buy or sell for their own account or
for the accounts of any other fund. They are not obligated to refrain from
investing in securities held by the Fund or other funds that they manage or
administer. Of course, any transactions for their accounts and other access
persons will be made in compliance with the Fund's Code of Ethics.
REDEMPTION OF SHARES
The Fund reserves the right to suspend the right of redemption and to
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange is closed (other than weekend and holiday closings) or
trading on the New York Stock Exchange is restricted or during which (as
determined by the SEC by rule or regulation) an emergency exists as a result of
which disposal or evaluation of the Fund's portfolio securities is not
reasonably practicable, or for such other periods as the SEC by order permits.
REDEMPTIONS IN KIND. The Fund has committed itself to pay in cash (by
check) all requests for redemption by any shareholder of record, limited in
amount, however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the Fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the SEC. In the case of
redemption requests in excess of these amounts, the Board reserves the right to
make payments in whole or in part in securities or other assets of the Fund, in
case of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash.
Net asset value per share will not be calculated on days the New York
Stock Exchange is not open, currently including the holidays of New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas.
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS
MANAGEMENT FEES. The Adviser serves as investment adviser to each of
the series pursuant to separate investment advisory agreements. Under the
agreements, Mutual Shares, Qualified, Beacon, Discovery and European each pay
the Adviser a management fee equal to an annual rate of 0.60%, 0.60%, 0.60%,
0.80%, and 0.80%, respectively. The fee is computed at the close of business on
the last business day of each month. Each class pays its proportionate share of
the management fee.
MANAGEMENT AGREEMENT. The management agreement is in effect until June
30, 1998. It may continue in effect for successive annual periods if its
continuance is specifically approved at least annually by a vote of the Board or
by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the management agreement or interested persons of any such party
(other than as members of the Board), cast in person at a meeting called for
that purpose. The management agreement may be terminated without penalty at any
time by the Board or by a vote of the holders of a majority of the Fund's
outstanding voting securities, or by the Adviser on 60 days' written notice, and
will automatically terminate in the event of its assignment, as defined in the
1940 Act.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative
services and facilities for the Fund. These include preparing and maintaining
books, records, and tax and financial reports, and monitoring compliance with
regulatory requirements. FT Services is a wholly owned subsidiary of Resources.
PRIOR SERVICES. Before November 1, 1996, Heine served as the investment
manager under separate investment management agreements substantially the same
in terms as the agreements currently in effect with Franklin Mutual. During the
fiscal year ended December 31, 1995, an aggregate of $1,392,294 of
administrative expenses was incurred by Mutual Shares, $720,315 by Qualified,
$886,843 by Beacon and $412,166 by Discovery. Heine's net fee for the fiscal
years ended December 31, 1995, 1994 and 1993, was $27,500,952, $21,795,512 and
$19,507,048, respectively for Mutual Shares; $14,607,723, $9,766,052 and
$8,434,525, respectively for Qualified; $17,720,127, $9,511,199 and $4,848,218,
respectively for Beacon; $7,930,967, $5,737,128 and $2,294,912, respectively for
Discovery.
PORTFOLIO BROKERAGE
PLACEMENT OF PORTFOLIO BROKERAGE. As a general matter, purchases and
sales of portfolio securities of the Fund are placed by the Adviser with brokers
and dealers who in its opinion will provide the Fund with the best combination
of price (inclusive of brokerage commissions) and execution for its orders.
However, pursuant to the Fund's management agreement, consideration may be given
in the selection of broker-dealers for research provided and payment may be made
of a commission higher than that charged by another broker-dealer which does not
furnish research services or which furnishes research services deemed to be of
lesser value, so long as the criteria of Section 28(e) of the Securities
Exchange Act of 1934, as amended (the "1934 Act") are met. Section 28(e) of the
1934 Act was adopted in 1975 and specifies that a person with investment
discretion shall not be "deemed to have acted unlawfully or to have breached a
fiduciary duty" solely because such person has caused the account to pay a
higher commission than the lowest available under certain circumstances. To
obtain the benefit of Section 28(e), the person so exercising investment
discretion must make a good faith determination that the commissions paid are
"reasonable in relation to the value of the brokerage and research services
provided...viewed in terms of either that particular transaction or his overall
responsibilities with respect to the accounts as to which he exercises
investment discretion."
Currently, it is not possible to determine the extent to which
commissions that reflect an element of value for research services might exceed
commissions that would be payable for execution services alone, nor generally
can the value of research services to the Fund be measured, except to the extent
such services have a readily ascertainable market value. Research services
furnished might be useful and of value to the Adviser in serving other clients
as well as the Fund, but on the other hand any research service obtained by the
Adviser from the placement of portfolio brokerage of other clients might be
useful and of value to the Adviser in carrying out its obligation to the Fund.
"SOFT DOLLAR" ARRANGEMENTS. The Fund receives research services from
persons who act as brokers or dealers for the Fund. The discussion below relates
in general to these brokers or dealers who pursuant to various arrangements pay
for certain computer hardware and software and other research and brokerage
services to the Adviser and/or the Fund for transactions effected by it for the
Fund. Commission "soft dollars" may be used only for "brokerage and research
services" provided by brokers to whom commissions are paid and under no
circumstances will cash payments be made by any such broker to the Adviser. To
the extent that commission "soft dollars" do not result in the provision of any
"brokerage and research services" by brokers to whom such commissions are paid,
the commissions, nevertheless, are the property of such broker. Although,
potentially, the Adviser could be influenced to place Fund brokerage
transactions with a broker in order to generate "soft dollars" for the Adviser's
benefit, the Adviser believes that the requirement that it achieve best
execution on Fund portfolio transactions, and the Fund's negotiated commission
structure with brokers, mitigate these concerns as the cost of transactions
effected through brokers, before consideration of any "soft dollar" benefits
that may be received, generally will be comparable to that available elsewhere.
During fiscal 1995, 1994 and 1993, the Fund paid brokerage commissions of
$3,355,180, $2,267,683 and $1,640,278, respectively, to brokers who provided
research services. This amount represented 14.90%, 19.45% and 17.75%,
respectively, of total commissions paid for the periods.
As stated in the Prospectus, the Fund generally executes purchases and
sales of non-U.S. securities through market makers acting as principals or
through brokers on the exchanges or in markets in which they are principally
traded. Over-the-counter purchases and sales are normally made with principal
market makers except where, in the opinion of the Adviser, the best executions
are available elsewhere.
The Fund from time to time allocates brokerage commissions to firms
which furnish research and statistical information to the Adviser. The
supplementary research supplied by such firms is useful in varying degrees and
is of indeterminable value. Such research may, among other things, include
advice regarding economic factors and trends, advice as to occasional
transactions in specific securities, and similar information relating to
securities.
If the Fund's officers are satisfied that the best execution is
obtained, consistent with internal policies, the sale of Fund shares, as well as
shares of other funds in the Franklin Templeton Group of Funds, may also be
considered a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
A portion of the Fund's brokerage commissions are paid with respect to
agency over-the-counter securities transactions. The Fund effects
over-the-counter securities transactions on either a principal or agency basis.
Transactions effected on a principal basis generally include a mark-up
but no commission. In fiscal 1995 total brokerage commissions of $8,028,205,
$5,182,736, $6,269,829 and $3,040,751 were paid by Mutual Shares, Qualified,
Beacon and Discovery, respectively.
Clearwater, an indirect affiliate of the Adviser, is a registered
securities dealer and a member of the National Association of Securities Dealers
("NASD"). Transactions in some Fund portfolio securities (particularly
transactions involving floor brokers) were effected through Clearwater prior to
the Transaction. During 1995, Mutual Shares paid brokerage commissions to
Clearwater Securities of $1,192,230; Qualified paid $640,588; Beacon paid
$764,323 and Discovery paid $217,609. The transactions constituted for Mutual
Shares 13.2%; Qualified 14.1%; Beacon 14.5% and Discovery 7.7% of the aggregate
dollar amount of brokerage transactions effected during 1995. These commissions
constituted for Mutual Shares 14.9%, for Qualified 12.4%, for Beacon 12.2% and
for Discovery 7.2% of the total commissions paid in 1995.
TAXES
The Fund intends that each of its series will meet the requirements for
qualification as a regulated investment company ("RIC") under the Internal
Revenue Code of 1986, as amended (the "Code"). Because each series intends to
qualify and to distribute all of its net investment income and capital gain to
shareholders, it is expected that each series will not be required to pay
Federal income taxes.
A series normally will distribute substantially all of its net
investment income and net realized capital gain, if any, to shareholders in the
form of dividends to be paid from time to time as determined by the Board. Such
dividends are taxable whether paid in cash or additional shares of such series.
The Board presently intends to declare such dividends and distributions from
earnings semi-annually.
In the event that total distributions (including distributed or
designated net capital gain) for a taxable year exceed its investment company
taxable income and net capital gain, a portion of each distribution generally
will be treated as a return of capital. Distributions treated as a return of
capital reduce a shareholder's basis in its shares and could result in a capital
gain tax either when a distribution is in excess of basis or, more likely, when
a shareholder redeems its shares.
Shareholders of a series will be notified annually by the Fund as to
the Federal tax treatment of dividends and distributions paid during the
calendar year. Dividends and distributions may also be subject to state and
local taxes. State and local tax treatment may vary according to applicable
laws. Shareholders can elect to receive distributions in cash or in additional
shares of such series. The price of the additional shares is determined as of
the date for the dividend payment. (See "Shareholder Services -- Reinvestment of
Distributions," in the Prospectus.)
To maintain qualification as a RIC under the Code, each series of the
Fund must limit gains from the sale or other disposition of its portfolio
securities (including options, futures and forward contracts) held for less than
three months to less than 30% of its annual gross income. Generally, gains on
foreign currencies (and gains on options, futures, or forward contracts with
respect to foreign currencies) are not subject to this 30% short- short rule if
directly related to regular investments by a series in equity or debt
securities.
Each series intends to declare and pay dividends and capital gain
distributions so as to avoid imposition of a 4% federal excise tax. To do so,
each series expects to distribute during the calendar year an amount at least
equal to (i) 98% of its calendar year net investment income, (ii) 98% of its
realized capital gain (the excess of short and long-term capital gain over short
and long-term capital loss) for each one-year period ending October 31, and
(iii) 100% of any undistributed net investment income or realized capital gain
from the prior calendar year which has not been distributed by such series.
Dividends declared in October, November, or December and made payable to
shareholders of record in such a month would be deemed paid by the Series and
taxable to its shareholders on December 31 of such year provided that such
dividends are actually paid during January of the following year. A series may
make a deemed distribution with respect to its net capital gain by paying the
tax with respect to the net capital gain and then designating, but not
distributing, all or a portion of such gain as a capital gain dividend. Such
series' shareholders will treat such designated amounts as a capital gain on
their income tax returns, but they will receive a credit or refund equal to
federal income taxes paid by such series with respect to such capital gain. In
addition, shareholders will increase their basis in the series' shares by 65% of
the amount subject to tax. If a capital gain dividend is paid with respect to
any shares of a series which are sold at a loss after being held for less than
six months, any loss realized upon the sale of such shares will be treated as a
long-term capital loss to the extent of such capital gain dividend. There are
special rules for determining holding periods for the purpose of the preceding
sentence.
Dividends distributed by a series will only be eligible for the
dividends-received deduction available to corporate shareholders to the extent
of the portion of a series' gross income which consists of dividends received on
equity securities issued by domestic corporations with respect to which such
series meets the same holding period, risk of loss, and borrowing limitations
applicable to the series' shareholders. Section 246 of the Code permits the
dividends-received deduction to corporate shareholders only if the shares with
respect to which the dividends were paid have been held for more than 45 days.
If the holding period is not satisfied, the dividends-received deduction is
disallowed, regardless of whether the shares with respect to which the dividends
were paid have been sold or otherwise disposed of. The holding period
requirements are separately applicable to each block of shares acquired,
including each block of shares received in payment of the Fund's dividends. For
purposes of determining whether this holding period requirement has been met,
the day of acquisition and any day after the first 45 days after the date on
which such shares become ex-dividend must be disregarded. In addition, the
holding period is suspended during periods in which the stock is subject to
diminished risk of loss including, for example, because the holder has acquired
a put option or sold a call option (other than certain covered call options
where the exercise price is not substantially below the selling price) or
otherwise hedged his position.
The dividends-received deduction will also be reduced, for shareholders
who incur indebtedness in order to purchase shares of a series of the Fund, by
the percentage of the cost of such series' shares that is debt-financed.
Generally, this limitation applies only if the debt is directly attributable to
the purchase of shares. Whether debt is directly attributable to the purchase of
shares depends on the particular facts and circumstances of each situation and
accordingly shareholders are urged to consult their tax advisors.
Under section 1059 of the Code, a corporation which receives an
"extraordinary dividend" and disposes of the stock with respect to which such
dividend was paid, provided generally that such stock has not been held for at
least two years prior to the date of declaration, announcement or agreement
about the extraordinary dividend, is required to reduce its basis in such stock
(but not below zero) by the amount of the dividend which was not taxed because
of the dividends-received deduction with such basis reduction generally being
treated as having occurred immediately before the sale or disposition of such
stock. To the extent such untaxed amount exceeds the shareholder's basis, such
excess will be taxed as gain upon a sale or disposition of such stock. An
extraordinary dividend generally is any dividend that equals or exceeds 10% of
the shareholder's basis in the stock (5% in the case of preferred stock). For
this purpose, generally, all dividends within any 85-day period, and if such
dividends total more than 20% of the shareholder's basis in its stock, all
dividends within one year, must be aggregated for purposes of determining
whether such dividends constitute extraordinary dividends. The shareholder may
elect to determine the status of extraordinary dividends by reference to the
fair market value of the stock as of the date before the ex-dividend date,
rather than by reference to the adjusted basis of such stock (provided the
shareholder establishes the fair market value to the satisfaction of the
Commissioner of the IRS). In determining whether the above-mentioned two-year
holding period has been met, the same rules apply as are applicable to the
45-day holding period requirement for the dividends received deduction.
Corporations should note that 75% of the untaxed portion of the Fund's
dividends could be taken into account for purposes of the alternative minimum
tax imposed on corporations.
A series may in the future engage in various defensive hedging
transactions. Under various Code provisions such transactions might change the
character of recognized gains and losses, accelerate the recognition of certain
gains and losses, and defer the recognition of certain losses or deductions.
If more than 50% of the assets of a series of the Fund at the close of
any taxable year consists of stocks or securities of foreign corporations, the
Fund may elect to treat any foreign income taxes, such as withholding taxes on
interest or dividends, that are paid by the Fund with respect to the series, as
paid by the shareholders of such series. If the Fund makes this election with
respect to a series, the series' shareholders will be entitled to credit their
pro rata share of the foreign taxes paid by the series against their United
States federal income tax liability, or to deduct such amounts from their United
States taxable income. No deduction for foreign taxes may be claimed by a
shareholder who does not itemize deductions. In addition, certain individual
shareholders may be subject to rules that limit or reduce their ability to
deduct fully their pro rata share of foreign taxes paid by the Fund. Since the
Fund anticipates that more than 50% of the value of the total assets of European
will consist of non-U.S. equity and debt securities, European shareholders are
expected to be eligible for a pass through of the foreign taxes paid by the
Fund. Shareholders of Mutual Shares, Qualified, Beacon and Discovery are not
expected to be eligible for a pass through of the foreign taxes paid by the
Fund.
Treasury regulations provide that the dividends-paid deduction
attributable to an in-kind distribution of property is equal to the adjusted
basis of such property.
CALCULATION OF PERFORMANCE DATA
The Fund's average annual total return is computed according to the
following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5, or 10
year periods at the end of the 1, 5, or 10 year
periods.
In making the computation described above, the Fund will assume that
all dividends and distributions by the Fund are reinvested at the Fund's net
asset value per share on the reinvestment date. The computation will also
reflect any charges made to all shareholder accounts, if any, during the
computation period.
CUSTODIAN, TRANSFER AGENT AND AUDITORS
State Street Bank and Trust Company, Atlantic Division, 225 Franklin
Street, Boston, MA 02110, is the principal custodian for the assets of all the
series of the Fund. Franklin Templeton Investors Services, Inc. ("Investor
Services"), 777 Mariners Island Blvd., San Mateo, CA 94404, is the transfer
agent for all of the series of the Fund, and PFPC Inc., 400 Bellevue Parkway,
Wilmington, DE 19809-3710, provides similar services regarding Class Z shares
through a subcontract with Investors Services. Ernst & Young LLP, Boston, MA,
are the Fund's independent auditors.
SUMMARY OF CODE OF ETHICS
The Adviser and the Fund have adopted Codes of Ethics and related
internal procedures (together referred to as the "Code of Ethics") which govern
the personal investing practices of the Adviser's employees. The Code of Ethics
generally incorporates the recommendation of the Investment Company Institute
contained in the Report of the Advisory Group on Personal Investing dated May 9,
1994. Specifically, employees of the Adviser may buy and sell securities for
themselves as long as their trades have been pre-cleared in accordance with the
Code of Ethics. Transactions by the Adviser's employees which comply with the
substantive and procedural provisions of the Code of Ethics are permitted even
if the security being purchased is one of limited availability (such as
investments in private placements), and is one in which any particular series
would be financially and legally able to invest.
FINANCIAL INFORMATION
The audited financial statements contained in the Annual Report to
Shareholders of Mutual Shares, Qualified, Beacon and Discovery for the fiscal
year ended December 31, 1995, including the auditors' report, and the unaudited
financial statements contained in the Semi-Annual Report to Shareholders of
Mutual Shares, Qualified, Beacon and Discovery for the period ended June 30,
1996, are incorporated herein by reference. The unaudited financial statements
for European for the period ended December 31, 1996, are as follows:
<TABLE>
<CAPTION>
MUTUAL EUROPEAN FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996 (UNAUDITED)
ASSETS
<S> <C>
Investments in Securities, at Value (cost $430,352,372) $ 458,823,937
Cash 530,404
Receivables:
Investment Securities Sold 6,800,225
Capital Stock Subscribed 1,888,609
Dividends 236,292
Interest 118,184
Fee Reimbursement 50,394
--------------
TOTAL ASSETS 468,448,045
--------------
LIABILITIES
Payables:
Investment Securities Purchased 5,023,495
Net Payable for Foreign Currency Exchange Contracts 105,235
Investment Advisory Fee 293,344
Capital Stock Repurchased 449,841
Accrued Expenses and Other Liabilities 127,174
--------------
TOTAL LIABILITIES 5,999,089
--------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 462,448,956
==============
COMPOSITION OF NET ASSETS
Paid In Capital $ 430,067,727
Undistributed Net Investment Income 580,686
Accumulated Net Realized Gain on Investments and Foreign Currency Transactions 3,364,491
Net Unrealized Appreciation of Investments 28,531,515
Net Unrealized Depreciation of Foreign Currency Exchange Contacts and Dividends (95,463)
==============
TOTAL NET ASSETS $ 462,448,956
==============
Class Z
Net Asset Value per Share (Offering and Redemption Price per Share)
($450,495,190 / 39,546,933 shares outstanding) $ 11.39
==============
Class I
Net Asset Value per Share
($9,199,892 / 808,273 shares outstanding) $ 11.38
==============
Maximum Offering Price
($11.38 / 95.5%) $ 11.92
==============
Class II
Net Asset Value per Share
($2,753,874 / 242,005 shares outstanding) $ 11.38
==============
Maximum Offering Price
($11.38 / 99.0%) $ 11.49
==============
See notes to financial statements.
MUTUAL EUROPEAN FUND
STATEMENT OF OPERATIONS
For Period July 3, 1996 (Commencement of Operations) to December 31, 1996 (Unaudited)
INVESTMENT INCOME:
Income:
<S> <C> <C>
InvestInterest Securities, at Value (cost $430,352,372) $ 2,724,820
Dividends
(Net of Foreign Withholding -- $76,402) 796,851 3,521,671
----------------
TOTAL INCOME
Expenses:
Investment Advisory Fee 949,616
Shareholder Servicing Costs 159,269
Administrative 80,467
Distribution Fee
Class I 3,373
Class II 1,008
Registration and Filing Fees 129,245
Shareholder Reports 21,180
Legal Fees 8,872
Insurance 370
Auditing Fees 8,500
Directors' Fees and Expenses 2,295
Miscellaneous 2,081
----------------
TOTAL EXPENSES 1,366,276
Less Expenses Reimbursed (50,394)
----------------
TOTAL EXPENSES LESS REIMBURSEMENT 1,315,882
-----------------
NET INVESTMENT INCOME 2,205,789
-----------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net Realized Gain on Investments and Foreign Currency Transactions 4,653,655
Net Realized Loss on Securities Sold Short (139,150)
Change in Unrealized Appreciation of Investments
and Foreign Currency Transactions 28,436,052
-----------------
NET GAIN ON INVESTMENTS 32,950,557
-----------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 35,156,346
=================
See notes to financial statements.
MUTUAL EUROPEAN FUND
STATEMENT OF CHANGES IN NET ASSETS
For Period July 3, 1996 (Commencement of Operations) to December 31, 1996 (Unaudited)
INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS:
<S> <C>
Net Investment Income $ 2,205,789
Net Realized Gain on Investments and Foreign Currency Transactions 4,514,505
Change in Unrealized Appreciation of Investments 28,436,052
--------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS 35,156,346
--------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income
Class Z (1,947,610)
Class I (25,784)
Class II (7,669)
Net Realized Gain on Investments
Class Z (779,044)
Class I (10,995)
Class II (4,015)
--------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (2,775,117)
--------------
CAPITAL STOCK TRANSACTIONS
Class Z 418,343,037
Class I 9,032,503
Class II 2,692,187
--------------
NET INCREASE IN NET ASSETS 462,448,956
NET ASSETS:
Beginning of Period -
--------------
End of Period -- Including Undistributed Net
Investment Income of $580,686 $ 462,448,956
==============
See notes to financial statements.
</TABLE>
MUTUAL EUROPEAN FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (UNAUDITED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Mutual European Fund is a portfolio of Franklin Mutual Series Fund Inc.
(the "Series Fund"), which is registered under the Investment Company Act of
1940 as a diversified, open-end management investment company. The Series Fund
currently consists of five portfolios: Mutual Qualified Fund, Mutual Shares
Fund, Mutual Beacon Fund, Mutual Discovery Fund and Mutual European Fund. Each
of these portfolios is considered to be a separate entity for financial
reporting and Federal income tax purposes. The financial statements and notes
include operations with respect to Mutual European Fund (the "Fund") only.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts of assets and liabilities.
Actual results could differ from those estimates.
SECURITY VALUATION: Investments in securities and securities sold short
that are listed on an exchange or the NASDAQ national market or other securities
traded in the over-the-counter market are valued at the last reported sales
price on the day of valuation; however, if there are no sales on that day, such
securities are valued at the mean between the closing bid and asked prices.
Securities for which market quotations are not readily available are valued at
"fair value" as determined in good faith by management under the direction of
the Board of Directors. Fair value reflects what management believes is the bid
price for the securities and is based on estimates and assumptions deemed
relevant under the circumstances. Actual results could differ from these
estimates. Temporary investments are valued at the prevailing market value.
RESTRICTED SECURITIES: The Fund invests in securities which are
restricted as to public sale in accordance with the Securities Act of 1933. Such
assets are valued at fair value as determined in good faith by management under
the direction of the Board of Directors. It is the Fund's policy that no more
than 15%, as determined at the time of investment, of the value of the Fund's
assets be invested in restricted securities.
FOREIGN SECURITIES: The value of foreign securities is converted into
U.S. dollars at the rate of exchange prevailing on the day of valuation.
Purchases and sales of foreign securities, as well as income and expenses
relating to such securities, are converted at the prevailing rate of exchange on
the respective date of such transactions.
FOREIGN EXCHANGE CONTRACTS: The Fund may engage in currency
transactions in order to hedge the value of portfolio holdings denominated in
foreign currencies against fluctuations in relative value. Foreign Exchange
contracts are valued at the forward rate, and are marked-to-market daily. The
change in market value is recorded by the Fund as an unrealized gain or loss.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed. The use of currency transactions can result
in the Fund 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 Fund does not isolate that portion
of the results of operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market prices of
securities held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments.
OPTIONS WRITTEN: When the Fund writes an option, the premium received
is recorded as a liability with subsequent daily adjustment to current market
value. When the Fund enters into a closing transaction or the option expires or
is exercised, the Fund realizes a gain or loss, and the liability is eliminated.
All securities covering outstanding options are held in a segregated account by
the custodian bank.
SECURITIES SOLD SHORT: The Fund is engaged in selling securities short,
which obligates the Fund to replace a security borrowed by purchasing the same
security at the current market value. The Fund would incur a loss if the price
of the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund would realize a gain if
the price of the security declines between those dates.
The Fund is required to establish a margin account with the broker
lending the security sold short. While the short sale is outstanding, the broker
retains the proceeds of the short sale and the Fund must also maintain a cash
deposit with the broker having a value equal to a specified percentage of the
value of the securities sold short.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions
are recorded on a trade-date basis. Securities gains or losses are determined on
the identified cost basis. Dividend income is recorded on the ex-dividend date
or, for certain foreign dividends, as soon as the Fund becomes aware of the
dividends. Interest income, including original issue discount, where applicable,
is recorded on the accrual basis, except for bonds trading "flat", in which case
interest is recorded when received.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Income dividends and
capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments of income and gains
on various investment securities held by the Fund, timing differences and
differing characterization of distributions made by the Fund. Differences in the
recognition or classification of income between the financial statements and tax
earnings and profits which result in temporary over-distribution for financial
statement purposes are classified as distributions in excess of net investment
income or accumulated net realized gains.
FEDERAL INCOME TAXES: The Fund qualifies, and intends to continue to
meet the requirements for qualification, as a regulated investment company, as
defined in applicable sections of the Internal Revenue Code ("Code"). By
complying with code provisions, the Fund is relieved from Federal income tax
provided that substantially all of its taxable income is distributed to
shareholders. Therefore, no Federal income tax provision has been provided.
NOTE B -- MERGER OF HEINE SECURITIES CORPORATION AND FRANKLIN RESOURCES
On October 31, 1996, pursuant to an agreement between Franklin
Resources, Inc. ("FRI") and Heine Securities Corporation ("Heine"), the
investment adviser, the assets of Heine were acquired by Franklin Mutual
Advisers, Inc. ("FMA"), a subsidiary of FRI. Franklin Mutual became the
investment adviser to the Series Fund and the Series Fund name changed from
Mutual Series Fund Inc. to Franklin Mutual Series Fund, Inc.
NOTE C -- INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Certain officers of the Fund are also directors or officers of FMA,
Franklin Templeton Distributors, Inc. ("FTD") and Franklin Templeton Investor
Services, Inc. ("FTIS"), the Fund's investment adviser, principal underwriter
for Class I and II, and transfer agent, respectively.
For the period ended December 31, 1996, the Advisers received fees of
$949,616 for investment management and advisory services under the investment
advisory agreements. The fee was paid monthly based on average daily net assets
at the annual rate of eight-tenths of one percent. Prior to November 1, 1996,
administrative personnel and services were provided at approximate cost by the
Heine. On November 1, 1996 Franklin Templeton Services, Inc. ("FTSI") became the
Fund's administrative manager. The Fund pays FTSI monthly its allocated share of
an administrative fee of 0.15% per annum on the first $200 million of the Series
Fund's aggregate average daily net assets, 0.135% of the next $500 million,
0.10% of the next $500 million and 0.075% per annum of such average net assets
in excess of $1.2 billion. The Fund paid fees of $57,060 through December 31,
1996. In connection with the merger, FRI and FMA have voluntarily agreed to
limit the total expenses of the Fund to be no higher than they were expected to
be for the Fund's 1996 fisal year based on the projected annualized expense
ratio had the merger between FRI and Heine not taken place. This limitation
expires on October 31, 1999. The amount of reimbursement is set forth in the
statement of operations. For the period ended December 31, 1996, FTD paid net
commissions of $1,291 from the sale of the Fund's shares and FTIS received fees
of $768.
Clearwater Securities, Inc. ("Clearwater"), is a registered securities
dealer which is owned by Michael F. Price, President of FMA. Through October 31,
1996, the Fund executed certain security transactions with Clearwater. Effective
November 1, 1996, security transactions are no longer executed with Clearwater.
For the period ended December 31, 1996, the Fund paid brokerage commissions
totaling $4,037 to Clearwater.
Under the distribution plans for Class I and Class II shares, the Fund
reimburses FTD quarterly for FTD's costs and expenses in connection with any
activity that is primarily intended to result in a sale of Fund shares, subject
to a maximum of 0.25% and 1.00% per annum of the average daily net assets of
Class I and Class II shares, respectively. Class II shares redeemed within 18
months are subject to a contingent deferred sales charge. There were no
contingent deferred sales charge paid to FTD for the period ended December 31,
1996.
NOTE D -- INVESTMENT TRANSACTIONS
Purchases and proceeds from the sale of investment securities
(excluding short-term investments) for the period ended December 31, 1996
aggregated $305,035,611 and $53,054,797, respectively.
For Federal income tax purposes, the identified cost of investments at
December 31, 1996 was $430,352,372. Net unrealized appreciation for all
securities at December 31, 1996, based on Federal income tax cost, amounted to
$28,471,565 consisting of aggregate gross unrealized appreciation of $31,458,530
and aggregate gross unrealized depreciation of $2,986,965.
NOTE E -- RESTRICTED SECURITIES
A summary of the restricted securities held at December 31, 1996
follows:
<TABLE>
<CAPTION>
ACQUISITION
NAME OF ISSUER DATE VALUE
OPTION
<S> <C> <C>
Cityscape Financial Corp., Options 11/25/96 $2,079,000
====================
TOTAL RESTRICTED SECURITIES: (COST $1,760,000) (0.45% OF NET ASSETS) $2,079,000
====================
NOTE F -- FOREIGN CURRENCY EXCHANGE CONTRACTS
At December 31, 1996, the Fund had various contracts which obligate the Fund
to deliver currencies at specified future dates. Open contracts were as follows:
Net Unrealized
Appreciation/
Contracts to Deliver In Exchange for Settlement Date Value (Depreciation)
--------------------- ----------------- ----------------- ---------------- ----------------
SALES
<S> <C> <C> <C> <C> <C> <C>
ATS 13,000,000 $1,193,044 2/11/97 $1,203,103 $ (10,059)
CHF 11,038,884 8,427,880 3/10/97 8,303,415 124,465
DEM 7,509,263 4,983,475 3/18/97 4,904,617 78,858
DKK 28,421,515 4,929,969 4/24/97 4,854,501 75,468
ESP 219,197,466 1,674,450 2/18/97 1,686,453 (12,003)
FIM 29,600,419 6,681,810 3/3/97 6,460,505 221,305
FRF 253,395,085 49,335,517 2/28/97 49,031,130 304,387
GBP 8,687,454 14,495,599 2/18/97 14,866,934 (371,335)
GBP 9,000,000 14,926,950 3/18/97 15,390,315 (463,365)
GBP 2,380,240 3,778,707 5/16/97 4,063,374 (284,667)
GBP 9,000,000 14,882,400 6/18/97 15,348,969 (466,569)
GBP 8,246,568 13,605,188 8/18/97 14,038,191 (433,003)
ITL 6,099,425,918 4,006,562 1/2/97 4,023,368 (16,806)
ITL 6,099,425,918 3,956,427 7/2/97 3,997,760 (41,333)
NLG 27,233,423 16,269,384 3/17/97 15,850,111 419,273
NLG 4,197,815 2,459,536 6/10/97 2,457,389 2,147
NOK 150,511,892 23,227,144 6/9/97 23,773,588 (546,444)
PTE 975,400,000 6,246,177 1/17/97 6,288,584 (42,407)
SEK 35,286,738 5,368,408 1/21/97 5,178,066 190,342
SEK 31,178,095 4,716,675 2/18/97 4,580,882 135,793
SEK 185,798,461 27,993,227 5/15/97 27,406,608 586,619
SEK 55,552,421 8,416,395 7/21/97 8,219,545 196,850
SEK 50,303,818 7,602,784 8/15/97 7,451,037 151,747
================= ================ ----------------
$249,177,708 $249,378,445 $(200,737)
================= ================ ----------------
PURCHASES
$3,107,592 FIN 14,034,621 3/3/97 $3,063,157 $ (44,435)
1,472,245 GBP 909,374 5/16/97 1,552,417 80,172
3,982,648 ITL 6,099,425,918 1/2/97 4,023,368 40,720
2,874,719 SEK 19,719,998 1/21/97 2,893,764 19,045
==================== ================ ----------------
$ 11,437,204 $11,532,706 95,502
==================== ================ ----------------
$(105,235)
================
</TABLE>
Currency type abbreviations are explained on page XX.
NOTE G -- CAPITAL STOCK
Effective November 1, 1996, the Fund offered three classes of shares: Class Z,
Class I and Class II. All Fund shares outstanding before that date were
designated Class Z shares. All classes of shares have the same rights, except
for their initial sales load, distribution fees, voting rights affecting a
single class and the exchange privilege of each class. At December 31, 1996,
there were 400 million shares authorized ($0.001 par value). Transactions in
capital stock were as follows:
<TABLE>
<CAPTION>
Class Z
-------------------------------------
For the period
July 3, 1996
(commencement of operations)
to December 31, 1996
-------------------------------------
SHARES AMOUNT
<S> <C> <C>
Shares sold 42,171,939 $446,968,711
Shares issued in reinvestment of dividends 229,503 2,586,502
Shares redeemed (2,854,509) (31,212,176)
================== ===============
Net Increase 39,546,933 $418,343,037
================== ===============
Class I
-------------------------------------
For the period
November 1, 1996 to
December 31, 1996
-------------------------------------
SHARES AMOUNT
<S> <C> <C>
Shares sold 813,014 $9,085,283
Shares issued in reinvestment of dividends 2,838 31,814
Shares redeemed (7,579) (84,594)
================== ===============
Net Increase 808,273 $9,032,503
================== ===============
Class II
-------------------------------------
For the period
November 1, 1996 to
December 31, 1996
-------------------------------------
SHARES AMOUNT
<S> <C> <C>
Shares sold 242,959 $2,703,061
Shares issued in reinvestment of dividends 860 9,680
Shares redeemed (1,814) (20,554)
================== ===============
Net Increase 242,005 $2,692,187
================== ===============
</TABLE>
Michael Price, President of the Fund's investment adviser, is the record owner
of 14,024,208 Class Z shares as of December 31, 1996.
<TABLE>
<CAPTION>
MUTUAL EUROPEAN FUND
FINANCIAL HIGHLIGHTS (UNAUDITED)
(Selected data for a share of capital stock outstanding throughout each period)
Class Z Class I Class II
------------------
------------------ ------------------ ------------------
For the period For the period For the period
July 3, 1996 (a) November 1, 1996 November 1, 1996
to December 31, (b) to December (b) to December
1996 31, 1996 31, 1996
------------------ ------------------ ------------------
NET ASSET VALUE,
<S> <C> <C> <C>
Beginning of Period $10.00 $ 10.84 $ 10.84
------------- ------------------ -----------------
INCOME FROM INVESTMENT
OPERATIONS:
Net Investment Income .06 .03 .02
Net Gains or Losses on Securities
(realized and unrealized) 1.40 .58 .58
------------- --------------- ---------------
Total from Investment Operations 1.46 .61 .60
------------- --------------- ---------------
LESS DISTRIBUTIONS:
Dividends (from net investment
income) .05 .05 .04
Distributions (from capital gains) .02 .02 .02
------------- --------------- ---------------
Total Distributions .07 .07 .06
------------- --------------- ---------------
NET ASSET VALUE,
End of Year $ 11.39 $ 11.38 $ 11.38
============= =============== ===============
TOTAL RETURN 14.61% + 5.61% ++ 5.52% +++
============= =============== ===============
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Year (millions) $ 450 $ 9 $ 3
Ratio of Expenses to Average Net Assets 1.14% * 1.38% * 2.01% *
Ratio of Expenses, net of reimbursement, to average 1.09% * 1.32% * 1.94% *
net assets
Ratio of Net Investment Income to
Average Net Assets 1.84% * 1.44% * .79% *
Portfolio Turnover Rate 26.76% 26.76% 26.76%
Average Commission Per Share $.023 $.023 $.023
+NOT ANNUALIZED FOR PERIODS OF LESS THAN ONE YEAR.
++TOTAL RETURN DOES NOT REFLECT SALES COMMISSIONS. NOT ANNUALIZED FOR PERIODS OF LESS THAN ONE YEAR.
+++TOTAL RETURN DOES NOT REFLECT SALES COMMISSIONS OR THE CONTINGENT DEFERRED
SALES CHARGE. NOT ANNUALIZED FOR PERIODS OF LESS THAN ONE YEAR.
*ANNUALIZED.
(A)COMMENCEMENT OF OPERATIONS.
(B)COMMENCEMENT OF OFFERING OF SALES.
</TABLE>
FRANKLIN MUTUAL SHARES FUND INC.
File Nos.
33-18516
811-5387
FORM N-1A
PART C
OTHER INFORMATION
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements
(1) Unaudited Financial Statements for European Fund Filed in
Part B.
(i) Schedule of Investments - December 31, 1996
(ii) Statements of Assets and Liabilities - December 31, 1996
(iii)Statement of Operations - December 31, 1996
(iv) Statement of Changes in Net Assets - Period ended
December 31, 1996
(v) Notes to Financial Statements
(2) Unaudited Financial Statements incorporated herein by reference to
the Mutual Shares Fund's Semi-Annual Report to Shareholders dated
June 30, 1996, as filed with the SEC electronically on Form Type
N-30D on August 30, 1996
(i) Schedule of Investments - June 30, 1996
(ii) Statement of Assets and Liabilities - June 30, 1996
(iii)Statement of Operations - June 30, 1996
(iv) Statement of Changes in Net Assets - for the six months ended
June 30, 1996 and the year ended December 31, 1995
(v) Notes to Financial Statements
(3) Unaudited Financial Statements incorporated herein by reference to
the Mutual Qualified Fund's Semi-Annual Report to Shareholders dated
June 30, 1996, as filed with the SEC electronically on Form Type
N-30D on August 30, 1996
(i) Schedule of Investments - June 30, 1996
(ii) Statement of Assets and Liabilities - June 30, 1996
(iii)Statement of Operations - June 30, 1996
(iv) Statement of Changes in Net Assets - for the six months ended
June 30, 1996 and the year ended December 31, 1995
(v) Notes to Financial Statements
(4) Unaudited Financial Statements incorporated herein by reference to
the Mutual Discovery Fund's Semi-Annual Report to Shareholders dated
June 30, 1996, as filed with the SEC electronically on Form Type
N-30D on August 30, 1996
(i) Schedule of Investments - June 30, 1996
(ii) Statement of Assets and Liabilities - June 30, 1996
(iii)Statement of Operations - June 30, 1996
(iv) Statement of Changes in Net Assets - for the six months ended
June 30, 1996 and the Year ended December 31, 1995
(v) Notes to Financial Statements
(5) Unaudited Financial Statements incorporated herein by reference to
the Mutual Beacon Fund's Semi-Annual Report to Shareholders dated
June 30, 1996, as filed with the SEC electronically on Form Type
N-30D on August 30, 1996
(i) Schedule of Investments - June 30, 1996
(ii) Statement of Assets and Liabilities - June 30, 1996
(iii)Statement of Operations - June 30, 1996
(iv) Statement of Changes in Net Assets - for the six months ended
June 30, 1996 and the Year ended December 31, 1995
(v) Notes to Financial Statements
(6) Audited Financial Statements incorporated herein by reference to the
Mutual Shares Fund's Annual Report to Shareholders dated December 31,
1995, as filed with the SEC electronically on Form Type N-30D on
February 29, 1996
(i) Schedule of Investments - December 31, 1995
(ii) Statement of Assets and Liabilities - December 31, 1995
(iii)Statements of Operations - for the year ended December
31, 1995
(iv) Statements of Changes in Net Assets - for the years ended
December 31, 1995 and the year ended December 31, 1994
(v) Notes to Financial Statements
(vi) Report of Independent Auditors - February 9, 1996
(7) Audited Financial Statements incorporated herein by reference to the
Mutual Qualified Fund's Annual Report to Shareholders dated December
31, 1995 as filed with the SEC electronically on Form Type N-30D on
February 29, 1996
(i) Schedule of Investments - December 31, 1995
(ii) Statement of Assets and Liabilities - December 31, 1995
(iii)Statement of Operations - for the year ended December
31, 1995
(iv) Statements of Changes in Net Assets - for the years ended
December 31, 1995 and December 31, 1994
(v) Notes to Financial Statements
(vi) Report of Independent Auditors - February 9, 1996
(8) Audited Financial Statements incorporated herein by reference to the
Mutual Discovery Fund's Annual Report to Shareholders dated December
31, 1995 as filed with the SEC electronically on Form Type N-30D on
February 29, 1996
(i) Schedule of Investments - December 31, 1995
(ii) Statement of Assets and Liabilities - December 31, 1995
(iii)Statement of Operations - for the year ended December
31, 1995
(iv) Statements of Changes in Net Assets - for the years ended
December 31, 1995 and December 31, 1994
(v) Notes to Financial Statements
(vi) Report of Independent Auditors - February 9, 1996
(9) Audited Financial Statements incorporated herein by reference to the
Mutual Beacon Fund's Annual Report to Shareholders dated December 31,
1995 as filed with the SEC electronically on Form Type N-30D on
February 29, 1996
(i) Schedule of Investments - December 31, 1995
(ii) Statement of Assets and Liabilities - December 31, 1995
(iii)Statement of Operations - for the year ended December
31, 1995
(iv) Statements of Changes in Net Assets - for the Years ended
December 31, 1995 and December 31, 1994
(v) Notes to Financial Statements
(vi) Report of Independent Auditors - February 9, 1996
b) Exhibits:
(1) copies of the charter as now in effect;
(i) *Form of Amendment to Articles of Incorporation
(ii) *Articles Supplementary Creating Mutual Discovery Fund
(iii)*Articles Supplementary Increasing Authorized Shares
(iv) *Articles Supplementary Increasing Authorized Shares and
Creating Mutual European Fund
(2) copies of the existing By-Laws or instruments corresponding thereto;
(i) *By-Laws
(3) copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant, including
copies of all constituent instruments, defining the rights of the holders
of such securities, and copies of each security being registered;
Not Applicable
(5) copies of all investment advisory contracts relating to
the management of the assets of the Registrant;
(i) Investment Advisory Agreement between Franklin Mutual
Advisers, Inc., and the Registrant on behalf of Mutual
Shares Fund dated November 1, 1996
(ii) Investment Advisory Agreement between Franklin Mutual
Advisers, Inc., and the Registrant on behalf of Mutual
Qualified Fund dated November 1, 1996
(iii) Investment Advisory Agreement between Franklin Mutual
Advisers, Inc., and the Registrant on behalf of Mutual
Beacon Fund dated November 1, 1996
(iv) Investment Advisory Agreement between Franklin Mutual
Advisers, Inc., and the Registrant on behalf of Mutual
Discovery Fund dated November 1, 1996
(v) Investment Advisory Agreement between Franklin Mutual
Advisers, Inc., and the Registrant on behalf of Mutual
European Fund dated November 1, 1996
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of all
agreements between principal underwriters and dealers;
(i) Distribution Agreement between Registrant and
Franklin/Templeton Distributors, Inc. on behalf of Mutual
Shares Fund dated November 1, 1996
(ii) Distribution Agreement Agreement between the Registrant and
Franklin/Templeton Distributors, Inc. on behalf of Mutual
Beacon Fund dated November 1, 1996
(iii)Distribution Agreement Agreement between the Registrant and
Franklin/Templeton Distributors, Inc. on behalf of Mutual
Qualified Fund dated November 1, 1996
(iv) Distribution Agreement Agreement between the Registrant and
Franklin/Templeton Distributors, Inc. on behalf of Mutual
Discovery Fund dated November 1, 1996
(v) Distribution Agreement Agreement between the Registrant and
Franklin/Templeton Distributors, Inc. on behalf of Mutual
European Fund dated November 1, 1996
(vi) Form of Dealer Agreement between the Registrant and
Franklin/Templeton Distributors, Inc., incorporated by
reference to:
Registrant: Franklin Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to the Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(7) copies of all bonus, profit sharing, pension or other similar contracts or
arrangements wholly or partly for the benefit of directors or officers of
the Registrant in their capacity as such; any such plan that is not set
forth in a formal document, furnish a reasonably detailed description
thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under Section
17(f) of the 1940 Act, with respect to securities and similar investments
of the Registrant, including the schedule of remuneration;
(i) *Custodian Agreement between the Registrant and State Street
Bank
(9) copies of all other material contracts not made in the ordinary course of
business which are to be performed in whole or in part at or after the
date of filing the Registration Statement;
Not Applicable
(10) an opinion and consent of counsel as to the legality of the securities
being registered, indicating whether they will when sold be legally
issued, fully paid and nonassessable;
(i) *Form of Opinion and Consent of Skadden, Arps, Slate, Meagher
& Flom as to Tax Matters
(ii) *Opinion and Consent of Miles and Stockbridge as to legality
(iii)*Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
as to Tax Matters
(11) copies of any other opinions, appraisals or rulings and consents to the
use thereof relied on in the preparation of this Registration Statement
and required by Section 7 of the 1933 Act;
(i) Consent of Ernst & Young LLP
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, adviser, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their purchases
were made for investment purposes without any present intention of
redeeming or reselling;
(i) *Form of Subscription by Sole Shareholder
(14) copies of the model plan used in the establishment of any retirement plan
in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model plan.
Such form(s) should disclose the costs and fees charged in connection
therewith;
(i) Copy of Model Retirement Plan incorporated by reference to:
Registrant: Franklin High Income Trust
Filing: Post-Effective Amendment No. 26 to
Registration Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(ii) *Model 403 (b) (7) Plan
(iii)*Model SEP-IRA Plan
(iv) *Model Fund Sponsored Plan
(v) *Model IRA Plan
(vi) *Model IRA Plan Amendment
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-1 under
the 1940 Act, which describes all material aspects of the financing of
distribution of Registrant's shares, and any agreements with any person
relating to implementation of such plan.
(i) Distribution Plan pursuant to Rule 12b-1 between the Registrant on
behalf of Mutual Shares Fund - Class I dated November 1, 1996
(ii) Distribution Plan pursuant to Rule 12b-1 between the Registrant on
behalf of Mutual Qualified Fund - Class I dated November 1, 1996
(iii)Distribution Plan pursuant to Rule 12b-1 between the Registrant on
behalf of Mutual Beacon Fund - Class I dated November 1, 1996
(iv) Distribution Plan pursuant to Rule 12b-1 between the Registrant on
behalf of Mutual Discovery Fund - Class I dated November 1, 1996
(v) Distribution Plan pursuant to Rule 12b-1 between the Registrant on
behalf of Mutual European Fund - Class I dated November 1, 1996
(vi) Distribution Plan pursuant to Rule 12b-1 between the Registrant dated
November 1, 1996 on behalf of:
Mutual Shares Fund - Class II
Mutual Qualified Fund - Class II
Mutual Beacon Fund - Class II
Mutual Discovery Fund - Class II
Mutual European Fund - Class II
(16) Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 (which need not be audited).
(i) Schedule for Computation of Performance quotations
incorporated by reference to:
Filing: Post-Effective Amendment No. 20 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: August 30, 1996
(18) Copies of any plan entered into by Registrant pursuant to Rule 18f-3 under
the 1940 Act.
(i) Form of Multiple Class Plan incorporated by reference to:
Filing: Post-Effective Amendment No. 20 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: August 30, 1996
* Previously Filed
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of January 30, 1997, the number of record holders of each series of the
Registrant was as follows:
NUMBER OF RECORD HOLDERS
CLASS Z CLASS I CLASS II
Mutual Shares Fund 145,635 4,586 2,505
Mutual Qualified Fund 174,010 2,854 1,531
Mutual Discovery Fund 110,248 5,255 3,242
Mutual Beacon Fund 122,993 4,722 2,362
Mutual European Fund 17,834 921 479
ITEM 27 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court or appropriate
jurisdiction the question whether such indemnification is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
a) Franklin Mutual Advisers, Inc.
See "Investment Advisers" in the Class Z Statement of Additional Information and
"Management of the Fund" in the Class Z Prospectus.
ITEM 29 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts
as principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund, Inc.
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Advantaged High Yield Securities Fund
Franklin Tax-Advantaged International Bond Fund
Franklin Tax-Advantaged U.S. Government Securities Fund
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Franklin Templeton Japan Fund
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
b) The information required by this item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889)
c) Not applicable. Registrant's principal underwriter is an affiliated
person of an affiliated person of the Registrant.
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules thereunder will be
maintained at the offices of Mutual Series Fund Inc., located at 51 John F
Kennedy Parkway, Short Hills, New Jersey 07078, or at the State Street Bank and
Trust Company, 1776 Heritage Drive, John Adams Building #2, North Quincy,
Massachusetts 02171 or PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware
19809-3710 or at Franklin/Templeton Investor Services, Inc., 777 Mariners Island
Blvd., San Mateo, California 94404.
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32 UNDERTAKINGS
(a) The Registrant hereby undertakes to promptly call a meeting of shareholders
for the purpose of voting upon the question of removal of any director or
directors when requested in writing to do so by the record holders of not less
than 10 percent of the Registrant's outstanding shares to assist its
shareholders in accordance with the requirements of Section 16(c) of the
Investment Company Act of 1940.
(b) The Registrant hereby undertakes to comply with the information requirement
in Item 5A of the Form N-1A by including the required information in the Fund's
Annual Report to Shareholders and to furnish each person to whom a prospectus is
delivered a copy of the Annual Report upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Mateo and the State of California, on the 31st day of January, 1996.
FRANKLIN MUTUAL SERIES FUND INC.
(Registrant)
By: /S/MICHAEL F. PRICE*
Michael F. Price
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
/S/MICHAEL F. PRICE* President and Chairman of the
Michael F. Price Board (Chief Executive Officer)
Dated: January 31, 1997
/S/EDWARD J. BRADLEY* Treasurer and Chief Financial and
Edward J. Bradley Accounting Officer
Dated: December 31, 1996
/S/EDWARD I. ALTMAN* Director
Edward I. Altman Dated: January 31, 1997
/S/RICHARD L. CHASSE, M.D.* Director
Richard L. Chasse, M.D. Dated: January 31, 1997
/S/ANN TORRE GRANT* Director
Ann Torre Grant Dated: January 31, 1997
/S/PETER A. LANGERMAN* Director
Peter A. Langerman Dated: January 31, 1997
/S/BRUCE A. MACPHERSON* Director
Bruce A. MacPherson Dated: January 31, 1997
/S/BARRY F. SCHWARTZ* Director
Barry F. Schwartz Dated: January 31, 1997
/S/VAUGHN R. STURTEVANT, M.D.* Director
Vaughn R. Sturtevant, M.D. Dated: January 31, 1997
/S/ROBERT E. WADE* Director
Robert E. Wade Dated: January 31, 1997
*By /s/Elizabeth N. Cohernour
Elizabeth N. Cohernour, Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
FRANKLIN MUTUAL SERIES FUND INC.
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1(i) Form of Amendment to Articles of *
Incorporation
EX-99.B1(ii) Articles Supplementary Creating Mutual *
Discovery Fund
EX-99.B1(iii) Articles Supplementary Increasing *
Authorized Shares
EX-99.B2(i) By-Laws *
EX-99.B5(i) Investment Advisory Agreement between Attached
Franklin Mutual Advisers, Inc., and
the Registrant on behalf of Mutual
Shares Series Fund
EX-99.B5(ii) Investment Advisory Agreement between Attached
Franklin Mutual Advisers, Inc., and
the Registrant on behalf of Mutual
Qualified Fund
EX-99.B5(iii) Investment Advisory Agreement between Attached
Franklin Mutual Advisers, Inc., and
the Registrant on behalf of Mutual
Beacon Fund
EX-99.B5(iv) Investment Advisory Agreement between Attached
Franklin Mutual Advisers, Inc., and
the Registrant on behalf of Mutual
Discovery Fund
EX-99.B5(v) Investment Advisory Agreement between Attached
Franklin Mutual Advisers, Inc., and
the Registrant on behalf of Mutual
European Fund
EX-99.6(i) Form of Distribution Agreement between **
Registrant and Franklin/Templeton
Distributors, Inc.
EX-99.6(ii) Form of Dealer Agreement between the **
Registrant and Franklin/Templeton
Distributors, Inc.
EX-99.B8(i) Custodian Agreement between the *
Registrant and State Street Bank
EX-99.B10(i) Form of Opinion and Consent of *
Skadden, Arps, Slate, Meagher & Flom
as to Tax Matters
EX-99.B10(ii) Opinion and Consent of Miles and *
Stockbridge as to legality
EX-99.B10(iii) Opinion and Consent of Skadden, Arps, *
Slate, Meagher & Flom as to Tax Matters
EX-99.B11(i) Consent of Ernst & Young L.L.P. Attached
EX-99.B13(i) Form of Letter of Understanding *
regarding Mutual Shares Fund Inc.
EX-99.B14(i) Copy of Model Retirement Plan **
EX-99.B14(ii) Model 403(b)(7) Plan *
EX-99.B14(iii) Model SEP-IRA Plan *
EX-99.B14(iv) Model Fund Sponsored Plan *
EX-99.B14(v) Model IRA Plan *
EX-99.B14(vi) Model IRA Plan Amendment *
EX-99.B15(i) Distribution Plan pursuant to Rule Attached
12b-1 between the Registrant on
behalf of Mutual Shares
Fund - Class I
EX-99.B15(ii) Distribution Plan pursuant to Rule Attached
12b-1 between the Registrant on
behalf of Mutual Qualified
Fund - Class I
EX-99.B15(iii) Distribution Plan pursuant to Rule Attached
12b-1 between the Registrant on
behalf of Mutual Beacon
Fund - Class I
EX-99.B15(iv) Distribution Plan pursuant to Rule Attached
12b-1 between the Registrant on
behalf of Mutual Discovery Fund - Class I
EX-99.B15(v) Distribution Plan pursuant to Rule Attached
12b-1 between the Registrant on
behalf of Mutual European
Fund - Class I
EX-99.B15(vi) Distribution Plan pursuant to Rule Attached
12b-1 between the Registrant on
behalf of All Series - Class II
EX-99.B16(i) Schedule for Computation of **
Performance Quotations
EX-99.B18(i) Form of Multiple Class Plan **
* Previously filed
**Incorporated by reference
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of the 1st day of November, 1996, between MUTUAL
SHARES FUND, a series (composed of one or more classes) of FRANKLIN MUTUAL
SERIES FUND INC., a corporation organized under the laws of the State of
Maryland (hereinafter referred to as the "Fund"), and Franklin Mutual Advisers,
Inc. (hereinafter referred to as the "Investment Adviser").
In consideration of the mutual agreements herein made, the Fund and
the Investment Adviser understand and agree as follows:
(1) The Investment Adviser agrees, during the life of this Agreement,
to manage the investment and reinvestment of the Fund's assets consistent with
the provisions of the Fund's Charter, By-laws and the investment policies
adopted and approved by the Fund's Board of Directors and shareholders pursuant
to the Investment Company Act of 1940 (the "1940 Act"). In pursuance of the
foregoing, the Investment Adviser shall have sole and exclusive discretion in
all determinations with respect to the purchasing and selling of securities and
other assets for the Fund and in voting and exercising all other rights
appertaining to such securities and other assets on behalf of the Fund, and
shall take all such steps as may be necessary to implement those determinations.
(2) The Investment Adviser is not required to furnish any personnel,
overhead items or facilities for the Fund, including trading desk facilities or
daily pricing of the Fund's portfolio, but personnel employed by the Investment
Adviser may act as officers and/or directors.
(3) The Investment Adviser shall be responsible for selecting members
of securities exchanges, brokers and dealers (such members, brokers and dealers
being hereinafter referred to as "brokers") for the execution of the Fund's
portfolio transactions consistent with the Fund's brokerage policy and, when
applicable, the negotiation of commissions in connection therewith. All
decisions and placements shall be made in accordance with the following
principles:
(A) Purchase and sale orders will usually be placed with brokers
which are selected by the Investment Adviser as able to achieve "best
execution" of such orders. "Best execution" shall mean prompt and
reliable execution at the most favorable securities price, taking
into account the other provisions hereinafter set forth. The
determination of what may constitute best execution and price in the
execution of a securities transaction by a broker involves a number
of considerations, including, without limitation, the overall direct
net economic result to the Fund (involving both price paid or
received and any commissions and other costs paid), the efficiency
with which the transaction is executed, the ability to effect the
transaction at all where a large block is involved, availability of
the broker to stand ready to execute possibly difficult transactions
in the future, and the financial strength and stability of the
broker. Such considerations are judgmental and are weighed by the
Investment Adviser in determining the overall reasonableness of
brokerage commissions.
(B) In selecting brokers for portfolio transactions, the
Investment Adviser shall take into account its past experience as to
brokers qualified to achieve "best execution", including brokers who
specialize in any foreign securities held by the Fund.
(C) The Investment Adviser is authorized to allocate brokerage
business to brokers who have provided brokerage and research
services, as such services are defined in Section 28(e) of the
Securities Exchange Act of 1934 (the "1934 Act") for the Fund and/or
other accounts, if any, for which the Investment Adviser exercises
investment discretion (as defined in Section 3(a)(35) of the 1934
Act) and, as to transactions for which fixed minimum commission rates
are not applicable, to cause the Fund to pay a commission for
effecting a securities transaction in excess of the amount another
broker would have charged for effecting that transaction, if the
Investment Adviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage
and research services provided by such broker, viewed in terms of
either that particular transaction or the Investment Adviser's
overall responsibilities with respect to the Fund and the other
accounts, if any, as to which it exercises investment discretion. In
reaching such determination, the Investment Adviser will not be
required to place or attempt to place a specific dollar value on the
research or execution services of a broker or on the portion of any
commission reflecting either of said services. In demonstrating that
such determinations were made in good faith, the Investment Adviser
shall be prepared to show that all commissions were allocated and
paid for purposes contemplated by the Fund's brokerage policy; that
the research services provide lawful and appropriate assistance to
the Investment Adviser in the performance of its investment
decision-making responsibilities, and that the commissions were
within a reasonable range. Whether commissions were within a
reasonable range shall be based on any available information as to
the level of commissions known to be charged by other brokers on
comparable transactions, but there shall be taken into account the
Fund's policies that (i) obtaining a low commission is deemed
secondary to obtaining a favorable securities price, since it is
recognized that usually it is more beneficial to the Fund to obtain a
favorable price than to pay the lowest commission; and (ii) the
quality, comprehensiveness, and frequency of research studies which
are provided for the Investment Adviser are useful to the Investment
Adviser in performing its advisory services under its Agreement.
Research services provided by brokers to the Investment Adviser are
considered to be in addition to, and not in lieu of, services
required to be performed by the Investment Adviser under this
Agreement. Research furnished by brokers through which the Fund
effects securities transactions may be used by the Investment Adviser
for any of its accounts, and not all such research may be used by the
Investment Adviser for the Fund. When execution of portfolio
transactions is allocated to brokers trading on exchanges with fixed
brokerage commission rates, account may be taken of various services
provided by the broker.
(D) Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be executed
with primary market makers acting as principal, except where, in the
judgment of the Investment Adviser, better prices and execution may
be obtained on a commission basis or from other sources.
(E) Sales of Fund Shares (which shall be deemed to include also
Shares of other registered investment companies which have either the
same adviser or an investment adviser affiliated with the Fund's
Investment Adviser) by a broker are one factor among others to be
taken into account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions, purchases in
underwritings or tenders in response to tender offers) for the
account of the Fund to that broker; provided that the broker shall
furnish "best execution," as defined in subparagraph A above, and
that such allocation shall be within the scope of the Fund's policies
as stated above; provided further, that in every allocation made to a
broker in which the sale of Fund Shares is taken into account, there
shall be no increase in the amount of the commissions or other
compensation paid to such broker beyond a reasonable commission or
other compensation determined, as set forth in subparagraph C above,
on the basis of best execution alone or best execution plus research
services, without taking account of or placing any value upon such
sale of Fund's Shares.
(4) The Fund agrees to pay to the Investment Adviser as compensation
for such services a fee for its services based upon a percentage of the Fund's
average daily net assets, payable at the end of each calendar month. This fee
shall be calculated daily at the following annual rate: .60% for Mutual Shares
Fund.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Adviser) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Adviser shall reimburse the Fund for such excess in the manner and to the extent
required by applicable State law. The term "total expenses," as used in this
paragraph, does not include interest, taxes, litigation expenses, distribution
expenses, brokerage commissions or other costs of acquiring or disposing of any
of the Fund's portfolio securities or any costs or expenses incurred or arising
other than in the ordinary and necessary course of the Fund's business. When the
accrued amount of such expenses exceeds this limit, the monthly payment of the
Investment Adviser's fee will be reduced by the amount of such excess, subject
to adjustment month by month during the balance of the Fund's fiscal year if
accrued expenses thereafter fall below the limit.
The Investment Adviser may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Investment Adviser shall be contractually
bound hereunder by the terms of any publicly announced waiver of its fee or any
limitation of the Fund's expenses, as if such waiver or limitation were fully
set forth herein.
(5) This Agreement shall become effective on November 1, 1996 and
shall continue in effect through June 30, 1998. If not sooner terminated, this
Agreement shall continue in effect for successive periods of 12 months each
thereafter, provided that each such continuance shall be specifically approved
annually by the vote of a majority of the Fund's Board of Directors who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of any such party, cast in person at a meeting called for the purpose of voting
on such approval and either the vote of (a) a majority of the outstanding voting
securities of the Fund, as defined in the 1940 Act, or (b) a majority of the
Fund's Board of Directors as a whole.
(6) Notwithstanding the foregoing, this Agreement may be terminated
by either party at any time, without the payment of any penalty, on sixty (60)
days' written notice to the other party, provided that termination by the Fund
is approved by vote of a majority of the Fund's Board of Directors in office at
the time or by vote of a majority of the outstanding voting securities of the
Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately in
the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the Investment
Adviser no longer acts as Investment Adviser to the Fund, the Investment Adviser
reserves the right to withdraw from the Fund the use of the name "Franklin",
"Templeton" or any name misleadingly implying a continuing relationship between
the Fund and the Investment Adviser or any of its affiliates.
(9) Except as may otherwise be provided by the 1940 Act, neither the
Investment Adviser nor its officers, directors, employees or agents shall be
subject to any liability for any error of judgment, mistake of law, or any loss
arising out of any investment or other act or omission in the performance by the
Investment Adviser of its duties under the Agreement or for any loss or damage
resulting from the imposition by any government of exchange control restrictions
which might affect the liquidity of the Fund's assets, or from acts or omissions
of custodians, or securities depositories, or from any war or political act of
any foreign government to which such assets might be exposed, or for failure, on
the part of the custodian or otherwise, timely to collect payments, except for
any liability, loss or damage resulting from willful misfeasance, bad faith or
gross negligence on the Investment Adviser's part or by reason of reckless
disregard of the Investment Adviser's duties under this Agreement. It is hereby
understood and acknowledged by the Fund that the value of the investments made
for the Fund may increase as well as decrease and are not guaranteed by the
Investment Adviser. It is further understood and acknowledged by the Fund that
investment decisions made on behalf of the Fund by the Investment Adviser are
subject to a variety of factors which may affect the values and income generated
by the Fund's portfolio securities, including general economic conditions,
market factors and currency exchange rates, and that investment decisions made
by the Investment Adviser will not always be profitable or prove to have been
correct.
(10) a. The Fund hereby agrees to indemnify the Investment
Adviser and each of the Investment Adviser's directors,
officers, employees, and agents (including any individual who
serves at the Investment Adviser's request as director, officer,
partner, trustee or the like of another corporation) (each such
person being an "Indemnitee") against any liabilities and
expenses, including amounts paid in satisfaction of judgments,
in compromise or as fines and penalties, and counsel fees (all
as provided in accordance with applicable corporate law)
reasonably incurred by such Indemnitee in connection with the
defense or disposition of any action, suit or other proceeding,
whether civil or criminal, before any court or administrative or
investigative body in which he may be or may have been involved
as a party or otherwise or with which he may be or may have been
threatened, while acting in any capacity set forth above in this
Section 10 or thereafter by reason of his having acted in any
such capacity, except with respect to any matter as to which he
shall have been adjudicated not to have acted in good faith in
the reasonable belief that his action was in the best interest
of the Fund and furthermore, in the case of any criminal
proceeding, so long as he had no reasonable cause to believe
that the conduct was unlawful, provided, however, that (1) no
Indemnitee shall be indemnified hereunder against any expense of
such Indemnitee arising by reason of (i) willful misfeasance,
(ii) bad faith, (iii) gross negligence or (iv) reckless
disregard of the duties involved in the conduct of his position
(the conduct referred to in such clauses (i) through (iv) being
sometimes referred to herein as "disabling conduct"), (2) as to
any matter disposed of by settlement or a compromise payment by
such Indemnitee, pursuant to a consent decree or otherwise, no
indemnification either for said payment or for any other
expenses shall be provided unless there has been a determination
that such settlement or compromise is in the best interests of
the Fund and that such Indemnitee appears to have acted in good
faith in the reasonable belief that his action was in the best
interests of the Fund and did not involve disabling conduct by
such Indemnitee and (3) with respect to any action, suit or
other proceeding voluntarily prosecuted by any Indemnitee as
plaintiff, indemnification shall be mandatory only if the
prosecution of such action, suit or other proceeding by such
Indemnitee was authorized by a majority of the full Board of the
Fund.
b. The Fund shall make advance payments in connection
with the expenses of defending any action with respect to which
indemnification might be sought hereunder in the Fund receives a
written affirmation of the Indemnitee's good faith belief that
the standard of conduct necessary for indemnification has been
met and a written undertaking to reimburse the Fund unless it is
subsequently determined that he is entitled to such
indemnification and if the directors of the Fund determine that
the facts then known to them would not preclude indemnification.
In addition, at least one of the following conditions must be
met: (A) the Indemnitee shall provide a security for his
undertaking, (B) the Fund shall be insured against losses
arising by reason of any lawful advance, or (C) a majority of a
quorum consisting of directors of the Fund who are neither
"interested persons" of the Fund (as defined in Section 2(a)(19)
of the Act) nor parties to the proceeding ("Disinterested
Non-party Directors") or an independent legal counsel in a
written opinion, shall determine, based on a review of readily
available facts (as opposed to a full trial-type inquiry), that
there is reason to believe that the Indemnitee ultimately will
be found entitled to indemnification.
c. All determinations with respect to indemnification
hereunder shall be made (1) by a final decision on the merits by
a court or other body before whom the proceeding was brought
that such Indemnitees is not liable by reason of disabling
conduct or, (2) in the absence of such a decision, by (i) a
majority vote of a quorum of the Disinterested Directors of the
Fund, or (ii) if such a quorum is not obtainable or even, if
obtainable, if a majority vote of such quorum so directs,
independent legal counsel in a written opinion. All
determinations that advance payments in connection with the
expense of defending any proceeding shall be authorized shall be
made in accordance with the immediately preceding clause (2)
above.
The rights accruing to any Indemnitee under these provisions shall
not exclude any other right to which he may be lawfully entitled.
(11) It is understood that the services of the Investment Adviser are
not deemed to be exclusive, and nothing in this Agreement shall prevent the
Investment Adviser, or any affiliate thereof, from providing similar services to
other investment companies and other clients, including clients which may invest
in the same types of securities as the Fund, or, in providing such services,
from using information furnished by others. The Fund acknowledges that the
Investment Adviser renders services to others, that officers and employees of
the investment adviser invest for their own accounts, and the Fund is not
entitled to, and does not expect, to obtain the benefits of any investment
opportunities developed by the Investment Adviser such officers or employees in
which the Investment Adviser acting in good faith, does not cause the Fund to
invest.
(12) This Agreement shall be construed in accordance with the laws of
the State of Maryland, provided that nothing herein shall be construed as being
inconsistent with applicable Federal and state securities laws and any rules,
regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the Investment
Adviser an agent of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers and their respective corporate
seals to be hereunto duly affixed and attested.
MUTUAL SHARES FUND, a series of
FRANKLIN MUTUAL SERIES FUND INC.
By: /S/E.N. COHERNOUR
Title: General Counsel/Secretary
FRANKLIN MUTUAL ADVISERS, INC.
By: /S/MICHAEL F. PRICE
Title: President
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of the 1st day of November, 1996, between MUTUAL
QUALIFIED FUND, a series (composed of one or more classes) of FRANKLIN MUTUAL
SERIES FUND INC., a corporation organized under the laws of the State of
Maryland (hereinafter referred to as the "Fund"), and Franklin Mutual Advisers,
Inc. (hereinafter referred to as the "Investment Adviser").
In consideration of the mutual agreements herein made, the Fund and
the Investment Adviser understand and agree as follows:
(1) The Investment Adviser agrees, during the life of this Agreement,
to manage the investment and reinvestment of the Fund's assets consistent with
the provisions of the Fund's Charter, By-laws and the investment policies
adopted and approved by the Fund's Board of Directors and shareholders pursuant
to the Investment Company Act of 1940 (the "1940 Act"). In pursuance of the
foregoing, the Investment Adviser shall have sole and exclusive discretion in
all determinations with respect to the purchasing and selling of securities and
other assets for the Fund and in voting and exercising all other rights
appertaining to such securities and other assets on behalf of the Fund, and
shall take all such steps as may be necessary to implement those determinations.
(2) The Investment Adviser is not required to furnish any personnel,
overhead items or facilities for the Fund, including trading desk facilities or
daily pricing of the Fund's portfolio, but personnel employed by the Investment
Adviser may act as officers and/or directors.
(3) The Investment Adviser shall be responsible for selecting members
of securities exchanges, brokers and dealers (such members, brokers and dealers
being hereinafter referred to as "brokers") for the execution of the Fund's
portfolio transactions consistent with the Fund's brokerage policy and, when
applicable, the negotiation of commissions in connection therewith. All
decisions and placements shall be made in accordance with the following
principles:
(A) Purchase and sale orders will usually be placed with brokers
which are selected by the Investment Adviser as able to achieve "best
execution" of such orders. "Best execution" shall mean prompt and
reliable execution at the most favorable securities price, taking
into account the other provisions hereinafter set forth. The
determination of what may constitute best execution and price in the
execution of a securities transaction by a broker involves a number
of considerations, including, without limitation, the overall direct
net economic result to the Fund (involving both price paid or
received and any commissions and other costs paid), the efficiency
with which the transaction is executed, the ability to effect the
transaction at all where a large block is involved, availability of
the broker to stand ready to execute possibly difficult transactions
in the future, and the financial strength and stability of the
broker. Such considerations are judgmental and are weighed by the
Investment Adviser in determining the overall reasonableness of
brokerage commissions.
(B) In selecting brokers for portfolio transactions, the
Investment Adviser shall take into account its past experience as to
brokers qualified to achieve "best execution", including brokers who
specialize in any foreign securities held by the Fund.
(C) The Investment Adviser is authorized to allocate brokerage
business to brokers who have provided brokerage and research
services, as such services are defined in Section 28(e) of the
Securities Exchange Act of 1934 (the "1934 Act") for the Fund and/or
other accounts, if any, for which the Investment Adviser exercises
investment discretion (as defined in Section 3(a)(35) of the 1934
Act) and, as to transactions for which fixed minimum commission rates
are not applicable, to cause the Fund to pay a commission for
effecting a securities transaction in excess of the amount another
broker would have charged for effecting that transaction, if the
Investment Adviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage
and research services provided by such broker, viewed in terms of
either that particular transaction or the Investment Adviser's
overall responsibilities with respect to the Fund and the other
accounts, if any, as to which it exercises investment discretion. In
reaching such determination, the Investment Adviser will not be
required to place or attempt to place a specific dollar value on the
research or execution services of a broker or on the portion of any
commission reflecting either of said services. In demonstrating that
such determinations were made in good faith, the Investment Adviser
shall be prepared to show that all commissions were allocated and
paid for purposes contemplated by the Fund's brokerage policy; that
the research services provide lawful and appropriate assistance to
the Investment Adviser in the performance of its investment
decision-making responsibilities, and that the commissions were
within a reasonable range. Whether commissions were within a
reasonable range shall be based on any available information as to
the level of commissions known to be charged by other brokers on
comparable transactions, but there shall be taken into account the
Fund's policies that (i) obtaining a low commission is deemed
secondary to obtaining a favorable securities price, since it is
recognized that usually it is more beneficial to the Fund to obtain a
favorable price than to pay the lowest commission; and (ii) the
quality, comprehensiveness, and frequency of research studies which
are provided for the Investment Adviser are useful to the Investment
Adviser in performing its advisory services under its Agreement.
Research services provided by brokers to the Investment Adviser are
considered to be in addition to, and not in lieu of, services
required to be performed by the Investment Adviser under this
Agreement. Research furnished by brokers through which the Fund
effects securities transactions may be used by the Investment Adviser
for any of its accounts, and not all such research may be used by the
Investment Adviser for the Fund. When execution of portfolio
transactions is allocated to brokers trading on exchanges with fixed
brokerage commission rates, account may be taken of various services
provided by the broker.
(D) Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be executed
with primary market makers acting as principal, except where, in the
judgment of the Investment Adviser, better prices and execution may
be obtained on a commission basis or from other sources.
(E) Sales of Fund Shares (which shall be deemed to include also
Shares of other registered investment companies which have either the
same adviser or an investment adviser affiliated with the Fund's
Investment Adviser) by a broker are one factor among others to be
taken into account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions, purchases in
underwritings or tenders in response to tender offers) for the
account of the Fund to that broker; provided that the broker shall
furnish "best execution," as defined in subparagraph A above, and
that such allocation shall be within the scope of the Fund's policies
as stated above; provided further, that in every allocation made to a
broker in which the sale of Fund Shares is taken into account, there
shall be no increase in the amount of the commissions or other
compensation paid to such broker beyond a reasonable commission or
other compensation determined, as set forth in subparagraph C above,
on the basis of best execution alone or best execution plus research
services, without taking account of or placing any value upon such
sale of Fund's Shares.
(4) The Fund agrees to pay to the Investment Adviser as compensation
for such services a fee for its services based upon a percentage of the Fund's
average daily net assets, payable at the end of each calendar month. This fee
shall be calculated daily at the following annual rate: .60% for Mutual Shares
Fund.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Adviser) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Adviser shall reimburse the Fund for such excess in the manner and to the extent
required by applicable State law. The term "total expenses," as used in this
paragraph, does not include interest, taxes, litigation expenses, distribution
expenses, brokerage commissions or other costs of acquiring or disposing of any
of the Fund's portfolio securities or any costs or expenses incurred or arising
other than in the ordinary and necessary course of the Fund's business. When the
accrued amount of such expenses exceeds this limit, the monthly payment of the
Investment Adviser's fee will be reduced by the amount of such excess, subject
to adjustment month by month during the balance of the Fund's fiscal year if
accrued expenses thereafter fall below the limit.
The Investment Adviser may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Investment Adviser shall be contractually
bound hereunder by the terms of any publicly announced waiver of its fee or any
limitation of the Fund's expenses, as if such waiver or limitation were fully
set forth herein.
(5) This Agreement shall become effective on November 1, 1996 and
shall continue in effect through June 30, 1998. If not sooner terminated, this
Agreement shall continue in effect for successive periods of 12 months each
thereafter, provided that each such continuance shall be specifically approved
annually by the vote of a majority of the Fund's Board of Directors who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of any such party, cast in person at a meeting called for the purpose of voting
on such approval and either the vote of (a) a majority of the outstanding voting
securities of the Fund, as defined in the 1940 Act, or (b) a majority of the
Fund's Board of Directors as a whole.
(6) Notwithstanding the foregoing, this Agreement may be terminated
by either party at any time, without the payment of any penalty, on sixty (60)
days' written notice to the other party, provided that termination by the Fund
is approved by vote of a majority of the Fund's Board of Directors in office at
the time or by vote of a majority of the outstanding voting securities of the
Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately in
the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the Investment
Adviser no longer acts as Investment Adviser to the Fund, the Investment Adviser
reserves the right to withdraw from the Fund the use of the name "Franklin",
"Templeton" or any name misleadingly implying a continuing relationship between
the Fund and the Investment Adviser or any of its affiliates.
(9) Except as may otherwise be provided by the 1940 Act, neither the
Investment Adviser nor its officers, directors, employees or agents shall be
subject to any liability for any error of judgment, mistake of law, or any loss
arising out of any investment or other act or omission in the performance by the
Investment Adviser of its duties under the Agreement or for any loss or damage
resulting from the imposition by any government of exchange control restrictions
which might affect the liquidity of the Fund's assets, or from acts or omissions
of custodians, or securities depositories, or from any war or political act of
any foreign government to which such assets might be exposed, or for failure, on
the part of the custodian or otherwise, timely to collect payments, except for
any liability, loss or damage resulting from willful misfeasance, bad faith or
gross negligence on the Investment Adviser's part or by reason of reckless
disregard of the Investment Adviser's duties under this Agreement. It is hereby
understood and acknowledged by the Fund that the value of the investments made
for the Fund may increase as well as decrease and are not guaranteed by the
Investment Adviser. It is further understood and acknowledged by the Fund that
investment decisions made on behalf of the Fund by the Investment Adviser are
subject to a variety of factors which may affect the values and income generated
by the Fund's portfolio securities, including general economic conditions,
market factors and currency exchange rates, and that investment decisions made
by the Investment Adviser will not always be profitable or prove to have been
correct.
(10) a. The Fund hereby agrees to indemnify the Investment
Adviser and each of the Investment Adviser's directors,
officers, employees, and agents (including any individual who
serves at the Investment Adviser's request as director, officer,
partner, trustee or the like of another corporation) (each such
person being an "Indemnitee") against any liabilities and
expenses, including amounts paid in satisfaction of judgments,
in compromise or as fines and penalties, and counsel fees (all
as provided in accordance with applicable corporate law)
reasonably incurred by such Indemnitee in connection with the
defense or disposition of any action, suit or other proceeding,
whether civil or criminal, before any court or administrative or
investigative body in which he may be or may have been involved
as a party or otherwise or with which he may be or may have been
threatened, while acting in any capacity set forth above in this
Section 10 or thereafter by reason of his having acted in any
such capacity, except with respect to any matter as to which he
shall have been adjudicated not to have acted in good faith in
the reasonable belief that his action was in the best interest
of the Fund and furthermore, in the case of any criminal
proceeding, so long as he had no reasonable cause to believe
that the conduct was unlawful, provided, however, that (1) no
Indemnitee shall be indemnified hereunder against any expense of
such Indemnitee arising by reason of (i) willful misfeasance,
(ii) bad faith, (iii) gross negligence or (iv) reckless
disregard of the duties involved in the conduct of his position
(the conduct referred to in such clauses (i) through (iv) being
sometimes referred to herein as "disabling conduct"), (2) as to
any matter disposed of by settlement or a compromise payment by
such Indemnitee, pursuant to a consent decree or otherwise, no
indemnification either for said payment or for any other
expenses shall be provided unless there has been a determination
that such settlement or compromise is in the best interests of
the Fund and that such Indemnitee appears to have acted in good
faith in the reasonable belief that his action was in the best
interests of the Fund and did not involve disabling conduct by
such Indemnitee and (3) with respect to any action, suit or
other proceeding voluntarily prosecuted by any Indemnitee as
plaintiff, indemnification shall be mandatory only if the
prosecution of such action, suit or other proceeding by such
Indemnitee was authorized by a majority of the full Board of the
Fund.
b. The Fund shall make advance payments in connection
with the expenses of defending any action with respect to which
indemnification might be sought hereunder in the Fund receives a
written affirmation of the Indemnitee's good faith belief that
the standard of conduct necessary for indemnification has been
met and a written undertaking to reimburse the Fund unless it is
subsequently determined that he is entitled to such
indemnification and if the directors of the Fund determine that
the facts then known to them would not preclude indemnification.
In addition, at least one of the following conditions must be
met: (A) the Indemnitee shall provide a security for his
undertaking, (B) the Fund shall be insured against losses
arising by reason of any lawful advance, or (C) a majority of a
quorum consisting of directors of the Fund who are neither
"interested persons" of the Fund (as defined in Section 2(a)(19)
of the Act) nor parties to the proceeding ("Disinterested
Non-party Directors") or an independent legal counsel in a
written opinion, shall determine, based on a review of readily
available facts (as opposed to a full trial-type inquiry), that
there is reason to believe that the Indemnitee ultimately will
be found entitled to indemnification.
c. All determinations with respect to indemnification
hereunder shall be made (1) by a final decision on the merits by
a court or other body before whom the proceeding was brought
that such Indemnitees is not liable by reason of disabling
conduct or, (2) in the absence of such a decision, by (i) a
majority vote of a quorum of the Disinterested Directors of the
Fund, or (ii) if such a quorum is not obtainable or even, if
obtainable, if a majority vote of such quorum so directs,
independent legal counsel in a written opinion. All
determinations that advance payments in connection with the
expense of defending any proceeding shall be authorized shall be
made in accordance with the immediately preceding clause (2)
above.
The rights accruing to any Indemnitee under these provisions shall
not exclude any other right to which he may be lawfully entitled.
(11) It is understood that the services of the Investment Adviser are
not deemed to be exclusive, and nothing in this Agreement shall prevent the
Investment Adviser, or any affiliate thereof, from providing similar services to
other investment companies and other clients, including clients which may invest
in the same types of securities as the Fund, or, in providing such services,
from using information furnished by others. The Fund acknowledges that the
Investment Adviser renders services to others, that officers and employees of
the investment adviser invest for their own accounts, and the Fund is not
entitled to, and does not expect, to obtain the benefits of any investment
opportunities developed by the Investment Adviser such officers or employees in
which the Investment Adviser acting in good faith, does not cause the Fund to
invest.
(12) This Agreement shall be construed in accordance with the laws of
the State of Maryland, provided that nothing herein shall be construed as being
inconsistent with applicable Federal and state securities laws and any rules,
regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the Investment
Adviser an agent of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers and their respective corporate
seals to be hereunto duly affixed and attested.
MUTUAL QUALIFIED FUND, a series of
FRANKLIN MUTUAL SERIES FUND INC.
By: /S/E.N. COHERNOUR
Title: General Counsel/Secretary
FRANKLIN MUTUAL ADVISERS, INC.
By: /s/MICHAEL F. PRICE
Title: President
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of the 1st day of November, 1996, between MUTUAL
BEACON FUND, a series (composed of one or more classes) of FRANKLIN MUTUAL
SERIES FUND INC., a corporation organized under the laws of the State of
Maryland (hereinafter referred to as the "Fund"), and Franklin Mutual Advisers,
Inc. (hereinafter referred to as the "Investment Adviser").
In consideration of the mutual agreements herein made, the Fund and
the Investment Adviser understand and agree as follows:
(1) The Investment Adviser agrees, during the life of this Agreement,
to manage the investment and reinvestment of the Fund's assets consistent with
the provisions of the Fund's Charter, By-laws and the investment policies
adopted and approved by the Fund's Board of Directors and shareholders pursuant
to the Investment Company Act of 1940 (the "1940 Act"). In pursuance of the
foregoing, the Investment Adviser shall have sole and exclusive discretion in
all determinations with respect to the purchasing and selling of securities and
other assets for the Fund and in voting and exercising all other rights
appertaining to such securities and other assets on behalf of the Fund, and
shall take all such steps as may be necessary to implement those determinations.
(2) The Investment Adviser is not required to furnish any personnel,
overhead items or facilities for the Fund, including trading desk facilities or
daily pricing of the Fund's portfolio, but personnel employed by the Investment
Adviser may act as officers and/or directors.
(3) The Investment Adviser shall be responsible for selecting members
of securities exchanges, brokers and dealers (such members, brokers and dealers
being hereinafter referred to as "brokers") for the execution of the Fund's
portfolio transactions consistent with the Fund's brokerage policy and, when
applicable, the negotiation of commissions in connection therewith. All
decisions and placements shall be made in accordance with the following
principles:
(A) Purchase and sale orders will usually be placed with brokers
which are selected by the Investment Adviser as able to achieve "best
execution" of such orders. "Best execution" shall mean prompt and
reliable execution at the most favorable securities price, taking
into account the other provisions hereinafter set forth. The
determination of what may constitute best execution and price in the
execution of a securities transaction by a broker involves a number
of considerations, including, without limitation, the overall direct
net economic result to the Fund (involving both price paid or
received and any commissions and other costs paid), the efficiency
with which the transaction is executed, the ability to effect the
transaction at all where a large block is involved, availability of
the broker to stand ready to execute possibly difficult transactions
in the future, and the financial strength and stability of the
broker. Such considerations are judgmental and are weighed by the
Investment Adviser in determining the overall reasonableness of
brokerage commissions.
(B) In selecting brokers for portfolio transactions, the
Investment Adviser shall take into account its past experience as to
brokers qualified to achieve "best execution", including brokers who
specialize in any foreign securities held by the Fund.
(C) The Investment Adviser is authorized to allocate brokerage
business to brokers who have provided brokerage and research
services, as such services are defined in Section 28(e) of the
Securities Exchange Act of 1934 (the "1934 Act") for the Fund and/or
other accounts, if any, for which the Investment Adviser exercises
investment discretion (as defined in Section 3(a)(35) of the 1934
Act) and, as to transactions for which fixed minimum commission rates
are not applicable, to cause the Fund to pay a commission for
effecting a securities transaction in excess of the amount another
broker would have charged for effecting that transaction, if the
Investment Adviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage
and research services provided by such broker, viewed in terms of
either that particular transaction or the Investment Adviser's
overall responsibilities with respect to the Fund and the other
accounts, if any, as to which it exercises investment discretion. In
reaching such determination, the Investment Adviser will not be
required to place or attempt to place a specific dollar value on the
research or execution services of a broker or on the portion of any
commission reflecting either of said services. In demonstrating that
such determinations were made in good faith, the Investment Adviser
shall be prepared to show that all commissions were allocated and
paid for purposes contemplated by the Fund's brokerage policy; that
the research services provide lawful and appropriate assistance to
the Investment Adviser in the performance of its investment
decision-making responsibilities, and that the commissions were
within a reasonable range. Whether commissions were within a
reasonable range shall be based on any available information as to
the level of commissions known to be charged by other brokers on
comparable transactions, but there shall be taken into account the
Fund's policies that (i) obtaining a low commission is deemed
secondary to obtaining a favorable securities price, since it is
recognized that usually it is more beneficial to the Fund to obtain a
favorable price than to pay the lowest commission; and (ii) the
quality, comprehensiveness, and frequency of research studies which
are provided for the Investment Adviser are useful to the Investment
Adviser in performing its advisory services under its Agreement.
Research services provided by brokers to the Investment Adviser are
considered to be in addition to, and not in lieu of, services
required to be performed by the Investment Adviser under this
Agreement. Research furnished by brokers through which the Fund
effects securities transactions may be used by the Investment Adviser
for any of its accounts, and not all such research may be used by the
Investment Adviser for the Fund. When execution of portfolio
transactions is allocated to brokers trading on exchanges with fixed
brokerage commission rates, account may be taken of various services
provided by the broker.
(D) Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be executed
with primary market makers acting as principal, except where, in the
judgment of the Investment Adviser, better prices and execution may
be obtained on a commission basis or from other sources.
(E) Sales of Fund Shares (which shall be deemed to include also
Shares of other registered investment companies which have either the
same adviser or an investment adviser affiliated with the Fund's
Investment Adviser) by a broker are one factor among others to be
taken into account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions, purchases in
underwritings or tenders in response to tender offers) for the
account of the Fund to that broker; provided that the broker shall
furnish "best execution," as defined in subparagraph A above, and
that such allocation shall be within the scope of the Fund's policies
as stated above; provided further, that in every allocation made to a
broker in which the sale of Fund Shares is taken into account, there
shall be no increase in the amount of the commissions or other
compensation paid to such broker beyond a reasonable commission or
other compensation determined, as set forth in subparagraph C above,
on the basis of best execution alone or best execution plus research
services, without taking account of or placing any value upon such
sale of Fund's Shares.
(4) The Fund agrees to pay to the Investment Adviser as compensation
for such services a fee for its services based upon a percentage of the Fund's
average daily net assets, payable at the end of each calendar month. This fee
shall be calculated daily at the following annual rate: .60% for Mutual Shares
Fund.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Adviser) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Adviser shall reimburse the Fund for such excess in the manner and to the extent
required by applicable State law. The term "total expenses," as used in this
paragraph, does not include interest, taxes, litigation expenses, distribution
expenses, brokerage commissions or other costs of acquiring or disposing of any
of the Fund's portfolio securities or any costs or expenses incurred or arising
other than in the ordinary and necessary course of the Fund's business. When the
accrued amount of such expenses exceeds this limit, the monthly payment of the
Investment Adviser's fee will be reduced by the amount of such excess, subject
to adjustment month by month during the balance of the Fund's fiscal year if
accrued expenses thereafter fall below the limit.
The Investment Adviser may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Investment Adviser shall be contractually
bound hereunder by the terms of any publicly announced waiver of its fee or any
limitation of the Fund's expenses, as if such waiver or limitation were fully
set forth herein.
(5) This Agreement shall become effective on November 1, 1996 and
shall continue in effect through June 30, 1998. If not sooner terminated, this
Agreement shall continue in effect for successive periods of 12 months each
thereafter, provided that each such continuance shall be specifically approved
annually by the vote of a majority of the Fund's Board of Directors who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of any such party, cast in person at a meeting called for the purpose of voting
on such approval and either the vote of (a) a majority of the outstanding voting
securities of the Fund, as defined in the 1940 Act, or (b) a majority of the
Fund's Board of Directors as a whole.
(6) Notwithstanding the foregoing, this Agreement may be terminated
by either party at any time, without the payment of any penalty, on sixty (60)
days' written notice to the other party, provided that termination by the Fund
is approved by vote of a majority of the Fund's Board of Directors in office at
the time or by vote of a majority of the outstanding voting securities of the
Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately in
the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the Investment
Adviser no longer acts as Investment Adviser to the Fund, the Investment Adviser
reserves the right to withdraw from the Fund the use of the name "Franklin",
"Templeton" or any name misleadingly implying a continuing relationship between
the Fund and the Investment Adviser or any of its affiliates.
(9) Except as may otherwise be provided by the 1940 Act, neither the
Investment Adviser nor its officers, directors, employees or agents shall be
subject to any liability for any error of judgment, mistake of law, or any loss
arising out of any investment or other act or omission in the performance by the
Investment Adviser of its duties under the Agreement or for any loss or damage
resulting from the imposition by any government of exchange control restrictions
which might affect the liquidity of the Fund's assets, or from acts or omissions
of custodians, or securities depositories, or from any war or political act of
any foreign government to which such assets might be exposed, or for failure, on
the part of the custodian or otherwise, timely to collect payments, except for
any liability, loss or damage resulting from willful misfeasance, bad faith or
gross negligence on the Investment Adviser's part or by reason of reckless
disregard of the Investment Adviser's duties under this Agreement. It is hereby
understood and acknowledged by the Fund that the value of the investments made
for the Fund may increase as well as decrease and are not guaranteed by the
Investment Adviser. It is further understood and acknowledged by the Fund that
investment decisions made on behalf of the Fund by the Investment Adviser are
subject to a variety of factors which may affect the values and income generated
by the Fund's portfolio securities, including general economic conditions,
market factors and currency exchange rates, and that investment decisions made
by the Investment Adviser will not always be profitable or prove to have been
correct.
(10) a. The Fund hereby agrees to indemnify the Investment
Adviser and each of the Investment Adviser's directors,
officers, employees, and agents (including any individual who
serves at the Investment Adviser's request as director, officer,
partner, trustee or the like of another corporation) (each such
person being an "Indemnitee") against any liabilities and
expenses, including amounts paid in satisfaction of judgments,
in compromise or as fines and penalties, and counsel fees (all
as provided in accordance with applicable corporate law)
reasonably incurred by such Indemnitee in connection with the
defense or disposition of any action, suit or other proceeding,
whether civil or criminal, before any court or administrative or
investigative body in which he may be or may have been involved
as a party or otherwise or with which he may be or may have been
threatened, while acting in any capacity set forth above in this
Section 10 or thereafter by reason of his having acted in any
such capacity, except with respect to any matter as to which he
shall have been adjudicated not to have acted in good faith in
the reasonable belief that his action was in the best interest
of the Fund and furthermore, in the case of any criminal
proceeding, so long as he had no reasonable cause to believe
that the conduct was unlawful, provided, however, that (1) no
Indemnitee shall be indemnified hereunder against any expense of
such Indemnitee arising by reason of (i) willful misfeasance,
(ii) bad faith, (iii) gross negligence or (iv) reckless
disregard of the duties involved in the conduct of his position
(the conduct referred to in such clauses (i) through (iv) being
sometimes referred to herein as "disabling conduct"), (2) as to
any matter disposed of by settlement or a compromise payment by
such Indemnitee, pursuant to a consent decree or otherwise, no
indemnification either for said payment or for any other
expenses shall be provided unless there has been a determination
that such settlement or compromise is in the best interests of
the Fund and that such Indemnitee appears to have acted in good
faith in the reasonable belief that his action was in the best
interests of the Fund and did not involve disabling conduct by
such Indemnitee and (3) with respect to any action, suit or
other proceeding voluntarily prosecuted by any Indemnitee as
plaintiff, indemnification shall be mandatory only if the
prosecution of such action, suit or other proceeding by such
Indemnitee was authorized by a majority of the full Board of the
Fund.
b. The Fund shall make advance payments in connection
with the expenses of defending any action with respect to which
indemnification might be sought hereunder in the Fund receives a
written affirmation of the Indemnitee's good faith belief that
the standard of conduct necessary for indemnification has been
met and a written undertaking to reimburse the Fund unless it is
subsequently determined that he is entitled to such
indemnification and if the directors of the Fund determine that
the facts then known to them would not preclude indemnification.
In addition, at least one of the following conditions must be
met: (A) the Indemnitee shall provide a security for his
undertaking, (B) the Fund shall be insured against losses
arising by reason of any lawful advance, or (C) a majority of a
quorum consisting of directors of the Fund who are neither
"interested persons" of the Fund (as defined in Section 2(a)(19)
of the Act) nor parties to the proceeding ("Disinterested
Non-party Directors") or an independent legal counsel in a
written opinion, shall determine, based on a review of readily
available facts (as opposed to a full trial-type inquiry), that
there is reason to believe that the Indemnitee ultimately will
be found entitled to indemnification.
c. All determinations with respect to indemnification
hereunder shall be made (1) by a final decision on the merits by
a court or other body before whom the proceeding was brought
that such Indemnitees is not liable by reason of disabling
conduct or, (2) in the absence of such a decision, by (i) a
majority vote of a quorum of the Disinterested Directors of the
Fund, or (ii) if such a quorum is not obtainable or even, if
obtainable, if a majority vote of such quorum so directs,
independent legal counsel in a written opinion. All
determinations that advance payments in connection with the
expense of defending any proceeding shall be authorized shall be
made in accordance with the immediately preceding clause (2)
above.
The rights accruing to any Indemnitee under these provisions shall
not exclude any other right to which he may be lawfully entitled.
(11) It is understood that the services of the Investment Adviser are
not deemed to be exclusive, and nothing in this Agreement shall prevent the
Investment Adviser, or any affiliate thereof, from providing similar services to
other investment companies and other clients, including clients which may invest
in the same types of securities as the Fund, or, in providing such services,
from using information furnished by others. The Fund acknowledges that the
Investment Adviser renders services to others, that officers and employees of
the investment adviser invest for their own accounts, and the Fund is not
entitled to, and does not expect, to obtain the benefits of any investment
opportunities developed by the Investment Adviser such officers or employees in
which the Investment Adviser acting in good faith, does not cause the Fund to
invest.
(12) This Agreement shall be construed in accordance with the laws of
the State of Maryland, provided that nothing herein shall be construed as being
inconsistent with applicable Federal and state securities laws and any rules,
regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the Investment
Adviser an agent of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers and their respective corporate
seals to be hereunto duly affixed and attested.
MUTUAL BEACON FUND, a series of
FRANKLIN MUTUAL SERIES FUND INC.
MUTUAL QUALIFIED FUND, a series of
FRANKLIN MUTUAL SERIES FUND INC.
By: /S/E.N. COHERNOUR
Title: General Counsel/Secretary
FRANKLIN MUTUAL ADVISERS, INC.
By: /s/MICHAEL F. PRICE
Title: President
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of the 1st day of November, 1996, between MUTUAL
DISCOVERY FUND, a series (composed of one or more classes) of FRANKLIN MUTUAL
SERIES FUND INC., a corporation organized under the laws of the State of
Maryland (hereinafter referred to as the "Fund"), and Franklin Mutual Advisers,
Inc. (hereinafter referred to as the "Investment Adviser").
In consideration of the mutual agreements herein made, the Fund and
the Investment Adviser understand and agree as follows:
(1) The Investment Adviser agrees, during the life of this Agreement,
to manage the investment and reinvestment of the Fund's assets consistent with
the provisions of the Fund's Charter, By-laws and the investment policies
adopted and approved by the Fund's Board of Directors and shareholders pursuant
to the Investment Company Act of 1940 (the "1940 Act"). In pursuance of the
foregoing, the Investment Adviser shall have sole and exclusive discretion in
all determinations with respect to the purchasing and selling of securities and
other assets for the Fund and in voting and exercising all other rights
appertaining to such securities and other assets on behalf of the Fund, and
shall take all such steps as may be necessary to implement those determinations.
(2) The Investment Adviser is not required to furnish any personnel,
overhead items or facilities for the Fund, including trading desk facilities or
daily pricing of the Fund's portfolio, but personnel employed by the Investment
Adviser may act as officers and/or directors.
(3) The Investment Adviser shall be responsible for selecting members
of securities exchanges, brokers and dealers (such members, brokers and dealers
being hereinafter referred to as "brokers") for the execution of the Fund's
portfolio transactions consistent with the Fund's brokerage policy and, when
applicable, the negotiation of commissions in connection therewith. All
decisions and placements shall be made in accordance with the following
principles:
(A) Purchase and sale orders will usually be placed with brokers
which are selected by the Investment Adviser as able to achieve "best
execution" of such orders. "Best execution" shall mean prompt and
reliable execution at the most favorable securities price, taking
into account the other provisions hereinafter set forth. The
determination of what may constitute best execution and price in the
execution of a securities transaction by a broker involves a number
of considerations, including, without limitation, the overall direct
net economic result to the Fund (involving both price paid or
received and any commissions and other costs paid), the efficiency
with which the transaction is executed, the ability to effect the
transaction at all where a large block is involved, availability of
the broker to stand ready to execute possibly difficult transactions
in the future, and the financial strength and stability of the
broker. Such considerations are judgmental and are weighed by the
Investment Adviser in determining the overall reasonableness of
brokerage commissions.
(B) In selecting brokers for portfolio transactions, the
Investment Adviser shall take into account its past experience as to
brokers qualified to achieve "best execution", including brokers who
specialize in any foreign securities held by the Fund.
(C) The Investment Adviser is authorized to allocate brokerage
business to brokers who have provided brokerage and research
services, as such services are defined in Section 28(e) of the
Securities Exchange Act of 1934 (the "1934 Act") for the Fund and/or
other accounts, if any, for which the Investment Adviser exercises
investment discretion (as defined in Section 3(a)(35) of the 1934
Act) and, as to transactions for which fixed minimum commission rates
are not applicable, to cause the Fund to pay a commission for
effecting a securities transaction in excess of the amount another
broker would have charged for effecting that transaction, if the
Investment Adviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage
and research services provided by such broker, viewed in terms of
either that particular transaction or the Investment Adviser's
overall responsibilities with respect to the Fund and the other
accounts, if any, as to which it exercises investment discretion. In
reaching such determination, the Investment Adviser will not be
required to place or attempt to place a specific dollar value on the
research or execution services of a broker or on the portion of any
commission reflecting either of said services. In demonstrating that
such determinations were made in good faith, the Investment Adviser
shall be prepared to show that all commissions were allocated and
paid for purposes contemplated by the Fund's brokerage policy; that
the research services provide lawful and appropriate assistance to
the Investment Adviser in the performance of its investment
decision-making responsibilities, and that the commissions were
within a reasonable range. Whether commissions were within a
reasonable range shall be based on any available information as to
the level of commissions known to be charged by other brokers on
comparable transactions, but there shall be taken into account the
Fund's policies that (i) obtaining a low commission is deemed
secondary to obtaining a favorable securities price, since it is
recognized that usually it is more beneficial to the Fund to obtain a
favorable price than to pay the lowest commission; and (ii) the
quality, comprehensiveness, and frequency of research studies which
are provided for the Investment Adviser are useful to the Investment
Adviser in performing its advisory services under its Agreement.
Research services provided by brokers to the Investment Adviser are
considered to be in addition to, and not in lieu of, services
required to be performed by the Investment Adviser under this
Agreement. Research furnished by brokers through which the Fund
effects securities transactions may be used by the Investment Adviser
for any of its accounts, and not all such research may be used by the
Investment Adviser for the Fund. When execution of portfolio
transactions is allocated to brokers trading on exchanges with fixed
brokerage commission rates, account may be taken of various services
provided by the broker.
(D) Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be executed
with primary market makers acting as principal, except where, in the
judgment of the Investment Adviser, better prices and execution may
be obtained on a commission basis or from other sources.
(E) Sales of Fund Shares (which shall be deemed to include also
Shares of other registered investment companies which have either the
same adviser or an investment adviser affiliated with the Fund's
Investment Adviser) by a broker are one factor among others to be
taken into account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions, purchases in
underwritings or tenders in response to tender offers) for the
account of the Fund to that broker; provided that the broker shall
furnish "best execution," as defined in subparagraph A above, and
that such allocation shall be within the scope of the Fund's policies
as stated above; provided further, that in every allocation made to a
broker in which the sale of Fund Shares is taken into account, there
shall be no increase in the amount of the commissions or other
compensation paid to such broker beyond a reasonable commission or
other compensation determined, as set forth in subparagraph C above,
on the basis of best execution alone or best execution plus research
services, without taking account of or placing any value upon such
sale of Fund's Shares.
(4) The Fund agrees to pay to the Investment Adviser as compensation
for such services a fee for its services based upon a percentage of the Fund's
average daily net assets, payable at the end of each calendar month. This fee
shall be calculated daily at the following annual rate: .60% for Mutual Shares
Fund.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Adviser) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Adviser shall reimburse the Fund for such excess in the manner and to the extent
required by applicable State law. The term "total expenses," as used in this
paragraph, does not include interest, taxes, litigation expenses, distribution
expenses, brokerage commissions or other costs of acquiring or disposing of any
of the Fund's portfolio securities or any costs or expenses incurred or arising
other than in the ordinary and necessary course of the Fund's business. When the
accrued amount of such expenses exceeds this limit, the monthly payment of the
Investment Adviser's fee will be reduced by the amount of such excess, subject
to adjustment month by month during the balance of the Fund's fiscal year if
accrued expenses thereafter fall below the limit.
The Investment Adviser may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Investment Adviser shall be contractually
bound hereunder by the terms of any publicly announced waiver of its fee or any
limitation of the Fund's expenses, as if such waiver or limitation were fully
set forth herein.
(5) This Agreement shall become effective on November 1, 1996 and
shall continue in effect through June 30, 1998. If not sooner terminated, this
Agreement shall continue in effect for successive periods of 12 months each
thereafter, provided that each such continuance shall be specifically approved
annually by the vote of a majority of the Fund's Board of Directors who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of any such party, cast in person at a meeting called for the purpose of voting
on such approval and either the vote of (a) a majority of the outstanding voting
securities of the Fund, as defined in the 1940 Act, or (b) a majority of the
Fund's Board of Directors as a whole.
(6) Notwithstanding the foregoing, this Agreement may be terminated
by either party at any time, without the payment of any penalty, on sixty (60)
days' written notice to the other party, provided that termination by the Fund
is approved by vote of a majority of the Fund's Board of Directors in office at
the time or by vote of a majority of the outstanding voting securities of the
Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately in
the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the Investment
Adviser no longer acts as Investment Adviser to the Fund, the Investment Adviser
reserves the right to withdraw from the Fund the use of the name "Franklin",
"Templeton" or any name misleadingly implying a continuing relationship between
the Fund and the Investment Adviser or any of its affiliates.
(9) Except as may otherwise be provided by the 1940 Act, neither the
Investment Adviser nor its officers, directors, employees or agents shall be
subject to any liability for any error of judgment, mistake of law, or any loss
arising out of any investment or other act or omission in the performance by the
Investment Adviser of its duties under the Agreement or for any loss or damage
resulting from the imposition by any government of exchange control restrictions
which might affect the liquidity of the Fund's assets, or from acts or omissions
of custodians, or securities depositories, or from any war or political act of
any foreign government to which such assets might be exposed, or for failure, on
the part of the custodian or otherwise, timely to collect payments, except for
any liability, loss or damage resulting from willful misfeasance, bad faith or
gross negligence on the Investment Adviser's part or by reason of reckless
disregard of the Investment Adviser's duties under this Agreement. It is hereby
understood and acknowledged by the Fund that the value of the investments made
for the Fund may increase as well as decrease and are not guaranteed by the
Investment Adviser. It is further understood and acknowledged by the Fund that
investment decisions made on behalf of the Fund by the Investment Adviser are
subject to a variety of factors which may affect the values and income generated
by the Fund's portfolio securities, including general economic conditions,
market factors and currency exchange rates, and that investment decisions made
by the Investment Adviser will not always be profitable or prove to have been
correct.
(10) a. The Fund hereby agrees to indemnify the Investment
Adviser and each of the Investment Adviser's directors,
officers, employees, and agents (including any individual who
serves at the Investment Adviser's request as director, officer,
partner, trustee or the like of another corporation) (each such
person being an "Indemnitee") against any liabilities and
expenses, including amounts paid in satisfaction of judgments,
in compromise or as fines and penalties, and counsel fees (all
as provided in accordance with applicable corporate law)
reasonably incurred by such Indemnitee in connection with the
defense or disposition of any action, suit or other proceeding,
whether civil or criminal, before any court or administrative or
investigative body in which he may be or may have been involved
as a party or otherwise or with which he may be or may have been
threatened, while acting in any capacity set forth above in this
Section 10 or thereafter by reason of his having acted in any
such capacity, except with respect to any matter as to which he
shall have been adjudicated not to have acted in good faith in
the reasonable belief that his action was in the best interest
of the Fund and furthermore, in the case of any criminal
proceeding, so long as he had no reasonable cause to believe
that the conduct was unlawful, provided, however, that (1) no
Indemnitee shall be indemnified hereunder against any expense of
such Indemnitee arising by reason of (i) willful misfeasance,
(ii) bad faith, (iii) gross negligence or (iv) reckless
disregard of the duties involved in the conduct of his position
(the conduct referred to in such clauses (i) through (iv) being
sometimes referred to herein as "disabling conduct"), (2) as to
any matter disposed of by settlement or a compromise payment by
such Indemnitee, pursuant to a consent decree or otherwise, no
indemnification either for said payment or for any other
expenses shall be provided unless there has been a determination
that such settlement or compromise is in the best interests of
the Fund and that such Indemnitee appears to have acted in good
faith in the reasonable belief that his action was in the best
interests of the Fund and did not involve disabling conduct by
such Indemnitee and (3) with respect to any action, suit or
other proceeding voluntarily prosecuted by any Indemnitee as
plaintiff, indemnification shall be mandatory only if the
prosecution of such action, suit or other proceeding by such
Indemnitee was authorized by a majority of the full Board of the
Fund.
b. The Fund shall make advance payments in connection
with the expenses of defending any action with respect to which
indemnification might be sought hereunder in the Fund receives a
written affirmation of the Indemnitee's good faith belief that
the standard of conduct necessary for indemnification has been
met and a written undertaking to reimburse the Fund unless it is
subsequently determined that he is entitled to such
indemnification and if the directors of the Fund determine that
the facts then known to them would not preclude indemnification.
In addition, at least one of the following conditions must be
met: (A) the Indemnitee shall provide a security for his
undertaking, (B) the Fund shall be insured against losses
arising by reason of any lawful advance, or (C) a majority of a
quorum consisting of directors of the Fund who are neither
"interested persons" of the Fund (as defined in Section 2(a)(19)
of the Act) nor parties to the proceeding ("Disinterested
Non-party Directors") or an independent legal counsel in a
written opinion, shall determine, based on a review of readily
available facts (as opposed to a full trial-type inquiry), that
there is reason to believe that the Indemnitee ultimately will
be found entitled to indemnification.
c. All determinations with respect to indemnification
hereunder shall be made (1) by a final decision on the merits by
a court or other body before whom the proceeding was brought
that such Indemnitees is not liable by reason of disabling
conduct or, (2) in the absence of such a decision, by (i) a
majority vote of a quorum of the Disinterested Directors of the
Fund, or (ii) if such a quorum is not obtainable or even, if
obtainable, if a majority vote of such quorum so directs,
independent legal counsel in a written opinion. All
determinations that advance payments in connection with the
expense of defending any proceeding shall be authorized shall be
made in accordance with the immediately preceding clause (2)
above.
The rights accruing to any Indemnitee under these provisions shall
not exclude any other right to which he may be lawfully entitled.
(11) It is understood that the services of the Investment Adviser are
not deemed to be exclusive, and nothing in this Agreement shall prevent the
Investment Adviser, or any affiliate thereof, from providing similar services to
other investment companies and other clients, including clients which may invest
in the same types of securities as the Fund, or, in providing such services,
from using information furnished by others. The Fund acknowledges that the
Investment Adviser renders services to others, that officers and employees of
the investment adviser invest for their own accounts, and the Fund is not
entitled to, and does not expect, to obtain the benefits of any investment
opportunities developed by the Investment Adviser such officers or employees in
which the Investment Adviser acting in good faith, does not cause the Fund to
invest.
(12) This Agreement shall be construed in accordance with the laws of
the State of Maryland, provided that nothing herein shall be construed as being
inconsistent with applicable Federal and state securities laws and any rules,
regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the Investment
Adviser an agent of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers and their respective corporate
seals to be hereunto duly affixed and attested.
MUTUAL DISCOVERY FUND, a series of
FRANKLIN MUTUAL SERIES FUND INC.
MUTUAL QUALIFIED FUND, a series of
FRANKLIN MUTUAL SERIES FUND INC.
By: /S/E.N. COHERNOUR
Title: General Counsel/Secretary
FRANKLIN MUTUAL ADVISERS, INC.
By: /s/MICHAEL F. PRICE
Title: President
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of the 1st day of November, 1996, between MUTUAL
EUROPEAN FUND, a series (composed of one or more classes) of FRANKLIN MUTUAL
SERIES FUND INC., a corporation organized under the laws of the State of
Maryland (hereinafter referred to as the "Fund"), and Franklin Mutual Advisers,
Inc. (hereinafter referred to as the "Investment Adviser").
In consideration of the mutual agreements herein made, the Fund and
the Investment Adviser understand and agree as follows:
(1) The Investment Adviser agrees, during the life of this Agreement,
to manage the investment and reinvestment of the Fund's assets consistent with
the provisions of the Fund's Charter, By-laws and the investment policies
adopted and approved by the Fund's Board of Directors and shareholders pursuant
to the Investment Company Act of 1940 (the "1940 Act"). In pursuance of the
foregoing, the Investment Adviser shall have sole and exclusive discretion in
all determinations with respect to the purchasing and selling of securities and
other assets for the Fund and in voting and exercising all other rights
appertaining to such securities and other assets on behalf of the Fund, and
shall take all such steps as may be necessary to implement those determinations.
(2) The Investment Adviser is not required to furnish any personnel,
overhead items or facilities for the Fund, including trading desk facilities or
daily pricing of the Fund's portfolio, but personnel employed by the Investment
Adviser may act as officers and/or directors.
(3) The Investment Adviser shall be responsible for selecting members
of securities exchanges, brokers and dealers (such members, brokers and dealers
being hereinafter referred to as "brokers") for the execution of the Fund's
portfolio transactions consistent with the Fund's brokerage policy and, when
applicable, the negotiation of commissions in connection therewith. All
decisions and placements shall be made in accordance with the following
principles:
(A) Purchase and sale orders will usually be placed with brokers
which are selected by the Investment Adviser as able to achieve "best
execution" of such orders. "Best execution" shall mean prompt and
reliable execution at the most favorable securities price, taking
into account the other provisions hereinafter set forth. The
determination of what may constitute best execution and price in the
execution of a securities transaction by a broker involves a number
of considerations, including, without limitation, the overall direct
net economic result to the Fund (involving both price paid or
received and any commissions and other costs paid), the efficiency
with which the transaction is executed, the ability to effect the
transaction at all where a large block is involved, availability of
the broker to stand ready to execute possibly difficult transactions
in the future, and the financial strength and stability of the
broker. Such considerations are judgmental and are weighed by the
Investment Adviser in determining the overall reasonableness of
brokerage commissions.
(B) In selecting brokers for portfolio transactions, the
Investment Adviser shall take into account its past experience as to
brokers qualified to achieve "best execution", including brokers who
specialize in any foreign securities held by the Fund.
(C) The Investment Adviser is authorized to allocate brokerage
business to brokers who have provided brokerage and research
services, as such services are defined in Section 28(e) of the
Securities Exchange Act of 1934 (the "1934 Act") for the Fund and/or
other accounts, if any, for which the Investment Adviser exercises
investment discretion (as defined in Section 3(a)(35) of the 1934
Act) and, as to transactions for which fixed minimum commission rates
are not applicable, to cause the Fund to pay a commission for
effecting a securities transaction in excess of the amount another
broker would have charged for effecting that transaction, if the
Investment Adviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage
and research services provided by such broker, viewed in terms of
either that particular transaction or the Investment Adviser's
overall responsibilities with respect to the Fund and the other
accounts, if any, as to which it exercises investment discretion. In
reaching such determination, the Investment Adviser will not be
required to place or attempt to place a specific dollar value on the
research or execution services of a broker or on the portion of any
commission reflecting either of said services. In demonstrating that
such determinations were made in good faith, the Investment Adviser
shall be prepared to show that all commissions were allocated and
paid for purposes contemplated by the Fund's brokerage policy; that
the research services provide lawful and appropriate assistance to
the Investment Adviser in the performance of its investment
decision-making responsibilities, and that the commissions were
within a reasonable range. Whether commissions were within a
reasonable range shall be based on any available information as to
the level of commissions known to be charged by other brokers on
comparable transactions, but there shall be taken into account the
Fund's policies that (i) obtaining a low commission is deemed
secondary to obtaining a favorable securities price, since it is
recognized that usually it is more beneficial to the Fund to obtain a
favorable price than to pay the lowest commission; and (ii) the
quality, comprehensiveness, and frequency of research studies which
are provided for the Investment Adviser are useful to the Investment
Adviser in performing its advisory services under its Agreement.
Research services provided by brokers to the Investment Adviser are
considered to be in addition to, and not in lieu of, services
required to be performed by the Investment Adviser under this
Agreement. Research furnished by brokers through which the Fund
effects securities transactions may be used by the Investment Adviser
for any of its accounts, and not all such research may be used by the
Investment Adviser for the Fund. When execution of portfolio
transactions is allocated to brokers trading on exchanges with fixed
brokerage commission rates, account may be taken of various services
provided by the broker.
(D) Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be executed
with primary market makers acting as principal, except where, in the
judgment of the Investment Adviser, better prices and execution may
be obtained on a commission basis or from other sources.
(E) Sales of Fund Shares (which shall be deemed to include also
Shares of other registered investment companies which have either the
same adviser or an investment adviser affiliated with the Fund's
Investment Adviser) by a broker are one factor among others to be
taken into account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions, purchases in
underwritings or tenders in response to tender offers) for the
account of the Fund to that broker; provided that the broker shall
furnish "best execution," as defined in subparagraph A above, and
that such allocation shall be within the scope of the Fund's policies
as stated above; provided further, that in every allocation made to a
broker in which the sale of Fund Shares is taken into account, there
shall be no increase in the amount of the commissions or other
compensation paid to such broker beyond a reasonable commission or
other compensation determined, as set forth in subparagraph C above,
on the basis of best execution alone or best execution plus research
services, without taking account of or placing any value upon such
sale of Fund's Shares.
(4) The Fund agrees to pay to the Investment Adviser as compensation
for such services a fee for its services based upon a percentage of the Fund's
average daily net assets, payable at the end of each calendar month. This fee
shall be calculated daily at the following annual rate: .60% for Mutual Shares
Fund.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Adviser) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Adviser shall reimburse the Fund for such excess in the manner and to the extent
required by applicable State law. The term "total expenses," as used in this
paragraph, does not include interest, taxes, litigation expenses, distribution
expenses, brokerage commissions or other costs of acquiring or disposing of any
of the Fund's portfolio securities or any costs or expenses incurred or arising
other than in the ordinary and necessary course of the Fund's business. When the
accrued amount of such expenses exceeds this limit, the monthly payment of the
Investment Adviser's fee will be reduced by the amount of such excess, subject
to adjustment month by month during the balance of the Fund's fiscal year if
accrued expenses thereafter fall below the limit.
The Investment Adviser may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Investment Adviser shall be contractually
bound hereunder by the terms of any publicly announced waiver of its fee or any
limitation of the Fund's expenses, as if such waiver or limitation were fully
set forth herein.
(5) This Agreement shall become effective on November 1, 1996 and
shall continue in effect through June 30, 1998. If not sooner terminated, this
Agreement shall continue in effect for successive periods of 12 months each
thereafter, provided that each such continuance shall be specifically approved
annually by the vote of a majority of the Fund's Board of Directors who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of any such party, cast in person at a meeting called for the purpose of voting
on such approval and either the vote of (a) a majority of the outstanding voting
securities of the Fund, as defined in the 1940 Act, or (b) a majority of the
Fund's Board of Directors as a whole.
(6) Notwithstanding the foregoing, this Agreement may be terminated
by either party at any time, without the payment of any penalty, on sixty (60)
days' written notice to the other party, provided that termination by the Fund
is approved by vote of a majority of the Fund's Board of Directors in office at
the time or by vote of a majority of the outstanding voting securities of the
Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately in
the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the Investment
Adviser no longer acts as Investment Adviser to the Fund, the Investment Adviser
reserves the right to withdraw from the Fund the use of the name "Franklin",
"Templeton" or any name misleadingly implying a continuing relationship between
the Fund and the Investment Adviser or any of its affiliates.
(9) Except as may otherwise be provided by the 1940 Act, neither the
Investment Adviser nor its officers, directors, employees or agents shall be
subject to any liability for any error of judgment, mistake of law, or any loss
arising out of any investment or other act or omission in the performance by the
Investment Adviser of its duties under the Agreement or for any loss or damage
resulting from the imposition by any government of exchange control restrictions
which might affect the liquidity of the Fund's assets, or from acts or omissions
of custodians, or securities depositories, or from any war or political act of
any foreign government to which such assets might be exposed, or for failure, on
the part of the custodian or otherwise, timely to collect payments, except for
any liability, loss or damage resulting from willful misfeasance, bad faith or
gross negligence on the Investment Adviser's part or by reason of reckless
disregard of the Investment Adviser's duties under this Agreement. It is hereby
understood and acknowledged by the Fund that the value of the investments made
for the Fund may increase as well as decrease and are not guaranteed by the
Investment Adviser. It is further understood and acknowledged by the Fund that
investment decisions made on behalf of the Fund by the Investment Adviser are
subject to a variety of factors which may affect the values and income generated
by the Fund's portfolio securities, including general economic conditions,
market factors and currency exchange rates, and that investment decisions made
by the Investment Adviser will not always be profitable or prove to have been
correct.
(10) a. The Fund hereby agrees to indemnify the Investment
Adviser and each of the Investment Adviser's directors,
officers, employees, and agents (including any individual who
serves at the Investment Adviser's request as director, officer,
partner, trustee or the like of another corporation) (each such
person being an "Indemnitee") against any liabilities and
expenses, including amounts paid in satisfaction of judgments,
in compromise or as fines and penalties, and counsel fees (all
as provided in accordance with applicable corporate law)
reasonably incurred by such Indemnitee in connection with the
defense or disposition of any action, suit or other proceeding,
whether civil or criminal, before any court or administrative or
investigative body in which he may be or may have been involved
as a party or otherwise or with which he may be or may have been
threatened, while acting in any capacity set forth above in this
Section 10 or thereafter by reason of his having acted in any
such capacity, except with respect to any matter as to which he
shall have been adjudicated not to have acted in good faith in
the reasonable belief that his action was in the best interest
of the Fund and furthermore, in the case of any criminal
proceeding, so long as he had no reasonable cause to believe
that the conduct was unlawful, provided, however, that (1) no
Indemnitee shall be indemnified hereunder against any expense of
such Indemnitee arising by reason of (i) willful misfeasance,
(ii) bad faith, (iii) gross negligence or (iv) reckless
disregard of the duties involved in the conduct of his position
(the conduct referred to in such clauses (i) through (iv) being
sometimes referred to herein as "disabling conduct"), (2) as to
any matter disposed of by settlement or a compromise payment by
such Indemnitee, pursuant to a consent decree or otherwise, no
indemnification either for said payment or for any other
expenses shall be provided unless there has been a determination
that such settlement or compromise is in the best interests of
the Fund and that such Indemnitee appears to have acted in good
faith in the reasonable belief that his action was in the best
interests of the Fund and did not involve disabling conduct by
such Indemnitee and (3) with respect to any action, suit or
other proceeding voluntarily prosecuted by any Indemnitee as
plaintiff, indemnification shall be mandatory only if the
prosecution of such action, suit or other proceeding by such
Indemnitee was authorized by a majority of the full Board of the
Fund.
b. The Fund shall make advance payments in connection
with the expenses of defending any action with respect to which
indemnification might be sought hereunder in the Fund receives a
written affirmation of the Indemnitee's good faith belief that
the standard of conduct necessary for indemnification has been
met and a written undertaking to reimburse the Fund unless it is
subsequently determined that he is entitled to such
indemnification and if the directors of the Fund determine that
the facts then known to them would not preclude indemnification.
In addition, at least one of the following conditions must be
met: (A) the Indemnitee shall provide a security for his
undertaking, (B) the Fund shall be insured against losses
arising by reason of any lawful advance, or (C) a majority of a
quorum consisting of directors of the Fund who are neither
"interested persons" of the Fund (as defined in Section 2(a)(19)
of the Act) nor parties to the proceeding ("Disinterested
Non-party Directors") or an independent legal counsel in a
written opinion, shall determine, based on a review of readily
available facts (as opposed to a full trial-type inquiry), that
there is reason to believe that the Indemnitee ultimately will
be found entitled to indemnification.
c. All determinations with respect to indemnification
hereunder shall be made (1) by a final decision on the merits by
a court or other body before whom the proceeding was brought
that such Indemnitees is not liable by reason of disabling
conduct or, (2) in the absence of such a decision, by (i) a
majority vote of a quorum of the Disinterested Directors of the
Fund, or (ii) if such a quorum is not obtainable or even, if
obtainable, if a majority vote of such quorum so directs,
independent legal counsel in a written opinion. All
determinations that advance payments in connection with the
expense of defending any proceeding shall be authorized shall be
made in accordance with the immediately preceding clause (2)
above.
The rights accruing to any Indemnitee under these provisions shall
not exclude any other right to which he may be lawfully entitled.
(11) It is understood that the services of the Investment Adviser are
not deemed to be exclusive, and nothing in this Agreement shall prevent the
Investment Adviser, or any affiliate thereof, from providing similar services to
other investment companies and other clients, including clients which may invest
in the same types of securities as the Fund, or, in providing such services,
from using information furnished by others. The Fund acknowledges that the
Investment Adviser renders services to others, that officers and employees of
the investment adviser invest for their own accounts, and the Fund is not
entitled to, and does not expect, to obtain the benefits of any investment
opportunities developed by the Investment Adviser such officers or employees in
which the Investment Adviser acting in good faith, does not cause the Fund to
invest.
(12) This Agreement shall be construed in accordance with the laws of
the State of Maryland, provided that nothing herein shall be construed as being
inconsistent with applicable Federal and state securities laws and any rules,
regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the Investment
Adviser an agent of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers and their respective corporate
seals to be hereunto duly affixed and attested.
MUTUAL EUROPEAN FUND, a series of
FRANKLIN MUTUAL SERIES FUND INC.
MUTUAL QUALIFIED FUND, a series of
FRANKLIN MUTUAL SERIES FUND INC.
By: /S/E.N. COHERNOUR
Title: General Counsel/Secretary
FRANKLIN MUTUAL ADVISERS, INC.
By: /s/MICHAEL F. PRICE
Title: President
FRANKLIN MUTUAL SERIES FUND INC.
51 John F. Kennedy Park Way
Short Hills, New Jersey
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404
Re: Distribution Agreement - Mutual Shares Fund
Gentlemen:
We are a corporation or business trust operating as an open-end management
investment company or "mutual fund", which is registered under the Investment
Company Act of 1940 (the "1940 Act") and whose shares are registered under the
Securities Act of 1933 (the "1933 Act"). On behalf of our series Mutual Shares
Fund (the "Fund"), we desire to issue one or more classes of authorized but
unissued shares of capital stock or beneficial interest of the Fund (the
"Shares") to authorized persons in accordance with applicable Federal and State
securities laws. The Fund's Shares may have one or more classes.
You have informed us that your company is registered as a broker-dealer under
the provisions of the Securities Exchange Act of 1934 and that your company is a
member of the National Association of Securities Dealers, Inc. You have
indicated your desire to act as the exclusive selling agent and distributor for
the Shares. We have been authorized to execute and deliver this Distribution
Agreement ("Agreement") to you by a resolution of our Board of Directors or
Trustees ("Board") passed at a meeting at which a majority of Board members,
including a majority who are not otherwise interested persons of the Fund and
who are not interested persons of our investment adviser, its related
organizations or with you or your related organizations, were present and voted
in favor of the said resolution approving this Agreement.
1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and in
consideration of the agreements on your part herein expressed and upon the terms
and conditions set forth herein, we hereby appoint you as the exclusive sales
agent for the Shares and agree that we will deliver such Shares as you may sell.
You agree to use your best efforts to promote the sale of Shares, but are not
obligated to sell any specific number of Shares.
However, the Fund retains the right to make direct sales of its Shares
without sales charges consistent with the terms of the then current prospectus
and statement of additional information (hereinafter, collectively,
"prospectus") and applicable law, and to engage in other legally authorized
transactions in its Shares which do not involve the sale of Shares to the
general public. Such other transactions may include, without limitation,
transactions between the Fund or any class and its shareholders only,
transactions involving the reorganization of the Fund and transactions involving
the merger or combination of the Fund with another corporation or trust.
2. INDEPENDENT CONTRACTOR. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no authority
or power to obligate or bind us by your actions, conduct or contracts except
that you are authorized to promote the sale of Shares. You may appoint
sub-agents or distribute through dealers or otherwise as you may determine from
time to time, but this Agreement shall not be construed as authorizing any
dealer or other person to accept orders for sale or repurchase on our behalf or
otherwise act as our agent for any purpose.
3. OFFERING PRICE. Shares shall be offered for sale at a price equivalent
to the net asset value per share of that class plus any applicable percentage of
the public offering price as sales commission or as otherwise set forth in our
then current prospectus. On each business day on which the New York Stock
Exchange is open for business, we will furnish you with the net asset value of
the Shares of each available class which shall be determined in accordance with
our then effective prospectus. All Shares will be sold in the manner set forth
in our then effective prospectus and statement of additional information, and in
compliance with applicable law.
4. COMPENSATION.
A. SALES COMMISSION. You shall be entitled to charge a sales
commission on the sale or redemption, as appropriate, of each class of the
Fund's Shares in the amount of any initial, deferred or contingent deferred
sales charge as set forth in our then effective prospectus. You may allow any
sub-agents or dealers such commissions or discounts from and not exceeding the
total sales commission as you shall deem advisable, so long as any such
commissions or discounts are set forth in our current prospectus to the extent
required by the applicable Federal and State securities laws. You may also make
payments to sub-agents or dealers from your own resources, subject to the
following conditions: (a) any such payments shall not create any obligation for
or recourse against the Fund or any class of Shares, and (b) the terms and
conditions of any such payments are consistent with our prospectus and
applicable federal and state securities laws and are disclosed in our prospectus
or statement of additional information to the extent such laws may require.
B. DISTRIBUTION PLANS. You shall also be entitled to
compensation for your services as provided in any Distribution Plan adopted
as to any class of Shares pursuant to Rule 12b-1 under the 1940 Act.
5. TERMS AND CONDITIONS OF SALES. Shares shall be offered for sale only in
those jurisdictions where they have been properly registered or are exempt from
registration, and only to those groups of people which the Board may from time
to time determine to be eligible to purchase such shares.
6. ORDERS AND PAYMENT FOR SHARES. Orders for Shares shall be directed to
the Fund's shareholder services agent, for acceptance on behalf of the Fund. At
or prior to the time of delivery of any of the Shares you will pay or cause to
be paid to the custodian of the Fund's assets, for our account, an amount in
cash equal to the net asset value of such Shares. Sales of Shares shall be
deemed to be made when and where accepted by the Fund's shareholder services
agent. The Fund's custodian and shareholder services agent shall be identified
in its prospectus.
7. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase the Shares for
your own account for purposes of resale to the public, but you may purchase
Shares for your own investment account upon your written assurance that the
purchase is for investment purposes and that the Shares will not be resold
except through redemption by us.
8. SALE OF SHARES TO AFFILIATES. You may sell the Shares at net asset
value to certain of your and our affiliated persons pursuant to the applicable
provisions of the federal securities statutes and rules or regulations
thereunder (the "Rules and Regulations"), including Rule 22d-1 under the 1940
Act, as amended from time to time.
9. ALLOCATION OF EXPENSES. We will pay the expenses:
(a) Of the preparation of the audited and certified financial
statements of our company to be included in any Post-Effective
Amendments ("Amendments") to our Registration Statement under
the 1933 Act or 1940 Act, including the prospectus, or in
reports to existing shareholders;
(b) Of the preparation, including legal fees, and printing of
all Amendments or supplements filed with the Securities and
Exchange Commission, including the copies of the
prospectuses included in the Amendments and the first 10
copies of the definitive prospectuses or supplements
thereto, other than those necessitated by your (including
your "Parent's") activities or Rules and Regulations related
to your activities where such Amendments or supplements
result in expenses which we would not otherwise have
incurred;
(c) Of the preparation, printing and distribution of any reports
or communications which we send to our existing
shareholders; and
(d) Of filing and other fees to Federal and State securities
regulatory authorities necessary to continue offering the
Shares.
You will pay the expenses:
(a) Of printing the copies of the prospectuses and any
supplements thereto which are necessary to continue to offer
our Shares;
(b) Of the preparation, excluding legal fees, and printing of all
Amendments and supplements to our prospectuses if the Amendment
or supplement arises from your (including your "Parent's")
activities or Rules and Regulations related to your activities
and those expenses would not otherwise have been incurred by us;
(c) Of printing additional copies, for use by you as sales
literature, of reports or other communications which we have
prepared for distribution to existing shareholders; and
(d) Incurred by you in advertising, promoting and selling the
Shares.
10. FURNISHING OF INFORMATION. We will furnish to you such information
with respect to each class of Shares, in such form and signed by such of our
officers as you may reasonably request, and we warrant that the statements
therein contained, when so signed, will be true and correct. We will also
furnish you with such information and will take such action as you may
reasonably request in order to qualify the Shares for sale to the public under
the Blue Sky Laws of jurisdictions in which you may wish to offer them. We will
furnish you with annual audited financial statements of our books and accounts
certified by independent public accountants, with semi-annual financial
statements prepared by us, with registration statements and, from time to time,
with such additional information regarding our financial condition as you may
reasonably request.
11. CONDUCT OF BUSINESS. Other than our currently effective prospectus,
you will not issue any sales material or statements except literature or
advertising which conforms to the requirements of Federal and State securities
laws and regulations and which have been filed, where necessary, with the
appropriate regulatory authorities. You will furnish us with copies of all such
materials prior to their use and no such material shall be published if we shall
reasonably and promptly object.
You shall comply with the applicable Federal and State laws and
regulations where the Shares are offered for sale and conduct your affairs with
us and with dealers, brokers or investors in accordance with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
12. REDEMPTION OR REPURCHASE WITHIN SEVEN DAYS. If Shares are tendered to
us for redemption or repurchase by us within seven business days after your
acceptance of the original purchase order for such Shares, you will immediately
refund to us the full sales commission (net of allowances to dealers or brokers)
allowed to you on the original sale, and will promptly, upon receipt thereof,
pay to us any refunds from dealers or brokers of the balance of sales
commissions reallowed by you. We shall notify you of such tender for redemption
within 10 days of the day on which notice of such tender for redemption is
received by us.
13. OTHER ACTIVITIES. Your services pursuant to this Agreement shall
not be deemed to be exclusive, and you may render similar services and act
as an underwriter, distributor or dealer for other investment companies in
the offering of their shares.
14. TERM OF AGREEMENT. This Agreement shall become effective on the date
of its execution, and shall remain in effect for a period of two (2) years. The
Agreement is renewable annually thereafter, with respect to the Fund, for
successive periods not to exceed one year (i) by a vote of (a) a majority of the
outstanding voting securities of the Fund, or (b) by a vote of the Board, AND
(ii) by a vote of a majority of the members of the Board who are not parties to
the Agreement or interested persons of any parties to the Agreement (other than
as members of the Board), cast in person at a meeting called for the purpose of
voting on the Agreement.
This Agreement may at any time be terminated by the Fund without the
payment of any penalty, (i) either by vote of the Board or by vote of a majority
of the outstanding voting securities of the Fund on 90 days' written notice to
you; or (ii) by you on 90 days' written notice to the Fund; and shall
immediately terminate with respect to the Fund in the event of its assignment.
15. SUSPENSION OF SALES. We reserve the right at all times to
suspend or limit the public offering of Shares upon two days' written notice
to you.
16. MISCELLANEOUS. This Agreement shall be subject to the laws of the
State of California and shall be interpreted and construed to further promote
the operation of the Fund as an open-end investment company. This Agreement
shall supersede all Distribution Agreements and Amendments previously in effect
between the parties, but shall not supersede or revise any Distribution Plan
between the parties adopted pursuant to Rule 12b-1 under the 1940 Act. As used
herein, the terms "Net Asset Value," "Offering Price," "Investment Company,"
"Open-End Investment Company," "Assignment," "Principal Underwriter,"
"Interested Person," "Parent," "Affiliated Person," and "Majority of the
Outstanding Voting Securities" shall have the meanings set forth in the 1933 Act
or the 1940 Act and the Rules and Regulations thereunder.
Nothing herein shall be deemed to protect you against any liability to us or to
our securities holders to which you would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of your
duties hereunder, or by reason of your reckless disregard of your obligations
and duties hereunder.
If the foregoing meets with your approval, please acknowledge your acceptance by
signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN MUTUAL SERIES FUND INC.
On behalf of Mutual Shares Fund
By: /S/E.N. COHERNOUR
General Counsel/Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By: /S/LESLIE M. KRATTER
Secretary
DATED: November 1, 1996
FRANKLIN MUTUAL SERIES FUND INC.
51 John F. Kennedy Park Way
Short Hills, New Jersey
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404
Re: Distribution Agreement - Mutual Beacon Fund
Gentlemen:
We are a corporation or business trust operating as an open-end management
investment company or "mutual fund", which is registered under the Investment
Company Act of 1940 (the "1940 Act") and whose shares are registered under the
Securities Act of 1933 (the "1933 Act"). On behalf of our series Mutual Shares
Fund (the "Fund"), we desire to issue one or more classes of authorized but
unissued shares of capital stock or beneficial interest of the Fund (the
"Shares") to authorized persons in accordance with applicable Federal and State
securities laws. The Fund's Shares may have one or more classes.
You have informed us that your company is registered as a broker-dealer under
the provisions of the Securities Exchange Act of 1934 and that your company is a
member of the National Association of Securities Dealers, Inc. You have
indicated your desire to act as the exclusive selling agent and distributor for
the Shares. We have been authorized to execute and deliver this Distribution
Agreement ("Agreement") to you by a resolution of our Board of Directors or
Trustees ("Board") passed at a meeting at which a majority of Board members,
including a majority who are not otherwise interested persons of the Fund and
who are not interested persons of our investment adviser, its related
organizations or with you or your related organizations, were present and voted
in favor of the said resolution approving this Agreement.
1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and in
consideration of the agreements on your part herein expressed and upon the terms
and conditions set forth herein, we hereby appoint you as the exclusive sales
agent for the Shares and agree that we will deliver such Shares as you may sell.
You agree to use your best efforts to promote the sale of Shares, but are not
obligated to sell any specific number of Shares.
However, the Fund retains the right to make direct sales of its Shares
without sales charges consistent with the terms of the then current prospectus
and statement of additional information (hereinafter, collectively,
"prospectus") and applicable law, and to engage in other legally authorized
transactions in its Shares which do not involve the sale of Shares to the
general public. Such other transactions may include, without limitation,
transactions between the Fund or any class and its shareholders only,
transactions involving the reorganization of the Fund and transactions involving
the merger or combination of the Fund with another corporation or trust.
2. INDEPENDENT CONTRACTOR. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no authority
or power to obligate or bind us by your actions, conduct or contracts except
that you are authorized to promote the sale of Shares. You may appoint
sub-agents or distribute through dealers or otherwise as you may determine from
time to time, but this Agreement shall not be construed as authorizing any
dealer or other person to accept orders for sale or repurchase on our behalf or
otherwise act as our agent for any purpose.
3. OFFERING PRICE. Shares shall be offered for sale at a price equivalent
to the net asset value per share of that class plus any applicable percentage of
the public offering price as sales commission or as otherwise set forth in our
then current prospectus. On each business day on which the New York Stock
Exchange is open for business, we will furnish you with the net asset value of
the Shares of each available class which shall be determined in accordance with
our then effective prospectus. All Shares will be sold in the manner set forth
in our then effective prospectus and statement of additional information, and in
compliance with applicable law.
4. COMPENSATION.
A. SALES COMMISSION. You shall be entitled to charge a sales
commission on the sale or redemption, as appropriate, of each class of the
Fund's Shares in the amount of any initial, deferred or contingent deferred
sales charge as set forth in our then effective prospectus. You may allow any
sub-agents or dealers such commissions or discounts from and not exceeding the
total sales commission as you shall deem advisable, so long as any such
commissions or discounts are set forth in our current prospectus to the extent
required by the applicable Federal and State securities laws. You may also make
payments to sub-agents or dealers from your own resources, subject to the
following conditions: (a) any such payments shall not create any obligation for
or recourse against the Fund or any class of Shares, and (b) the terms and
conditions of any such payments are consistent with our prospectus and
applicable federal and state securities laws and are disclosed in our prospectus
or statement of additional information to the extent such laws may require.
B. DISTRIBUTION PLANS. You shall also be entitled to
compensation for your services as provided in any Distribution Plan adopted
as to any class of Shares pursuant to Rule 12b-1 under the 1940 Act.
5. TERMS AND CONDITIONS OF SALES. Shares shall be offered for sale only in
those jurisdictions where they have been properly registered or are exempt from
registration, and only to those groups of people which the Board may from time
to time determine to be eligible to purchase such shares.
6. ORDERS AND PAYMENT FOR SHARES. Orders for Shares shall be directed to
the Fund's shareholder services agent, for acceptance on behalf of the Fund. At
or prior to the time of delivery of any of the Shares you will pay or cause to
be paid to the custodian of the Fund's assets, for our account, an amount in
cash equal to the net asset value of such Shares. Sales of Shares shall be
deemed to be made when and where accepted by the Fund's shareholder services
agent. The Fund's custodian and shareholder services agent shall be identified
in its prospectus.
7. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase the Shares for
your own account for purposes of resale to the public, but you may purchase
Shares for your own investment account upon your written assurance that the
purchase is for investment purposes and that the Shares will not be resold
except through redemption by us.
8. SALE OF SHARES TO AFFILIATES. You may sell the Shares at net asset
value to certain of your and our affiliated persons pursuant to the applicable
provisions of the federal securities statutes and rules or regulations
thereunder (the "Rules and Regulations"), including Rule 22d-1 under the 1940
Act, as amended from time to time.
9. ALLOCATION OF EXPENSES. We will pay the expenses:
(a) Of the preparation of the audited and certified financial
statements of our company to be included in any Post-Effective
Amendments ("Amendments") to our Registration Statement under
the 1933 Act or 1940 Act, including the prospectus, or in
reports to existing shareholders;
(b) Of the preparation, including legal fees, and printing of
all Amendments or supplements filed with the Securities and
Exchange Commission, including the copies of the
prospectuses included in the Amendments and the first 10
copies of the definitive prospectuses or supplements
thereto, other than those necessitated by your (including
your "Parent's") activities or Rules and Regulations related
to your activities where such Amendments or supplements
result in expenses which we would not otherwise have
incurred;
(c) Of the preparation, printing and distribution of any reports
or communications which we send to our existing
shareholders; and
(d) Of filing and other fees to Federal and State securities
regulatory authorities necessary to continue offering the
Shares.
You will pay the expenses:
(a) Of printing the copies of the prospectuses and any
supplements thereto which are necessary to continue to offer
our Shares;
(b) Of the preparation, excluding legal fees, and printing of all
Amendments and supplements to our prospectuses if the Amendment
or supplement arises from your (including your "Parent's")
activities or Rules and Regulations related to your activities
and those expenses would not otherwise have been incurred by us;
(c) Of printing additional copies, for use by you as sales
literature, of reports or other communications which we have
prepared for distribution to existing shareholders; and
(d) Incurred by you in advertising, promoting and selling the
Shares.
10. FURNISHING OF INFORMATION. We will furnish to you such information
with respect to each class of Shares, in such form and signed by such of our
officers as you may reasonably request, and we warrant that the statements
therein contained, when so signed, will be true and correct. We will also
furnish you with such information and will take such action as you may
reasonably request in order to qualify the Shares for sale to the public under
the Blue Sky Laws of jurisdictions in which you may wish to offer them. We will
furnish you with annual audited financial statements of our books and accounts
certified by independent public accountants, with semi-annual financial
statements prepared by us, with registration statements and, from time to time,
with such additional information regarding our financial condition as you may
reasonably request.
11. CONDUCT OF BUSINESS. Other than our currently effective prospectus,
you will not issue any sales material or statements except literature or
advertising which conforms to the requirements of Federal and State securities
laws and regulations and which have been filed, where necessary, with the
appropriate regulatory authorities. You will furnish us with copies of all such
materials prior to their use and no such material shall be published if we shall
reasonably and promptly object.
You shall comply with the applicable Federal and State laws and
regulations where the Shares are offered for sale and conduct your affairs with
us and with dealers, brokers or investors in accordance with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
12. REDEMPTION OR REPURCHASE WITHIN SEVEN DAYS. If Shares are tendered to
us for redemption or repurchase by us within seven business days after your
acceptance of the original purchase order for such Shares, you will immediately
refund to us the full sales commission (net of allowances to dealers or brokers)
allowed to you on the original sale, and will promptly, upon receipt thereof,
pay to us any refunds from dealers or brokers of the balance of sales
commissions reallowed by you. We shall notify you of such tender for redemption
within 10 days of the day on which notice of such tender for redemption is
received by us.
13. OTHER ACTIVITIES. Your services pursuant to this Agreement shall
not be deemed to be exclusive, and you may render similar services and act
as an underwriter, distributor or dealer for other investment companies in
the offering of their shares.
14. TERM OF AGREEMENT. This Agreement shall become effective on the date
of its execution, and shall remain in effect for a period of two (2) years. The
Agreement is renewable annually thereafter, with respect to the Fund, for
successive periods not to exceed one year (i) by a vote of (a) a majority of the
outstanding voting securities of the Fund, or (b) by a vote of the Board, AND
(ii) by a vote of a majority of the members of the Board who are not parties to
the Agreement or interested persons of any parties to the Agreement (other than
as members of the Board), cast in person at a meeting called for the purpose of
voting on the Agreement.
This Agreement may at any time be terminated by the Fund without the
payment of any penalty, (i) either by vote of the Board or by vote of a majority
of the outstanding voting securities of the Fund on 90 days' written notice to
you; or (ii) by you on 90 days' written notice to the Fund; and shall
immediately terminate with respect to the Fund in the event of its assignment.
15. SUSPENSION OF SALES. We reserve the right at all times to
suspend or limit the public offering of Shares upon two days' written notice
to you.
16. MISCELLANEOUS. This Agreement shall be subject to the laws of the
State of California and shall be interpreted and construed to further promote
the operation of the Fund as an open-end investment company. This Agreement
shall supersede all Distribution Agreements and Amendments previously in effect
between the parties, but shall not supersede or revise any Distribution Plan
between the parties adopted pursuant to Rule 12b-1 under the 1940 Act. As used
herein, the terms "Net Asset Value," "Offering Price," "Investment Company,"
"Open-End Investment Company," "Assignment," "Principal Underwriter,"
"Interested Person," "Parent," "Affiliated Person," and "Majority of the
Outstanding Voting Securities" shall have the meanings set forth in the 1933 Act
or the 1940 Act and the Rules and Regulations thereunder.
Nothing herein shall be deemed to protect you against any liability to us or to
our securities holders to which you would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of your
duties hereunder, or by reason of your reckless disregard of your obligations
and duties hereunder.
If the foregoing meets with your approval, please acknowledge your acceptance by
signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN MUTUAL SERIES FUND INC.
On behalf of Mutual Beacon Fund
By: /S/E.N. COHERNOUR
General Counsel/Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By: /S/LESLIE M. KRATTER
Secretary
DATED: November 1, 1996
FRANKLIN MUTUAL SERIES FUND INC.
51 John F. Kennedy Park Way
Short Hills, New Jersey
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404
Re: Distribution Agreement - Mutual Qualified Fund
Gentlemen:
We are a corporation or business trust operating as an open-end management
investment company or "mutual fund", which is registered under the Investment
Company Act of 1940 (the "1940 Act") and whose shares are registered under the
Securities Act of 1933 (the "1933 Act"). On behalf of our series Mutual Shares
Fund (the "Fund"), we desire to issue one or more classes of authorized but
unissued shares of capital stock or beneficial interest of the Fund (the
"Shares") to authorized persons in accordance with applicable Federal and State
securities laws. The Fund's Shares may have one or more classes.
You have informed us that your company is registered as a broker-dealer under
the provisions of the Securities Exchange Act of 1934 and that your company is a
member of the National Association of Securities Dealers, Inc. You have
indicated your desire to act as the exclusive selling agent and distributor for
the Shares. We have been authorized to execute and deliver this Distribution
Agreement ("Agreement") to you by a resolution of our Board of Directors or
Trustees ("Board") passed at a meeting at which a majority of Board members,
including a majority who are not otherwise interested persons of the Fund and
who are not interested persons of our investment adviser, its related
organizations or with you or your related organizations, were present and voted
in favor of the said resolution approving this Agreement.
1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and in
consideration of the agreements on your part herein expressed and upon the terms
and conditions set forth herein, we hereby appoint you as the exclusive sales
agent for the Shares and agree that we will deliver such Shares as you may sell.
You agree to use your best efforts to promote the sale of Shares, but are not
obligated to sell any specific number of Shares.
However, the Fund retains the right to make direct sales of its Shares
without sales charges consistent with the terms of the then current prospectus
and statement of additional information (hereinafter, collectively,
"prospectus") and applicable law, and to engage in other legally authorized
transactions in its Shares which do not involve the sale of Shares to the
general public. Such other transactions may include, without limitation,
transactions between the Fund or any class and its shareholders only,
transactions involving the reorganization of the Fund and transactions involving
the merger or combination of the Fund with another corporation or trust.
2. INDEPENDENT CONTRACTOR. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no authority
or power to obligate or bind us by your actions, conduct or contracts except
that you are authorized to promote the sale of Shares. You may appoint
sub-agents or distribute through dealers or otherwise as you may determine from
time to time, but this Agreement shall not be construed as authorizing any
dealer or other person to accept orders for sale or repurchase on our behalf or
otherwise act as our agent for any purpose.
3. OFFERING PRICE. Shares shall be offered for sale at a price equivalent
to the net asset value per share of that class plus any applicable percentage of
the public offering price as sales commission or as otherwise set forth in our
then current prospectus. On each business day on which the New York Stock
Exchange is open for business, we will furnish you with the net asset value of
the Shares of each available class which shall be determined in accordance with
our then effective prospectus. All Shares will be sold in the manner set forth
in our then effective prospectus and statement of additional information, and in
compliance with applicable law.
4. COMPENSATION.
A. SALES COMMISSION. You shall be entitled to charge a sales
commission on the sale or redemption, as appropriate, of each class of the
Fund's Shares in the amount of any initial, deferred or contingent deferred
sales charge as set forth in our then effective prospectus. You may allow any
sub-agents or dealers such commissions or discounts from and not exceeding the
total sales commission as you shall deem advisable, so long as any such
commissions or discounts are set forth in our current prospectus to the extent
required by the applicable Federal and State securities laws. You may also make
payments to sub-agents or dealers from your own resources, subject to the
following conditions: (a) any such payments shall not create any obligation for
or recourse against the Fund or any class of Shares, and (b) the terms and
conditions of any such payments are consistent with our prospectus and
applicable federal and state securities laws and are disclosed in our prospectus
or statement of additional information to the extent such laws may require.
B. DISTRIBUTION PLANS. You shall also be entitled to compensation for
your services as provided in any Distribution Plan adopted as to any class of
Shares pursuant to Rule 12b-1 under the 1940 Act.
5. TERMS AND CONDITIONS OF SALES. Shares shall be offered for sale only in
those jurisdictions where they have been properly registered or are exempt from
registration, and only to those groups of people which the Board may from time
to time determine to be eligible to purchase such shares.
6. ORDERS AND PAYMENT FOR SHARES. Orders for Shares shall be directed to
the Fund's shareholder services agent, for acceptance on behalf of the Fund. At
or prior to the time of delivery of any of the Shares you will pay or cause to
be paid to the custodian of the Fund's assets, for our account, an amount in
cash equal to the net asset value of such Shares. Sales of Shares shall be
deemed to be made when and where accepted by the Fund's shareholder services
agent. The Fund's custodian and shareholder services agent shall be identified
in its prospectus.
7. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase the Shares for
your own account for purposes of resale to the public, but you may purchase
Shares for your own investment account upon your written assurance that the
purchase is for investment purposes and that the Shares will not be resold
except through redemption by us.
8. SALE OF SHARES TO AFFILIATES. You may sell the Shares at net asset
value to certain of your and our affiliated persons pursuant to the applicable
provisions of the federal securities statutes and rules or regulations
thereunder (the "Rules and Regulations"), including Rule 22d-1 under the 1940
Act, as amended from time to time.
9. ALLOCATION OF EXPENSES. We will pay the expenses:
(a) Of the preparation of the audited and certified financial
statements of our company to be included in any Post-Effective
Amendments ("Amendments") to our Registration Statement under
the 1933 Act or 1940 Act, including the prospectus, or in
reports to existing shareholders;
(b) Of the preparation, including legal fees, and printing of
all Amendments or supplements filed with the Securities and
Exchange Commission, including the copies of the
prospectuses included in the Amendments and the first 10
copies of the definitive prospectuses or supplements
thereto, other than those necessitated by your (including
your "Parent's") activities or Rules and Regulations related
to your activities where such Amendments or supplements
result in expenses which we would not otherwise have
incurred;
(c) Of the preparation, printing and distribution of any reports
or communications which we send to our existing
shareholders; and
(d) Of filing and other fees to Federal and State securities
regulatory authorities necessary to continue offering the
Shares.
You will pay the expenses:
(a) Of printing the copies of the prospectuses and any
supplements thereto which are necessary to continue to offer
our Shares;
(b) Of the preparation, excluding legal fees, and printing of all
Amendments and supplements to our prospectuses if the Amendment
or supplement arises from your (including your "Parent's")
activities or Rules and Regulations related to your activities
and those expenses would not otherwise have been incurred by us;
(c) Of printing additional copies, for use by you as sales
literature, of reports or other communications which we have
prepared for distribution to existing shareholders; and
(d) Incurred by you in advertising, promoting and selling the
Shares.
10. FURNISHING OF INFORMATION. We will furnish to you such information
with respect to each class of Shares, in such form and signed by such of our
officers as you may reasonably request, and we warrant that the statements
therein contained, when so signed, will be true and correct. We will also
furnish you with such information and will take such action as you may
reasonably request in order to qualify the Shares for sale to the public under
the Blue Sky Laws of jurisdictions in which you may wish to offer them. We will
furnish you with annual audited financial statements of our books and accounts
certified by independent public accountants, with semi-annual financial
statements prepared by us, with registration statements and, from time to time,
with such additional information regarding our financial condition as you may
reasonably request.
11. CONDUCT OF BUSINESS. Other than our currently effective prospectus,
you will not issue any sales material or statements except literature or
advertising which conforms to the requirements of Federal and State securities
laws and regulations and which have been filed, where necessary, with the
appropriate regulatory authorities. You will furnish us with copies of all such
materials prior to their use and no such material shall be published if we shall
reasonably and promptly object.
You shall comply with the applicable Federal and State laws and
regulations where the Shares are offered for sale and conduct your affairs with
us and with dealers, brokers or investors in accordance with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
12. REDEMPTION OR REPURCHASE WITHIN SEVEN DAYS. If Shares are tendered to
us for redemption or repurchase by us within seven business days after your
acceptance of the original purchase order for such Shares, you will immediately
refund to us the full sales commission (net of allowances to dealers or brokers)
allowed to you on the original sale, and will promptly, upon receipt thereof,
pay to us any refunds from dealers or brokers of the balance of sales
commissions reallowed by you. We shall notify you of such tender for redemption
within 10 days of the day on which notice of such tender for redemption is
received by us.
13. OTHER ACTIVITIES. Your services pursuant to this Agreement shall
not be deemed to be exclusive, and you may render similar services and act
as an underwriter, distributor or dealer for other investment companies in
the offering of their shares.
14. TERM OF AGREEMENT. This Agreement shall become effective on the date
of its execution, and shall remain in effect for a period of two (2) years. The
Agreement is renewable annually thereafter, with respect to the Fund, for
successive periods not to exceed one year (i) by a vote of (a) a majority of the
outstanding voting securities of the Fund, or (b) by a vote of the Board, AND
(ii) by a vote of a majority of the members of the Board who are not parties to
the Agreement or interested persons of any parties to the Agreement (other than
as members of the Board), cast in person at a meeting called for the purpose of
voting on the Agreement.
This Agreement may at any time be terminated by the Fund without the
payment of any penalty, (i) either by vote of the Board or by vote of a majority
of the outstanding voting securities of the Fund on 90 days' written notice to
you; or (ii) by you on 90 days' written notice to the Fund; and shall
immediately terminate with respect to the Fund in the event of its assignment.
15. SUSPENSION OF SALES. We reserve the right at all times to
suspend or limit the public offering of Shares upon two days' written notice
to you.
16. MISCELLANEOUS. This Agreement shall be subject to the laws of the
State of California and shall be interpreted and construed to further promote
the operation of the Fund as an open-end investment company. This Agreement
shall supersede all Distribution Agreements and Amendments previously in effect
between the parties, but shall not supersede or revise any Distribution Plan
between the parties adopted pursuant to Rule 12b-1 under the 1940 Act. As used
herein, the terms "Net Asset Value," "Offering Price," "Investment Company,"
"Open-End Investment Company," "Assignment," "Principal Underwriter,"
"Interested Person," "Parent," "Affiliated Person," and "Majority of the
Outstanding Voting Securities" shall have the meanings set forth in the 1933 Act
or the 1940 Act and the Rules and Regulations thereunder.
Nothing herein shall be deemed to protect you against any liability to us or to
our securities holders to which you would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of your
duties hereunder, or by reason of your reckless disregard of your obligations
and duties hereunder.
If the foregoing meets with your approval, please acknowledge your acceptance by
signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN MUTUAL SERIES FUND INC.
On behalf of Mutual Qualified Fund
By: /S/E.N. COHERNOUR
General Counsel/Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By: /S/LESLIE M. KRATTER
Secretary
DATED: November 1, 1996
FRANKLIN MUTUAL SERIES FUND INC.
51 John F. Kennedy Park Way
Short Hills, New Jersey
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404
Re: Distribution Agreement - Mutual Discovery Fund
Gentlemen:
We are a corporation or business trust operating as an open-end management
investment company or "mutual fund", which is registered under the Investment
Company Act of 1940 (the "1940 Act") and whose shares are registered under the
Securities Act of 1933 (the "1933 Act"). On behalf of our series Mutual Shares
Fund (the "Fund"), we desire to issue one or more classes of authorized but
unissued shares of capital stock or beneficial interest of the Fund (the
"Shares") to authorized persons in accordance with applicable Federal and State
securities laws. The Fund's Shares may have one or more classes.
You have informed us that your company is registered as a broker-dealer under
the provisions of the Securities Exchange Act of 1934 and that your company is a
member of the National Association of Securities Dealers, Inc. You have
indicated your desire to act as the exclusive selling agent and distributor for
the Shares. We have been authorized to execute and deliver this Distribution
Agreement ("Agreement") to you by a resolution of our Board of Directors or
Trustees ("Board") passed at a meeting at which a majority of Board members,
including a majority who are not otherwise interested persons of the Fund and
who are not interested persons of our investment adviser, its related
organizations or with you or your related organizations, were present and voted
in favor of the said resolution approving this Agreement.
1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and in
consideration of the agreements on your part herein expressed and upon the terms
and conditions set forth herein, we hereby appoint you as the exclusive sales
agent for the Shares and agree that we will deliver such Shares as you may sell.
You agree to use your best efforts to promote the sale of Shares, but are not
obligated to sell any specific number of Shares.
However, the Fund retains the right to make direct sales of its Shares
without sales charges consistent with the terms of the then current prospectus
and statement of additional information (hereinafter, collectively,
"prospectus") and applicable law, and to engage in other legally authorized
transactions in its Shares which do not involve the sale of Shares to the
general public. Such other transactions may include, without limitation,
transactions between the Fund or any class and its shareholders only,
transactions involving the reorganization of the Fund and transactions involving
the merger or combination of the Fund with another corporation or trust.
2. INDEPENDENT CONTRACTOR. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no authority
or power to obligate or bind us by your actions, conduct or contracts except
that you are authorized to promote the sale of Shares. You may appoint
sub-agents or distribute through dealers or otherwise as you may determine from
time to time, but this Agreement shall not be construed as authorizing any
dealer or other person to accept orders for sale or repurchase on our behalf or
otherwise act as our agent for any purpose.
3. OFFERING PRICE. Shares shall be offered for sale at a price equivalent
to the net asset value per share of that class plus any applicable percentage of
the public offering price as sales commission or as otherwise set forth in our
then current prospectus. On each business day on which the New York Stock
Exchange is open for business, we will furnish you with the net asset value of
the Shares of each available class which shall be determined in accordance with
our then effective prospectus. All Shares will be sold in the manner set forth
in our then effective prospectus and statement of additional information, and in
compliance with applicable law.
4. COMPENSATION.
A. SALES COMMISSION. You shall be entitled to charge a sales
commission on the sale or redemption, as appropriate, of each class of the
Fund's Shares in the amount of any initial, deferred or contingent deferred
sales charge as set forth in our then effective prospectus. You may allow any
sub-agents or dealers such commissions or discounts from and not exceeding the
total sales commission as you shall deem advisable, so long as any such
commissions or discounts are set forth in our current prospectus to the extent
required by the applicable Federal and State securities laws. You may also make
payments to sub-agents or dealers from your own resources, subject to the
following conditions: (a) any such payments shall not create any obligation for
or recourse against the Fund or any class of Shares, and (b) the terms and
conditions of any such payments are consistent with our prospectus and
applicable federal and state securities laws and are disclosed in our prospectus
or statement of additional information to the extent such laws may require.
B. DISTRIBUTION PLANS. You shall also be entitled to
compensation for your services as provided in any Distribution Plan adopted
as to any class of Shares pursuant to Rule 12b-1 under the 1940 Act.
5. TERMS AND CONDITIONS OF SALES. Shares shall be offered for sale only in
those jurisdictions where they have been properly registered or are exempt from
registration, and only to those groups of people which the Board may from time
to time determine to be eligible to purchase such shares.
6. ORDERS AND PAYMENT FOR SHARES. Orders for Shares shall be directed to
the Fund's shareholder services agent, for acceptance on behalf of the Fund. At
or prior to the time of delivery of any of the Shares you will pay or cause to
be paid to the custodian of the Fund's assets, for our account, an amount in
cash equal to the net asset value of such Shares. Sales of Shares shall be
deemed to be made when and where accepted by the Fund's shareholder services
agent. The Fund's custodian and shareholder services agent shall be identified
in its prospectus.
7. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase the Shares for
your own account for purposes of resale to the public, but you may purchase
Shares for your own investment account upon your written assurance that the
purchase is for investment purposes and that the Shares will not be resold
except through redemption by us.
8. SALE OF SHARES TO AFFILIATES. You may sell the Shares at net asset
value to certain of your and our affiliated persons pursuant to the applicable
provisions of the federal securities statutes and rules or regulations
thereunder (the "Rules and Regulations"), including Rule 22d-1 under the 1940
Act, as amended from time to time.
9. ALLOCATION OF EXPENSES. We will pay the expenses:
(a) Of the preparation of the audited and certified financial
statements of our company to be included in any Post-Effective
Amendments ("Amendments") to our Registration Statement under
the 1933 Act or 1940 Act, including the prospectus, or in
reports to existing shareholders;
(b) Of the preparation, including legal fees, and printing of
all Amendments or supplements filed with the Securities and
Exchange Commission, including the copies of the
prospectuses included in the Amendments and the first 10
copies of the definitive prospectuses or supplements
thereto, other than those necessitated by your (including
your "Parent's") activities or Rules and Regulations related
to your activities where such Amendments or supplements
result in expenses which we would not otherwise have
incurred;
(c) Of the preparation, printing and distribution of any reports
or communications which we send to our existing
shareholders; and
(d) Of filing and other fees to Federal and State securities
regulatory authorities necessary to continue offering the
Shares.
You will pay the expenses:
(a) Of printing the copies of the prospectuses and any
supplements thereto which are necessary to continue to offer
our Shares;
(b) Of the preparation, excluding legal fees, and printing of all
Amendments and supplements to our prospectuses if the Amendment
or supplement arises from your (including your "Parent's")
activities or Rules and Regulations related to your activities
and those expenses would not otherwise have been incurred by us;
(c) Of printing additional copies, for use by you as sales
literature, of reports or other communications which we have
prepared for distribution to existing shareholders; and
(d) Incurred by you in advertising, promoting and selling the
Shares.
10. FURNISHING OF INFORMATION. We will furnish to you such information
with respect to each class of Shares, in such form and signed by such of our
officers as you may reasonably request, and we warrant that the statements
therein contained, when so signed, will be true and correct. We will also
furnish you with such information and will take such action as you may
reasonably request in order to qualify the Shares for sale to the public under
the Blue Sky Laws of jurisdictions in which you may wish to offer them. We will
furnish you with annual audited financial statements of our books and accounts
certified by independent public accountants, with semi-annual financial
statements prepared by us, with registration statements and, from time to time,
with such additional information regarding our financial condition as you may
reasonably request.
11. CONDUCT OF BUSINESS. Other than our currently effective prospectus,
you will not issue any sales material or statements except literature or
advertising which conforms to the requirements of Federal and State securities
laws and regulations and which have been filed, where necessary, with the
appropriate regulatory authorities. You will furnish us with copies of all such
materials prior to their use and no such material shall be published if we shall
reasonably and promptly object.
You shall comply with the applicable Federal and State laws and
regulations where the Shares are offered for sale and conduct your affairs with
us and with dealers, brokers or investors in accordance with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
12. REDEMPTION OR REPURCHASE WITHIN SEVEN DAYS. If Shares are tendered to
us for redemption or repurchase by us within seven business days after your
acceptance of the original purchase order for such Shares, you will immediately
refund to us the full sales commission (net of allowances to dealers or brokers)
allowed to you on the original sale, and will promptly, upon receipt thereof,
pay to us any refunds from dealers or brokers of the balance of sales
commissions reallowed by you. We shall notify you of such tender for redemption
within 10 days of the day on which notice of such tender for redemption is
received by us.
13. OTHER ACTIVITIES. Your services pursuant to this Agreement shall
not be deemed to be exclusive, and you may render similar services and act
as an underwriter, distributor or dealer for other investment companies in
the offering of their shares.
14. TERM OF AGREEMENT. This Agreement shall become effective on the date
of its execution, and shall remain in effect for a period of two (2) years. The
Agreement is renewable annually thereafter, with respect to the Fund, for
successive periods not to exceed one year (i) by a vote of (a) a majority of the
outstanding voting securities of the Fund, or (b) by a vote of the Board, AND
(ii) by a vote of a majority of the members of the Board who are not parties to
the Agreement or interested persons of any parties to the Agreement (other than
as members of the Board), cast in person at a meeting called for the purpose of
voting on the Agreement.
This Agreement may at any time be terminated by the Fund without the
payment of any penalty, (i) either by vote of the Board or by vote of a majority
of the outstanding voting securities of the Fund on 90 days' written notice to
you; or (ii) by you on 90 days' written notice to the Fund; and shall
immediately terminate with respect to the Fund in the event of its assignment.
15. SUSPENSION OF SALES. We reserve the right at all times to
suspend or limit the public offering of Shares upon two days' written notice
to you.
16. MISCELLANEOUS. This Agreement shall be subject to the laws of the
State of California and shall be interpreted and construed to further promote
the operation of the Fund as an open-end investment company. This Agreement
shall supersede all Distribution Agreements and Amendments previously in effect
between the parties, but shall not supersede or revise any Distribution Plan
between the parties adopted pursuant to Rule 12b-1 under the 1940 Act. As used
herein, the terms "Net Asset Value," "Offering Price," "Investment Company,"
"Open-End Investment Company," "Assignment," "Principal Underwriter,"
"Interested Person," "Parent," "Affiliated Person," and "Majority of the
Outstanding Voting Securities" shall have the meanings set forth in the 1933 Act
or the 1940 Act and the Rules and Regulations thereunder.
Nothing herein shall be deemed to protect you against any liability to us or to
our securities holders to which you would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of your
duties hereunder, or by reason of your reckless disregard of your obligations
and duties hereunder.
If the foregoing meets with your approval, please acknowledge your acceptance by
signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN MUTUAL SERIES FUND INC.
On behalf of Mutual Discovery Fund
By: /S/E.N. COHERNOUR
General Counsel/Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By: /S/LESLIE M. KRATTER
Secretary
DATED: November 1, 1996
FRANKLIN MUTUAL SERIES FUND INC.
51 John F. Kennedy Park Way
Short Hills, New Jersey
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404
Re: Distribution Agreement - Mutual European Fund
Gentlemen:
We are a corporation or business trust operating as an open-end management
investment company or "mutual fund", which is registered under the Investment
Company Act of 1940 (the "1940 Act") and whose shares are registered under the
Securities Act of 1933 (the "1933 Act"). On behalf of our series Mutual Shares
Fund (the "Fund"), we desire to issue one or more classes of authorized but
unissued shares of capital stock or beneficial interest of the Fund (the
"Shares") to authorized persons in accordance with applicable Federal and State
securities laws. The Fund's Shares may have one or more classes.
You have informed us that your company is registered as a broker-dealer under
the provisions of the Securities Exchange Act of 1934 and that your company is a
member of the National Association of Securities Dealers, Inc. You have
indicated your desire to act as the exclusive selling agent and distributor for
the Shares. We have been authorized to execute and deliver this Distribution
Agreement ("Agreement") to you by a resolution of our Board of Directors or
Trustees ("Board") passed at a meeting at which a majority of Board members,
including a majority who are not otherwise interested persons of the Fund and
who are not interested persons of our investment adviser, its related
organizations or with you or your related organizations, were present and voted
in favor of the said resolution approving this Agreement.
1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and in
consideration of the agreements on your part herein expressed and upon the terms
and conditions set forth herein, we hereby appoint you as the exclusive sales
agent for the Shares and agree that we will deliver such Shares as you may sell.
You agree to use your best efforts to promote the sale of Shares, but are not
obligated to sell any specific number of Shares.
However, the Fund retains the right to make direct sales of its Shares
without sales charges consistent with the terms of the then current prospectus
and statement of additional information (hereinafter, collectively,
"prospectus") and applicable law, and to engage in other legally authorized
transactions in its Shares which do not involve the sale of Shares to the
general public. Such other transactions may include, without limitation,
transactions between the Fund or any class and its shareholders only,
transactions involving the reorganization of the Fund and transactions involving
the merger or combination of the Fund with another corporation or trust.
2. INDEPENDENT CONTRACTOR. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no authority
or power to obligate or bind us by your actions, conduct or contracts except
that you are authorized to promote the sale of Shares. You may appoint
sub-agents or distribute through dealers or otherwise as you may determine from
time to time, but this Agreement shall not be construed as authorizing any
dealer or other person to accept orders for sale or repurchase on our behalf or
otherwise act as our agent for any purpose.
3. OFFERING PRICE. Shares shall be offered for sale at a price equivalent
to the net asset value per share of that class plus any applicable percentage of
the public offering price as sales commission or as otherwise set forth in our
then current prospectus. On each business day on which the New York Stock
Exchange is open for business, we will furnish you with the net asset value of
the Shares of each available class which shall be determined in accordance with
our then effective prospectus. All Shares will be sold in the manner set forth
in our then effective prospectus and statement of additional information, and in
compliance with applicable law.
4. COMPENSATION.
A. SALES COMMISSION. You shall be entitled to charge a sales
commission on the sale or redemption, as appropriate, of each class of the
Fund's Shares in the amount of any initial, deferred or contingent deferred
sales charge as set forth in our then effective prospectus. You may allow any
sub-agents or dealers such commissions or discounts from and not exceeding the
total sales commission as you shall deem advisable, so long as any such
commissions or discounts are set forth in our current prospectus to the extent
required by the applicable Federal and State securities laws. You may also make
payments to sub-agents or dealers from your own resources, subject to the
following conditions: (a) any such payments shall not create any obligation for
or recourse against the Fund or any class of Shares, and (b) the terms and
conditions of any such payments are consistent with our prospectus and
applicable federal and state securities laws and are disclosed in our prospectus
or statement of additional information to the extent such laws may require.
B. DISTRIBUTION PLANS. You shall also be entitled to
compensation for your services as provided in any Distribution Plan adopted
as to any class of Shares pursuant to Rule 12b-1 under the 1940 Act.
5. TERMS AND CONDITIONS OF SALES. Shares shall be offered for sale only in
those jurisdictions where they have been properly registered or are exempt from
registration, and only to those groups of people which the Board may from time
to time determine to be eligible to purchase such shares.
6. ORDERS AND PAYMENT FOR SHARES. Orders for Shares shall be directed to
the Fund's shareholder services agent, for acceptance on behalf of the Fund. At
or prior to the time of delivery of any of the Shares you will pay or cause to
be paid to the custodian of the Fund's assets, for our account, an amount in
cash equal to the net asset value of such Shares. Sales of Shares shall be
deemed to be made when and where accepted by the Fund's shareholder services
agent. The Fund's custodian and shareholder services agent shall be identified
in its prospectus.
7. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase the Shares for
your own account for purposes of resale to the public, but you may purchase
Shares for your own investment account upon your written assurance that the
purchase is for investment purposes and that the Shares will not be resold
except through redemption by us.
8. SALE OF SHARES TO AFFILIATES. You may sell the Shares at net asset
value to certain of your and our affiliated persons pursuant to the applicable
provisions of the federal securities statutes and rules or regulations
thereunder (the "Rules and Regulations"), including Rule 22d-1 under the 1940
Act, as amended from time to time.
9. ALLOCATION OF EXPENSES. We will pay the expenses:
(a) Of the preparation of the audited and certified financial
statements of our company to be included in any Post-Effective
Amendments ("Amendments") to our Registration Statement under
the 1933 Act or 1940 Act, including the prospectus, or in
reports to existing shareholders;
(b) Of the preparation, including legal fees, and printing of
all Amendments or supplements filed with the Securities and
Exchange Commission, including the copies of the
prospectuses included in the Amendments and the first 10
copies of the definitive prospectuses or supplements
thereto, other than those necessitated by your (including
your "Parent's") activities or Rules and Regulations related
to your activities where such Amendments or supplements
result in expenses which we would not otherwise have
incurred;
(c) Of the preparation, printing and distribution of any reports
or communications which we send to our existing
shareholders; and
(d) Of filing and other fees to Federal and State securities
regulatory authorities necessary to continue offering the
Shares.
You will pay the expenses:
(a) Of printing the copies of the prospectuses and any
supplements thereto which are necessary to continue to offer
our Shares;
(b) Of the preparation, excluding legal fees, and printing of all
Amendments and supplements to our prospectuses if the Amendment
or supplement arises from your (including your "Parent's")
activities or Rules and Regulations related to your activities
and those expenses would not otherwise have been incurred by us;
(c) Of printing additional copies, for use by you as sales
literature, of reports or other communications which we have
prepared for distribution to existing shareholders; and
(d) Incurred by you in advertising, promoting and selling the
Shares.
10. FURNISHING OF INFORMATION. We will furnish to you such information
with respect to each class of Shares, in such form and signed by such of our
officers as you may reasonably request, and we warrant that the statements
therein contained, when so signed, will be true and correct. We will also
furnish you with such information and will take such action as you may
reasonably request in order to qualify the Shares for sale to the public under
the Blue Sky Laws of jurisdictions in which you may wish to offer them. We will
furnish you with annual audited financial statements of our books and accounts
certified by independent public accountants, with semi-annual financial
statements prepared by us, with registration statements and, from time to time,
with such additional information regarding our financial condition as you may
reasonably request.
11. CONDUCT OF BUSINESS. Other than our currently effective prospectus,
you will not issue any sales material or statements except literature or
advertising which conforms to the requirements of Federal and State securities
laws and regulations and which have been filed, where necessary, with the
appropriate regulatory authorities. You will furnish us with copies of all such
materials prior to their use and no such material shall be published if we shall
reasonably and promptly object.
You shall comply with the applicable Federal and State laws and
regulations where the Shares are offered for sale and conduct your affairs with
us and with dealers, brokers or investors in accordance with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
12. REDEMPTION OR REPURCHASE WITHIN SEVEN DAYS. If Shares are tendered to
us for redemption or repurchase by us within seven business days after your
acceptance of the original purchase order for such Shares, you will immediately
refund to us the full sales commission (net of allowances to dealers or brokers)
allowed to you on the original sale, and will promptly, upon receipt thereof,
pay to us any refunds from dealers or brokers of the balance of sales
commissions reallowed by you. We shall notify you of such tender for redemption
within 10 days of the day on which notice of such tender for redemption is
received by us.
13. OTHER ACTIVITIES. Your services pursuant to this Agreement shall
not be deemed to be exclusive, and you may render similar services and act
as an underwriter, distributor or dealer for other investment companies in
the offering of their shares.
14. TERM OF AGREEMENT. This Agreement shall become effective on the date
of its execution, and shall remain in effect for a period of two (2) years. The
Agreement is renewable annually thereafter, with respect to the Fund, for
successive periods not to exceed one year (i) by a vote of (a) a majority of the
outstanding voting securities of the Fund, or (b) by a vote of the Board, AND
(ii) by a vote of a majority of the members of the Board who are not parties to
the Agreement or interested persons of any parties to the Agreement (other than
as members of the Board), cast in person at a meeting called for the purpose of
voting on the Agreement.
This Agreement may at any time be terminated by the Fund without the
payment of any penalty, (i) either by vote of the Board or by vote of a majority
of the outstanding voting securities of the Fund on 90 days' written notice to
you; or (ii) by you on 90 days' written notice to the Fund; and shall
immediately terminate with respect to the Fund in the event of its assignment.
15. SUSPENSION OF SALES. We reserve the right at all times to
suspend or limit the public offering of Shares upon two days' written notice
to you.
16. MISCELLANEOUS. This Agreement shall be subject to the laws of the
State of California and shall be interpreted and construed to further promote
the operation of the Fund as an open-end investment company. This Agreement
shall supersede all Distribution Agreements and Amendments previously in effect
between the parties, but shall not supersede or revise any Distribution Plan
between the parties adopted pursuant to Rule 12b-1 under the 1940 Act. As used
herein, the terms "Net Asset Value," "Offering Price," "Investment Company,"
"Open-End Investment Company," "Assignment," "Principal Underwriter,"
"Interested Person," "Parent," "Affiliated Person," and "Majority of the
Outstanding Voting Securities" shall have the meanings set forth in the 1933 Act
or the 1940 Act and the Rules and Regulations thereunder.
Nothing herein shall be deemed to protect you against any liability to us or to
our securities holders to which you would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of your
duties hereunder, or by reason of your reckless disregard of your obligations
and duties hereunder.
If the foregoing meets with your approval, please acknowledge your acceptance by
signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN MUTUAL SERIES FUND INC.
On behalf of Mutual European Fund
By: /S/E.N. COHERNOUR
General Counsel/Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By: /S/LESLIE M. KRATTER
Secretary
DATED: November 1, 1996
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Condensed Financial
Information" in the Class Z Prospectus, "Custodian, Transfer Agent and Auditors"
in the Class Z Statement of Additional Information, "Auditors" in the Class I
and Class II Statement of Additional Information, and to the incorporation by
reference in this Post-Effective Amendment No. 21 to Registration Statement
Number 33-18516 on Form N-1A of our reports dated February 9, 1996, on the
financial statements and financial highlights of Mutual Shares Fund, Mutual
Qualified Fund, Mutual Beacon Fund, and Mutual Discovery Fund (each a portfolio
of Franklin Mutual Series Fund Inc.) included in the 1995 Annual Reports to
Shareholders.
/s/Ernst & Young LLP
ERNST & YOUNG LLP
Boston, Massachusetts
January 28, 1997
CLASS I DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUTUAL SERIES FUND INC.
II. Fund: MUTUAL SHARES FUND - CLASS I
PREAMBLE TO CLASS I DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by FRANKLIN
MUTUAL SERIES FUND INC. ("Mutual Series") for the class I shares (the "Class")
of the fund named above (the "Fund"), which Plan shall take effect on the date
class I shares of the Fund are first offered (the "Effective Date of the Plan").
The Plan has been approved by a majority of the Board of Directors of Mutual
Series (the "Board"), including a majority of the directors who are not
interested persons of Mutual Series and who have no direct or indirect financial
interest in the operation of the Plan (the "non-interested board members"), cast
in person at a meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of payments
and terms of the Management Agreement between Mutual Series on behalf of the
Fund and Franklin Mutual Advisers, Inc. ("Advisers") and the terms of the
Underwriting Agreement between Mutual Series on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board concluded that
the compensation of Advisers under the Management Agreement, and of Distributors
under the Underwriting Agreement, was fair and not excessive; however, the Board
also recognized that uncertainty may exist from time to time with respect to
whether payments to be made by the Fund to Advisers, Distributors, or others or
by Advisers or Distributors to others may be deemed to constitute distribution
expenses. Accordingly, the Board determined that the Plan should provide for
such payments and that adoption of the Plan would be prudent and in the best
interests of the Fund and its shareholders. Such approval included a
determination that in the exercise of their reasonable business judgment and in
light of their fiduciary duties, there is a reasonable likelihood that the Plan
will benefit the Fund and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all expenses incurred by
Distributors or others in the promotion and distribution of the shares of the
Class, as well as for shareholder services provided for existing shareholders of
the Class. These expenses may include, but are not limited to, the expenses of
the printing of prospectuses and reports used for sales purposes, preparing and
distributing sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of Distributors'
overhead expenses attributable to the distribution of Class shares. These
expenses may also include any distribution or service fees paid to securities
dealers or their firms or others. Agreements for the payment of service fees to
securities dealers or their firms or others shall be in a form which has been
approved from time to time by the Board, including the non-interested board
members.
2. The maximum amount which may be reimbursed by the Fund to Distributors or
others pursuant to Paragraph 1 herein shall be 0.35% per annum of the average
daily net assets of the Class. Said reimbursement shall be made quarterly by the
Fund to Distributors or others.
3. In addition to the payments which the Fund is authorized to make pursuant to
paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers, Distributors
or other parties on behalf of the Fund, Advisers or Distributors make payments
that are deemed to be payments by the Fund for the financing of any activity
primarily intended to result in the sale of Class shares issued by the Fund
within the context of Rule 12b-1 under the Act, then such payments shall be
deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Conduct National Association of Securities
Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year only so
long as such continuance is specifically approved at least annually by a vote of
the Board, including the non-interested board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between Mutual Series on behalf of the Fund and
Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent for distribution pursuant
to Paragraph 2 hereof without approval by a majority of the Fund's outstanding
voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of Mutual
Series' non-interested board members shall be committed to the discretion of
such non-interested board members.
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by Mutual Series and Distributors as evidenced by their execution hereof.
FRANKLIN MUTUAL SERIES FUND INC.
By: /S/E.N. COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: /S/DEBORAH R. GATZEK
Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
As of November 1, 1996
CLASS I DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUTUAL SERIES FUND INC.
II. Fund: MUTUAL QUALIFIED FUND - CLASS I
PREAMBLE TO CLASS I DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by FRANKLIN
MUTUAL SERIES FUND INC. ("Mutual Series") for the class I shares (the "Class")
of the fund named above (the "Fund"), which Plan shall take effect on the date
class I shares of the Fund are first offered (the "Effective Date of the Plan").
The Plan has been approved by a majority of the Board of Directors of Mutual
Series (the "Board"), including a majority of the directors who are not
interested persons of Mutual Series and who have no direct or indirect financial
interest in the operation of the Plan (the "non-interested board members"), cast
in person at a meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of payments
and terms of the Management Agreement between Mutual Series on behalf of the
Fund and Franklin Mutual Advisers, Inc. ("Advisers") and the terms of the
Underwriting Agreement between Mutual Series on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board concluded that
the compensation of Advisers under the Management Agreement, and of Distributors
under the Underwriting Agreement, was fair and not excessive; however, the Board
also recognized that uncertainty may exist from time to time with respect to
whether payments to be made by the Fund to Advisers, Distributors, or others or
by Advisers or Distributors to others may be deemed to constitute distribution
expenses. Accordingly, the Board determined that the Plan should provide for
such payments and that adoption of the Plan would be prudent and in the best
interests of the Fund and its shareholders. Such approval included a
determination that in the exercise of their reasonable business judgment and in
light of their fiduciary duties, there is a reasonable likelihood that the Plan
will benefit the Fund and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all expenses incurred by
Distributors or others in the promotion and distribution of the shares of the
Class, as well as for shareholder services provided for existing shareholders of
the Class. These expenses may include, but are not limited to, the expenses of
the printing of prospectuses and reports used for sales purposes, preparing and
distributing sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of Distributors'
overhead expenses attributable to the distribution of Class shares. These
expenses may also include any distribution or service fees paid to securities
dealers or their firms or others. Agreements for the payment of service fees to
securities dealers or their firms or others shall be in a form which has been
approved from time to time by the Board, including the non-interested board
members.
2. The maximum amount which may be reimbursed by the Fund to Distributors or
others pursuant to Paragraph 1 herein shall be 0.35% per annum of the average
daily net assets of the Class. Said reimbursement shall be made quarterly by the
Fund to Distributors or others.
3. In addition to the payments which the Fund is authorized to make pursuant to
paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers, Distributors
or other parties on behalf of the Fund, Advisers or Distributors make payments
that are deemed to be payments by the Fund for the financing of any activity
primarily intended to result in the sale of Class shares issued by the Fund
within the context of Rule 12b-1 under the Act, then such payments shall be
deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Conduct National Association of Securities
Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year only so
long as such continuance is specifically approved at least annually by a vote of
the Board, including the non-interested board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between Mutual Series on behalf of the Fund and
Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent for distribution pursuant
to Paragraph 2 hereof without approval by a majority of the Fund's outstanding
voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of Mutual
Series' non-interested board members shall be committed to the discretion of
such non-interested board members.
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by Mutual Series and Distributors as evidenced by their execution hereof.
FRANKLIN MUTUAL SERIES FUND INC.
By: /S/E.N. COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: /S/DEBORAH R. GATZEK
Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
As of November 1, 1996
CLASS I DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUTUAL SERIES FUND INC.
II. Fund: MUTUAL BEACON FUND - CLASS I
PREAMBLE TO CLASS I DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by FRANKLIN
MUTUAL SERIES FUND INC. ("Mutual Series") for the class I shares (the "Class")
of the fund named above (the "Fund"), which Plan shall take effect on the date
class I shares of the Fund are first offered (the "Effective Date of the Plan").
The Plan has been approved by a majority of the Board of Directors of Mutual
Series (the "Board"), including a majority of the directors who are not
interested persons of Mutual Series and who have no direct or indirect financial
interest in the operation of the Plan (the "non-interested board members"), cast
in person at a meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of payments
and terms of the Management Agreement between Mutual Series on behalf of the
Fund and Franklin Mutual Advisers, Inc. ("Advisers") and the terms of the
Underwriting Agreement between Mutual Series on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board concluded that
the compensation of Advisers under the Management Agreement, and of Distributors
under the Underwriting Agreement, was fair and not excessive; however, the Board
also recognized that uncertainty may exist from time to time with respect to
whether payments to be made by the Fund to Advisers, Distributors, or others or
by Advisers or Distributors to others may be deemed to constitute distribution
expenses. Accordingly, the Board determined that the Plan should provide for
such payments and that adoption of the Plan would be prudent and in the best
interests of the Fund and its shareholders. Such approval included a
determination that in the exercise of their reasonable business judgment and in
light of their fiduciary duties, there is a reasonable likelihood that the Plan
will benefit the Fund and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all expenses incurred by
Distributors or others in the promotion and distribution of the shares of the
Class, as well as for shareholder services provided for existing shareholders of
the Class. These expenses may include, but are not limited to, the expenses of
the printing of prospectuses and reports used for sales purposes, preparing and
distributing sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of Distributors'
overhead expenses attributable to the distribution of Class shares. These
expenses may also include any distribution or service fees paid to securities
dealers or their firms or others. Agreements for the payment of service fees to
securities dealers or their firms or others shall be in a form which has been
approved from time to time by the Board, including the non-interested board
members.
2. The maximum amount which may be reimbursed by the Fund to Distributors or
others pursuant to Paragraph 1 herein shall be 0.35% per annum of the average
daily net assets of the Class. Said reimbursement shall be made quarterly by the
Fund to Distributors or others.
3. In addition to the payments which the Fund is authorized to make pursuant to
paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers, Distributors
or other parties on behalf of the Fund, Advisers or Distributors make payments
that are deemed to be payments by the Fund for the financing of any activity
primarily intended to result in the sale of Class shares issued by the Fund
within the context of Rule 12b-1 under the Act, then such payments shall be
deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Conduct National Association of Securities
Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year only so
long as such continuance is specifically approved at least annually by a vote of
the Board, including the non-interested board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between Mutual Series on behalf of the Fund and
Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent for distribution pursuant
to Paragraph 2 hereof without approval by a majority of the Fund's outstanding
voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of Mutual
Series' non-interested board members shall be committed to the discretion of
such non-interested board members.
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by Mutual Series and Distributors as evidenced by their execution hereof.
FRANKLIN MUTUAL SERIES FUND INC.
By: /S/E.N. COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: /S/DEBORAH R. GATZEK
Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
As of November 1, 1996
CLASS I DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUTUAL SERIES FUND INC.
II. Fund: MUTUAL DISCOVERY FUND - CLASS I
PREAMBLE TO CLASS I DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by FRANKLIN
MUTUAL SERIES FUND INC. ("Mutual Series") for the class I shares (the "Class")
of the fund named above (the "Fund"), which Plan shall take effect on the date
class I shares of the Fund are first offered (the "Effective Date of the Plan").
The Plan has been approved by a majority of the Board of Directors of Mutual
Series (the "Board"), including a majority of the directors who are not
interested persons of Mutual Series and who have no direct or indirect financial
interest in the operation of the Plan (the "non-interested board members"), cast
in person at a meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of payments
and terms of the Management Agreement between Mutual Series on behalf of the
Fund and Franklin Mutual Advisers, Inc. ("Advisers") and the terms of the
Underwriting Agreement between Mutual Series on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board concluded that
the compensation of Advisers under the Management Agreement, and of Distributors
under the Underwriting Agreement, was fair and not excessive; however, the Board
also recognized that uncertainty may exist from time to time with respect to
whether payments to be made by the Fund to Advisers, Distributors, or others or
by Advisers or Distributors to others may be deemed to constitute distribution
expenses. Accordingly, the Board determined that the Plan should provide for
such payments and that adoption of the Plan would be prudent and in the best
interests of the Fund and its shareholders. Such approval included a
determination that in the exercise of their reasonable business judgment and in
light of their fiduciary duties, there is a reasonable likelihood that the Plan
will benefit the Fund and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all expenses incurred by
Distributors or others in the promotion and distribution of the shares of the
Class, as well as for shareholder services provided for existing shareholders of
the Class. These expenses may include, but are not limited to, the expenses of
the printing of prospectuses and reports used for sales purposes, preparing and
distributing sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of Distributors'
overhead expenses attributable to the distribution of Class shares. These
expenses may also include any distribution or service fees paid to securities
dealers or their firms or others. Agreements for the payment of service fees to
securities dealers or their firms or others shall be in a form which has been
approved from time to time by the Board, including the non-interested board
members.
2. The maximum amount which may be reimbursed by the Fund to Distributors or
others pursuant to Paragraph 1 herein shall be 0.35% per annum of the average
daily net assets of the Class. Said reimbursement shall be made quarterly by the
Fund to Distributors or others.
3. In addition to the payments which the Fund is authorized to make pursuant to
paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers, Distributors
or other parties on behalf of the Fund, Advisers or Distributors make payments
that are deemed to be payments by the Fund for the financing of any activity
primarily intended to result in the sale of Class shares issued by the Fund
within the context of Rule 12b-1 under the Act, then such payments shall be
deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Conduct National Association of Securities
Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year only so
long as such continuance is specifically approved at least annually by a vote of
the Board, including the non-interested board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between Mutual Series on behalf of the Fund and
Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent for distribution pursuant
to Paragraph 2 hereof without approval by a majority of the Fund's outstanding
voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of Mutual
Series' non-interested board members shall be committed to the discretion of
such non-interested board members.
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by Mutual Series and Distributors as evidenced by their execution hereof.
FRANKLIN MUTUAL SERIES FUND INC.
By: /S/E.N. COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: /S/DEBORAH R. GATZEK
Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
As of November 1, 1996
CLASS I DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUTUAL SERIES FUND INC.
II. Fund: MUTUAL EUROPEAN FUND - CLASS I
PREAMBLE TO CLASS I DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by FRANKLIN
MUTUAL SERIES FUND INC. ("Mutual Series") for the class I shares (the "Class")
of the fund named above (the "Fund"), which Plan shall take effect on the date
class I shares of the Fund are first offered (the "Effective Date of the Plan").
The Plan has been approved by a majority of the Board of Directors of Mutual
Series (the "Board"), including a majority of the directors who are not
interested persons of Mutual Series and who have no direct or indirect financial
interest in the operation of the Plan (the "non-interested board members"), cast
in person at a meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of payments
and terms of the Management Agreement between Mutual Series on behalf of the
Fund and Franklin Mutual Advisers, Inc. ("Advisers") and the terms of the
Underwriting Agreement between Mutual Series on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board concluded that
the compensation of Advisers under the Management Agreement, and of Distributors
under the Underwriting Agreement, was fair and not excessive; however, the Board
also recognized that uncertainty may exist from time to time with respect to
whether payments to be made by the Fund to Advisers, Distributors, or others or
by Advisers or Distributors to others may be deemed to constitute distribution
expenses. Accordingly, the Board determined that the Plan should provide for
such payments and that adoption of the Plan would be prudent and in the best
interests of the Fund and its shareholders. Such approval included a
determination that in the exercise of their reasonable business judgment and in
light of their fiduciary duties, there is a reasonable likelihood that the Plan
will benefit the Fund and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all expenses incurred by
Distributors or others in the promotion and distribution of the shares of the
Class, as well as for shareholder services provided for existing shareholders of
the Class. These expenses may include, but are not limited to, the expenses of
the printing of prospectuses and reports used for sales purposes, preparing and
distributing sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of Distributors'
overhead expenses attributable to the distribution of Class shares. These
expenses may also include any distribution or service fees paid to securities
dealers or their firms or others. Agreements for the payment of service fees to
securities dealers or their firms or others shall be in a form which has been
approved from time to time by the Board, including the non-interested board
members.
2. The maximum amount which may be reimbursed by the Fund to Distributors or
others pursuant to Paragraph 1 herein shall be 0.35% per annum of the average
daily net assets of the Class. Said reimbursement shall be made quarterly by the
Fund to Distributors or others.
3. In addition to the payments which the Fund is authorized to make pursuant to
paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers, Distributors
or other parties on behalf of the Fund, Advisers or Distributors make payments
that are deemed to be payments by the Fund for the financing of any activity
primarily intended to result in the sale of Class shares issued by the Fund
within the context of Rule 12b-1 under the Act, then such payments shall be
deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Conduct National Association of Securities
Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year only so
long as such continuance is specifically approved at least annually by a vote of
the Board, including the non-interested board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between Mutual Series on behalf of the Fund and
Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent for distribution pursuant
to Paragraph 2 hereof without approval by a majority of the Fund's outstanding
voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of Mutual
Series' non-interested board members shall be committed to the discretion of
such non-interested board members.
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by Mutual Series and Distributors as evidenced by their execution hereof.
FRANKLIN MUTUAL SERIES FUND INC.
By: /S/E.N. COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: /S/DEBORAH R. GATZEK
Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
As of November 1, 1996
CLASS II DISTRIBUTION PLAN
I. Investment Company: MUTUAL SERIES FUND, INC.
II. Fund: MUTUAL SHARES FUND - CLASS II
MUTUAL QUALIFIED FUND - CLASS II
MUTUAL BEACON FUND - CLASS II
MUTUAL DISCOVERY FUND - CLASS II
MUTUAL EUROPEAN FUND - CLASS II
III. Maximum Per Annum Rule 12b-1 Fees for Class II Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS II DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class II shares
(the "Class") of each Fund named above ("Fund"), which Plan shall take effect as
of the date class II shares are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Directors of
the Investment Company (the "Board"), including a majority of the Board members
who are not interested persons of the Investment Company and who have no direct,
or indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Mutual Advisers, Inc. ("Advisers") and the terms of the
Underwriting Agreement between the Investment Company and Franklin/Templeton
Distributors, Inc. ("Distributors"). The Board concluded that the compensation
of Advisers, under the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive. The approval of the Plan
included a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed the
above-stated maximum distribution fee per annum of the Class' average daily net
assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall
pay (i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Fund's Board from time to time, as a service fee
pursuant to servicing agreements which have been approved from time to time by
the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to Paragraph
1(a) above to assist in the distribution and promotion of shares of the Class.
Payments made to Distributors under the Plan may be used for, among other
things, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a pro-rated
portion of Distributors' overhead expenses attributable to the distribution of
Class shares, as well as for additional distribution fees paid to securities
dealers or their firms or others who have executed agreements with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Directors including the non-interested
directors. In addition, such fees may be used to pay for advancing the
commission costs to dealers or others with respect to the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be
used to pay dealers or others for, among other things, furnishing personal
services and maintaining shareholder accounts, which services include, among
other things, assisting in establishing and maintaining customer accounts and
records; assisting with purchase and redemption requests; arranging for bank
wires; monitoring dividend payments from the Fund on behalf of customers;
forwarding certain shareholder communications from the Fund to customers;
receiving and answering correspondence; and aiding in maintaining the investment
of their respective customers in the Class. Any amounts paid under this
paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which
form of agreement has been approved from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested Board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement.
7. The Plan, and any agreements entered into pursuant to this Plan, may
not be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: NOVEMBER 1, 1996
MUTUAL SERIES FUND, INC.
By: /S/E.N. COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
Franklin/Templeton Distributors, Inc.
By: /S/DEBORAH R. GATZEK
Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
