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."
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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.
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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.
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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 ("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 331/3% 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 Financial Services will invest more than 25% of its assets in the
financial services industry). 5. Act as an underwriter except to the extent the
series may be deemed to be an underwriter when disposing of securities it owns
or when selling its own shares.
6. Purchase the securities of any one issuer, other than the U.S. government or
any of its agencies or instrumentalities, if immediately after such purchase
more than 5% of the value of its total assets would be invested in such issuer,
or such series would own more than 10% of the outstanding voting securities of
such issuer, except that up to 25% of the value of such series' total assets may
be invested without regard to such 5% and 10% limitations.
7. Except as may be described in the Prospectus, engage in short sales, purchase
securities on margin or maintain a net short position.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value 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 (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.; Director of Sunbeam Oster and Lancer Industries; Manager (Director) of MB
Motori, L.L.C. and MWCR, L.L.C.; and formerly, employee of Heine Securities
Corporation, June 1986 to October 1996.
* 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
Chairman 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.; Principal Executive Officer and majority owner of Compliance Solutions,
Inc. (developer of compliance monitoring software for money managers); Director
and owner of Clearwater Securities, Inc. (registered securities dealer); and
formerly, President, Chief Executive Officer, and Director of Heine Securities
Corporation, January 1987 to October 1996.
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.; Manager (Director), MB
Metropolis, L.L.C.; Manager (Director) of MB Motori, L.L.C., MWCR, L.L.C. and
S.H. Mortgage Acquisition, L.L.C.; Trustee of Resurgence Properties, Inc.; and
Chairman of the Board of Trustees, Value Property Trust; and formerly, employee
of Heine Securities Corporation, August 1988 to October 1996.
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.; Secretary and General Counsel of Compliance Solutions, Inc.
(developer of compliance monitoring software for money managers) and Clearwater
Securities, Inc. (registered securities dealer); and formerly, Secretary and
General Counsel of Heine Securities Corporation, May 1988 to October 1996.
Robert L. Friedman (38)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; and formerly,
employee of Heine Securities Corporation, August 1988 to October 1996.
Raymond Garea (48)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; and formerly, employee
of Heine Securities Corporation, March 1991 to October 1996; 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.; and formerly, employee
of Heine Securities Corporation, March 1984 to October 1996.
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 or trustees 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.
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***
- -------------------------------------------------------------------------------
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
+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 58 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 or trustee.
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 July 22, 1997, the officers and Board members, as a group, owned of record
and beneficially the following shares of Mutual Series: 348,113.720 shares of
Mutual Shares - Class Z; 101,811.017 shares of Qualified - Class Z; 677,082.051
shares of Beacon - Class Z; 386,990.273 shares of Discovery - Class Z, or less
than 1% of the total outstanding Class Z shares of each of those series. As of
July 22, 1997, the officers and Board members, as a group, owned of record and
beneficially 14,175,307.480 shares or 30% 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 for all Funds except Financial
Services is in effect until June 30, 1998. The management agreement for
Financial Services is in effect until June 30, 1999. They may continue in effect
for successive annual periods if their 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. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
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 Funds paid
brokerage commissions as follows:
MUTUAL SHARES QUALIFIED BEACON DISCOVERY EUROPEAN
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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 the Funds 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?
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ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
- ---------------------------------------------------
Under $30,000 .................. 3.0%
$30,000 but less than $50,000 .. 2.5%
$50,000 but less than $100,000 . 2.0%
$100,000 but less than $200,000 1.5%
$200,000 but less than $400,000 1.0%
$400,000 or more ............... 0%
Other Payments to Securities Dealers. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 1% on
sales of $1 million to $2 million, plus 0.80% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales
over $50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans 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. 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, Martin Luther King Jr. 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 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 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-, ten-year and from
inception periods, 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-,
ten-year and from inception periods 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-, ten-year and from inception 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
*Discovery commenced operations on December 31, 1992. The restated average
annual return from inception was 21.19% for Class I and 22.29% for Class II
**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 or from inception periods at
the end of the one-, five- or ten-year or from inception periods
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-, ten-year and from inception periods. 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% 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
*Discovery commenced operations on December 31, 1992. The restated cumulative
total return from inception was 115.74% for Class I and 123.64% for Class II.
**European commenced operations on July 3, 1996. The restated cumulative total
return from inception was 9.34% for Class I and 12.27% for Class II.
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 Fund 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 Funds' 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 $207 billion in assets under
management for more than 5.4 million U.S. based mutual fund shareholder and
other accounts. The Franklin Templeton Group of Funds offers 120 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.
As of July 22, 1997, the principal shareholders of the Fund, beneficial or of
record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- ---------------------------------------------------------------------
BEACON - CLASS I
The Manufacturers 5,007,623.863 16%
Life Ins Co USA
Attn.: Kris Ramdial
Pension Acctg NT3
200 Bloor St E
Toronto ON M4W 1E5
Canada
EUROPEAN - CLASS Z
Michael F. Price 14,110,113.885 29%
51 John F. Kennedy Pkwy
Short Hills, NJ 07078
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, 199751
AS AMENDED AUGUST 19, 1997
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
- -------------------------------------------------------------------------------
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.
- -----------------------------------------------------------------------------
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 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 331/3% 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 Financial Services will invest more than 25% of its assets in the
financial services industry).
5. Act as an underwriter except to the extent the series may be deemed to be an
underwriter when disposing of securities it owns or when selling its own shares.
6. Purchase the securities of any one issuer, other than the U.S. government or
any of its agencies or instrumentalities, if immediately after such purchase
more than 5% of the value of its total assets would be invested in such issuer,
or such series would own more than 10% of the outstanding voting securities of
such issuer, except that up to 25% of the value of such series' total assets may
be invested without regard to such 5% and 10% limitations.
7. Except as may be described in the Prospectus, engage in short sales, purchase
securities on margin or maintain a net short position.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value 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
- -------------------------------------------------------------------------------
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 (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.; Director of Sunbeam Oster and Lancer Industries; Manager (Director) of MB
Motori, L.L.C. and MWCR, L.L.C.; and formerly, employee of Heine Securities
Corporation, June 1986 to October 1996.
* 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
Chairman 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) Chairman of the
51 John F. Kennedy Pkwy. Board and
Short Hills, NJ 07078 President
Chairman of the Board and President
President, Chief Executive Officer, and Director of Franklin Mutual Advisers,
Inc.; Principal Executive Officer and majority owner of Compliance Solutions,
Inc. (developer of compliance monitoring software for money managers); Director
and owner of Clearwater Securities, Inc. (registered securities dealer); and
formerly, President, Chief Executive Officer, and Director of Heine Securities
Corporation, January 1987 to October 1996.
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.; Manager (Director), MB
Metropolis, L.L.C.; Manager (Director) of MB Motori, L.L.C., MWCR, L.L.C. and
S.H. Mortgage Acquisition, L.L.C.; Trustee of Resurgence Properties, Inc.; and
Chairman of the Board of Trustees, Value Property Trust; and formerly, employee
of Heine Securities Corporation, August 1988 to October 1996.
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.; Secretary and General Counsel of Compliance Solutions, Inc.
(developer of compliance monitoring software for money managers) and Clearwater
Securities, Inc. (registered securities dealer); and formerly, Secretary and
General Counsel of Heine Securities Corporation, May 1988 to October 1996.
Robert L. Friedman (38)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; and formerly,
employee of Heine Securities Corporation, August 1988 to October 1996.
Raymond Garea (48)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; and formerly, employee
of Heine Securities Corporation, March 1991 to October 1996; prior thereto, Vice
President and Analyst with Donaldson, Lufkin & Jenrette; Manager (Director), MB
Metropolis, L.L.C. and S.H. Mortgage Acquisition.
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 or trustees 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.
TOTAL FEES NUMBER OF BOARDS
RECEIVED FROM IN THE FRANKLIN
TOTAL FEES PENSIONS ANNUAL THE FRANKLIN TEMPLETON GROUP
RECEIVED FROM RETIREMENT BENEFITS TEMPLETON GROUP OF FUNDS ON WHICH
NAME MUTUAL SERIES*ACCRUED RETIREMENT OF FUNDS** EACH SERVES***
- ------------------------------------------------------------------------------
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
+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 58 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 or trustee.
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 July 22, 1997, the officers and Board members, as a group, owned of record
and beneficially the following shares of Mutual Series: 348,113.720 shares of
Mutual Shares - Class Z; 101,811.017 shares of Qualified - Class Z; 677,082.051
shares of Beacon - Class Z; 386,990.273 shares of Discovery - Class Z, or less
than 1% of the total outstanding Class Z shares of each of those Funds. As of
July 22, 1997, the officers and Board members, as a group, owned of record and
beneficially 14,175,307.480 shares or 30% 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 for all Funds except Financial
Services is in effect until June 30, 1998. The management agreement for
Financial Services is in effect until June 30, 1999.They may continue in effect
for successive annual periods if their 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. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
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 Funds 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 $7,418,38 $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 the Funds 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. 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, Martin
Luther King Jr. 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-, ten-year and from
inception periods, 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-,
ten-year and from inception 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-, ten-year and
from inception 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-, ten-year or from inception periods at the end of
the one-, five-, ten-year and from inception periods
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-, ten-year and from inception periods. The cumulative total
return for Class Z for the one-, five-, ten-year and from inception 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.
q) 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 $207 billion in assets under
management for more than 5.4 million U.S. based mutual fund shareholder and
other accounts. The Franklin Templeton Group of Funds offers 120.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.
As of July 22, 1997, the principal shareholders of the Fund, beneficial or of
record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- -----------------------------------------------------------------------
BEACON - CLASS I
The Manufacturers
Life Ins. Co. USA 5,007,623.863 16%
200 Bloor St. E
Toronto ON M4W 1E5
Canada
EUROPEAN - CLASS Z
Michael F. Price 14,110,113.885 29%
51 John F. Kennedy Pkwy
Short Hills, NJ 07078
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 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
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.
