As filed with the Securities and Exchange Commission June 5, 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. 23 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 24 (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)
[ ]on (date) 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)
[X]on August 19, 1997 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, 1997.
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)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "Financial Highlights";"How does
Information the Fund Measure Performance?"
4. General Description of "How is the Fund Organized?";
Registrant "How does the Fund Invest its
Assets
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
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"; "What If I Have
Questions About My Account?"
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";
"Useful Terms and Definitions";
"What If I Have Questions About
My Account?"; "Who Manages the
Fund?"
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 "Expense Summary"
3. Condensed Financial "Financial Highlights";"How does
Information the Fund Measure Performance?"
4. General Description of "How is the Fund Organized?";
Registrant "How does the Fund Invest its
Assets?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
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"; "What If I Have
Questions About My Account?"
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";
"Useful Terms and Definitions";
"What If I Have Questions About
My Account?"; "Who Manages the
Fund?"
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 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 "Miscellaneous
History Information"; see also
"Expense Summary" in the
Prospectus
13. Investment Objectives "How does the Fund Invest
and Policies its Assets?"; "Restrictions
and Limitations"
14. Management of the Fund "Officers and Directors";
"Investment Management and
Other Services"
15. Control Persons and "Officers and Directors";
Principal Holders of "Investment Management and
Securities
Other Services";
"Miscellaneous Information"
16. Investment Advisory and "Investment Management and
Other Services Other Services"; "The
Fund's Underwriter"
17. Brokerage Allocation "How does the Fund Buy
and Other Practices Securities for its
Portfolio?"
18. Capital Stock and Other "How Do I Buy, Sell and
Securities Exchange Shares?";
"Information on
Distributions and Taxes";
See also Prospectus "How is
the Fund Organized?"
19. Purchase, Redemption "How Do I Buy, Sell and
and Pricing of Exchange Shares?"; "How are
Securities Fund Shares Valued?";
"Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of "How does the Fund Measure
Performance 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 Contents
12. General Information and "Miscellaneous Information;
History see also "Expense Summary"
in the Prospectus
13. Investment Objectives "How does the Fund Invest
and Policies its Assets?"; "Restrictions
and Limitations"
14. Management of the Fund "Officers and Directors";
"Investment Management and
Other Services"
15. Control Persons and "Officers and Directors";
Principal Holders of "Investment Management and
Securities Other Services";
"Miscellaneous Information"
16. Investment Advisory and "Investment Management and
Other Services Other Services"; "The
Fund's Underwriter"
17. Brokerage Allocation "How does the Fund Buy
and Other Practices Securities for its
Portfolio?"
18. Capital Stock and Other "How Do I Buy, Sell and
Securities Exchange Shares?";
"Additional Information on
Distributions and Taxes";
see also Prospectus "How is
the Fund Organized?"
19. Purchase, Redemption "How Do I Buy, Sell and
and Pricing of Exchange Shares?"; "How are
Securities Fund Shares Valued?";
"Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of "How does the Fund Measure
Performance Data Performance?"
23. Financial Statements "Financial Statements"
PROSPECTUS & APPLICATION
FRANKLIN MUTUAL SERIES FUND INC.
MAY 1, 1997, AS AMENDED AUGUST 19, 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
Mutual Financial Services Fund GROWTH o VALUE
This prospectus describes Class I and Class II shares of the six series of
Franklin Mutual Series Fund Inc. ("Mutual Series"): Mutual Shares Fund
("Mutual Shares"), Mutual Qualified Fund ("Qualified"), Mutual Beacon Fund
("Beacon"), Mutual European Fund ("European"), Mutual Discovery Fund
("Discovery") and Mutual Financial Services Fund ("Financial Services"). Each
of these series may, individually or together, be referred to as the
"Fund(s)." 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 a 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 shares, dated May 1, 1997, as amended August 19, 1997, which may
be further 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
its address.
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.
The principal investment objective of Mutual Shares, Qualified, Beacon,
European and Financial Services is capital appreciation, which may
occasionally be short-term. A secondary objective of each is income.
Discovery's investment objective is long-term capital appreciation.
FRANKLIN MUTUAL SERIES FUND INC.
May 1, 1997 as amended August 19, 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..........................................
Financial Highlights.....................................
How does the Fund Invest its Assets?.....................
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.................
What If I Have Questions About My 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. With the exception of Financial Services, it is based on the historical
management fees and other expenses of the Class Z shares of each series for
the fiscal year ended December 31, 1996, and the maximum contractual Class I
or Class II Rule 12b-1 fees. The numbers in the table for Financial Services
are based on estimated expenses for the current fiscal year. Fund's actual
expenses may vary.
<TABLE>
<CAPTION>
A. SHAREHOLDER TRANSACTION EXPENSES+
MUTUAL FINANCIAL
SHARES QUALIFIED BEACON DISCOVERY EUROPEAN SERVICES
<S> <C> <C> <C> <C> <C> <C>
CLASS I
Maximum Sales Charge
(as a percentage of Offering Price) 4.50% 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% 4.50%
Paid at redemption++++ None 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% 1.99%
Paid at time of purchase+++ 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Paid at redemption++++ 0.99% 0.99% 0.99% 0.99% 0.99% 0.99%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
CLASS I
Management Fees 0.60%** 0.60%** 0.60%** 0.80%** 0.80%**0.00%*
Rule 12b-1 Fees*** 0.35% 0.35% 0.35% 0.35% 0.35% 0.35%
Other Expenses 0.12% 0.18% 0.15% 0.19% 0.35% 1.00%
-------------------------------------------------
Total Fund Operating Expenses** 1.07%** 1.13%** 1.10%** 1.34%** 1.50%**1.35%*
================================================
CLASS II
Management Fees 0.60%** 0.60%** 0.60%** 0.80%** 0.80%**0.00%*
Rule 12b-1 Fees*** 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Other Expenses 0.12% 0.18% 0.15% 0.19% 0.35% 1.00%
-------------------------------------------------
Total Fund Operating Expenses** 1.72%** 1.78%** 1.75%** 1.99%** 2.15%**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 FINANCIAL
SHARES QUALIFIED BEACON DISCOVERY EUROPEANSERVICES
CLASS I
<S> <C> <C> <C> <C> <C> <C>
1 Year**** $ 55 $ 56 $ 56 $ 58 $ 60 $ 58
3 Years $ 78 $ 79 $ 78 $ 86 $ 90 $ 86
5 Years $101 $104 $103 $115 $123 --
10 Years $170 $176 $173 $199 $216 --
CLASS II
1 Year $ 37 $ 38 $ 38 $ 40 $ 41 $ 40
3 Years $ 64 $ 65 $ 65 $ 72 $ 77 $ 72
5 Years $102 $105 $104 $116 $124 --
10 Years $211 $217 $214 $239 $256 --
</TABLE>
For the same Class II investment, you would pay projected expenses of $27
(Mutual Shares), $28 (Qualified), $28 (Beacon), $30 (Discovery), $31
(European) and $30 (Financial Services) 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. A Contingent Deferred Sales
Charge may also apply to purchases by certain retirement plans that qualify
to buy Class I shares without a front-end sales charge. 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.
*Mutual Advisers has agreed in advance to waive its management fee and make
certain payments to reduce the Financial Services Fund's expenses so it's
aggregate annual operating expenses do not exceed 1.35% for Class I and 2.00%
for Class II for the current fiscal year. Absent this reduction, contractual
and expected management fees would equal 0.80% and total operating expenses
would equal 2.20% for Class I and 2.85% for Class II. After december 31,
1997, Mutual Advisers may terminate this arrangement at any time.
**For the period shown, Franklin Mutual and its affiliates had agreed in
advance to limit its management fees during the Fund's previous fiscal year.
This agreement did not apply to Financial Services, which was not in
existence during the Fund's previous fiscal year. With this reduction,
management fees and total operating expenses were as follows:
MUTUAL
SHARES QUALIFIED BEACON DISCOVERY EUROPEAN
Management Fees 0.58% 0.57% 0.58% 0.77% 0.74%
Total Operating Expenses:
Class I 1.05% 1.10% 1.08% 1.31% 1.44%
Class II 1.70% 1.75% 1.73% 1.96% 2.09%
***The combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the
maximum front-end sales charge permitted under the NASD's rules.
****Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history for Class I and Class II.
The information has been audited by Ernst & Young LLP, the Fund's independent
auditors. Their audit report appears in the Fund's Annual Report to
Shareholders. The Annual Report to Shareholders also includes more
information about the Fund's performance. For a free copy, please call Fund
Information.
CLASS I CLASS II
FOR THE PERIOD FOR THE PERIOD
NOVEMBER 1, 1996 NOVEMBER 1, 1996*
MUTUAL SHARES TO DECEMBER 31, 1996TO DECEMBER 31, 1996
- ------------------------------------------------------------------------------
Net Asset Value
Beginning of Period $94.49 $94.49
------------------------
Income from Investment Operations
Net Investment Income 1.03 0.97
Net Gain on Securities
(realized and unrealized) 5.43 5.41
----------------------
Total from Investment Operations 6.46 6.38
----------------------
Less Distributions:
Dividends (from net investment income) 2.35 2.30
Distributions (from capital gains) 5.79 5.79
----------------------
Total Distributions 8.14 8.09
----------------------
Net Asset Value
End of Period $92.81 $92.78
------------------------
Total Return 6.91%+ 6.82%++
=========================
Ratios/Supplemental Data:
Net Assets, End of Period (millions) $35 $17
Ratio of Expenses to Average Net Assets 1.09%** 1.71%**
Ratio of Net Investment Income
to Average Net Assets 2.44%** 1.69%**
Portfolio Turnover Rate 58.35% 58.35%
Average Commission Per Share $0.041 $0.041
CLASS I CLASS II
FOR THE PERIOD FOR THE PERIOD
NOVEMBER 1, 1996* NOVEMBER 1, 1996*
QUALIFIED TO DECEMBER 31, 1996TO DECEMBER 31, 1996
Net Asset Value
Beginning of Period $32.80 $32.80
Income from Investment Operations
Net Investment Income 0.32 0.26
Net Gain on Securities
(realized and unrealized) 1.78 1.81
Total from Investment Operations 2.10 2.07
Less Distributions:
Dividends (from net investment income) 0.81 0.79
Distributions (from capital gains) 1.63 1.63
Total Distributions 2.44 2.42
Net Asset Value
End of Period $32.46 $32.45
Total Return 6.47%+ 6.37%++
Ratios/Supplemental Data:
Net Assets, End of Period (millions) $20 $10
Ratio of Expenses to Average Net Assets 1.13%** 1.78%**
Ratio of Net Investment Income
to Average Net Assets 3.19%** 2.59%**
Portfolio Turnover Rate 65.03% 65.03%
Average Commission Per Share $0.036 $0.036
CLASS I CLASS II
FOR THE PERIOD FOR THE PERIOD
NOVEMBER 1, 1996* NOVEMBER 1, 1996*
BEACON TO DECEMBER 31, 1996TO DECEMBER 31, 1996
Net Asset Value
Beginning of Period $39.64 $39.64
Income from Investment Operations
Net Investment Income 0.48 0.38
Net Gain on Securities
(realized and unrealized) 2.07 2.14
Total from Investment Operations 2.55 2.52
Less Distributions:
Dividends (from net investment income) 1.00 0.97
Distributions (from capital gains) 2.26 2.26
Total Distributions 3.26 3.23
Net Asset Value
End of Period $38.93 $38.93
Total Return 6.51%+ 6.45%++
Ratios/Supplemental Data:
Net Assets, End of Period (millions) $52 $16
Ratio of Expenses to Average Net Assets 1.03%** 1.75%**
Ratio of Net Investment Income
to Average Net Assets 1.33%** 0.84%**
Portfolio Turnover Rate 66.87% 66.87%
Average Commission Per Share $0.047 $0.047
CLASS I CLASS II
FOR THE PERIOD FOR THE PERIOD
NOVEMBER 1, 1996* NOVEMBER 1, 1996*
DISCOVERY TO DECEMBER 31, 1996TO DECEMBER 31, 1996
Net Asset Value
Beginning of Period $17.66 $17.66
Income from Investment Operations
Net Investment Income 0.11 0.09
Net Gain on Securities
(realized and unrealized) 0.74 0.76
Total from Investment Operations 0.85 0.85
Less Distributions:
Dividends (from net investment income) 0.29 0.27
Distributions (from capital gains) 1.07 1.07
Total Distributions 1.36 1.34
Net Asset Value
End of Period $17.15 $17.17
Total Return 4.85%+ 4.90%++
Ratios/Supplemental Data:
Net Assets, End of Period (millions) $30 $18
Ratio of Expenses to Average Net Assets 1.38%** 2.00%**
Ratio of Net Investment Income
to Average Net Assets 0.74%** 0.13%**
Portfolio Turnover Rate 80.18% 80.18%
Average Commission Per Share $0.026 $0.026
CLASS I CLASS II
FOR THE PERIOD FOR THE PERIOD
NOVEMBER 1, 1996* NOVEMBER 1, 1996*
EUROPEAN TO DECEMBER 31, 1996TO DECEMBER 31, 1996
Net Asset Value
Beginning of Period $10.84 $10.84
Income from Investment Operations
Net Investment Income 0.03 0.02
Net Gain on Securities
(realized and unrealized) 0.58 0.58
Total from Investment Operations 0.61 0.60
Less Distributions:
Dividends (from net investment income) 0.05 0.04
Distributions (from capital gains) 0.02 0.02
Total Distributions 0.07 0.06
Net Asset Value
End of Period $11.38 $11.38
Total Return 5.61%+ 5.52%++
Ratios/Supplemental Data:
Net Assets, End of Period (millions) $9 $3
Ratio of Expenses to Average Net Assets 1.32%** 1.94%**
Ratio of Net Investment Income
to Average Net Assets 1.44%** 0.79%**
Portfolio Turnover Rate 36.75% 36.75%
Average Commission Per Share $0.023 $0.023
+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 deferred contingent
sales charges. Not annualized for periods of less than one year.
*Commencement of offering of sale.
**Annualized. After reduction of expenses by Franklin Mutual. Had Franklin
Mutual not taken such action, the ratios of operating expenses and net
investment income would have been:
Operating Net Investment
Expenses Income
MUTUAL SHARES
Class I 1.18% 2.35%
Class II 1.80% 1.60%
QUALIFIED
Class I 1.28% 3.04%
Class II 1.93% 2.44%
BEACON
Class I 1.13% 1.23%
Class II 1.85% 0.74%
DISCOVERY
Class I 1.51% 0.61%
Class II 2.13% 0.00%
EUROPEAN
Class I 1.42% 1.34%
Class II 2.04% 0.69%
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The principal investment objective of Mutual Shares, Qualified, Beacon,
European and Financial Services is capital appreciation, which may
occasionally be short-term. A secondary objective of each is income.
Discovery's investment objective is long-term capital appreciation. These
objectives are fundamental policies of each Fund and may not be changed
without shareholder approval. Of course, there is no assurance that the
Fund's objective will be achieved.
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 are in, 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.
Financial Services will normally invest at least 65% of its invested assets
in the securities issued by companies in the financial services industry
which, for Fund purposes, is considered to be issuers, a substantial portion
of whose assets, revenues or operations relate to the creation, purchase and
sale of financial instruments. Accordingly, Financial Services will be
concentrated in the financial services industry. Issuers in the financial
services industry include banks, savings and loan organizations, credit card
companies, brokerage firms, finance companies, sub-prime lending
institutions, investment advisers and insurance companies. As the nature of
the financial services industry continues to evolve, additional types of
issues may be included in the Fund. Financial Services' investment policy of
concentrating in the financial services industry is fundamental and may not
be changed without a vote of a majority of the outstanding voting securities
of Financial Services.
Discovery expects to invest approximately 50% 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. Smaller companies often are not well known, often may trade at a
discount and may not be followed by established financial institutions.
Each Fund 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 fluctuates
with changes in the market value of the Fund's 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 Fund 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
Fund's 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 Funds 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 Fund may invest in securities that
are traded on U.S. or foreign exchanges, the NASDAQ national market system or
in the OTC market. With the exception of Financial Services, each Fund 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 Fund 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 Fund 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 Funds 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 "How does the Fund Invest its Assets? - Medium and Lower Rated Corporate
Debt Securities" in the SAI.
Each Fund 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 a Fund may invest in such transactions, no Fund 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 Fund makes
its investment will be consummated or will be consummated on the terms and
within the time period contemplated by Franklin Mutual.
Each Fund 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 Fund 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.
Each Fund 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 Funds purchase
loans from national and state chartered banks as well as foreign ones. The
Funds normally invest in senior indebtedness of the debtor companies,
although on occasion subordinated indebtedness may also be acquired.
Each Fund 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 Fund 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.
Each Fund 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.
Each Fund may also invest in cash equivalents such as Treasury bills and high
quality commercial paper. The series generally purchase 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 Funds 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 Funds 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 Fund can profit if the price
decreases. The Funds may also sell securities "short against the box" without
limit. See "How does the Fund Invest its Assets? - Short Sales" in the SAI
for more discussion of these practices.
Each Fund 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 Fund invested in
short-term debt securities and preferred stocks although it may choose not to
do so when circumstances dictate. In addition, each Fund may invest from time
to time in other investment company securities, subject to applicable law
which restricts such investments. Investors should recognize that a Fund's
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.
SPECIAL CONSIDERATIONS RELATING TO FINANCIAL SERVICES
Under regulations of the SEC, the Funds, including Financial Services, may
not invest more than 5% of its total assets in the securities of any company
that derives more than 15% of its revenues from securities-related
activities, which means activities as a broker, dealer, underwriter or
investment adviser. Further, immediately after a purchase of equity
securities of such an issuer, such Fund may not own more than 5% of the
outstanding securities of any class of equity securities of such issuer, and
immediately after a purchase of debt securities of such an issuer, such Fund
may not own more than 10% of the outstanding principal amount of such
issuer's debt securities.
As stated above, Financial Services concentrates its investments in the
financial service industry. Its investments and performance, accordingly,
will be affected by general market and economic conditions as well as other
risk factors particular to the financial services industry. Financial
services companies are subject to extensive government regulation which may
limit both the amount and types of loans and other financial commitments they
can make, and the interest rates and fees they can charge. Profitability is
largely dependent on the availability and cost of capital funds, and can
fluctuate significantly when interest rates change. Credit losses resulting
from financial difficulties of borrowers can negatively impact the industry.
Insurance companies may be subject to severe price competition, claims
activity, marketing competition and general economic conditions. Particular
insurance lines will also be influenced by specific matters. Property and
casualty insurer profits may be affected by certain weather catastrophes and
other disasters. Life and health insurer profits may be affected by mortality
risks and morbidity rates. Individual insurance companies may be subject to
material risks including reserve inadequacy and the inability to collect from
reinsurance carriers.
Congress is currently considering legislation that would reduce the
separation between commercial and investment banking businesses. If enacted
this could significantly impact the industry and Financial Services. While
banks may be able to expand the services which they offer if legislation
broadening bank powers is enacted, expanded powers could expose banks to
well-established competitors, particularly as the historical distinctions
between banks and other financial institutions erode. In addition, the
financial services industry is an evolving and competitive industry that is
undergoing significant change with various consolidations and the continual
development of new products, structures and a regulatory framework that is
anticipated to be subject to further change.
NON-U.S. SECURITIES
The Funds may purchase securities of non-U.S. issuers and Discovery expects
that 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 Funds 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, Financial Services and finally
with Mutual Shares holding the smallest percentage of these securities. The
Funds 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 Fund 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 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. Please see the SAI for
more details.
REPURCHASE AGREEMENTS AND LOANS OF SECURITIES
Each Fund may invest up to 10% of its assets in repurchase agreements,
including tri-party repurchase agreements. Each Fund may also loan its
portfolio securities in order to realize additional income. Repurchase and
tri-party agreements are generally agreements under which the Fund obtains
money market instruments subject to resale to the seller at an agreed upon
price and date. Any loans of portfolio securities which the Fund 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 Funds
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 Funds 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
Funds 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
Fund's portfolio resulting from changes in securities markets or currency
exchange rate fluctuations, to protect the Fund's 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 Fund 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 Fund
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 Fund's 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 Fund, 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 Fund 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 Fund's total return to
investors.
FUNDAMENTAL RESTRICTIONS
Each Fund has adopted a number of fundamental investment restrictions, which
may not be changed for a particular Fund without the approval of that Fund's
shareholders. These restrictions are set forth in the SAI.
Among other things, each Fund 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 Fund
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 Fund 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; for all Funds except for Financial Services, 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 Investment Company Act of 1940, 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,
Financial Services, and European have identical investment objectives,
Franklin Mutual seeks to retain certain historical differences among the
Funds 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 Funds, 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. Financial
Services and European will utilize the same investment philosophy but will
apply it in the context of investing in the financial services industry and
European securities, respectively. Allocation of investments among the Funds
will also depend upon, among other things, the amount of cash in, and
relative size of each Fund's portfolio. In addition, the factors outlined
above are not mutually exclusive and a particular security may be owned by
more than one of the Funds.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional
investment restrictions that limit its activities to some extent. Some of
these restrictions may only be changed with shareholder approval. For a list
of these restrictions and more information about the Fund's investment
policies, please see "How does the Fund Invest its Assets?" and "Restrictions
and Limitations" in the SAI.
Each of the Fund's policies and restrictions discussed in this prospectus and
in the SAI is considered at the time the Fund makes an investment. The Fund
is generally not required to sell a security because of a change in
circumstances.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations.
The Board also monitors the Fund to ensure no material conflicts exist
between the Fund's classes of shares. 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 $191
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 F. 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 manager for Franklin Mutual Series
Fund Inc. He became Chief Executive Officer of Franklin Mutual in November
1996. He is Chairman of the Board and President of Franklin Mutual Series
Fund Inc.
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 manager for Franklin Mutual Series Fund Inc. He
joined Franklin Mutual in November 1996. He is a Vice President of Franklin
Mutual Series Fund Inc.
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 manager for Franklin Mutual
Series Fund Inc. He joined Franklin Mutual in November 1996. He is a Vice
President of Franklin Mutual Series Fund Inc.
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 manager for Franklin Mutual Series Fund Inc. He joined
Franklin Mutual in November 1996. He is a Vice President of Franklin Mutual
Series Fund Inc.
Peter A. Langerman
Chief Operating Officer and 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 manager for Franklin Mutual
Series Fund Inc. He joined Franklin Mutual in November 1996. Mr. Langerman is
a director and Executive Vice President of Franklin Mutual Series Fund Inc.
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 manager for Franklin Mutual Series Fund Inc. He joined
Franklin Mutual in November 1996. He is a Vice President of Franklin Mutual
Series Fund Inc.
MANAGEMENT FEES. During the fiscal year ended December 31, 1996, management
fees, before any advance waiver, totaled 0.60%, 0.60%, 0.60%, 0.80% and 0.80%
of the average daily net assets of Mutual Shares, Qualified, Beacon,
Discovery, and European, respectively, and total operating expenses were:
Mutual Shares, Class I, 1.18%, Class II, 1.80%; Qualified, Class I, 1.28%,
Class II, 1.93%; Beacon, Class I, 1.13%, Class II, 1.85%; Discovery, Class I,
1.51%, Class II, 2.13%; and European, Class I, 1.42%, Class II, 2.04%. Under
an agreement by Franklin Mutual to limit its fees, Mutual Shares, Qualified,
Beacon, Discovery, and European paid management fees totaling 0.58%, 0.57%,
0.58%, 0.77% and 0.74%, respectively, and total operating expenses were:
Mutual Shares, Class I, 1.09%, Class II, 1.71%; Qualified, Class I, 1.13%,
Class II, 1.78%; Beacon, Class I, 1.03%, Class II, 1.75%; Discovery, Class I,
1.38%, Class II, 2.00%; and European, Class I, 1.32%, Class II, 1.94%.
Franklin Mutual may end this arrangement at any time upon notice to the Board.
The Fund pays its own operating expenses. These expenses include Franklin
Mutual's management fees; taxes, if any; custodian, legal and auditing fees;
the fees and expenses of Board members who are not members of, affiliated
with, or interested persons of Franklin Mutual; fees of any personnel not
affiliated with Franklin Mutual; insurance premiums; trade association dues;
expenses of obtaining quotations for calculating the Fund's Net Asset Value;
and printing and other expenses that are not expressly assumed by Franklin
Mutual. The Board has determined the method and procedure for allocating
expenses between the series and the classes of the Fund and reserves the
right to modify such method and procedures.
Under their management agreements, the Funds pay 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, European and Financial Services. The fee is computed at the
close of business on the last business day of each month.
PORTFOLIO TRANSACTIONS. Franklin Mutual seeks to obtain the best execution on
all transactions. If Franklin Mutual believes more than one broker or dealer
can provide the best execution, it may consider research and related services
and the sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. To the extent
that any of the Funds owns more than 5% of the securities of a broker-dealer,
that broker-dealer may be considered to be an affiliated person of such Fund.
If such Fund places any portfolio transactions through that broker-dealer,
such fund would be required to comply with certain rules of the SEC relating
to the payment of brokerage commissions to affiliated broker-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 the Fund's 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. During the fiscal year ended
December 31, 1996, annualized administration fees totaling 0.08% of the
average daily net assets of each series were paid to FT Services. These fees
are included in the amount of total expenses shown above. Please see
"Investment Management and Other Services" in the SAI for more information.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses
of activities that are 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; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
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 measure of performance is total return. 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.
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.
Each series is treated as a separate entity for federal income tax purposes.
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 generally 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
U.S. 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. Please 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. Please consult your own tax
advisors with respect to the tax consequences of an investment in the Fund.
HOW IS THE FUND ORGANIZED?
Each Fund is a diversified series of Mutual Series, an open-end management
investment company, commonly called a mutual fund. Mutual Series was
organized as a Maryland corporation on November 12, 1987, and is registered
with the SEC. Each Fund, with the exception of Financial Services, which was
not effective until August 19, 1997, began offering three classes of shares
on November 1, 1996: Mutual Shares Fund - Class Z, Mutual Shares Fund - Class
I, Mutual Shares Fund - Class II, Mutual Qualified Fund - Class Z, Mutual
Qualified Fund - Class I, Mutual Qualified Fund - Class II, Mutual Beacon
Fund - Class Z, Mutual Beacon Fund - Class I, Mutual Beacon Fund - Class II,
Mutual European Fund - Class Z, Mutual European Fund - Class I, Mutual
European Fund - Class II, Mutual Discovery Fund - Class Z, Mutual Discovery
Fund - Class I, and Mutual Discovery Fund - Class II. All shares outstanding
before the offering of Class I and Class II shares on November 1, 1996, are
considered Class Z shares. Financial Services was created initially with, and
offers, three classes of shares: Class I, Class II, and Class Z. 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 affecting only that class,
or expressly required to be voted on separately by state or federal law.
Shares of each class of a series have the same voting and other rights and
preferences as the other classes and series of Mutual Series for matters that
affect Mutual Series as a whole.
Mutual Series 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.
Mutual Series does not intend to hold annual shareholder meetings. Mutual
Series or a Fund may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares.
In certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
As of May 30, 1997, Michael F. Price owned of record and beneficially more
than 25% of the outstanding shares 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. CURRENTLY, THE FUND DOES NOT ALLOW INVESTMENTS BY MARKET TIMERS.
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.
**$500 for accounts opened pursuant to an automatic investment plan.
DECIDING WHICH CLASS TO BUY
You should consider a number of factors when deciding which class of shares
to buy. IF YOU PLAN TO BUY $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU
QUALIFY TO BUY CLASS I SHARES WITHOUT A SALES CHARGE, YOU MAY NOT BUY CLASS
II SHARES.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately
six years or less of your investment.
Class I shares are generally more attractive for long-term investors because
of Class II's higher Rule 12b-1 fees. These may accumulate over time to
outweigh the lower Class II front-end sales charge and result in lower income
dividends for Class II shareholders. If you qualify to buy Class I shares at
a reduced sales charge based upon the size of your purchase or through our
Letter of Intent or cumulative quantity discount programs, but plan to hold
your shares less than approximately six years, you should evaluate whether it
is more economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you
to buy Class I shares since there is no front-end sales charge, even though
these purchases may be subject to a Contingent Deferred Sales Charge. Any
purchase of $1 million or more is therefore automatically invested in Class I
shares. You may accumulate more than $1 million in Class II shares through
purchases over time, but if you plan to do this you should determine whether
it would be more beneficial for you to buy Class I shares through a Letter of
Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is
1% and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID TO
AS A PERCENTAGE OF DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I
Under $100,000 4.50% 4.71% 4.00%
$100,000 but less than 3.75% 3.90% 3.25%
$250,000
$250,000 but less than 2.75% 2.83% 2.50%
$500,000
$500,000 but less than 2.25% 2.30% 2.00%
$1,000,000
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of
$1 million or more and any Class II purchase. Please see "How Do I Sell
Shares? - Contingent Deferred Sales Charge." Please also see "Other Payments
to Securities Dealers" below for a discussion of payments Distributors may
make out of its own resources to Securities Dealers for certain purchases.
Purchases of Class II shares are limited to purchases below $1 million.
Please see "Deciding Which Class to Buy."
SALES CHARGE REDUCTIONS AND WAIVERS
IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't
include this statement, we cannot guarantee that you will receive the
sales charge reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in
the Franklin Templeton Funds, as well as those of your spouse, children under
the age of 21 and grandchildren under the age of 21. If you are the sole
owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced
sales charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION,
YOU ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on
the reserved shares as you direct. Our policy of reserving shares does not
apply to certain retirement plans.
If you would like more information about the Letter of Intent privilege,
please see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in
the SAI or call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as
a whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
SALES CHARGE WAIVERS. The Fund's front-end sales charge and Contingent
Deferred Sales Charge do 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 do 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 real estate investment trust (REIT) sponsored or advised by Franklin
Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, the Templeton Variable Annuity Fund, the
Templeton Variable Products Series Fund, or the Franklin Government
Securities Trust. You should contact your tax advisor for information on any
tax consequences that may apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares 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.
The Fund's sales charges also do not apply to Class I purchases by:
5. 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.
6. Group annuity separate accounts offered to retirement plans
7. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
8. 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.
9. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs. Distributors may, at its
discretion, reduce the required minimum initial investment amount to $500 for
investors in this category.
10. Registered Securities Dealers and their affiliates, for their investment
accounts only
11. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
12. 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
13. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
14. Accounts managed by the Franklin Templeton Group
15. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with
at least 100 employees, or (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 may buy Class I shares without a front-end sales charge.
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. For retirement plan accounts opened on or
after May 1, 1997, a Contingent Deferred Sales Charge may apply if the
account is closed within 365 days of the retirement plan account's initial
purchase in the Franklin Templeton Funds. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
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, call Retirement Plan Services.
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. 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. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 1% of the amount invested.
3. Class I purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers -
Retirement Plans" above - up to 1% of the amount invested. For retirement
plan accounts opened on or after May 1, 1997, a Contingent Deferred Sales
Charge will not apply to the account if the Securities Dealer chooses to
receive a payment of 0.25% or less or if no payment is made.
4. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
5. Class I purchases by Chilean retirement plans - up to 1% of the amount
invested.
A Securities Dealer may receive only one of these payments for each
qualifying purchase. Securities Dealers who receive payments in connection
with investments described in paragraphs 1, 2 or 5 above or a payment of up
to 1% for investments described in paragraph 3 will be eligible to receive
the Rule 12b-1 fee associated with the purchase starting in the thirteenth
calendar month after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.
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
- --------------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all
account owners
2. Include any outstanding share certificates for
the shares you want to exchange
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
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- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable
sales charge of the new fund. If you have never paid a sales charge on your
shares because, for example, they have always been held in a money fund, you
will pay the Fund's applicable sales charge no matter how long you have held
your shares. These charges may not apply if you qualify to buy shares without
a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange
shares. Any shares subject to a Contingent Deferred Sales Charge at the time
of exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE - CLASS I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the
new fund in the order they were purchased. If you exchange Class I shares
into one of our money funds, the time your shares are held in that fund will
not count towards the completion of any Contingency Period.
CONTINGENT DEFERRED SALES CHARGE - CLASS II. For accounts with Class II
shares subject to a Contingent Deferred Sales Charge, shares are exchanged
into the new fund proportionately based on the amount of shares subject to a
Contingent Deferred Sales Charge and the length of time the shares have been
held. For example, suppose you own $1,000 in shares that have never been
subject to a 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.
o The accounts must be identically registered. You may, however, 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. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares
as described above. Restrictions may apply to other types of retirement
plans. Please contact Retirement Plan Services for information on
exchanges within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations 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
- --------------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all
account owners. If you would like your redemption
proceeds wired to a bank account, your instructions
should include:
The name, address and telephone number of the
bank where you want the proceeds sent
Your bank account number
The Federal Reserve ABA routing number
If you are using a savings and loan or credit
union, the name of the corresponding bank and the
account number
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 other requirements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other
than an escrow account, you must first sign up for
the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid
any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
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 15 days
If you do not want the ability to redeem by phone
to apply to your account, please let us know.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. By offering this service to you, the Fund is not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the Fund nor its agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as
described in this section.
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 Retirement Plan Services.
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.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan account
is closed within 365 days of the account's initial purchase in the Franklin
Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will 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 Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1,
1997, or (ii) the Securities Dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, as described under "How Do I Buy
Shares? - Other Payments to Securities Dealers"
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 at a rate of up to 1% a
month of an account's Net Asset Value. For example, if you maintain an
annual balance of $1 million in Class I shares, you can redeem 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 redeemed 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 Redemptions by Trust Company employee benefit plans or employee benefit
plans serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
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, usually once in
December and once at mid-year.
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 Class I
and Class II.
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. 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. For Trust Company retirement
plans, special forms are required to receive distributions in cash.
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 are 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. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
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 may 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 us
written instructions, as described elsewhere in this prospectus. If you are
unable to execute a transaction by phone, 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 Retirement Plan Services.
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.
- --------------------------------------------------------------------------------
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we 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
savings or 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(R) system (day or night)
at 1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the code number for each class to use TeleFACTS(R). The code
numbers for Class I and Class II are:
CODE NUMBER
FUND NAME CLASSI CLASS II
Mutual Shares 474 574
Qualified 475 575
Beacon 476 576
Discovery 477 577
European 478 578
Financial Services
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.
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 700 Central Avenue, P.O. Box 33030, St. Petersburg, Florida
33733-8030. The Fund and Franklin Mutual are located at 51 John F. Kennedy
Parkway, Short Hills, New Jersey 07078. Distributors is located at 777
Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777. 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 Plan Services 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
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 MUTUAL - Franklin Mutual Advisers, Inc., the Fund's investment
manager
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator
Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable Products`
Series Fund
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 TIMERS - Market Timers generally include market timing or asset
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 or whose transactions include
frequent or large exchanges.
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.
QUALIFIED RETIREMENT PLANS - 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.
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
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.
PROSPECTUS & APPLICATION
FRANKLIN MUTUAL SERIES FUND INC. - CLASS Z
MAY 1, 1997, AS AMENDED AUGUST 19, 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
Mutual Financial Services Fund GROWTH o VALUE
This prospectus describes the Class Z shares of the six series of Franklin
Mutual Series Fund Inc. ("Mutual Series"): Mutual Shares Fund ("Mutual
Shares"), Mutual Qualified Fund ("Qualified"), Mutual Beacon Fund ("Beacon"),
Mutual European Fund ("European"), Mutual Discovery Fund ("Discovery") and
Mutual Financial Services Fund ("Financial Services"). Each of these series
may, individually or together, be referred to as the "Fund(s)." This
prospectus contains information you should know before investing in the Fund.
Please keep it for future reference.
The Fund currently offers other classes of shares with different sales charge
and expense structures, which affect performance. These classes are 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 Z
shares, dated May 1, 1997, as amended August 19, 1997, which may be further
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 its address.
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.
The principal investment objective of Mutual Shares, Qualified, Beacon,
European and Financial Services is capital appreciation, which may
occasionally be short-term. A secondary objective of each is income.
Discovery's investment objective is long-term capital appreciation. These
objectives are fundamental policies of each Fund and may not be changed
without shareholder approval. Of course, there is no assurance that the
Fund's objective will be achieved.
FRANKLIN MUTUAL SERIES FUND INC. - CLASS Z
May 1, 1997, as amended August 19, 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..........................................
Financial Highlights.....................................
How does the Fund Invest its Assets?.....................
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.................
What If I Have Questions About My 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. With the exception of Financial Services, it is based on the historical
expenses of Class Z for the fiscal year ended December 31, 1996. The numbers
in the table for Financial Services are based on estimated expenses for the
current fiscal year. The Fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
<TABLE>
<CAPTION>
Mutual Financial
Shares Qualified Beacon Discovery European Services
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge
Imposed on Purchases None None None None None None
B. Annual Fund Operating Expenses*
(as a percentage of average net assets)
Management Fees 0.60%*** 0.60%*** 0.60%*** 0.80%*** 0.80%*** 0.00%**
Rule 12b-1 Fees None None None None None None
Other Expenses 0.12% 0.18% 0.15% 0.19% 0.35% 1.00%
Total Fund Operating Expenses 0.72%*** 0.78%*** 0.75%*** 0.99%*** 1.15%*** 1.00%**
C. EXAMPLE
Assume the annual return for the 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 FINANCIAL
SHARES QUALIFIED BEACON DISCOVERY EUROPEAN SERVICES
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 Year $ 7 $ 8 $ 8 $ 10 $ 12 $10
3 Years $ 23 $ 25 $ 24 $ 32 $ 37 $32
5 Years $ 40 $ 43 $ 42 $ 55 $ 63 --
10 Years $ 89 $ 97 $ 93 $121 $140 --
</TABLE>
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 the 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.
*In connection with the transaction which resulted in Franklin Mutual
becoming the Fund's investment manager, Franklin Mutual 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. This agreement
applies only to those series which existed at that time. The parties also
agreed that for the same period the ordinary expenses of each series' (based
on a percentage of net assets) will not be higher than they were expected to
be as of November 1, 1996, based on the annualized expense ratios of each
series as of that date. Increases in expenses beyond these expense ratios
will be permitted, however, if the Board is satisfied 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, regulatory requirements and general
economic conditions) had the transaction not taken place. This expense
limitation does not include items such as litigation expenses, interest,
taxes, insurance, brokerage commissions and expenses of an extraordinary
nature.
**Mutual Advisers has agreed in advance to waive its management fee and make
certain payments to reduce the Financial Services Fund's expenses so it's
aggregate annual operating expenses do not exceed 1.00% of Class Z's average
net assets for the current fiscal year. Absent this reduction, contractual
and expected management fees and total operating expenses would equal 0.80%
and 1.85% respectively, of Class Z's average net assets. After December 31,
1997, Mutual Advisers may terminate this arrangement at any time.
***For the period shown, Franklin Mutual and its affiliates had agreed in
advance to limit its management fees during the Fund's previous fiscal year.
This agreement did not apply to Financial Services which was not in existence
during the Fund's previous fiscal year. With this reduction, management fees
and total operating expenses were as follows:
MUTUAL SHARES QUALIFIED BEACON DISCOVERY EUROPEAN
MANAGEMENT FEES 0.58% 0.57% 0.58% 0.77% 0.74%
TOTAL OPERATING
EXPENSES 0.70% 0.75% 0.73% 0.96% 1.09%
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history for Class Z. The
information has been audited by Ernst & Young LLP, the Fund's independent
auditors. Their audit report appears in the Fund's Annual Report to
Shareholders. The Annual Report to Shareholders also includes more
information about the Fund's performance. For a free copy, please call Fund
Information.
MUTUAL SHARES - CLASS Z
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $86.45 $78.69 $80.97 $73.36 $64.49 $56.39 $67.16 $67.77 $57.83 $60.43
Income from Investment Operations:
Net Investment Income 2.77 1.99 1.34 1.41 1.55 2.04 3.32 4.03 2.64 2.23
Net Gains or Losses on Securities
(realized and unrealized) 14.80 20.51 2.28 13.89 12.07 9.69 (9.86) 6.00 14.98 1.78
Total from Investment Operations 17.57 22.50 3.62 15.30 13.62 11.73 (6.54) 10.03 17.62 4.01
Less Distributions:
Dividends (from net investment
income) 2.48 1.93 1.34 1.38 1.59 2.00 3.34 4.09 2.63 2.52
Distributions (from capital gains) 8.69 12.81 4.56 6.31 3.16 1.63 .89 6.55 5.05 4.09
Total Distributions 11.17 14.74 5.90 7.69 4.75 3.63 4.23 10.64 7.68 6.61
Net Asset Value,
End of Period $92.85 $86.45 $78.69 $80.97 $73.36 $64.49 $56.39 $67.16 $67.77 $57.83
Total Return 20.76% 29.11% 4.53% 21.00% 21.33% 20.99% (9.82)% 14.93% 30.69% 6.34%
Ratios/Supplemental Data:
Net Assets, End of Period (millions) $6,543 $5,230 $3,746 $3,527 $2,913 $2,640 $2,521 $3,403 $2,551 $1,685
Ratio of Expenses to Average Net Assets .70%* .69% .72% .74% .78% .82% .85% .65%* .67%* .69%
Ratio of Net Investment Income to
Average Net Assets 3.02%* 2.47% 1.80% 1.90% 2.18% 3.08% 4.88% 5.57%* 4.16%* 3.32%
Portfolio Turnover Rate 58.35% 79.32% 66.55% 48.78% 41.06% 47.89% 43.41% 71.54% 89.67% 77.72%
Average Commission Per Share $.041 -- -- -- -- -- -- -- -- --
*After reduction of expenses by the investment adviser. Had the investment
adviser not undertaken such action, the ratios of operating expenses and net
investment income would have been .72% and 3.00% in 1996, .67% and 5.55% in
1989, and .74% and 4.09% in 1988.
QUALIFIED - CLASS Z
Year Ended December 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $29.74 $26.67 $27.00 $24.43 $21.18 $18.37 $22.21 $22.71 $19.37 $20.06
Income from Investment Operations:
Net Investment Income .94 .66 .43 .38 .49 .67 1.22 1.34 .84 .77
Net Gains or Losses on Securities
(realized and unrealized) 5.24 6.33 1.10 5.12 4.27 3.18 (3.45) 1.91 4.95 .86
Total from Investment Operations 6.18 6.99 1.53 5.50 4.76 3.85 (2.23) 3.25 5.79 1.63
Less Distributions:
Dividends (from net investment
income) .87 .65 .43 .37 .49 .67 1.23 1.36 .83 .88
Distributions (from capital gains) 2.58 3.27 1.43 2.56 1.02 .37 .38 2.39 1.62 1.44
Total Distributions 3.45 3.92 1.86 2.93 1.51 1.04 1.61 3.75 2.45 2.32
Net Asset Value,
End of Period $32.47 $29.74 $26.67 $27.00 $24.43 $21.18 $18.37 $22.21 $22.71 $19.37
Total Return 21.19% 26.60% 5.73% 22.71% 22.70% 21.13% (10.12)% 14.44% 30.15% 7.72%
Ratios/Supplemental Data:
Net Assets, End of Period (millions) $4,287 $3,002 $1,792 $1,511 $1,251 $1,110 $1,075 $1,470 $1,094 $686
Ratio of Expenses to Average Net Assets .75%* .72% .73% .78% .82% .87% .89% .70%* .62%* .71%
Ratio of Net Investment Income to
Average Net Assets 3.06%* 2.71% 1.91% 1.65% 2.10% 3.09% 5.40% 5.61%* 3.96%* 3.43%
Portfolio Turnover Rate 65.03% 75.59% 67.65% 56.22% 47.39% 51.99% 46.12% 73.41% 85.05% 73.50%
Average Commission Per Share $.036 -- -- -- -- -- -- -- -- --
*After reduction of expenses by the investment adviser. Had the investment
adviser not undertaken such action, the ratios of operating expenses and net
investment income would have been .78% and 3.03% in 1996, .71% and 5.60% in
1989, and .69% and 3.89% in 1988.
BEACON - CLASS Z
Year Ended December 31, Dec. 31, August 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1987+
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $35.94 $31.03 $31.09 $27.10 $23.36 $20.80 $24.09 $22.85 $19.49 $24.78 $19.27
Income from Investment
Operations:
Net Investment Income 1.20 .87 .46 .37 .45 .75 1.08 1.12 .77 .22 .37
Net Gains or Losses on
Securities (realized
and unrealized) 6.28 7.09 1.28 5.81 4.85 2.88 (3.03) 2.84 4.80 (3.96) 6.39
Total from Investment
Operations 7.48 7.96 1.74 6.18 5.30 3.63 (1.95) 3.96 5.57 (3.74) 6.76
Less Distributions:
Dividends (from net
investment income) 1.06 .84 .44 .37 .46 .74 1.08 1.17 .80 .51 .31
Distributions (from
capital gains) 3.41 2.21 1.36 1.82 1.10 .33 .26 1.55 1.41 1.04 .94
Total Distributions 4.47 3.05 1.80 2.19 1.56 1.07 1.34 2.72 2.21 1.55 1.25
Net Asset Value,
End of Period $38.95 $35.94 $31.03 $31.09 $27.10 $23.36 $20.80 $24.09 $22.85 $19.49 $24.78
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -
Total Return* 21.19% 25.89% 5.61% 22.93% 22.92% 17.60% (8.17)% 17.46% 28.79% (15.12)% 37.33%
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -
Ratios/Supplemental Data:
Net Assets, End of Period
(millions) $4,920 $3,573 $2,060 $1,062 $534 $398 $388 $409 $214 $131 $159
Ratio of Expenses to
Average Net Assets .73%*** .72% .75% .73% .81% .85% .85% .67%*** .59%*** .87%** .85%
Ratio of Net Investment Income
to Average Net Assets 3.21%*** 2.89% 1.96% 1.53% 1.90% 3.07% 4.59% 4.98%*** 3.64%*** 2.86%** 2.50%
Portfolio Turnover Rate 66.87% 73.18% 70.63% 52.88% 57.52% 56.63% 57.74% 67.18% 86.79% 28.07% 73.41%
Average Commission
Per Share $.047 -- -- -- -- -- -- -- -- -- --
</TABLE>
+This year is covered by the report of other independent auditors. This
report is not included in this prospectus..
*Not annualized for periods of less than one year.
**Annualized.
***After reduction of expenses by the investment adviser. Had the investment
adviser not undertaken such action, the ratios of operating expenses and net
investment income would have been 0.75% and 3.19% in 1996 .68% and 4.97% in
1989, and .66% and 3.57% in 1988.
DISCOVERY - CLASS Z
Year Ended December 31,
1996 1995 1994 1993
---------------------------------
NET ASSET VALUE,
Beginning of Year $15.16 $12.55 $13.05 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .34 .17 .15 .10
Net Gain on Securities
(realized and unrealized) 3.39 3.40 .32 3.48
----------------------------------
Total from Investment Operations 3.73 3.57 .47 3.58
----------------------------------
LESS DISTRIBUTIONS:
Dividends (from net investment income) .31 .14 .16 .09
Distributions (from capital gains) 1.40 .82 .81 .44
----------------------------------
Total Distributions 1.71 .96 .97 .53
----------------------------------
NET ASSET VALUE,
End of Period $17.18 $15.16 $12.55 $13.05
------------------------------------
TOTAL RETURN 24.93% 28.63% 3.62% 35.85%
====================================
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (millions) $2,976 $1,370 $725 $548
Ratio of Expenses to Average Net Assets .96%* .99% .99% 1.07%
Ratio of Net Investment Income to
Average Net Assets 2.24%* 2.00% 1.64% 1.17%
Portfolio Turnover Rate 80.18% 73.23% 72.70% 90.37%
Average Commission Per Share $.026 -- -- --
*After reduction of expenses by the investment adviser. Had the investment
adviser not undertaken such action, the ratios of operating expenses and net
investment income would have been .99% and 2.21% in 1996.
EUROPEAN - CLASS Z
For the period
July 3, 1996+ to
December 31, 1996
------------
NET ASSET VALUE,
Beginning of Period $10.00
------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .06
Net Gain 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 Period $11.39
------
- -----
TOTAL RETURN 14.61%*
======
RATIOS/SUPPLEMENTAL DATA:
Net Assets,
End of Period (millions) $450
Ratio of Expenses
to Average Net Assets 1.15%**
Ratio of Expenses,
Net of Reimbursement, to
Average Net Assets 1.09%**
Ratio of Net Investment Income to
Average Net Assets 1.87%**
Portfolio Turnover Rate 36.75%
Average Commission Per Share $.023
+Commencement of Operations
*Not annualized for periods of less than one year.
**Annualized.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The principal investment objective of Mutual Shares, Qualified, Beacon,
European and Financial Services is capital appreciation, which may
occasionally be short-term. A secondary objective of each is income.
Discovery's investment objective is long-term capital appreciation. These
objectives are fundamental policies of each Fund and may not be changed
without shareholder approval. Of course, there is no assurance that the
Fund's objective will be achieved.
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.
Financial Services will normally invest at least 65% of its invested assets
in the securities issued by companies in the financial services industry.
Accordingly, Financial Services will be concentrated in the financial
services industry which, for Fund purposes, is considered to be issuers, a
substantial portion of whose assets, revenues or operations relate to the
creation, purchase and sale of financial instruments. Issuers in the
financial services industry include banks, savings and loan organizations,
credit card companies, brokerage firms, finance companies, sub-prime lending
institutions, investment advisers and insurance companies. As the nature of
the financial services industry continues to evolve, additional types of
issues may be included in the Fund. Financial Services' investment policy of
concentrating in the financial services industry is fundamental and may not
be changed without a vote of a majority of the outstanding voting securities
of Financial Services.
Discovery expects to invest approximately 50% 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. Smaller companies often are not well known, often may trade at a
discount and may not be followed by established financial institutions.
Each Fund 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 fluctuates
with changes in the market value of the Fund's 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 Fund 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
Fund's 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 Funds 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 Fund may invest in securities that
are traded on U.S. or foreign exchanges, the NASDAQ national market system or
in the OTC market. With the exception of Financial Services, each Fund 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 Fund 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 Fund 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 Funds 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 "How does the Fund Invest its Assets? - Medium and Lower Rated Corporate
Debt Securities" in the SAI.
Each Fund 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 a Fund may invest in such transactions, no Fund 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 Fund makes
its investment will be consummated or will be consummated on the terms and
within the time period contemplated by Franklin Mutual.
Each Fund 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 Fund 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.
Each Fund 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 Funds purchase
loans from national and state chartered banks as well as foreign ones. The
Funds normally invest in senior indebtedness of the debtor companies,
although on occasion subordinated indebtedness may also be acquired.
Each Fund 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.
Each Fund 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.
Each Fund may also invest in cash equivalents such as Treasury bills and high
quality commercial paper. The series generally purchase 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 Funds 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 Funds 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 Fund can profit if the price
decreases. The Funds may also sell securities "short against the box" without
limit. See "How does the Fund Invest its Assets? - Short Sales" in the SAI
for more discussion of these practices.
Each Fund 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 Fund invested in
short-term debt securities and preferred stocks although it may choose not to
do so when circumstances dictate. In addition, each Fund may invest from time
to time in other investment company securities, subject to applicable law
which restricts such investments. Investors should recognize that a Fund's
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.
SPECIAL CONSIDERATIONS RELATING TO FINANCIAL SERVICES
Under regulations of the SEC, the Funds, including Financial Services, may
not invest more than 5% of its total assets in the securities of any company
that derives more than 15% of its revenues from securities-related
activities, which means activities as a broker, dealer, underwriter or
investment adviser. Further, immediately after a purchase of equity
securities of such an issuer, such Fund may not own more than 5% of the
outstanding securities of any class of equity securities of such issuer, and
immediately after a purchase of debt securities of such an issuer, such Fund
may not own more than 10% of the outstanding principal amount of such
issuer's debt securities.
As stated above, Financial Services concentrates its investments in the
financial service industry. Its investment and performance, accordingly, will
be affected by general market and economic conditions as well as other risk
factors particular to the financial services industry. Financial services
companies are subject to extensive government regulation which may limit both
the amount and types of loans and other financial commitments they can make,
and the interest rates and fees they can charge. Profitability is largely
dependent on the availability and cost of capital funds, and can fluctuate
significantly when interest rates change. Credit losses resulting from
financial difficulties of borrowers can negatively impact the industry.
Insurance companies may be subject to severe price competition, claims
activity, marketing competition and general economic conditions. Particular
insurance lines will also be influenced by specific matters. Property and
casualty insurer profits may be affected by certain weather catastrophes and
other disasters. Life and health insurer profits may be affected by mortality
risks and morbidity rates. Individual insurance companies may be subject to
material risks including reserve inadequacy and the inability to collect from
reinsurance carriers.
Congress is currently considering legislation that would reduce the
separation between commercial and investment banking businesses. If enacted
this could significantly impact the industry and Financial Services. While
banks may be able to expand the services which they offer if legislation
broadening bank powers is enacted, expanded powers could expose banks to
well-established competitors, particularly as the historical distinctions
between banks and other financial institutions erode. In addition, the
financial services industry is an evolving and competitive industry that is
undergoing significant change with various consolidations and the continual
development of new products, structures and a regulatory framework that is
anticipated to be subject to further change.
NON-U.S. SECURITIES
The Funds may purchase securities of non-U.S. issuers and Discovery expects
that 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 Funds 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, Financial Services and finally
with Mutual Shares holding the smallest percentage of these securities. The
Funds 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 Fund 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 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. Please see the SAI for
more details.
REPURCHASE AGREEMENTS AND LOANS OF SECURITIES
Each Fund may invest up to 10% of its assets in repurchase agreements,
including tri-party repurchase agreements. Each Fund may also loan its
portfolio securities in order to realize additional income. Repurchase and
tri-party agreements are generally agreements under which the Fund obtains
money market instruments subject to resale to the seller at an agreed upon
price and date. Any loans of portfolio securities which the Fund 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 Funds
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 Funds 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
Funds 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
Fund's portfolio resulting from changes in securities markets or currency
exchange rate fluctuations, to protect the Fund's 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 Fund 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 Fund
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 Fund's 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 Fund, 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 Fund 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 Fund's total return to
investors.
FUNDAMENTAL RESTRICTIONS
Each Fund has adopted a number of fundamental investment restrictions, which
may not be changed for a particular Fund without the approval of that Fund's
shareholders. These restrictions are set forth in the SAI.
Among other things, each Fund 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 Fund
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 Fund 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; for all Funds except for Financial Services, 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 Investment Company Act of 1940, 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, European
and Financial Services have identical investment objectives, Franklin Mutual
seeks to retain certain historical differences among the Funds 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 Funds, 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. Financial Services and European will utilize the
same investment philosophy but will apply it in the context of investing in
the financial services industry and European securities, respectively.
Allocation of investments among the Funds will also depend upon, among other
things, the amount of cash in, and relative size of each Fund's portfolio. In
addition, the factors outlined above are not mutually exclusive and a
particular security may be owned by more than one of the Funds.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional
investment restrictions that limit its activities to some extent. Some of
these restrictions may only be changed with shareholder approval. For a list
of these restrictions and more information about the Fund's investment
policies, please see "How does the Fund Invest its Assets?" and "Restrictions
and Limitations" in the SAI.
Each of the Fund's policies and restrictions discussed in this prospectus and
in the SAI is considered at the time the Fund makes an investment. The Fund
is generally not required to sell a security because of a change in
circumstances.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations.
The Board also monitors the Fund to ensure no material conflicts exist
between the Fund's classes of shares. 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 $191
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 F. 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 manager for Franklin Mutual Series
Fund Inc. He became Chief Executive Officer of Franklin Mutual in November
1996. He is Chairman of the Board and President of Franklin Mutual Series
Fund Inc.
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 manager for Franklin Mutual Series Fund Inc. He
joined Franklin Mutual in November 1996. He is a Vice President of Franklin
Mutual Series Fund Inc.
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 manager for Franklin Mutual
Series Fund Inc. He joined Franklin Mutual in November 1996. He is a Vice
President of Franklin Mutual Series Fund Inc.
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 manager for Franklin Mutual Series Fund Inc. He joined
Franklin Mutual in November 1996. He is a Vice President of Franklin Mutual
Series Fund Inc.
Peter A. Langerman
Chief Operating Officer and 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 manager for Franklin Mutual
Series Fund Inc. He joined Franklin Mutual in November 1996. Mr. Langerman is
a director and Executive Vice President of Franklin Mutual Series Fund Inc.
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 manager for Franklin Mutual Series Fund Inc. He joined
Franklin Mutual in November 1996. He is a Vice President of Franklin Mutual
Series Fund Inc.
MANAGEMENT FEES. During the fiscal year ended December 31, 1996, management
fees, before any advance waiver, totaled 0.60%, 0.60%, 0.60%, 0.80% and 0.80%
of the average daily net assets of Mutual Shares, Qualified, Beacon,
Discovery, and European, respectively. Total operating expenses of the class
were 0.72%, 0.78%, 0.75%, 0.99% and 1.15% of the average daily net assets of
Mutual Shares, Qualified, Beacon, Discovery, and European, respectively.
Under an agreement by Franklin Mutual to limit its fees, Mutual Shares,
Qualified, Beacon, Discovery, and European paid management fees totaling
0.58%, 0.57%, 0.58%, 0.77% and 0.74%, respectively, and operating expenses
totaling 0.70%, 0.75%, 0.73%, 0.96% and 1.09%, respectively.
The Fund pays its own operating expenses. These expenses include Franklin
Mutual's management fees; taxes, if any; custodian, legal and auditing fees;
the fees and expenses of Board members who are not members of, affiliated
with, or interested persons of Franklin Mutual; fees of any personnel not
affiliated with Franklin Mutual; insurance premiums; trade association dues;
expenses of obtaining quotations for calculating the Fund's Net Asset Value;
and printing and other expenses that are not expressly assumed by Franklin
Mutual. The Board has determined the method and procedure for allocating
expenses between the series and the classes within the series and reserves
the right to modify such method and procedures.
Under their management agreements, the Funds pay 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, European and Financial Services. The fee is computed at
the close of business on the last business day of each month.
PORTFOLIO TRANSACTIONS. Franklin Mutual seeks to obtain the best execution on
all transactions. If Franklin Mutual believes more than one broker or dealer
can provide the best execution, it may consider research and related services
and the sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. To the extent
that any of the Funds owns more than 5% of the securities of a broker-dealer,
that broker-dealer may be considered to be an affiliated person of such Fund.
If such Fund places any portfolio transactions through the broker-dealer,
such Fund would be required to comply with certain rules of the SEC relating
to the payment of brokerage commissions to affiliated broker-dealers. 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 the Fund's 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. During the fiscal year ended
December 31, 1996, annualized administration fees totaling 0.08% of the
average daily net assets of each series were paid to FT Services. These fees
are included in the amount of total expenses shown above. 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.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, Class Z of the Fund advertises its performance. The more
commonly used measure of performance is total return.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The investment results of Class Z 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.
Each series is treated as a separate entity for federal income tax purposes.
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 generally 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
U.S. 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. Please 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. Please consult your own tax
advisors with respect to the tax consequences of an investment in the Fund.
HOW IS THE FUND ORGANIZED?
Each Fund is a diversified series of Mutual Series, an open-end management
investment company, commonly called a mutual fund. Mutual Series was
organized as a Maryland corporation on November 12, 1987, and is registered
with the SEC. Each Fund, with the exception of Financial Services, which was
not effective until August 18, 1997, began offering three classes of shares
on November 1, 1996: Mutual Shares Fund - Class Z, Mutual Shares Fund - Class
I, Mutual Shares Fund - Class II, Mutual Qualified Fund - Class Z, Mutual
Qualified Fund - Class I, Mutual Qualified Fund - Class II, Mutual Beacon
Fund - Class Z, Mutual Beacon Fund - Class I, Mutual Beacon Fund - Class II,
Mutual European Fund - Class Z, Mutual European Fund - Class I, Mutual
European Fund - Class II, Mutual Discovery Fund - Class Z, Mutual Discovery
Fund - Class I, and Mutual Discovery Fund - Class II. All shares outstanding
before the offering of Class I and Class II shares on November 1, 1996, are
considered Class Z shares. Financial Services was created initially with, and
offers, three classes of shares: Class I, Class II, and Class Z. 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 affecting only that class or
expressly required to be voted on separately by state or federal law. Shares
of each class of a series have the same voting and other rights and
preferences as the other classes and series of Mutual Series for matters that
affect Mutual Series as a whole.
Mutual Series 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.
Mutual Series does not intend to hold annual shareholder meetings. Mutual
Series or a Fund may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares.
In certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
As of May 30, 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
Shares of the Fund may be purchased without a sales charge. 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.
CURRENTLY, THE FUND DOES NOT ALLOW INVESTMENTS BY MARKET TIMERS.
MINIMUM
INVESTMENTS*
To Open Your Account........$5,000,000
To Add to Your Account............$ 25
*We waive or lower these minimums for certain investors listed below. We may
also refuse any order to buy shares.
To determine if you meet the minimum investment requirement, the amount of
your current purchase is added to the cost or current value, whichever is
higher, of your existing shares in the Franklin Templeton Funds. At least $1
million of this amount, however, must be invested in Advisor Class or Class Z
shares of any of the Franklin Templeton Funds.
The Fund's minimum initial investment requirement will not apply to purchases
by:
1. Existing shareholders of any series as of October 31, 1996, and their
immediate family members residing at the same address 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 if
reinvested in the same class of shares of any series within 365 days of
the redemption date
3. A direct rollover to an IRA by employees of a company with a
non-custodial pension plan set up as an omnibus account on October 31,
1996
4. Partnership shareholders who have an account on October 31, 1996,
whether or not they are listed on the registration
5. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition, or exchange offer or other business combination
transaction
6. New participants and accounts of employer-sponsored retirement plans
invested in the Fund as of October 31, 1996, and employees who own Fund
shares through an employer-sponsored retirement plan as of October 31,
1996, who wish to open new individual Class Z accounts in their own
names
7. Corporate shareholders invested in the Fund as of October 31, 1996,
using the same registration, or new companies of such corporate
shareholders that have been reorganized into smaller, independent
companies
8. Shareholders who owned shares of the Fund through a broker-dealer or
service agent omnibus account on October 31, 1996
9. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs
10. Qualified registered investment advisors or certified financial
planners who have clients invested in the Franklin Mutual Series Fund
Inc. on October 31, 1996, or who buy through a broker-dealer or service
agent who has entered into an agreement with Distributors
11. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group and their immediate
family members, subject to a $100 minimum investment requirement
12. Accounts managed by the Franklin Templeton Group
13. The Franklin Templeton Profit Sharing 401(k) Plan
14. Each series of the Franklin Templeton Fund Allocator Series investing
in Mutual Shares and Discovery, subject to a $1,000 minimum initial and
subsequent investment requirement
15. Employer stock, bonus, pension or profit sharing plans that meet the
requirements for qualification under Section 401 of the Code, including
salary reduction plans qualified under Section 401(k) of the Code, and
that (i) are sponsored by an employer with at least 5,000 employees, or
(ii) have plan assets of $50 million or more
16. 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
17. 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 in Class Z
shares
18. Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of a qualified group, if
the group as a whole meets the $5 million minimum investment
requirement. A qualified group is one that:
Was formed at least six months ago,
Has a purpose other than buying Fund shares at a discount,
Has more than 10 members,
Can arrange for meetings between our representatives and group
members,
Agrees to include 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.
TELEPHONE PURCHASES
If you are a current shareholder, you may buy Fund shares by calling the Fund
at 1-800-448-FUND prior to the earlier of 4:00 p.m. Eastern time or the close
of the NYSE. 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.
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, call Retirement Plan Services.
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.
PAYMENTS TO SECURITIES DEALERS
Securities Dealers who initiate and are responsible for purchases of Class Z
shares may receive up to 0.25% of the amount invested. The payment is subject
to the sole discretion of Distributors, and is paid by Distributors or one of
its affiliates and not by the Fund or its shareholders.
For information on additional compensation payable to Securities Dealers in
connection with the sale of Fund shares, please see "How Do I Buy, Sell and
Exchange Shares? - Other Payments to Securities Dealers" in the SAI.
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.
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 some do
not offer Class Z or Advisor Class shares.
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METHOD STEPS TO FOLLOW
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BY MAIL 1. Send us written instructions signed by all
account owners
2. Include any outstanding share certificates for
the shares you want to exchange
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BY PHONE Call Shareholder Services
If you do not want the ability to exchange by phone
to apply to your account, please let us know.
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- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, 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. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares
as described above. Restrictions may apply to other types of retirement
plans. Please contact Retirement Plan Services for information on
exchanges within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
o Mutual Series Class Z shareholders of record on October 31, 1996 and
others who would not qualify to buy Class I shares of Franklin Templeton
Funds at Net Asset Value, may exchange their shares for Class I shares at
Net Asset Value of other Franklin Templeton Funds, as permitted by each
fund's current prospectus, provided those shares have been held at least
six consecutive months in any one Fund prior to the exchange.
Because excessive trading can hurt Fund performance, operations, 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.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
If you qualify to buy Advisor Class shares of the Franklin Templeton Funds
and you want to exchange into a fund that does not currently offer Advisor
Class, you may exchange your Class Z shares for Class I shares of that fund
at Net Asset Value. If you qualify to buy Advisor Class shares of the
Franklin Templeton Funds and you do not qualify to buy Advisor Class shares
of Templeton Developing Markets Trust, Templeton Foreign Fund or Templeton
Growth Fund, you may exchange the Class Z shares you own for Class I shares
of those funds or of Templeton Institutional Funds, Inc. at Net Asset Value.
If you do so and you later decide you would like to exchange into a fund that
offers a Class Z or Advisor Class, you may exchange your Class I shares for
Class Z or Advisor Class shares of that fund.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
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METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all
account owners
2. Include any outstanding share certificates for
the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may
need to send additional documents. Accounts under
court jurisdiction may have other requirements.
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- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services
Telephone requests will be accepted:
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 15 days
If you do not want the ability to redeem by phone
to apply to your account, please let us know or
check the appropriate box on the shareholder
application.
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- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. 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 Retirement Plan Services.
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, usually once in
December and once at mid-year.
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 by reinvesting capital gain distributions, or both
dividend and capital gain distributions. 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 Advisor Class of another Franklin Templeton Fund.
You may also direct your distributions to buy Class I shares of another
Franklin Templeton Fund. Many shareholders find this a convenient way to
diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both
dividend and capital gain distributions, in cash. If you have the money sent
to another person or to a checking account, you may need a signature
guarantee.
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. 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. For Trust Company retirement
plans, special forms are required to receive distributions in cash.
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 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 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. 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 and sell Class Z shares at the Net Asset Value per share. We
calculate it to two decimal places using standard rounding criteria. 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 are 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. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
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 may 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 us
written instructions, as described elsewhere in this prospectus. If you are
unable to execute a transaction by phone, 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 Retirement Plan Services.
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.
- --------------------------------------------------------------------------------
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we 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.
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 $300, or $100 for IRA
accounts. 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 $300, or $100 for IRA accounts.
These minimums do not apply if you fall within categories 12, 13, 14 or 15
under "How Do I Buy Shares? - Opening Your Account."
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
savings or 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. 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.
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.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce
Fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if you
would like an additional free copy of the Fund's financial reports.
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 997151, Sacramento, California 95899-9983. The Fund and
Franklin Mutual are located at 51 John F. Kennedy Parkway, Short Hills, New
Jersey 07078. Distributors is located at 777 Mariners Island Blvd., San
Mateo, California 94403-7777. You may also contact us by phone at one of the
numbers listed below.
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/448-3863 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plan Services 1-800/448-3863 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Automated Telephone 1-800/858-3013 24 hours a day, 7 days a
Inquiry week
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
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
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."
FRANKLIN MUTUAL - Franklin Mutual Advisers, Inc., the Fund's investment
manager
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator
Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable Products
Series Fund
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
MARKET TIMERS - Market Timers generally include market timing or asset
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 or whose transactions include
frequent or large exchanges.
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
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.
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.
FRANKLIN MUTUAL SERIES FUND INC.
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997 AS AMENDED AUGUST 19, 1997
51 JOHN F. KENNEDY PARKWAY
SHORT HILLS, NJ 07078 1-800/DIAL BEN
TABLE OF CONTENTS
How does the Fund Invest its Assets?.......................
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..................................
Financial Statements.......................................
Useful Terms and Definitions...............................
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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."
- -----------------------------------------------------------------------
Mutual Shares Fund ("Mutual Shares"), Mutual Qualified Fund ("Qualified"),
Mutual Beacon Fund ("Beacon"), Mutual Discovery Fund ("Discovery"), Mutual
European Fund ("European") and Mutual Financial Services Fund("Financial
Services") are diversified series of Franklin Mutual Series Fund Inc.
("Mutual Series"), an open-end management investment company. Each series may
individually or together be referred to as the "Fund(s)." The principal
investment objective of Mutual Shares, Qualified, Beacon, European and
Financial Services is capital appreciation, which may occasionally be
short-term. A secondary objective of each is income. Discovery's investment
objective is long-term capital appreciation.
The Prospectus, dated May 1, 1997, as amended August 19, 1997, and as may be
further 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 describes the Fund's Class I and Class II shares. The Fund currently
offers another class of shares with a different sales charge and expense
structure, which affects performance. This class is described in a separate
SAI and prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN
MORE DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE
YOU WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF
THE FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- ------------------------------------------------------------------------------
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
- ------------------------------------------------------------------------------
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together
with the section in the Prospectus entitled "How does the Fund Invest its
Assets?"
The general investment policy of the Fund 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 to invest in
common stock, preferred stock, debt securities and other securities in such
proportions as Franklin Mutual deems advisable. Without committing any fixed
portion of the Fund's assets, Franklin Mutual typically maintains a portion
of the assets of the Fund invested in debt securities and preferred stocks
(which may be convertible). In addition, the Fund may also invest in
restricted debt and equity securities, in foreign securities, and in other
investment company securities.
REPURCHASE AGREEMENTS AND LOANS OF SECURITIES
The Fund may invest in repurchase agreements with domestic banks or
broker-dealers. Repurchase agreements are considered loans by the Fund
collateralized by the underlying securities. As with loans of portfolio
securities which the Fund 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 Fund.
Repurchase agreements and lending of portfolio securities involve some credit
risk to the Fund. If the other party defaults on its obligations, the Fund
could be delayed or prevented from receiving payment or recovering its
collateral. Even if the Fund recovers the collateral in such a situation, the
Fund 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
S&P or "P-l" from 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 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 bank 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 bank. 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
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
The Fund 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 Fund has 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 Fund 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 Fund's portfolio and thus could have an
effect on the Net Asset Value of the Fund if other types of securities did
not show offsetting changes in values. The secondary market value of
corporate debt securities structured as zero coupon securities or payment in
kind securities may be more volatile in response to changes in interest rates
than debt securities which pay interest periodically in cash. Because such
securities do not pay current interest, but rather, income is accreted, to
the extent that a series does not have available cash to meet distribution
requirements with respect to such income, it could be required to dispose of
portfolio securities that it otherwise would not. Such disposition could be
at a disadvantageous price. Failure to satisfy distribution requirements
could result in the Fund 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 Fund's investments pursuant to guidelines adopted
and periodically reviewed by the Board. See "How are Fund Shares Valued?" in
this SAI. To the extent that there is no established retail market for some
of the medium or low grade corporate debt securities in which the Fund 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 Fund 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 Fund 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
The Fund may make short sales of securities. A short sale is a transaction in
which the Fund sells a security it does not own in anticipation that the
market price of that security will decline. Each Fund 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 Fund 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 Fund 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 Fund's 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 Fund 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 Fund replaces the borrowed security, the Fund
will incur a loss; conversely, if the price declines, the Fund will realize a
gain. Any gain will be decreased, and any loss increased, by the transaction
costs described above. Although the Fund's gain is limited to the price at
which it sold the security short, its potential loss is theoretically
unlimited.
The Fund 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 Fund's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Fund
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 Fund
owns or has the immediate and unconditional right to acquire at no additional
cost the identical security.
SPECIAL CONSIDERATIONS RELATED TO SECURITIES IN THE FINANCIAL SERVICES
INDUSTRY
Certain provisions of the federal securities laws permit investment
portfolios, including Financial Services, to invest in companies engaged in
securities-related activities subject to certain conditions. Purchases of
securities of a company that derived 15% or less of gross revenues during its
most recent fiscal year from securities-related activities (i.e., broker,
dealer, underwriting, or investment advisory activities) are subject only to
the same percentage limitations as would apply to any other security a Fund
may purchase. Each Fund, including Financial Services, may purchase
securities (not limited to equity or debt individually) of an issuer that
derived more than 15% of its gross revenues in its most recent fiscal year
from securities-related activities, subject to the following conditions:
a. the purchase cannot cause more than 5% of the Fund's total assets to be
invested in securities of that issuer;
b. for an equity security, the purchase cannot result in the fund owning
more than 5% of the issuer's outstanding securities in the class;
c. for a debt security, the purchase cannot result in the fund owning more
than 10% of the outstanding principal amount of the issuer's debt securities.
The applying the gross revenue test, an issuer's own securities-related
activities must be combined with its ratable share of securities-related
revenues from enterprises in which it owns a 20% or greater voting or equity
interest. All of the above percentage limitations, as well as the issuer's
gross revenue test, are applicable at the time of purchase. With respect to
warrants, rights, and convertible securities, a determination of compliance
with the above limitations must be made as though such warrant, right, or
conversion privilege had been exercised.
The following transactions would not be deemed to be an acquisition of
securities of a securities-related business: (i) receipt of stock dividends
on securities acquired in compliance with the Rule; (ii) receipt of
securities arising from a stock-for-stock split on securities acquired in
compliance with the Rule; (iii) exercise of options, warrants, or rights
acquired in compliance with the Rule; (iv) conversion of convertible
securities acquired in compliance with the Rule; and (v) the acquisition of
puts under certain circumstances.
The Funds also are not permitted to acquire any security issued by Franklin
Mutual or any affiliated company (including Resources) that is a
securities-related business. The purchase of a general partnership interest
in a securities-related business is also prohibited.
In addition, the Funds are generally prohibited from purchasing or otherwise
acquiring any security (not limited to equity or debt individually) issued by
any insurance company if such Fund and any company controlled by such Fund
own in the aggregate or, as a result of the purchase, will own in the
aggregate more than 10% of the total outstanding voting stock of the
insurance company. Certain state insurance laws impose similar limitations.
RESTRICTIONS AND LIMITATIONS
Mutual Shares, Qualified, Beacon, Discovery, European and Financial Services,
except as noted, 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 and
except that this restriction does not apply to Financial Services).
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 or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
NONFUNDAMENTAL POLICIES
The following policies apply to all Funds with the exception of Financial
Services.
As a matter of policy that is not fundamental, no Fund 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 NYSE or American Stock
Exchange. Also, as a matter of policy, the Fund will not purchase securities
for purposes of short term trading and will not invest more than 5% of its
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 Fund 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 Fund does 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 Fund's 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 (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH MUTUAL SERIES DURING THE PAST FIVE
YEARS
Edward I. Altman, Ph.D. (56)
New York University
44 West 4th Street
New York, NY 10012
Director
Max L. Heine Professor of Financing and Vice Director, NYU Salomon Center,
Stern School of Business, New York University; editor and author of numerous
financial publications; and financial consultant.
Ann Torre Grant (39)
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, 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 and Director of
Precise Power Corporation; Executive-in-Residence of Eckerd College
(1991-present); Director of Checkers Drive-In Restaurants, Inc.; formerly,
Chairman of the Board and Chief Executive Officer of Florida Progress
Corporation (1982-1990) and director of various of its subsidiaries; and
director or trustee, as the case may be, of 24 of the investment companies in
the Franklin Templeton Group of Funds.
*Peter A. Langerman (42)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Director and Executive Vice President
Chief Operating Officer and Senior Vice President of Franklin Mutual
Advisers, Inc.; 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 (72)
One Parker Plaza
Fort Lee, NJ 07024
Director
Senior Vice President, Franklin Resources, Inc. and Franklin Management,
Inc.; President and Director, Franklin Advisory Services, Inc.; and officer
and/or director or trustee, as the case may be, of seven of the investment
companies in the Franklin Templeton Group of Funds.
Bruce A. MacPherson (67)
1 Pequot Way
Canton, MA 02021
Director
President of A.A. MacPherson, Inc. Boston, MA (representative for electrical
manufacturers).
Fred R. Millsaps (68)
2665 NE 37th Drive
Fort Lauderdale, FL 33394
Director
Manager of personal investments (1978-present); director of various business
and nonprofit organizations; formerly, Chairman and Chief Executive Officer
of Landmark Banking Corporation (1969-1978), Financial Vice President of
Florida Power and Light (1965-1969) and Vice President of the Federal Reserve
Bank of Atlanta (1958-1965); and director or trustee, as the case may be, of
24 of the investment companies in the Franklin Templeton Group of Funds.
*Michael F. Price (46)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Chairman of the Board and President
President, Chief Executive Officer, and Director of Franklin Mutual Advisers,
Inc.; 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)
2 Executive Drive
Suite 560
Fort Lee, NJ 07024
Director
Partner in LDR Equities, LLC (manages various personal investments); Vice
President, Trimtex Co., Inc. (manufactures and markets specialty fabrics);
and trustee or director, as the case may be, of four of the investment
companies in the Franklin Templeton Group of Funds.
Barry F. Schwartz (48)
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. (74)
6 Noyes Avenue
Waterville, ME 04901
Director
Practicing physician.
Robert E. Wade (51)
225 Hardwick Street
Belvidere, NJ 07823
Director
Practicing attorney.
Jeffrey A. Altman (30)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; was employed by
Heine Securities Corporation, 8/88 to 10/96; Manager (Director), MB
Metropolis, L.L.C. since 1994; Manager (Director) of MB Motori, L.L.C., MWCR,
L.L.C. and S.H. Mortgage Acquisition, L.L.C. since 1995; Trustee of
Resurgence Properties, Inc.; and Chairman of the Board of Trustees, Value
Property Trust.
James R. Baio (43)
500 East Broward Blvd.
Fort Lauderdale, FL 33701
Treasurer
Certified Public Accountant; Treasurer of Franklin Mutual Advisers, Inc.;
Senior Vice President, Templeton Worldwide, Inc., Templeton Global Investors,
Inc. and Templeton Funds Trust Company; formerly, Senior Tax Manager for
Ernst & Young (certified public accountants)(1977-1989); and officer of 24 of
the investment companies in the Franklin Templeton Group of Funds.
Elizabeth N. Cohernour (47)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
General Counsel and Secretary
Vice President, General Counsel and Assistant Secretary of Franklin Mutual
Advisers, Inc.; 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 (38)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; was employed by
Heine Securities Corporation, 8/88 to 10/96.
Raymond Garea (48)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; was employed by
Heine Securities Corporation, 3/91 to 10/96; prior thereto, Vice President
and Analyst with Donaldson, Lufkin & Jenrette; Manager (Director), MB
Metropolis, L.L.C. and S.H. Mortgage Acquisition.
Lawrence N. Sondike (40)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; 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.
The table above shows the officers and Board members who are affiliated with
Distributors and Franklin Mutual. Nonaffiliated members of the Board 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 7 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 other 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 Mutual Series and by other funds
in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
TOTAL FEES NUMBER OF BOARDS
RECEIVED FROM IN THE FRANKLIN
TOTAL FEES PENSION ANNUAL THE FRANKLIN TEMPLETON GROUP
RECEIVED FROM RETIREMENT BENEFITS TEMPLETON GROUP OF FUNDS ON WHICH
NAME MUTUAL SERIES* ACCRUED RETIREMENT OF FUNDS** EACH SERVES***
<S> <C> <C> <C> <C> <C>
Edward I. Altman ....... $19,000 0 $7,500 $ 19,000 1
Ann Torre Grant+........ $19,000 0 $7,500 $ 19,000 1
Bruce A. MacPherson..... $18,000 0 $7,500 $ 18,000 1
Barry F. Schwartz+...... $18,000 0 $7,500 $ 18,000 1
Vaughn R. Sturtevant, M.D. $18,000 0 $7,500 $ 18,000 1
Robert E. Wade+......... $24,500 0 $7,500 $ 24,500 1
Andrew H. Hines, Jr.+ .. $ 5,250 0 $7,500 $125,275 24
Fred R. Millsaps+....... $ 5,250 0 $7,500 $125,275 24
Leonard Rubin+.......... $ 4,500 0 $7,500 $ 24,600 4
Richard L. Chasse++..... $17,250 0 $7,500 $ 17,250 0
</TABLE>
+Not vested in retirement plan
++Retired December 1996.
*For the fiscal year ended December 31, 1996.
**For the calendar year ended December 31, 1996.
***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 169 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 May 30, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of Mutual Series: 343,705.908
shares of Mutual Shares - Class Z; 100,027.044 shares of Qualified - Class Z;
666,641.843 shares of Beacon - Class Z; 380,548.058 shares of Discovery -
Class Z, or less than 1% of the total outstanding Class Z shares of that
series. As of May 30, 1997, the officers and Board members, as a group, owned
of record and beneficially 14,091,332.472 shares or 29% of the total
outstanding Class Z shares of European. 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. The Fund's investment manager is
Franklin Mutual. On October 31, 1996, pursuant to an agreement between
Resources and Heine Securities, Inc. ("Heine"), the assets of Heine were
transferred to Franklin Mutual and Mutual Series Fund Inc.'s name was changed
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 and its
officers, directors and employees are covered by fidelity insurance for the
protection of the Fund.
Franklin Mutual and its affiliates act as investment manager to numerous
other investment companies and accounts. Franklin Mutual may give advice and
take action with respect to any of the other funds it manages, or for its own
account, that may differ from action taken by Franklin Mutual on behalf of
the Fund. Similarly, with respect to the Fund, Franklin Mutual is not
obligated to recommend, buy or sell, or to refrain from recommending, buying
or selling any security that Franklin Mutual and access persons, as defined
by the 1940 Act, may buy or sell for its or their own account or for the
accounts of any other fund. Franklin Mutual is not obligated to refrain from
investing in securities held by the Fund or other funds that it manages. Of
course, any transactions for the accounts of Franklin Mutual 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 FEES. For the fiscal years ended December 31, 1994, 1995 and 1996,
management fees, before any advance waiver, totaled $21,795,512, $27,500,952,
and $35,687,092, respectively, for Mutual Shares; $9,766,052, $14,607,723 and
$22,515,334, respectively, for Qualified; $9,511,199, $17,720,127 and
$26,083,112, respectively, for Beacon; $5,737,128, $7,930,967 and
$17,795,530, respectively, for Discovery. For the fiscal year ended December
31, 1996, management fees, before any advance waiver totaled $949,616 for
European. Under an agreement by Franklin Mutual to limit its fees for the
fiscal year ended December 31, 1996, the Funds paid management fees totaling
$34,719,646 for Mutual Shares; $21,439,007 for Qualified; $25,260,160 for
Beacon; $17,154,254 for Discovery; and $876,464 for European. For the fiscal
years ended December 31, 1994 and 1995, the investment manager did not waive
or limit its fees.
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. On November 1, 1996, FT Services became the Fund's
administrator. 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.
For the two-month period ended December 31, 1996, administration fees
totaling $840,707, $553,904, $634,856, $380,772, and $57,060 were paid to FT
Services for Mutual Shares, Qualified, Beacon, Discovery and European,
respectively.
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, acts as custodian of the securities and other assets of the Fund.
The custodian does not participate in decisions relating to the purchase and
sale of portfolio securities.
AUDITORS. Ernst & Young LLP, 200 Clarendon Street, Boston, MA 02116, are the
Fund's independent auditors. During the fiscal year ended December 31, 1996,
their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders
for the fiscal year ended December 31, 1996.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Franklin Mutual selects brokers and dealers to execute the Fund's portfolio
transactions 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. For portfolio
transactions on a securities exchange, the amount of commission paid by the
Fund is negotiated between Franklin Mutual and the broker executing the
transaction. The determination and evaluation of the reasonableness of the
brokerage commissions paid are based to a large degree on the professional
opinions of the persons responsible for 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.
Franklin Mutual may pay certain brokers commissions that are higher than
those another broker may charge, if Franklin Mutual determines in good faith
that the amount paid is reasonable in relation to the value of the brokerage
and research services it receives. This may be viewed in terms of either the
particular transaction or Franklin Mutual's overall responsibilities to
client accounts over which it exercises investment discretion. The services
that brokers may provide to Franklin Mutual include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to Franklin Mutual in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the Fund. They must, however, be of value to Franklin Mutual in
carrying out its overall responsibilities to its clients.
It is not always possible to place a precise dollar value on the special
executions or on the research services Franklin Mutual receives 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 staffs of other
securities firms. As long as it is lawful and appropriate to do so, Franklin
Mutual and its affiliates may use this research and data in their investment
advisory capacities with other clients. If the Fund's officers are satisfied
that the best execution is obtained, the sale of Fund shares, 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.
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 may be
tendered through Distributors if it is legally permissible and Franklin
Mutual believes it would be in the best interests of the Fund to do so. In
turn, the next management fee payable to Franklin Mutual will be reduced by
the amount of any fees received by Distributors in cash, less any costs and
expenses incurred in connection with the tender.
If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by Franklin Mutual are considered
at or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by Franklin Mutual, taking into account the respective sizes
of the funds and the amount of securities to be purchased or sold. In some
cases this procedure could have a detrimental effect on the price or volume
of the security so far as the Fund is concerned. In other cases it is
possible that the ability to participate in volume transactions and to
negotiate lower brokerage commissions will be beneficial to the Fund.
During the fiscal years ended December 31, 1994, 1995 and 1996, the Fund paid
brokerage commissions as follows:
MUTUAL SHARES QUALIFIED BEACON DISCOVERY EUROPEAN
1994 $4,036,735 $2,648,109 $2,745,963 $2,225,634 -0-
1995 $8,028,205 $5,182,736 $6,269,829 $3,040,751 -0-
1996 $8,095,501 $6,090,786 $7,418,388 $7,928,860 $734,682
As of December 31, 1996, the Funds owned securities issued by Bear Stearns &
Co. valued in the aggregate at $39,490. Except as noted, the Funds did not
own any securities issued by their regular broker-dealers as of the end of
the fiscal year.
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 before November 1, 1996. During the fiscal years
ended December 31, 1994, 1995 and 1996, Mutual Shares paid brokerage
commissions to Clearwater of $313,814, $1,192,230 and $755,142, respectively;
Qualified paid $147,829, $640,588 and $439,926, respectively; Beacon paid
$168,828, $764,323 and $607,402, respectively; and Discovery paid $74,704,
$217,609 and $384,267, respectively. During the fiscal year ended December
31, 1996, European paid $4,037.
Because Financial Services may, from time to time, invest in broker-dealers,
it is possible that Financial Services will purchase in excess of 5% of the
voting securities of one or another broker-dealer through whom it places
portfolio brokerage transactions. In such circumstances, the broker-dealer
will be considered to be an affiliated person of the Fund. The extent that
the Fund places brokerage transactions through such a broker-dealer at a time
when the broker-dealer is considered to be an affiliate of the Fund, the Fund
will be required to adhere to certain rules relating to the payment of
commissions to an affiliated broker-dealer. These rules require the Fund to
adhere to procedures adopted by the Board relating to ensuring that the
commissions paid to such broker-dealers do not exceed what would otherwise be
the usual and customary broker's commissions for similar transactions. The
same rules apply to the Fund's use of Clearwater.
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 the fiscal years ended December 31, 1994,
1995 and 1996, the Fund paid brokerage commissions of $2,267,683, $3,355,180,
and $2,539,782, respectively, to brokers who provided research services. This
amount represented 19.45%, 14.90%, and 8.50%, respectively, of total
commissions paid for the periods.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have
an agreement with Distributors. Securities Dealers may at times receive the
entire sales charge. A Securities Dealer who receives 90% or more of the
sales charge may be deemed an underwriter under the Securities Act of 1933,
as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund
may be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction
fee in the percentages indicated in the table under "How Do I Buy Shares? -
Purchase Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the Fund we may impose a $10 charge against your account for each returned
item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge.
The banks may charge service fees to their customers who participate in the
trusts. A portion of these service fees may be paid to Distributors or one of
its affiliates to help defray expenses of maintaining a service office in
Taiwan, including expenses related to local literature fulfillment and
communication facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
Size of Purchase - U.S. dollars Sales Charge
Under $30,000 3.0%
$30,000 but less than $50,000 2.5%
$50,000 but less than $100,000 2.0%
$100,000 but less than $200,000 1.5%
$200,000 but less than $400,000 1.0%
$400,000 or more 0%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors 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
without a front-end sales charge, 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 acquired more than 90
days before the Letter is filed will be counted towards completion of the
Letter, but they 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. If the 25th falls on a weekend or
holiday, we will process the redemption on the prior business day.
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. In the case of redemption requests, the Board reserves
the right to make payments in whole or in part in securities or other assets
of the Fund, in case of an emergency, or if the payment of such a redemption
in cash would be detrimental to the existing shareholders of the Fund. In
these circumstances, the securities distributed would be valued at the price
used to compute the Fund's net assets and you may incur brokerage fees in
converting the securities to cash. The Fund does not intend to redeem
illiquid securities in kind. If this happens, however, you may not be able to
recover your investment in a timely manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your
dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at Net Asset Value until we receive new
instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find
you from your account. These costs may include a percentage of the account
when a search company charges a percentage fee in exchange for its location
services.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the Fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
SPECIAL SERVICES. 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 foreign security is valued within the
range of the most recent quoted bid and ask prices. 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, once in
December and once at mid-year. The Fund may adjust the timing of these
distributions for operational or other reasons.
TAXES
As stated in the Prospectus, Mutual Series has elected and qualified to be
treated as a regulated investment company under Subchapter M of the Code. The
Board reserves the right not to maintain the qualification of Mutual Series
as a regulated investment company if it determines this course of action to
be beneficial to shareholders. In that case, the Fund 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 Fund's
available earnings and profits.
Because the Fund intends to qualify and to distribute all of its net
investment income and capital gain to shareholders, it is expected that the
Fund will not be required to pay Federal income taxes.
The Fund 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 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 regulated investment company under the Code,
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.
The Fund intends to declare and pay dividends and capital gain distributions
so as to avoid imposition of a 4% federal excise tax. To do so, the Fund
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 the Fund. Dividends
declared in October, November, or December and made payable to shareholders
of record in such a month would be deemed paid by the Fund and taxable to
shareholders on December 31 of such year provided that the dividends are
actually paid during January of the following year. The Fund 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 the gain as a capital gain dividend. The
Fund's shareholders will treat the 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 the Fund with respect to the capital gain. In
addition, shareholders will increase their basis in the Fund's shares by 65%
of the amount subject to tax. If a capital gain dividend is paid with respect
to any shares sold at a loss after being held for less than six months, any
loss realized will be treated as a long-term capital loss to the extent of
the capital gain dividend. There are special rules for determining holding
periods for the purpose of the preceding sentence.
Dividends distributed by the Fund will only be eligible for the
dividends-received deduction available to corporate shareholders to the
extent of the portion of the Fund's gross income that consists of dividends
received on equity securities issued by domestic corporations meets the same
holding period, risk of loss, and borrowing limitations applicable to the
Fund's 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 the Fund, by the percentage
of the cost of the Fund's 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.
The Fund 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 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 as paid by the shareholders of the Fund.
If the Fund makes this election, shareholders will be entitled to credit
their pro rata share of the foreign taxes paid by the Fund against their U.S.
federal income tax liability, or to deduct the 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
European anticipates that more than 50% of the value of its total assets 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 each class 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.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions received by Distributors for the two-month period ended December
31, 1996, and the amounts retained by Distributors after allowances to
dealers were:
Aggregate Amount
Underwriting Retained by
Fund Commissions Distributors
Mutual Shares $962,557 $99,326
Discovery $710,492 $41,905
Beacon $717,831 $68,177
Qualified $494,207 $37,660
For the two-month period ended December 31, 1996, European received $152,732
in underwriting commissions and paid a net amount of $1,291 to dealers.
Distributors may be entitled to reimbursement under the Rule 12b-1 plan for
each class, as discussed below. Except as noted, Distributors received no
other compensation from the Fund for acting as underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans"
that were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan, the Fund may pay up to a maximum of
0.25% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares. In
addition, the Fund is permitted to pay Distributors up to an additional 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, the Fund pays Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the
Fund.
Under the Class II plan, the Fund also pays an additional 0.25% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
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.
For the two-month period ended December 31, 1996, Distributors had eligible
expenditures for advertising, printing and payments to underwriters and
broker-dealers pursuant to the Class I and Class II plans. The Fund paid a
portion of these expenditures to Distributors, as noted below.
Distributors' Amount
Eligible Paid by
Fund Expenditures the Fund
Mutual Shares Class I $136,669 $23,457
Class II 434,345 36,285
Qualified
Class I 189,111 14,806
Class II 257,829 20,640
Beacon
Class I 235,264 31,178
Class II 418,760 32,675
Discovery Class I
158,034 20,639
Class II 822,714 35,995
European
Class I 87,602 5,607
Class II 90,814 5,982
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 used by the Fund is 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 return for each class for the one-, five- and
ten-year periods ended December 31, 1996, was:
CLASS I 1 YEAR 5 YEARS 10 YEARS
Mutual Shares 15.24% 17.95% 14.82%
Qualified 15.67% 18.44% 15.09%
Beacon 15.65% 18.37% 15.66%
Discovery* 19.17% N/A N/A
European** N/A N/A N/A
CLASS II 1 YEAR 5 YEARS 10 YEARS
Mutual Shares 18.38% 18.79% 15.22%
Qualified 18.80% 19.28% 15.49%
Beacon 18.83% 19.20% 16.07%
Discovery* 22.53% N/A N/A
European** N/A N/A N/A
*From inception on December 31, 1992, Class I, 21.19%; and Class II, 22.29%.
**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 return for each class for the
one-, five- and ten-year periods ended December 31, 1996, was:
Class I 1 Year 5 Years 10 Years
Mutual Shares 15.24% 128.33% 298.10%
Qualified 15.67% 133.07% 307.66%
Beacon 15.65% 132.35% 328.28%
Discovery* 19.17% N/A N/A
European** N/A N/A N/A
Class II 1 Year 5 Years 10 Years
Mutual Shares 18.38% 136.51% 312.39%
Qualified 18.80% 141.44% 322.15%
Beacon 18.83% 140.68% 343.72%
Discovery* 22.53% N/A N/A
European** N/A N/A N/A
*From inception on December 31, 1992, Class I, 115.74%; and Class II, 123.64%.
**From inception on July 3, 1996, Class I, 9.34%; and Class II 12.27%.
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 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 the Franklin 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(R) 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(R) 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, and 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(R) 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 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 2.7 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. Mutual Series, 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 $191 billion in assets under management for more than 5.2 million U.S.
based mutual fund shareholder and other accounts. The Franklin Templeton
Group of Funds offers 122 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 nine years.
From time to time, the number of Fund shares held in the "street name"
accounts of various Securities Dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
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. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal
securities transactions subject to the following general restrictions and
procedures: (i) the trade must receive advance clearance from a compliance
officer and must be completed by the close of the business day following the
day clearance is granted; (ii) copies of all brokerage confirmations must be
sent to a compliance officer and, within 10 days after the end of each
calendar quarter, a report of all securities transactions must be provided to
the compliance officer; and (iii) access persons involved in preparing and
making investment decisions must, in addition to (i) and (ii) above, file
annual reports of their securities holdings each January and inform the
compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they
are recommending a security in which they have an ownership interest for
purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to
Shareholders of the Fund, for the fiscal year ended December 31, 1996,
including the independent auditors' report, are incorporated herein by
reference.
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
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN MUTUAL - Franklin Mutual Advisers, Inc., the Fund's investment
manager
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator
Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable Products
Series Fund
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
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.
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's Class I and Class II shares dated
May 1, 1997, as amended August 19, 1997, as may be further amended from time
to time
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.
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.
FRANKLIN MUTUAL SERIES FUND INC. - CLASS Z
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997, AS AMENDED AUGUST 19, 1997
51 JOHN F. KENNEDY PARKWAY
SHORT HILLS, NJ 07078 1-800/DIAL BEN
TABLE OF CONTENTS
How does the Fund Invest its Assets?.......................
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..................................
Financial Statements.......................................
Useful Terms and Definitions...............................
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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."
- -----------------------------------------------------------------------
Mutual Shares Fund ("Mutual Shares"), Mutual Qualified Fund("Qualified"),
Mutual Beacon Fund ("Beacon"), Mutual Discovery Fund ("Discovery"), Mutual
European Fund ("European") and Mutual Financial Services Fund ("Financial
Services") are diversified series of Franklin Mutual Series Fund Inc.
("Mutual Series"), an open-end management investment company. Each series
may, individually or together, be referred to as the "Fund(s)." The principal
investment objective of Mutual Shares, Qualified, Beacon, European and
Financial Services is capital appreciation, which may occasionally be
short-term. A secondary objective of each is income. Discovery's investment
objective is long-term capital appreciation.
This SAI describes the Fund's Class Z shares. The Prospectus, dated May 1,
1997, as amended August 19, 1997 and as may be further 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;
- ------------------------------------------------------------------------------
ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
- ------------------------------------------------------------------------------
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- ------------------------------------------------------------------------------
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together
with the section in the Prospectus entitled "How does the Fund Invest its
Assets?"
The general investment policy of the Fund 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 to invest in
common stock, preferred stock, debt securities and other securities in such
proportions as Franklin Mutual deems advisable. Without committing any fixed
portion of the Fund's assets, Franklin Mutual typically maintains a portion
of the assets of the Fund invested in debt securities and preferred stocks
(which may be convertible). In addition, the Fund may also invest in
restricted debt and equity securities, in foreign securities, and in other
investment company securities.
REPURCHASE AGREEMENTS AND LOANS OF SECURITIES
The Fund may invest in repurchase agreements with domestic banks or
broker-dealers. Repurchase agreements are considered loans by the Fund
collateralized by the underlying securities. As with loans of portfolio
securities which the Fund 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 Fund.
Repurchase agreements and lending of portfolio securities involve some credit
risk to the Fund. If the other party defaults on its obligations, the Fund
could be delayed or prevented from receiving payment or recovering its
collateral. Even if the Fund recovers the collateral in such a situation, the
Fund 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
S&P or "P-l" from 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 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 bank 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 bank. 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
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
The Fund 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 Fund has 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 Fund 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 Fund's portfolio and thus could have an
effect on the Net Asset Value of the Fund if other types of securities did
not show offsetting changes in values. The secondary market value of
corporate debt securities structured as zero coupon securities or payment in
kind securities may be more volatile in response to changes in interest rates
than debt securities which pay interest periodically in cash. Because such
securities do not pay current interest, but rather, income is accreted, to
the extent that a series does not have available cash to meet distribution
requirements with respect to such income, it could be required to dispose of
portfolio securities that it otherwise would not. Such disposition could be
at a disadvantageous price. Failure to satisfy distribution requirements
could result in the Fund 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 Fund's investments pursuant to guidelines adopted
and periodically reviewed by the Board. See "How are Fund Shares Valued?" in
this SAI. To the extent that there is no established retail market for some
of the medium or low grade corporate debt securities in which the Fund 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 Fund 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 Fund 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
The Fund may make short sales of securities. A short sale is a transaction in
which the Fund sells a security it does not own in anticipation that the
market price of that security will decline. Each Fund 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 Fund 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 Fund 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 Fund's 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 Fund 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 Fund replaces the borrowed security, the Fund
will incur a loss; conversely, if the price declines, the Fund will realize a
gain. Any gain will be decreased, and any loss increased, by the transaction
costs described above. Although the Fund's gain is limited to the price at
which it sold the security short, its potential loss is theoretically
unlimited.
The Fund 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 Fund's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Fund
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 Fund
owns or has the immediate and unconditional right to acquire at no additional
cost the identical security.
SPECIAL CONSIDERATIONS RELATED TO SECURITIES IN THE FINANCIAL SERVICES
INDUSTRY
Certain provisions of the federal securities laws permit investment
portfolios, including Financial Services, to invest in companies engaged in
securities-related activities only if certain conditions are met. Purchase of
securities of a company that derived 15% or less of gross revenues during
its most recent fiscal year from securities-related activities (i.e. broker,
dealer, underwriting, or investment advisory activities) are subject only to
the same percentage limitations as would apply to any other security a Fund
may purchase. Each Fund, including Financial Services, may purchase
securities (not limited to equity or debt individually) of an issuer that
derived more than 15% of its gross revenues in its most recent fiscal year
from securities-related activities, subject to the following conditions:
a. the purchase cannot cause more than 5% of the fund's total assets to
be invested in securities of that issuer;
b. for an equity security, the purchase cannot result in the fund owning
more than 5% of the issuer's outstanding securities in that class;
c. for a debt security, the purchase cannot result in the fund
owning more than 10% of the outstanding principal amount of the
issuer's debt securities.
In applying the gross revenue test, an issuer's own securities-related
activities must be combined with its ratable share of securities-related
revenues from enterprises in which it owns a 20% or greater voting or equity
interest. All of the above percentage limitations, as well as the issuer's
gross revenue test, are applicable at the time of purchase. With respect to
warrants, rights, and convertible securities, a determination of compliance
with the above limitations must be made as though such warrant, right, or
conversion privilege had been exercised.
The following transactions would not be deemed to be an acquisition of
securities of a securities-related business: (i) receipt of stock dividends
on securities acquired in compliance with the conditions described above;
(ii) receipt of securities arising from a stock-for-stock split on securities
acquired in compliance with the conditions described above; (iii) exercise of
options, warrants, or rights acquired in compliance with the federal
securities laws; (iv) conversion of convertible securities acquired in
compliance with the conditions described above; (v) the acquisition of puts
under certain circumstances.
The Funds also are not permitted to acquire any security issued by Franklin
Mutual or any affiliated company (including Resources) that is a
securities-related business. The purchase of a general partnership interest
in a securities-related business is also prohibited.
In addition, the Funds are generally prohibited from purchasing or otherwise
acquiring any security (not limited to equity or debt individually) issued by
any insurance company if such Fund and any company controlled by such Fund
own in the aggregate or, as a result of the purchase, will own in the
aggregate more than 10% of the total outstanding voting stock of the
insurance company. Certain state insurance laws impose similar limitations.
RESTRICTIONS AND LIMITATIONS
Mutual Shares, Qualified, Beacon, Discovery, European and Financial
Services, except as noted 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 and
except that this restriction does not apply to Financial Services).
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 or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
NONFUNDAMENTAL POLICIES
The following policies apply to all Funds with the exception of Financial
Services.
As a matter of policy that is not fundamental, no Fund 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 NYSE or American Stock
Exchange. Also, as a matter of policy, the Fund will not purchase securities
for purposes of short term trading and will not invest more than 5% of its
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 Fund 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 Fund does 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 Fund's 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 (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH Mutual Series During the Past Five Years
Edward I. Altman, Ph.D. (56)
New York University
44 West 4th Street
New York, NY 10012
Director
Max L. Heine Professor of Financing and Vice Director, NYU Salomon Center,
Stern School of Business, New York University; editor and author of numerous
financial publications; and financial consultant.
Ann Torre Grant (39)
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, 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 and Director of
Precise Power Corporation; Executive-in-Residence of Eckerd College
(1991-present); Director of Checkers Drive-In Restaurants, Inc.; formerly,
Chairman of the Board and Chief Executive Officer of Florida Progress
Corporation (1982-1990) and director of various of its subsidiaries; and
director or trustee, as the case may be, of 24 of the investment companies in
the Franklin Templeton Group of Funds.
*Peter A. Langerman (42)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Director and Executive Vice President
Chief Operating Officer and Senior Vice President of Franklin Mutual
Advisers, Inc.; 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 (72)
One Parker Plaza
Fort Lee, NJ 07024
Director
Senior Vice President, Franklin Resources, Inc. and Franklin Management,
Inc.; President and Director, Franklin Advisory Services, Inc.; and officer
and/or director or trustee, as the case may be, of seven of the investment
companies in the Franklin Templeton Group of Funds.
Bruce A. MacPherson (67)
1 Pequot Way
Canton, MA 02021
Director
President of A.A. MacPherson, Inc. Boston, MA (representative for electrical
manufacturers).
Fred R. Millsaps (68)
2665 NE 37th Drive
Fort Lauderdale, FL 33394
Director
Manager of personal investments (1978-present); director of various business
and nonprofit organizations; formerly, Chairman and Chief Executive Officer
of Landmark Banking Corporation (1969-1978), Financial Vice President of
Florida Power and Light (1965-1969) and Vice President of the Federal Reserve
Bank of Atlanta (1958-1965); and director or trustee, as the case may be, of
24 of the investment companies in the Franklin Templeton Group of Funds.
*Michael F. Price (46)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Chairman of the Board and President
President, Chief Executive Officer, and Director of Franklin Mutual Advisers,
Inc.; 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)
2 Executive Drive, Suite 560
Fort Lee, NJ 07024
Director
Partner in LDR Equities, LLC (manages various personal investments); Vice
President, Trimtex Co. Inc. (manufactures and markets specialty fabrics); and
trustee or director, as the case may be, of four of the investment companies
in the Franklin Templeton Group of Funds.
Barry F. Schwartz (48)
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. (74)
6 Noyes Avenue
Waterville, ME 04901
Director
Practicing physician.
Robert E. Wade (51)
225 Hardwick Street
Belvidere, NJ 07823
Director
Practicing attorney.
Jeffrey A. Altman (30)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; was employed by
Heine Securities Corporation, 8/88 to 10/96; Manager (Director), MB
Metropolis, L.L.C. since 1994; Manager (Director) of MB Motori, L.L.C., MWCR,
L.L.C. and S.H. Mortgage Acquisition L.L.C. since 1995; Trustee of Resurgence
Properties Inc.; and Chairman of the Board of Trustees, Value Property Trust.
James R. Baio (43)
500 East Broward Blvd.
Fort Lauderdale, FL 33701
Treasurer
Certified Public Accountant; Treasurer of Franklin Mutual Advisers, Inc.;
Senior Vice President, Templeton Worldwide, Inc., Templeton Global Investors,
Inc. and Templeton Funds Trust Company; formerly, Senior Tax Manager for
Ernst & Young (certified public accountants)( 1977-1989); and officer of 24
of the investment companies in the Franklin Templeton Group of Funds.
Elizabeth N. Cohernour (47)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
General Counsel and Secretary
Vice President, General Counsel and Assistant Secretary of Franklin Mutual
Advisers, Inc.; 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 (38)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; was employed by
Heine Securities Corporation, 8/88 to 10/96.
Raymond Garea (48)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; was employed by
Heine Securities Corporation, 3/91 to 10/96; prior thereto, Vice President
and Analyst with Donaldson, Lufkin & Jenrette; Manager (Director), MB
Metropolis, L.L.C. and S.H. Mortgage Acquisition.
Lawrence N. Sondike (40)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; 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.
The table above shows the officers and Board members who are affiliated with
Distributors and Franklin Mutual. Nonaffiliated members of the Board 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 7 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 other 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 Mutual Series and by other funds
in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
TOTAL FEES NUMBER OF BOARDS
RECEIVED FROM IN THE FRANKLIN
TOTAL FEES PENSION ANNUAL THE FRANKLIN TEMPLETON GROUP
RECEIVED FROM RETIREMENT BENEFITS TEMPLETON GROUP OF FUNDS ON WHICH
NAME MUTUAL SERIES* Accrued Retirement of Funds** Each Serves***
<S> <C> <C> <C> <C> <C>
Edward I. Altman ....... $19,000 0 $7,500 $ 19,000 1
Ann Torre Grant+........ $19,000 0 $7,500 $ 19,000 1
Bruce A. MacPherson..... $18,000 0 $7,500 $ 18,000 1
Barry F. Schwartz+...... $18,000 0 $7,500 $ 18,000 1
Vaughn R. Sturtevant, M.D. $18,000 0 $7,500 $ 18,000 1
Robert E. Wade+......... $24,500 0 $7,500 $ 24,500 1
Andrew H. Hines, Jr.+ .. $ 5,250 0 $7,500 $125,275 24
Fred R. Millsaps+....... $ 5,250 0 $7,500 $125,275 24
Leonard Rubin+.......... $ 4,500 0 $7,500 $ 24,600 4
Richard L. Chasse++..... $17,250 0 $7,500 $ 17,250 0
</TABLE>
+Not vested in retirement plan
++Retired December, 1996
*For the fiscal year ended December 31, 1996.
**For the calendar year ended December 31, 1996.
***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 169 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 May 30, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of Mutual Series: 343,705.908
shares of Mutual Shares - Class Z; 100,027.044 shares of Qualified - Class Z;
666,641.843 shares of Beacon - Class Z; 380,548.058 shares of Discovery -
Class Z, or less than 1% of the total outstanding Class Z shares of that
series. As of May 30, 1997, the officers and Board members, as a group, owned
of record and beneficially 14,091,332.472 shares or 29% of the total
outstanding Class Z shares of European. 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. The Fund's investment manager is
Franklin Mutual. On October 31, 1996, pursuant to an agreement between
Resources and Heine Securities, Inc. ("Heine"), the assets of Heine were
transferred to Franklin Mutual and Mutual Series Fund Inc.'s name was changed
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 and its
officers, directors and employees are covered by fidelity insurance for the
protection of the Fund.
Franklin Mutual and its affiliates act as investment manager to numerous
other investment companies and accounts. Franklin Mutual may give advice and
take action with respect to any of the other funds it manages, or for its own
account, that may differ from action taken by Franklin Mutual on behalf of
the Fund. Similarly, with respect to the Fund, Franklin Mutual is not
obligated to recommend, buy or sell, or to refrain from recommending, buying
or selling any security that Franklin Mutual and access persons, as defined
by the 1940 Act, may buy or sell for its or their own account or for the
accounts of any other fund. Franklin Mutual is not obligated to refrain from
investing in securities held by the Fund or other funds that it manages. Of
course, any transactions for the accounts of Franklin Mutual 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 FEES. For the fiscal years ended December 31, 1994, 1995 and 1996,
management fees, before any advance waiver, totaled $21,795,512, $27,500,952,
and $35,687,092, respectively, for Mutual Shares; $9,766,052, $14,607,723 and
$22,515,334, respectively, for Qualified; $9,511,199, $17,720,127 and
$26,083,112, respectively, for Beacon; $5,737,128, $7,930,967 and
$17,795,530, respectively, for Discovery. For the fiscal year ended December
31, 1996, management fees, before any advance waiver totaled $949,616 for
European. Under an agreement by Franklin Mutual to limit its fees for the
fiscal year ended December 31, 1996, the Funds paid management fees totaling
$34,719,646 for Mutual Shares; $21,439,007 for Qualified; $25,260,160 for
Beacon; $17,154,254 for Discovery; and $876,464 for European. For the fiscal
years ended December 31, 1994 and 1995, the investment manager did not waive
or limit its fees.
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. On November 1, 1996, FT Services became the Fund's
administrator. 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.
For the two-month period ended December 31, 1996, administration fees
totaling $840,707, $553,904, $634,856, $380,772, and $57,060 were paid to FT
Services for Mutual Shares, Qualified, Beacon, Discovery and European,
respectively.
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, acts as custodian of the securities and other assets of the Fund.
The custodian does not participate in decisions relating to the purchase and
sale of portfolio securities.
AUDITORS. Ernst & Young LLP, 200 Clarendon Street, Boston, MA 02116, are the
Fund's independent auditors. During the fiscal year ended December 31, 1996,
their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders
for the fiscal year ended December 31, 1996.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Franklin Mutual selects brokers and dealers to execute the Fund's portfolio
transactions 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. For portfolio
transactions on a securities exchange, the amount of commission paid by the
Fund is negotiated between Franklin Mutual and the broker executing the
transaction. The determination and evaluation of the reasonableness of the
brokerage commissions paid are based to a large degree on the professional
opinions of the persons responsible for 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.
Franklin Mutual may pay certain brokers commissions that are higher than
those another broker may charge, if Franklin Mutual determines in good faith
that the amount paid is reasonable in relation to the value of the brokerage
and research services it receives. This may be viewed in terms of either the
particular transaction or Franklin Mutual's overall responsibilities to
client accounts over which it exercises investment discretion. The services
that brokers may provide to Franklin Mutual include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to Franklin Mutual in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the Fund. They must, however, be of value to Franklin Mutual in
carrying out its overall responsibilities to its clients.
It is not always possible to place a precise dollar value on the special
executions or on the research services Franklin Mutual receives 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 staffs of other
securities firms. As long as it is lawful and appropriate to do so, Franklin
Mutual and its affiliates may use this research and data in their investment
advisory capacities with other clients. If the Fund's officers are satisfied
that the best execution is obtained, the sale of Fund shares, 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.
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 may be
tendered through Distributors if it is legally permissible and Franklin
Mutual believes it would be in the best interests of the Fund to do so. In
turn, the next management fee payable to Franklin Mutual will be reduced by
the amount of any fees received by Distributors in cash, less any costs and
expenses incurred in connection with the tender.
If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by Franklin Mutual are considered
at or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by Franklin Mutual, taking into account the respective sizes
of the funds and the amount of securities to be purchased or sold. In some
cases this procedure could have a detrimental effect on the price or volume
of the security so far as the Fund is concerned. In other cases it is
possible that the ability to participate in volume transactions and to
negotiate lower brokerage commissions will be beneficial to the Fund.
During the fiscal years ended December 31, 1994, 1995 and 1996, the Fund paid
brokerage commissions as follows:
MUTUAL
SHARES QUALIFIED BEACON DISCOVERY EUROPEAN
------ --------- ------ --------- --------
1994 $4,036,735 $2,648,109 $2,745,963 $2,225,634 -0-
1995 $8,028,205 $5,182,736 $6,269,829 $3,040,751 -0-
1996 $8,095,501 $6,090,786 $7,418,388 $7,928,860 $734,682
As of December 31, 1996, the Funds owned securities issued by Bear Stearns &
Co. valued in the aggregate at $39,490. Except as noted, the Fund did not own
any securities issued by their regular broker-dealers as of the end of the
fiscal year.
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 before November 1, 1996. During the fiscal years
ended December 31, 1994, 1995 and 1996, Mutual Shares paid brokerage
commissions to Clearwater of $313,814, $1,192,230 and $755,142, respectively;
Qualified paid $147,829, $640,588 and $439,926, respectively; Beacon paid
$168,828, $764,323 and $607,402, respectively; and Discovery paid $74,704,
$217,609 and $384,267, respectively. During the fiscal year ended December
31, 1996, European paid $4,037.
Because the Funds, including Financial Services, may, from time to time,
invest in broker-dealers, it is possible that a fund will own in excess of 5%
of the voting securities of one or more broker-dealers through whom such Fund
places portfolio brokerage transactions. In such circumstances, the
broker-dealer would be considered to be an affiliated person of such Fund. To
the extent that such Fund places brokerage transactions through such a
broker-dealer at a time when the broker-dealer is considered to be an
affiliate of such Fund, such Fund will be required to adhere to certain rules
relating to the payment of commissions to an affiliated broker-dealer. These
rules require the Fund to adhere to procedures adopted by the Board relating
to ensuring that the commissions paid to such broker-dealers do not exceed
what would otherwise be the usual and customary broker's commissions for
similar transactions. The same rules apply to each Fund's use of Clearwater.
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 the fiscal years ended December 31, 1994,
1995 and 1996, the Fund paid brokerage commissions of $2,267,683, $3,355,180,
and $2,539,782, respectively, to brokers who provided research services. This
amount represented 19.45%, 14.90%, and 8.50%, respectively, of total
commissions paid for the periods.
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 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.
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.
OTHER PAYMENTS TO SECURITIES DEALERS. 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.
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 10th or 25th
day of the month in which a payment is scheduled. If the 10th or 25th falls
on a weekend or holiday, we will process the redemption on the next business
day.
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. In the case of redemption requests, the Board reserves
the right to make payments in whole or in part in securities or other assets
of the Fund, in case of an emergency, or if the payment of such a redemption
in cash would be detrimental to the existing shareholders of the Fund. In
these circumstances, the securities distributed would be valued at the price
used to compute the Fund's net assets and you may incur brokerage fees in
converting the securities to cash. The Fund does not intend to redeem
illiquid securities in kind. If this happens, however, you may not be able to
recover your investment in a timely manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your
dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at Net Asset Value until we receive new
instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find
you from your account. These costs may include a percentage of the account
when a search company charges a percentage fee in exchange for its location
services.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the Fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
SPECIAL SERVICES. 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 of the Fund's shares
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 foreign security is valued within the
range of the most recent quoted bid and ask prices. 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. 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 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. 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, once in
December and once at mid-year. The Fund may adjust the timing of these
distributions for operational or other reasons.
TAXES
As stated in the Prospectus, Mutual Series has elected and qualified to be
treated as a regulated investment company under Subchapter M of the Code. The
Board reserves the right not to maintain the qualification of Mutual Series
as a regulated investment company if it determines this course of action to
be beneficial to shareholders. In that case, the Fund 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 Fund's
available earnings and profits.
Because the Fund intends to qualify and to distribute all of its net
investment income and capital gain to shareholders, it is expected that the
Fund will not be required to pay Federal income taxes.
The Fund 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 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 regulated investment company under the Code,
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.
The Fund intends to declare and pay dividends and capital gain distributions
so as to avoid imposition of a 4% federal excise tax. To do so, the Fund
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 the Fund. Dividends
declared in October, November, or December and made payable to shareholders
of record in such a month would be deemed paid by the Fund and taxable to
shareholders on December 31 of such year provided that the dividends are
actually paid during January of the following year. The Fund 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 the gain as a capital gain dividend. The
Fund's shareholders will treat the 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 the Fund with respect to the capital gain. In
addition, shareholders will increase their basis in the Fund's shares by 65%
of the amount subject to tax. If a capital gain dividend is paid with respect
to any shares sold at a loss after being held for less than six months, any
loss realized will be treated as a long-term capital loss to the extent of
the capital gain dividend. There are special rules for determining holding
periods for the purpose of the preceding sentence.
Dividends distributed by the Fund will only be eligible for the
dividends-received deduction available to corporate shareholders to the
extent of the portion of the Fund's gross income that consists of dividends
received on equity securities issued by domestic corporations meets the same
holding period, risk of loss, and borrowing limitations applicable to the
Fund's 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 the Fund, by the percentage
of the cost of the Fund's 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.
The Fund 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 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 as paid by the shareholders of the Fund.
If the Fund makes this election, shareholders will be entitled to credit
their pro rata share of the foreign taxes paid by the Fund against their U.S.
federal income tax liability, or to deduct the 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
European anticipates that more than 50% of the value of its total assets 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 each class 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.
Distributors does not receive compensation from the Fund for acting as
underwriter of the Fund's Class Z shares.
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 used by the Fund is 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 Class Z 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.
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 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 average annual total return for Class Z for the one-, five- and ten-year
periods ended December 31, 1996, was:
1 YEAR 5 YEARS 10 YEARS
MUTUAL SHARES 20.76% 19.06% 15.35%
QUALIFIED 21.19% 19.55% 15.62%
BEACON 21.19% 19.48% 16.20%
DISCOVERY* 24.93% N/A N/A
EUROPEAN** N/A N/A N/A
*Discovery commenced operations on December 31, 1992. The average annual
return for the three-year period ended December 31, 1996, was 18.53% and from
inception was 22.64%.
**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 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 cumulative total return for Class Z for the one-, five- and
ten-year periods ended December 31, 1996, was:
1 YEAR 5 YEARS 10 YEARS
MUTUAL SHARES 20.76% 139.27% 317.19%
QUALIFIED 21.19% 327.03% 327.03%
BEACON 21.19% 143.38% 348.84%
DISCOVERY* 24.93% N/A N/A
EUROPEAN** N/A N/A N/A
*Discovery commenced operations on December 31, 1992. The cumulative total
return for the three-year period ended December 31, 1996, was 66.51% and from
inception was 126.20%.
**European commenced operations on July 3, 1996. The cumulative total return
from inception was 14.61%.
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
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 the Franklin 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 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(R) 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(R) 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, and 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(R) 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, 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 the performance of Class Z 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 2.7 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. Mutual Series, 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 $191 billion in assets under management for more than 5.2 million U.S.
based mutual fund shareholder and other accounts. The Franklin Templeton
Group of Funds offers 122 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 nine years.
From time to time, the number of Fund shares held in the "street name"
accounts of various Securities Dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
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. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal
securities transactions subject to the following general restrictions and
procedures: (i) the trade must receive advance clearance from a compliance
officer and must be completed by the close of the business day following the
day clearance is granted; (ii) copies of all brokerage confirmations must be
sent to a compliance officer and, within 10 days after the end of each
calendar quarter, a report of all securities transactions must be provided to
the compliance officer; and (iii) access persons involved in preparing and
making investment decisions must, in addition to (i) and (ii) above, file
annual reports of their securities holdings each January and inform the
compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they
are recommending a security in which they have an ownership interest for
purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to
Shareholders of the Fund, for the fiscal year ended December 31, 1996,
including the independent auditors' report, are incorporated herein by
reference.
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
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN MUTUAL - Franklin Mutual Advisers, Inc., the Fund's investment
manager
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 FundsAE 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
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.
NYSE - New York Stock Exchange
PROSPECTUS - The prospectus for Class Z shares of the Fund dated May 1, 1997,
as amended August 19, 1997 as may be further amended from time to time
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.
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.
FORM N-1A
PART C
Other Information
Item 24 Financial Statements and Exhibits
a) Financial Statements
(1) Audited Financial Statements incorporated herein by reference to the
Mutual Shares Fund's Annual Report to Shareholders dated December 31,
1996, as filed with the SEC electronically on Form Type N-30D on March
5, 1997
(i) Schedule of Investments - December 31, 1996
(ii) Statement of Assets and Liabilities - December 31, 1996
(iii)Statement of Operations - for the year ended December 31, 1996
(iv) Statements of Changes in Net Assets - for the years ended
December 31, 1996 and the year ended December 31, 1995
(v) Notes to Financial Statements
(vi) Report of Independent Auditors - February 7, 1997
(2) Audited Financial Statements incorporated herein by reference to the
Mutual Qualified Fund's Annual Report to Shareholders dated December
31, 1996 as filed with the SEC electronically on Form Type N-30D on
March 5, 1997
(i) Schedule of Investments - December 31, 1996
(ii) Statement of Assets and Liabilities - December 31, 1996
(iii) Statement of Operations - for the year ended December31, 1996
(iv) Statements of Changes in Net Assets - for the years ended
December 31, 1996 and December 31, 1995
(v) Notes to Financial Statements
(vi) Report of Independent Auditors - February 7, 1997
(3) Audited Financial Statements incorporated herein by reference to the
Mutual Discovery Fund's Annual Report to Shareholders dated December
31, 1996 as filed with the SEC electronically on Form Type N-30D on
March 5, 1997
(i) Schedule of Investments - December 31, 1996
(ii) Statement of Assets and Liabilities - December 31, 1996
(iii) Statement of Operations - for the year ended December 31, 1996
(iv) Statements of Changes in Net Assets - for the years ended
December 31, 1996 and December 31, 1995
(v) Notes to Financial Statements
(vi) Report of Independent Auditors - February 7, 1997
(4) Audited Financial Statements incorporated herein by reference to the
Mutual Beacon Fund's Annual Report to Shareholders dated December 31,
1996 as filed with the SEC electronically on Form Type N-30D on March
5, 1997
(i) Schedule of Investments - December 31, 1996
(ii) Statement of Assets and Liabilities - December 31, 1996
(iii) Statement of Operations - for the year ended December 31, 1996
(iv) Statements of Changes in Net Assets - for the Years ended
December 31, 1996 and December 31, 1995
(v) Notes to Financial Statements
(vi) Report of Independent Auditors - February 7, 1997
(5) Audited Financial Statements incorporated herein by reference to the
Mutual European Fund's Annual Report to Shareholders dated December 31,
1996 as filed with the SEC electronically on Form Type N-30D on March
5, 1997
(i) Schedule of Investments - December 31, 1996
(ii) Statement of Assets and Liabilities - December 31, 1996
(iii) Statement of Operations - for the year ended December 31, 1996
(iv) Statements of Changes in Net Assets - for the Years ended
December 31, 1996 and December 31, 1995
(v) Notes to Financial Statements
(vi) Report of Independent Auditors - February 7, 1997
b) The following exhibits are incorporated by reference except 5(xi),
5(xii), 6(vii), 11(i), 15(vi), 15(vii), 15(viii), 15(ix), 15(x), 15(xi),
15(xii) and 18(ii), which are attached herewith.
(1) copies of the charter as now in effect;
(i) Articles of Incorporation dated November 12, 1987
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(ii) Articles of Amendment dated December 30, 1987
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(iii) Articles Supplementary dated September 18, 1992
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(iv) Articles Supplementary dated January 26, 1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(v) Articles Supplementary dated June 17, 1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(2) copies of the existing By-Laws or instruments corresponding thereto;
(i) By-Laws
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(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
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(ii) Investment Advisory Agreement between Franklin Mutual Advisers,
Inc., and the Registrant on behalf of Mutual Qualified Fund dated
November 1, 1996
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(iii) Investment Advisory Agreement between Franklin Mutual Advisers,
Inc., and the Registrant on behalf of Mutual Beacon Fund dated
November 1, 1996
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(iv) Investment Advisory Agreement between Franklin Mutual Advisers,
Inc., and the Registrant on behalf of Mutual Discovery Fund dated
November 1, 1996
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(v) Investment Advisory Agreement between Franklin Mutual Advisers,
Inc., and the Registrant on behalf of Mutual European Fund dated
November 1, 1996
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(vi) Administration Agreement between Franklin Templeton Services,
Inc. and Franklin Mutual Series Inc. on behalf of Mutual Shares
Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(vii) Administration Agreement between Franklin Templeton Services,
Inc. and Franklin Mutual Series Inc. on behalf of Mutual
Qualified Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(viii) Administration Agreement between Franklin Templeton Services,
Inc. and Franklin Mutual Series Inc. on behalf of Mutual Beacon
Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(ix) Administration Agreement between Franklin Templeton Services, Inc.
and Franklin Mutual Series Inc. on behalf of Mutual Discovery
Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(x) Administration Agreement between Franklin Templeton Services,
Inc. and Franklin Mutual Series Inc. on behalf of Mutual European
Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(xi) Form of Investment Advisory Agreement between Franklin Mutual
Advisers, Inc., and the Registrant on behalf of Mutual Financial
Services Fund
(xii) Form of Administration Agreement between Franklin Templeton
Services, Inc. and Franklin Mutual Series Inc. on behalf of
Mutual Financial Services Fund
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of all
agreements between principal underwriters and dealers;
(i) Distribution Agreement between Registrant and
Franklin/Templeton Distributors, Inc. on behalf of Mutual Shares
Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(ii) Distribution Agreement Agreement between the Registrant and
Franklin/Templeton Distributors, Inc. on behalf of Mutual Beacon
Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(iii) Distribution Agreement Agreement between the Registrant and
Franklin/Templeton Distributors, Inc. on behalf of Mutual
Qualified Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(iv) Distribution Agreement Agreement between the Registrant and
Franklin/Templeton Distributors, Inc. on behalf of Mutual
Discovery Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(v) Distribution Agreement Agreement between the Registrant and
Franklin/Templeton Distributors, Inc. on behalf of Mutual European
Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(vi) Form of Dealer Agreement
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
(vii) Form of Distribution Agreement between the Registrant and
Franklin/Templeton Distributors, Inc. on behalf of Mutual
Financial Services Fund
(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
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(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) Opinion and Consent of Miles and Stockbridge as to legality of
shares dated December 18, 1992
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(ii) Opinion and Consent of Miles and Stockbridge as to legality of
shares dated June 17, 1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(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
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(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
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 and
Franklin/Templeton Distributors, Inc. on behalf of Mutual Shares
Fund - Class I dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(ii) Distribution Plan pursuant to Rule 12b-1 between the Registrant and
Franklin/Templeton Distributors, Inc. on behalf of Mutual
Qualified Fund - Class I dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(iii) Distribution Plan pursuant to Rule 12b-1 between the Registrant and
Franklin/Templeton Distributors, Inc. on behalf of Mutual Beacon
Fund - Class I dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(iv) Distribution Plan pursuant to Rule 12b-1 between the Registrant and
Franklin/Templeton Distributors, Inc. on behalf of Mutual
Discovery Fund - Class I dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(v) Distribution Plan pursuant to Rule 12b-1 between the Registrant and
Franklin/Templeton Distributors, Inc. on behalf of Mutual European
Fund - Class I dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A File No. 33-18516
Filing Date: January 31, 1997
(vi) Distribution Plan pursuant to Rule 12b-1 between the Registrant and
Franklin/Templeton Distributors, Inc. dated November 1, 1996 on
behalf of Mutual Shares Fund - Class II
(vii) Distribution Plan pursuant to Rule 12b-1 between the Registrant and
Franklin/Templeton Distributors, Inc. dated November 1, 1996 on
behalf of Mutual Qualified Fund - Class II
(viii)Distribution Plan pursuant to Rule 12b-1 between the Registrant
and Franklin/Templeton Distributors, Inc. dated November 1, 1996
on behalf of Mutual Beacon Fund - Class II
(ix) Distribution Plan pursuant to Rule 12b-1 between the Registrant and
Franklin/Templeton Distributors, Inc. dated November 1, 1996 on
behalf of Mutual Discovery Fund - Class II
(x) Distribution Plan pursuant to Rule 12b-1 between the Registrant and
Franklin/Templeton Distributors, Inc. dated November 1, 1996 on
behalf of Mutual European Fund - Class II
(xi) Distribution Plan pursuant to Rule 12b-1 between the Registrant and
Franklin/Templeton Distributors, Inc. on behalf of Mutual
Financial Services Fund - Class I
(xii) Distribution Plan pursuant to Rule 12b-1 between the Registrant and
Franklin/Templeton Distributors, Inc. on behalf of Mutual
Financial Services 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
Filing: Post-Effective Amendment No. 22 to Registration Statement
on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(17) Power of Attorney
(i) Power of Attorney
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(ii) Certificate of Secretary
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(18) Copies of any plan entered into by Registrant pursuant to Rule 18f-3
under the 1940 Act.
(i) Form of Multiple Class Plan
Filing: Post-Effective Amendment No. 20 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: August 30, 1996
(ii) Form of Multiple Class Plan
* Previously Filed
Item 25 Persons Controlled by or Under Common Control with Registrant
None
Item 26 Number of Holders of Securities
As of April 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 145,226 18,452 10,472
Mutual Qualified Fund 172,602 10,117 5,715
Mutual Beacon Fund 123,030 16,770 9,498
Mutual Discovery Fund 113,399 19,077 12,058
Mutual European Fund 20,057 3,259 1,568
Mutual Financial Services Fund -0- -0- -0-
(New Series)
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) The officers and directors of the Registrant's manager also serve as
officers and/or directors for (1) the manager's corporate parent,
Franklin Resources, Inc., and/or (2) other investment companies in the
Franklin Templeton Group of Funds. For additional information please see
Part B and Schedules A and D of Form ADV of the Funds' Investment Manager
(SEC File 801-53068), incorporated herein by reference, which sets forth
the officers and directors of the Investment Manager and information as
to any business, profession, vocation or employment of a substantial
nature engaged in by those officers and directors during the past two
years.
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
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
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 Franklin 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 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.
(c) The registrant hereby undertakes to file a Post-Effective Amendment on
behalf of Mutual Financial Services Fund using Financial Statements which
need not be certified, within four to six months from effective date of
Registrant's Registration Statement under the Securities Act of 1933.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of San Mateo and the State
of California, on the 5th day of June, 1997.
FRANKLIN MUTUAL SERIES FUND INC.
(Registrant)
By: 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:
Michael F. Price* President and Chairman of the
Michael F. Price Board (Chief Executive Officer and
Director)
Dated: June 5, 1997
James R. Baio* Treasurer and Chief Financial
James R. Baio Officer
Dated: June 5, 1997
Edward I. Altman* Director
Edward I. Altman Dated: June 5, 1997
Ann Torre Grant* Director
Ann Torre Grant Dated: June 5, 1997
Andrew H. Hines, Jr.* Director
Andrew H. Hines, Jr. Dated: June 5, 1997
Peter A. Langerman* Director
Peter A. Langerman Dated: June 5, 1997
William S. Lippman* Director
William S. Lippman Dated: June 5, 1997
Bruce A. MacPherson* Director
Bruce A. MacPherson Dated: June 5, 1997
Fred R. Millsaps* Director
Fred R. Millsaps Dated: June 5, 1997
Leonard Rubin* Director
Leonard Rubin Dated: June 5, 1997
Barry F. Schwartz* Director
Barry F. Schwartz Dated: June 5, 1997
Vaughn R. Sturtevant, M.D.* Director
Vaughn R. Sturtevant, M.D. Dated: June 5, 1997
Robert E. Wade* Director
Robert E. Wade Dated: June 5, 1997
*By /s/Larry L. Greene
Larry L. Greene, 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) Articles of Incorporation *
EX-99.B1(ii) Articles of Amendment *
EX-99.B1(iii) Articles Supplementary *
EX-99.B1(iv) Articles Supplementary *
EX-99.B1(v) Articles Supplementary *
EX-99.B2(i) By-Laws *
EX-99.B5(i) Investment Advisory Agreement Between *
Franklin Mutual Advisers, Inc., and the
Registrant on behalf of Mutual Shares Fund
EX-99.B5(ii) Investment Advisory Agreement between *
Franklin Mutual Advisers, Inc., and the
Registrant on behalf of Mutual Qualified
Fund
EX-99.B5(iii) Investment Advisory Agreement between *
Franklin Mutual Advisers, Inc., and the
Registrant on behalf of Mutual Beacon Fund
EX-99.B5(iv) Investment Advisory Agreement between *
Franklin Mutual Advisers, Inc., and the
Registrant on behalf of Mutual Discovery
Fund
EX-99.B5(v) Investment Advisory Agreement between *
Franklin Mutual Advisers, Inc., and the
Registrant on behalf of Mutual European Fund
EX-99.B5(vi) Administration Agreement between Franklin *
Templeton Services, Inc. and the Registrant
on behalf of Mutual Shares Fund
EX-99.B5(vii) Administration Agreement between Franklin *
Templeton Services, Inc. and the Registrant
on behalf of Mutual Qualified Fund
EX-99.B5(viii) Administration Agreement between Franklin *
Templeton Services, Inc. and the Registrant
on behalf of Mutual Beacon Fund
EX-99.B5(ix) Administration Agreement between Franklin *
Templeton Services, Inc. and the Registrant
on behalf of Mutual Discovery Fund
EX-99.B5(x) Administration Agreement between Franklin *
Templeton Services, Inc. and the Registrant
on behalf of Mutual European Fund
EX-99.B5(xi) Form of Investment Advisory Agreement Attached
between Franklin Mutual Advisers, Inc., and
the Registrant on behalf of Mutual
Financial Services Fund
EX-99.B5(xii) Form of Administration Agreement between Attached
Franklin Templeton Services, Inc. and the
Registrant on behalf of Mutual Financial
Services Fund
EX-99.B6(i) Distribution Agreement between Registrant *
and Franklin/Templeton Distributors, Inc.
on behalf of Mutual Shares Fund
EX-99.B6(ii) Distribution Agreement between Registrant *
and Franklin/Templeton Distributors, Inc.
on behalf of Mutual Beacon Fund
EX-99.B6(iii) Distribution Agreement between Registrant *
and Franklin/Templeton Distributors, on
behalf of Mutual Qualified Fund
EX-99.B6(iv) Distribution Agreement between Registrant *
and Franklin/Templeton Distributors, on
behalf of Mutual Discovery Fund
EX-99.B6(v) Distribution Agreement between Registrant *
and Franklin/Templeton Distributors, Inc.
on behalf of Mutual European Fund
EX-99.B6(vi) Form of Dealer Agreement *
EX-99.B6(vii) Distribution Agreement between Registrant Attached
and Franklin/Templeton Distributors, Inc.
on behalf of Mutual Financial Services Fund
EX-99.B8(i) Custodian Agreement between the Registrant *
and State Street Bank
EX-99.B10(i) Opinion and Consent of Miles and *
Stockbridge as to legality of shares
EX-99.B10(ii) Opinion and Consent of Miles and *
Stockbridge as to legality of shares
EX-99.B11(i) Consent of Ernst & Young L.L.P. Attached
EX-99.B13(i) Form of subscription by Sole Shareholder *
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 12b-1 *
between the Registrant and Franklin
Templeton/Distributors, Inc. on behalf of
Mutual Shares Fund - Class I
EX-99.B15(ii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant and Franklin
Templeton/Distributors, Inc. on behalf of
Mutual Qualified Fund - Class I
EX-99.B15(iii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant and Franklin
Templeton/Distributors, Inc. on behalf of
Mutual Beacon Fund - Class I
EX-99.B15(iv) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant and Franklin
Templeton/Distributors, Inc. on behalf of
Mutual Discovery Fund - Class I
EX-99.B15(v) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant and Franklin
Templeton/Distributors, Inc. on behalf of
Mutual European Fund - Class I
EX-99.B15(vi) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant and
Franklin/Templeton Distributors, Inc. on
behalf of Mutual Shares Fund - Class II
EX-99.B15(vii) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant and
Franklin/Templeton Distributors, Inc. on
behalf of Mutual Qualified Fund - Class II
EX-99.B15(viii) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant and
Franklin/Templeton Distributors, Inc. on
behalf of Mutual Beacon Fund - Class II
EX-99.B15(ix) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant and
Franklin/Templeton Distributors, Inc. on
behalf of Mutual Discovery Fund - Class II
EX-99.B15(x) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant and
Franklin/Templeton Distributors, Inc. on
behalf of Mutual European Fund - Class II
EX-99.B15(xi) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant and
Franklin/Templeton Distributors, Inc. on
behalf of Mutual Financial Services Fund -
Class I
EX-99.B15(xii) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant and Franklin
Templeton Distributors, Inc. on behalf of
Mutual Financial Services Fund - Class II
EX-99.B16(i) Schedule for Computation of Performance *
Quotations
EX-99.B17(i) Power of Attorney *
EX-99.B17(ii) Certificate of Secretary *
EX-99.B18(i) Form of Multiple Class Plan *
EX-99.B18(ii) Form of Multiple Class Plan Attached
*Incorporated by reference
**Previously filed
[FORM]
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of the ____ day of ________, 1997, between
MUTUAL FINANCIAL SERVICES 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:
0.80% for Mutual Financial Services 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 __________, 1997
and shall continue in effect through ______________. 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 FINANCIAL SERVICES FUND, a series of
FRANKLIN MUTUAL SERIES FUND INC.
By:
Title:
FRANKLIN MUTUAL ADVISERS, INC.
By:
Title:
[FORM]
ADMINISTRATION AGREEMENT BETWEEN
FRANKLIN TEMPLETON SERVICES, INC.
AND
FRANKLIN MUTUAL SERIES FUND INC.
AGREEMENT dated as of ____________, 1997, between Franklin Mutual
Series Fund Inc., a Maryland corporation which is a registered open-end
investment company, on behalf of its series, MUTUAL FINANCIAL SERVICES FUND
(the "Fund"), and Franklin Templeton Services, Inc. ("FTS").
In consideration of the mutual promises herein made, the parties hereby
agree as follows:
(1) FTS agrees, during the life of this Agreement, to be responsible
for:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) paying compensation of the Fund's officers for services
rendered as such;
(c) authorizing expenditures and approving bills for payment on
behalf of the Fund;
(d) supervising preparation of annual and semiannual reports to
shareholders, notices of dividends, capital gains distribution and tax
credits, and attending to routine correspondence and other communications
with individual shareholders;
(e) daily pricing of the Fund's investment portfolio and
preparing and supervising publication of daily quotations of the bid and
asked prices of the Fund's Shares, earnings reports and other financial data;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents and printers;
(g) providing trading desk facilities for the Fund;
(h) supervising compliance by the Fund with recordkeeping
requirements under the Investment Company Act of 1940 (the "1940 Act") and
the rules and regulations thereunder, with state regulatory requirements,
maintenance of books and records for the Fund (other than those maintained by
the custodian and transfer agent), preparing and filing of tax reports other
than the Fund's income tax returns;
(i) monitoring the qualifications of tax deferred retirement
plans for the Fund; and
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities.
(2) The Fund agrees, during the life of this Agreement, to pay to FTS
as compensation for the foregoing a monthly fee equal on an annual basis to
0.15% of the first $200 million of the aggregate average daily net assets of
the Fund during the month preceding each payment, reduced as follows: on
such net assets in excess of $200 million up to $700 million, a monthly fee
equal on an annual basis to 0.135%; on such net assets in excess of $700
million up to $1.2 billion, a monthly fee equal on an annual basis to 0.10% ;
and on such net assets in excess of $1.2 billion, a monthly fee equal on an
annual basis to 0.075%.
(3) This Agreement shall remain in full force and effect through
___________, 1998 and thereafter from year to year to the extent continuance
is approved annually by the Board of Directors of the Fund.
(4) This Agreement may be terminated by the Fund at any time on sixty
(60) days' written notice without payment of penalty, provided that such
termination by the Fund shall be directed or approved by the vote of a
majority of the Directors of the Fund in office at the time or by the vote of
a majority of the outstanding voting securities of the Fund (as defined by
the 1940 Act); and shall automatically and immediately terminate in the event
of its assignment (as defined by the 1940 Act).
(5) In the absence of willful misfeasance, bad faith or gross
negligence on the part of FTS, or of reckless disregard of its duties and
obligations hereunder, FTS shall not be subject to liability for any act or
omission in the course of, or connected with, rendering services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers.
FRANKLIN MUTUAL SERIES FUND INC.
By: _____________________________
Elizabeth Cohernour
General Counsel & Secretary
Franklin Templeton Services, Inc.
By: ____________________________
Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
[FORM]
FRANKLIN MUTUAL SERIES FUND INC.
51 John F. Kennedy Parkway
Short Hills, New Jersey
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404
Re: Distribution Agreement - Mutual Financial Services 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
FINANCIAL SERVICES 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 Financial Services Fund
By:____________________________
Accepted:
Franklin/Templeton Distributors, Inc.
By:_____________________________
DATED: _______________
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in the Class Z and Class I and II Prospectuses and "Investment
Management and Other Services" and "Financial Statements" in the Class Z and
Class I and II Statements of Additional Information, and to the incorporation
by reference in this Post-Effective Amendment No. 23 to Registration
Statement Number 33-18516 on Form N-1A of our reports dated February 7, 1997,
on the financial statements and financial highlights of Mutual Shares Fund,
Mutual Qualified Fund, Mutual Beacon Fund, Mutual Discovery Fund, and Mutual
European Fund (each a portfolio of Franklin Mutual Series Fund Inc.) included
in the 1996 Annual Reports to Shareholders.
/s/ Ernst & Young
Ernst & Young
Boston, Massachusetts
June 2, 1997
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUTUAL SERIES FUND INC.
II. Fund: MUTUAL SHARES 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 the Fund named above (the "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 Conduct 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.
Dated as of November 1, 1996.
FRANKLIN MUTUAL SERIES FUND INC.
By: /S/ ELIZABETH COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
Franklin/Templeton Distributors, Inc.
By:/S/ DEBORAH R. GATZEK
Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUTUAL SERIES FUND INC.
II. Fund: MUTUAL QUALIFIED 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 the Fund named above (the "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 Conduct 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.
Dated as of November 1, 1996.
FRANKLIN MUTUAL SERIES FUND INC.
By:/S/ ELIZABETH COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
Franklin/Templeton Distributors, Inc.
By:/S/ DEBORAH R. GATZEK
Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUTUAL SERIES FUND INC.
II. Fund: MUTUAL BEACON 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 the Fund named above (the "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 Conduct 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.
Dated as of November 1, 1996.
FRANKLIN MUTUAL SERIES FUND INC.
By:/S/ ELIZABETH COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
Franklin/Templeton Distributors, Inc.
By:/S/ DEBORAH R. GATZEK
Deborah R. Gatzek
Senior Vice President
& Assistant Secretary
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUTUAL SERIES FUND INC.
II. Fund: MUTUAL DISCOVERY 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 the Fund named above (the "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 Conduct 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.
Dated as of November 1, 1996.
FRANKLIN MUTUAL SERIES FUND INC.
By:/S/ ELIZABETH COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
Franklin/Templeton Distributors, Inc.
By:/S/ DEBORAH R. GATZEK
Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUTUAL SERIES FUND INC.
II. Fund: 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 the Fund named above (the "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 Conduct 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.
Dated as of November 1, 1996.
FRANKLIN MUTUAL SERIES FUND INC.
By:/S/ ELIZABETH COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
Franklin/Templeton Distributors, Inc.
By:/S/ DEBORAH R. GATZEK
Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
[FORM]
CLASS I DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUTUAL SERIES FUND INC.
II. Fund: MUTUAL FINANCIAL SERVICES 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 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 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: ____________________________
Elizabeth Cohernour
General Counsel & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: ____________________________
Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
As of ______________, 1997
[FORM]
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUTUAL SERIES FUND INC.
II. Fund: MUTUAL FINANCIAL SERVICES 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 the Fund named above (the 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 Conduct 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.
Dated as of ____________, 1997.
FRANKLIN MUTUAL SERIES FUND INC.
By:_____________________________
Elizabeth Cohernour
General Counsel & Secretary
Franklin/Templeton Distributors, Inc.
By:_____________________________
Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
[FORM]
FRANKLIN MUTUAL SERIES FUND INC.
on behalf of
MUTUAL FINANCIAL SERVICES FUND
Multiple Class Plan
This Multiple Class Plan (the "Plan") has been adopted by a majority of
the Board of Directors of Franklin Mutual Series Fund Inc. (the "Investment
Company") for its series, Mutual Financial Services Fund, (the "Fund"). The
Board has determined that the Plan is in the best interests of each class of
the Fund and the Investment Company as a whole. The Plan sets forth the
provisions relating to the establishment of multiple classes of shares of the
Fund.
1. The Fund shall offer three classes of shares, to be known as
Class I, Class II shares and Class Z shares.
2. Class I Shares shall carry a front-end sales charge ranging from
0% - 4.50 %, and Class II Shares shall carry a front-end sales charge of
1.00%. Class Z Shares shall not be subject to any front-end sales charges.
3. Class I Shares shall not be subject to a contingent deferred
sales charge ("CDSC") except in the following limited circumstances. On
investments of $1 million or more, a contingent deferred sales charge of
1.00% of the lesser of the then-current net asset value or the original net
asset value at the time of purchase applies to redemptions of those
investments within the contingency period of 12 months from the calendar
month following their purchase. The CDSC is waived in certain circumstances,
as described in the Investment Company's prospectus.
Class II Shares redeemed within 18 months of their purchase shall be
assessed a CDSC of 1.00% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase. The CDSC is waived in
certain circumstances as described in the Investment Company's prospectus.
Class Z Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Investment Company pursuant
to Rule 12b-1 under the Investment Company Act of 1940, as amended, (the
"Rule 12b-1 Plan") associated with the Class I Shares may be used to
reimburse Franklin/Templeton Distributors, Inc. (the "Distributor") or others
for expenses incurred in the promotion and distribution of the Class I
Shares. Such expenses include, but are not limited to, the printing of
prospectuses and reports used for sales purposes, expenses of preparing and
distributing sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of the
Distributor's overhead expenses attributable to the distribution of the Class
I Shares, as well as any distribution or service fees paid to securities
dealers of their firms or others who have executed a servicing agreement with
the Investment Company for the Class I Shares, the Distributor or its
affiliates.
The Rule 12b-1 Plan associated with the Class II Shares has two
components. The first component is a shareholder servicing fee, to be paid
to broker-dealers, banks, trust companies and others who provide personal
assistance to shareholders in servicing their accounts. The second component
is an asset-based sales charge to be retained by the Distributor during the
first year after the sale of shares, and in subsequent years, to be paid to
dealers or retained by the Distributor to be used in the promotion and
distribution of Class II Shares, in a manner similar to that described above
for Class I Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Class Z Shares,
and therefore, the Class Z Shares shall not be subject to deductions relating
to rule 12b-1 fees.
The Rule 12b-1 Plans for the Class I and Class II Shares shall operate
in accordance with the Rules of Conduct of the National Association of
Securities Dealers, Inc.
5. The only difference in expenses as between Class I, Class II, and
Class Z Shares shall relate to differences in Rule 12b-1 plan expenses, as
described in the applicable Rule 12b-1 Plans.
6. There shall be no conversion features associated with the Class
I, Class II, and Class Z Shares.
7. Shares of Class I, Class II and Class Z may be exchanged for
shares of another investment company within the Franklin Templeton Group of
Funds according to the terms and conditions stated in each fund's prospectus,
as it may be amended from time to time, to the extent permitted by the
Investment Company Act of 1940 and the rules and regulations adopted
thereunder.
8. Each class will vote separately with respect to any Rule 12b-1
Plan related to that class.
9. On an ongoing basis, the Board members, pursuant to their
fiduciary responsibilities under the 1940 Act and otherwise, will monitor the
Fund for the existence of any material conflicts between the Board members
interests of the various classes of shares. The Board members, including a
majority of the independent Board members, shall take such action as is
reasonably necessary to eliminate any such conflict that may develop Franklin
Mutual Advisers, Inc. and Franklin/Templeton Distributors, Inc. shall be
responsible for alerting the Board to any material conflicts that arise.
10. All material amendments to this Plan must be approved by a
majority of the Board members, including a majority of the Board members who
are not interested persons of the Investment Company.
11. I, Elizabeth N. Cohernour, Secretary of Franklin Mutual Series
Fund Inc., do hereby certify that this Multiple Class Plan was adopted by the
Board of Directors of the Investment Company on ____________, 1997.
--------------------------
Elizabeth N. Cohernour
General Counsel & Secretary
