SUPPLEMENT DATED FEBRUARY 19, 1998
TO THE PROSPECTUS OF
FRANKLIN MUTUAL SERIES FUND INC.
DATED MAY 1, 1997, AS AMENDED AUGUST 19, 1997
The prospectus is amended as follows:
I. EXPENSE SUMMARY
The table under "C. EXAMPLE" is replaced with the following:
<TABLE>
<CAPTION>
Mutual Financial
SHARES QUALIFIED BEACON DISCOVERY EUROPEAN SERVICES
CLASS I
<S> <C> <C> <C> <C> <C> <C>
1 Year**** $ 55 $ 56 $ 56 $ 58 $ 60 $ 58
3 Years $ 78 $ 79 $ 78 $ 86 $ 90 $ 86
5 Years $101 $104 $103 $115 $123 -
10 Years $170 $176 $173 $199 $216 -
CLASS II
1 Year $ 37 $ 38 $ 38 $ 40 $ 41 $ 40
3 Years $ 64 $ 65 $ 65 $ 72 $ 77 $ 72
5 Years $102 $105 $104 $116 $124 -
10 Years $211 $217 $214 $239 $256 -
</TABLE>
II. FINANCIAL HIGHLIGHTS
The "FINANCIAL HIGHLIGHTS" table is amended to add:
CLASS I CLASS II
AUGUST 19, 1997 AUGUST 19, 1997
(COMMENCEMENT OF (COMMENCEMENT OF
OPERATIONS) TO OPERATIONS) TO
FINANCIAL SERVICES DECEMBER 31, 1997 DECEMBER 31, 1997
- ---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period $10.00 $10.00
-------------------------
Income from investment operations:
Net investment income .03 .01
Net realized and unrealized gain 2.35 2.35
-------------------------
Total from investment operations 2.38 2.36
-------------------------
Less distributions from:
Net investment income (.02) (.01)
Net realized gains (.09) (.09)
--------------------------
Total distributions (.11) (.10)
--------------------------
Net asset value, end of period $12.27 $12.26
=========================
Total Return 23.83%* 23.57%**
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $78,249 $43,207
Ratio to average net assets:
Expenses 1.35%*** 2.00%***
Expenses, excluding waiver and 1.97%*** 2.62%***
payments by affiliates
Net investment income 1.02%*** 0.37%***
Portfolio turnover rate 42.26% 42.26%
Average commission rate paid**** $.0241 $.0241
*Total return does not reflect sales commissions and is not annualized.
**Total return does not reflect sales commissions or the Contingent Deferred
Sales Charges and is not annualized.
***Annualized.
****Relates to purchases and sales of equity securities.
CLASS I CLASS II
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1997
MUTUAL SHARES (UNAUDITED) (UNAUDITED)
- ----------------------------------------------------------------------
Net asset value, beginning of period $18.56 $18.56
Income from investment operations:
Net investment income .35 .31
Net realized and unrealized gain 2.16 2.13
-------------------------
Total from investment operations 2.51 2.44
-------------------------
Distributions:
Dividends from net investment income - -
Distributions from net realized gains - -
---------------------
Total distributions - -
------------------------
Change in net asset value 2.51 2.44
-------------------------
Net asset value, end of period $21.07 $21.00
=========================
TOTAL RETURN* 13.52% 13.15%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $477,620 $250,669
Ratio of expenses to
average net assets 1.10%** 1.75%**
Ratio of expenses, net
of fee waiver, to average net assets 1.06%** 1.72%**
Ratio of net investment income
to average net assets 2.04%** 1.35%**
Portfolio turnover rate 27.07% 27.07%
Average commission rate
paid (per share) $.0412 $.0412
CLASS I CLASS II
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1997
QUALIFIED (UNAUDITED) (UNAUDITED)
- ------------------------------------------------------------------------
Net asset value, beginning of period $16.23 $16.23
Income from investment operations:
Net investment income .08 .04
Net realized and unrealized gain 2.11 2.10
-------------------------
Total from investment operations 2.19 2.14
-------------------------
Distributions:
Dividends from net investment income - -
Distributions from net realized gains - -
---------------------
Total distributions - -
------------------------
Change in net asset value 2.19 2.14
-------------------------
Net asset value, end of period $18.42 $18.37
=========================
TOTAL RETURN* 13.49% 13.19%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $220,550 $106,670
Ratio of expenses to
average net assets 1.13%** 1.78%**
Ratio of expenses, net
of fee waiver, to average net assets 1.10%** 1.75%**
Ratio of net investment income
to average net assets 2.15%** 1.50%**
Portfolio turnover rate 27.62% 27.62%
Average commission rate paid (per share) $0.0413 $0.0413
CLASS I CLASS II
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1997
BEACON (UNAUDITED) (UNAUDITED)
- ---------------------------------------------------------------------
Net asset value, beginning of period $12.98 $12.98
Income from investment operations:
Net investment income .23 .24
Net realized and unrealized gain 1.34 1.28
-------------------------
Total from investment operations 1.57 1.52
-------------------------
Distributions:
Dividends from net investment income - -
Distributions from net realized gains - -
------------------------
Total distributions - -
------------------------
Change in net asset value 1.57 1.52
-------------------------
Net asset value, end of period $14.55 $14.50
=========================
TOTAL RETURN* 12.10% 11.71%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $408,237 $180,576
Ratio of expenses to
average net assets 1.11%** 1.76%**
Ratio of expenses, net
of fee waiver, to average net assets 1.08%** 1.73%**
Ratio of net investment
income to average net assets 2.21%** .52%**
Portfolio turnover rate 25.96% 25.96%
Average commission rate paid (per share) $.020 $.0204
CLASS I CLASS II
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1997
DISCOVERY (UNAUDITED) (UNAUDITED)
- -----------------------------------------------------------------------
Net asset value, beginning of period $17.15 $17.17
Income from investment operations:
Net investment income .27 .25
Net realized and unrealized gain 2.08 2.03
-------------------------
Total from investment operations 2.35 2.28
-------------------------
Distributions:
Dividends from net investment income - -
Distributions from net realized gains - -
------------------------
Total distributions - -
------------------------
Change in net asset value 2.35 2.28
-------------------------
Net asset value, end of period $19.50 $19.45
=========================
TOTAL RETURN* 13.70% 13.28%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $380,439 $194,955
Ratio of expenses to
average net assets 1.35%** 2.00%**
Ration of expenses, net
of fee waiver, to average net assets 1.33%** 1.98%**
Ratio of net investment income
to average net assets 2.46%** 1.82%**
Portfolio turnover rate 27.02% 27.02%
Average commission rate paid (per share) $.0275 $0.0275
CLASS I CLASS II
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1997
EUROPEAN (UNAUDITED) (UNAUDITED)
- ---------------------------------------------------------------------------
Net asset value, beginning of period $11.38 $11.38
Income from investment operations: -------------------------
Net investment income .18 .14
Net realized and unrealized gain 1.29 1.28
-------------------------
Total from investment operations 1.47 1.42
-------------------------
Distributions:
Dividends from net investment income - -
Distributions from net realized gains - -
------------------------
Total distributions - -
------------------------
Change in net asset value 1.47 1.42
-------------------------
Net asset value, end of period $12.85 $12.80
=========================
TOTAL RETURN* 12.92% 12.48%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $58,906 $26,954
Ratio of expenses to
average net assets 1.40%** 2.05%**
Ratio of expenses, net
of fee waiver, to average net assets 1.38%** 2.04%**
Ratio of net investment income
to average net assets 4.09%** 3.56%**
Portfolio turnover rate 44.40% 44.40%
Average commission rate paid (per share) $.0153 $.0153
*Total return does not reflect sales commissions or the Contingent Deferred
Sales Charges. Not annualized for periods of less than one year.
**Annualized.
III. WHO MANAGES THE FUND?
The following replaces the first two paragraphs under "THE RULE 12B-1 PLANS":
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1
Plans" under which they may pay or reimburse Distributors or others for
the expenses of activities that are primarily intended to sell shares of
the class. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a
servicing agreement with the Fund, Distributors or its affiliates; a
prorated portion of Distributors' overhead expenses; and the expenses of
printing prospectuses and reports used for sales purposes, and preparing
and distributing sales literature and advertisements.
Payments by the Fund under the Class I plan may not exceed 0.35% per year
of Class I's average daily net assets. Of this amount, the Fund may
reimburse up to 0.35% to Distributors or others, out of which 0.10% will
generally be retained by Distributors for its distribution expenses. All
distribution expenses over this amount will be borne by those who have
incurred them. During the first year after certain purchases made without
a sales charge, Securities Dealers may not be eligible to receive the Rule
12b-1 fee associated with the purchase.
IV. HOW DO I BUY SHARES?
The following paragraph is added to the end of the section "GROUP PURCHASES -
CLASS I ONLY" found under "SALES CHARGE REDUCTIONS AND WAIVERS":
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased Class I shares of the Fund at a reduced
sales charge under the group purchase privilege before February 1, 1998,
however, may continue to do so.
The first two paragraphs and the first waiver category in the section "SALES
CHARGE WAIVERS," found under "SALES CHARGE REDUCTIONS AND WAIVERS," are replaced
with the following:
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies
to you or your purchase of Fund shares, you may buy shares of the Fund
without a front-end sales charge or a Contingent Deferred Sales Charge.
All of the sales charge waivers listed below apply to purchases of Class I
shares only, except for items 1 and 4 which also apply to Class II
purchases.
Certain distributions, payments or redemption proceeds that you receive
may be used to buy shares of the Fund without a sales charge if you
reinvest them within 365 days of their payment or redemption date. They
include:
1. Dividend and capital gain distributions from any Franklin Templeton
Fund or a real estate investment trust (REIT) sponsored or advised by
Franklin Properties, Inc. The distributions generally must be
reinvested in the same class of shares. Certain exceptions apply,
however, to Class II shareholders who chose to reinvest their
distributions in Class I shares of the Fund before November 17, 1997,
and to Advisor Class or Class Z shareholders of a Franklin Templeton
Fund who may reinvest their distributions in Class I shares of the
Fund.
The section "SALES CHARGE WAIVERS" under "SALES CHARGE REDUCTIONS AND WAIVERS"
is amended to add the following new category 5 to the list of sales charge
waiver categories. The waiver categories numbered 5 through 15 in the prospectus
are renumbered accordingly:
5. Redemptions of Class A shares from any of the Templeton Global
Strategy Funds if you:
o Are a qualified investor, and
o Reinvest the money within 365 days of the redemption date.
The Fund's Contingent Deferred Sales Charge will not be waived if a
contingent deferred sales charge applied to the redemption of your Class A
shares of the Global Strategy Funds. The amount of the Global Strategy
Funds' contingent deferred sales charge that applied to your redemption
will be used to buy shares in the Fund, based on the amount of those
proceeds being reinvested, but the Contingency Period will start again.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
The section "RETIREMENT PLANS," found under "SALES CHARGE REDUCTIONS AND
WAIVERS," is replaced in its entirety with the following:
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer
with at least 100 employees, or (ii) have plan assets of $1 million or
more, or (iii) agree to invest at least $500,000 in the Franklin Templeton
Funds over a 13 month period may buy Class I shares without a front-end
sales charge. Retirement plans that are not Qualified Retirement Plans,
SIMPLEs or SEPs must also meet the requirements described under "Group
Purchases - Class I Only" above to be able to buy Class I shares without a
front-end sales charge. We may enter into a special arrangement with a
Securities Dealer, based on criteria established by the Fund, to add
together certain small Qualified Retirement Plan accounts for the purpose
of meeting these requirements.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out
of the Franklin Templeton Funds or terminated within 365 days of the
retirement plan account's initial purchase in the Franklin Templeton
Funds. Please see "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
The following paragraph is added at the end of the section "HOW DO I BUY
SHARES?":
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and the offering of Fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the
Fund should determine, or have a broker-dealer determine, the applicable
laws and regulations of the relevant jurisdiction. Investors are
responsible for compliance with tax, currency exchange or other
regulations applicable to redemption and purchase transactions in any
jurisdiction to which they may be subject. Investors should consult
appropriate tax and legal advisors to obtain information on the rules
applicable to these transactions.
V. MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
The prospectus is amended to replace the sections "CONTINGENT DEFERRED SALES
CHARGE - CLASS I" and "CONTINGENT DEFERRED SALES CHARGE - CLASS II", found under
"WILL SALES CHARGES APPLY TO MY EXCHANGE?", with the following:
CONTINGENT DEFERRED SALES CHARGE. For accounts with shares subject to a
Contingent Deferred Sales Charge, we will first exchange any shares in
your account that are not subject to the charge. If there are not enough
of these to meet your exchange request, we will exchange shares subject to
the charge in the order they were purchased.
If you exchange Class I shares into one of our money funds, the time your
shares are held in that fund will not count towards the completion of any
Contingency Period. If you exchange your Class II shares for shares of
Money Fund II, however, the time your shares are held in that fund will
count towards the completion of any Contingency Period.
VI. HOW DO I SELL SHARES?
The following replaces the second paragraph under - "CONTINGENT DEFERRED SALES
CHARGE":
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan is
transferred out of the Franklin Templeton Funds or terminated within 365
days of the account's initial purchase in the Franklin Templeton Funds.
VII. WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
Under "DISTRIBUTION OPTIONS" the references in the first two paragraphs to the
ability of Class II shareholders to reinvest or direct their distributions to
Class I shares of the Fund or another Franklin Templeton Fund are deleted and
the following paragraph is added to the section:
Distributions may be reinvested only in the SAME CLASS of shares,
except as follows: (i) Class II shareholders who chose to reinvest their
distributions in Class I shares of the Fund or another Franklin Templeton
Fund before November 17, 1997, may continue to do so; and (ii) Class II
shareholders may reinvest their distributions in shares of any Franklin
Templeton money fund.
VIII. USEFUL TERMS AND DEFINITIONS
The following definition is added to the section:
SIMPLE (SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES) - An employer
sponsored salary deferral plan established under section 408(p) of the
Code.
PROSPECTUS & APPLICATION
FRANKLIN
MUTUAL
SERIES FUND INC.
- ------------------------------------------------------------------------------
MAY 1, 1997
AS AMENDED AUGUST 19, 1997
INVESTMENT STRATEGIES
Mutual Shares Fund GROWTH AND INCOME o VALUE
Mutual Qualified Fund GROWTH AND INCOME o VALUE
Mutual Beacon Fund GROWTH AND INCOME o VALUE
Mutual Financial Services Fund GROWTH AND INCOME o VALUE
Mutual European Fund GLOBAL o VALUE
Mutual Discovery Fund GLOBAL o VALUE
This prospectus describes Class I and Class II shares of the six series of
Franklin Mutual Series Fund Inc. ("Mutual Series"): Mutual Shares Fund ("Mutual
Shares"), Mutual Qualified Fund ("Qualified"), Mutual Beacon Fund ("Beacon"),
Mutual European Fund ("European"), Mutual Discovery Fund ("Discovery") and
Mutual Financial Services Fund ("Financial Services"). Each of these series may,
individually or together, be referred to as the "Fund(s)." This prospectus
contains information you should know before investing in the Fund. Please keep
it for future reference.
The Fund currently offers another class of shares with a different sales charge
and expense structure, which affects performance. This class is described in a
separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Class I and
Class II shares, dated May 1, 1997, as amended August 19, 1997, which may be
further amended from time to time. It includes more information about the Fund's
procedures and policies. It has been filed with the SEC and is incorporated by
reference into this prospectus. For a free copy or a larger print version of
this prospectus, call 1-800/DIAL BEN or write the Fund at its address.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
The principal investment objective of Mutual Shares, Qualified, Beacon, European
and Financial Services is capital appreciation, which may occasionally be
short-term. A secondary objective of each is income. Discovery's investment
objective is long-term capital appreciation.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary
Financial Highlights
How does the Fund Invest its Assets?
Who Manages the Fund? 19
How does the Fund Measure Performance?
How Taxation Affects the Fund and its Shareholders
How is the Fund Organized?
ABOUT YOUR ACCOUNT
How Do I Buy Shares?
May I Exchange Shares for Shares of Another Fund?
How Do I Sell Shares?
What Distributions Might I Receive from the Fund?
Transaction Procedures and Special Requirements
Services to Help You Manage Your Account
What If I Have Questions About My Account?
GLOSSARY
Useful Terms and Definitions
FRANKLIN
MUTUAL SERIES
FUND INC.
- -----------------------------------------------------------
MAY 1, 1997
AS AMENDED AUGUST 19, 1997
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
51 John F. Kennedy Parkway
Short Hills, NJ 07078
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. With the exception of Financial Services, it is based on the historical
management fees and other expenses of the Class Z shares of each series for the
fiscal year ended December 31, 1996, and the maximum contractual Class I or
Class II Rule 12b-1 fees. The numbers in the table for Financial Services are
based on estimated expenses for the current fiscal year. The Funds' actual
expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Mutual Financial
Shares Qualified Beacon Discovery European Services
- ------------------------------------------------------------------------------
Class I
Maximum Sales Charge
(as a percentage
of Offering
Price) 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Paid at
time of
purchase++ 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Paid at
redemption++++
None None None None None None
Class II
Maximum Sales Charge
(as a
percentage
of Offering
Price) 1.99% 1.99% 1.99% 1.99% 1.99% 1.99%
Paid at
time of
purchase+++ 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Paid at
redemption++++
0.99% 0.99% 0.99% 0.99% 0.99 0.99%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
CLASS I
Management
Fees 0.60%** 0.60%** 0.60%** 0.80%** 0.80%** 0.00%*
Rule 12b-1
Fees*** 0.35% 0.35% 0.35% 0.35% 0.35% 0.35%
Other
Expenses 0.12% 0.18% 0.15% 0.19% 0.35% 1.00%
---------------------------------------------------------------
Total
Fund
Operating
Expenses**
1.07%** 1.13%** 1.10%** 1.34%** 1.50%** 1.35%*
================================================================
CLASS II
Management
Fees 0.60%** 0.60%** 0.60%** 0.80%** 0.80%** 0.00%*
Rule
12b-1
Fees***
1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Other
Expenses
0.12% 0.18% 0.15% 0.19% 0.35% 1.00%
------------------------------------------------------------------
Total
Fund
Operating
Expenses**
1.72%** 1.78%** 1.75%** 1.99%** 2.15%** 2.00%*
C. Example
Assume the annual return for each class is 5%, operating expenses are
as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in
the Fund.
MUTUAL FINANCIAL
SHARES QUALIFIED BEACON DISCOVERY EUROPEAN SERVICES
- -------------------------------------------------------------------------------
CLASS I
1 Year**** $ 55 $ 56 $ 56 $ 58 $ 60 $ 58
3 Years $ 78 $ 79 $ 78 $ 86 $ 90 $ 86
5 Years $101 $104 $103 $115 $123 --
10 Years $170 $176 $173 $199 $216 --
CLASS I
1 Year $ 37 $ 38 $ 38 $ 40 $ 41 $ 40
3 Years $ 64 $ 65 $ 65 $ 72 $ 77 $ 72
5 Years $102 $105 $104 $116 $124 --
10 Years $211 $217 $214 $239 $256 --
For the same Class II investment, you would pay projected expenses of $27
(Mutual Shares), $28 (Qualified), $28 (Beacon), $30 (Discovery), $31
(European) and $30 (Financial Services) if you did not sell your shares at the
end of the first year. Your projected expenses for the remaining periods would
be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. Actual expenses and returns may be more or less than those shown. The
Fund pays its operating expenses. The effects of these expenses are reflected
in the Net Asset Value or dividends of each class and are not directly charged
to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in Class I
shares.
+++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy."
++++A Contingent Deferred Sales Charge may apply to any Class II purchase if you
sell the shares within 18 months and to Class I purchases of $1 million or more
if you sell the shares within one year. A Contingent Deferred Sales Charge may
also apply to purchases by certain retirement plans that qualify to buy Class I
shares without a front-end sales charge. The charge is 1% of the value of the
shares sold or the Net Asset Value at the time of purchase, whichever is less.
The number in the table shows the charge as a percentage of Offering Price.
While the percentage is different depending on whether the charge is shown based
on the Net Asset Value or the Offering Price, the dollar amount paid by you
would be the same. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
*Franklin Mutual has agreed in advance to waive its management fee and
make certain payments to reduce the Financial Services Fund's expenses so its
aggregate annual operating expenses do not exceed 1.35% for Class I and 2.00%
for Class II for the Fund's initial twenty-four months of operations. Absent
this reduction, contractual management fees would equal 0.80% and total expected
operating expenses would equal 2.20% for Class I and 2.85% for Class II for the
current fiscal year. After the first twenty-four months of operations, Franklin
Mutual may terminate this arrangement at any time.
**For the period shown, Franklin Mutual and its affiliates had agreed in advance
to limit its management fees during the Fund's previous fiscal year. This
agreement, which expires October 31, 1999, did not apply to Financial Services,
which was not in existence during the previous fiscal year. With this reduction,
management fees and total operating expenses were as follows:
MUTUAL
SHARES QUALIFIED BEACON DISCOVERY EUROPEAN
- ---------------------------------------------------------------------------
Management Fees 0.58% 0.57% 0.58% 0.77% 0.74%
Total Operating
Expenses:
Class I 1.05% 1.10% 1.08% 1.31% 1.44%
Class II 1.70% 1.75% 1.73% 1.96% 2.09%
***The combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the maximum
front-end sales charge permitted under the NASD's rules.
****Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history for Class I and Class II. The
information has been audited by Ernst & Young LLP, the Fund's independent
auditors. Their audit report appears in the Fund's Annual Report to
Shareholders. The Annual Report to Shareholders also includes more information
about the Fund's performance. For a free copy, please call Fund Information.
CLASS I CLASS II
FOR THE PERIOD FOR THE PERIOD
NOVEMBER 1, 1996* NOVEMBER 1, 1996*
MUTUAL SHARES TO DECEMBER 31, 1996 TO DECEMBER 31, 1996
- -----------------------------------------------------------------------------
NET ASSET VALUE
Beginning of Period $94.49 $94.49
---------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 1.03 0.97
Net Gain on Securities
(realized and unrealized) 5.43 5.41
----------------------------------------------------
Total from Investment
Operations 6.46 6.38
LESS DISTRIBUTIONS: --------------------------------------------------
Dividends (from net
investment income) 2.35 2.30
Distributions
(from capital gains) 5.79 5.79
----------------------------------------------------
Total Distributions 8.14 8.09
NET ASSET VALUE
End of Period $92.81 $92.78
----------------------------------------------------
TOTAL RETURN 6.91%+ 6.82%++
====================================================
RATIOS/SUPPLEMENTAL DATA:
Net Assets,
End of Period (millions) $35 $17
Ratio of Expenses
to Average Net Assets 1.09%** 1.71%**
Ratio of Net
Investment Income
to Average
Net Assets 2.44%** 1.69%**
Portfolio Turnover
Rate 58.35% 58.35%
Average Commission
Per Share $0.041 $0.041
CLASS I CLASS II
FOR THE PERIOD FOR THE PERIOD
NOVEMBER 1, 1996* NOVEMBER 1, 1996*
QUALIFIED TO DECEMBER 31, 1996 TO DECEMBER 31, 1996
- -------------------------------------------------------------------------
NET ASSET VALUE
Beginning of Period $32.80 $32.80
------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment
Income 0.32 0.26
Net Gain on Securities
(realized and
unrealized) 1.78 1.81
---------------------------------------------------
Total from Investment
Operations 2.10 2.07
Less Distributions: ---------------------------------------------------
Dividends
(from net
investment income) 0.81 0.79
Distributions
(from capital gains) 1.63 1.63
--------------------------------------------------------
Total Distributions 2.44 2.42
Net Asset Value --------------------------------------------------
End of Period $32.46 $32.45
-------------------------------------------------
Total Return 6.47%+ 6.37%++
=================================================
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End
of Period
(millions) $20 $10
Ratio of Expenses
to Average
Net Assets 1.13%** 1.78%**
Ratio of Net
Investment Income
to Average Net Assets 3.19%** 2.59%**
Portfolio Turnover
Rate 65.03% 65.03%
Average Commission
Per Share $0.036 $0.036
CLASS I CLASS II
FOR THE PERIOD FOR THE PERIOD
NOVEMBER 1, 1996* NOVEMBER 1, 1996*
BEACON TO DECEMBER 31, 1996 TO DECEMBER 31, 1996
- --------------------------------------------------------------------------
NET ASSET VALUE
Beginning of Period $39.64 $39.64
----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment
Income 0.48 0.38
Net Gain on Securities
(realized and
unrealized) 2.07 2.14
------------------------------------------------------
Total from Investment
Operations 2.55 2.52
Less Distributions: ------------------------------------------------------
Dividends
(from net
investment income) 1.00 0.97
Distributions
(from capital gains) 2.26 2.26
-------------------------------------------------------
Total Distributions 3.26 3.23
Net Asset Value -------------------------------------------------------
End of Period $38.93 $38.93
-------------------------------------------------------
TOTAL RETURn 6.51%+ 6.45%++
=======================================================
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of
Period (millions) $52 $16
Ratio of Expenses
to Average
Net Assets 1.03%** 1.75%**
Ratio of Net
Investment Income
to Average Net
Assets 1.33%** 0.84%**
Portfolio
Turnover Rate 66.87% 66.87%
Average
Commission
Per Share $0.047 $0.047
CLASS I CLASS II
FOR THE PERIOD FOR THE PERIOD
NOVEMBER 1, 1996* NOVEMBER 1, 1996*
DISCOVERY TO DECEMBER 31, 1996 TO DECEMBER 31, 1996
- ------------------------------------------------------------------------------
NET ASSET VALUE
Beginning of Period $17.66 $17.66
-----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.11 0.09
Net Gain on Securities
(realized and unrealized) 0.74 0.76
------------------------------------------------------
Total from Investment
Operations 0.85 0.85
Less Distributions: -----------------------------------------------------
Dividends
(from net
investment income) 0.29 0.27
Distributions
(from capital gains) 1.07 1.07
-------------------------------------------------
Total Distributions 1.36 1.34
NET ASSET VALUE --------------------------------------------------
End of Period $17.15 $17.17
--------------------------------------------------
TOTAL RETURN 4.85%+ 4.90%++
==========================================
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of
Period (millions) $30 $18
Ratio of Expenses
to Average Net Assets 1.38%** 2.00%**
Ratio of Net
Investment Income
to Average Net Assets 0.74%** 0.13%**
Portfolio Turnover Rate 80.18% 80.18%
Average Commission
Per Share $0.026 $0.026
CLASS I CLASS II
FOR THE PERIOD FOR THE PERIOD
NOVEMBER 1, 1996* NOVEMBER 1, 1996*
EUROPEAN TO DECEMBER 31, 1996 TO DECEMBER 31, 1996
- ---------------------------------------------------------------------------
NET ASSET VALUE
Beginning of Period $10.84 $10.84
-------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.03 0.02
Net Gain on Securities
(realized and
unrealized) 0.58 0.58
-------------------------------------------------------
Total from Investment
Operations 0.61 0.60
LESS DISTRIBUTIONS: -------------------------------------------------------
Dividends
(from net
investment income) 0.05 0.04
Distributions
(from capital gains) 0.02 0.02
-------------------------------------------------------
Total Distributions 0.07 0.06
NET ASSET VALUE -------------------------------------------------------
End of Period $11.38 $11.38
-------------------------------------------------------
TOTAL RETURN 5.61%+ 5.52%++
=============================================
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of
Period (millions) $9 $3
Ratio of Expenses
to Average Net Assets 1.32%** 1.94%**
Ratio of Net
Investment Income
to Average Net Assets 1.44%** 0.79%**
Portfolio Turnover Rate 36.75% 36.75%
Average Commission
Per Share $0.023 $0.023
+Total return does not reflect sales commissions. Not annualized for periods of
less than one year.
++Total return does not reflect sales commissions, or the Contingent Deferred
Sales Charges. Not annualized for periods of less than one year.
*Commencement of offering of sale.
**Annualized. After reduction of expenses by Franklin Mutual. Had Franklin
Mutual not taken such action, the ratios of operating expenses and net
investment income would have been:
OPERATING NET INVESTMENT
EXPENSES INCOME
- -----------------------------------------------------------------------
MUTUAL SHARES
Class I 1.18% 2.35%
Class II 1.80% 1.60%
QUALIFIED
Class I 1.28% 3.04%
Class II 1.93% 2.44%
BEACON
Class I 1.13% 1.23%
Class II 1.85% 0.74%
DISCOVERY
Class I 1.51% 0.61%
Class II 2.13% 0.00%
EUROPEAN
Class I 1.42% 1.34%
Class II 2.04% 0.69%
HOW DOES THE FUND INVEST ITS ASSETS?
The Fund's Investment Objective
The principal investment objective of Mutual Shares, Qualified, Beacon, European
and Financial Services is capital appreciation, which may occasionally be
short-term. A secondary objective of each is income. Discovery's investment
objective is long-term capital appreciation. These objectives are fundamental
policies of each Fund and may not be changed without shareholder approval. Of
course, there is no assurance that the Fund's objective will be achieved.
Types of Securities in which the Fund May Invest
European will normally invest at least 65% of its invested assets in the
securities of issuers organized under the laws of, or whose principal business
operations are in, or at least 50% of whose revenue is earned from, European
countries. European countries are given a broad definition which includes all of
the countries that are members of the European Union, United Kingdom,
Scandinavia, Eastern and Western Europe and those regions of Russia and the
former Soviet Union that are considered part of Europe. European may also invest
up to 35% of its invested assets in U.S. securities as well as in securities of
issuers from the Levant, Middle East and the rest of the world. European is
currently expected to invest primarily in Western Europe and Scandinavia but may
also include investments in other countries. European will normally invest in at
least 5 countries although it may invest all of its assets in a single country.
However, European may include in its portfolio securities of issuers from
outside of Europe and the U.S. For short-term purposes, European anticipates
that it generally will buy short-term securities denominated in U.S. dollars.
European will normally attempt to maintain at least 50% of the value of its
assets invested in securities of foreign corporations at the close of each
taxable year.
Financial Services will normally invest at least 65% of its invested assets in
the securities issued by companies in the financial services industry.
Accordingly, Financial Services will be concentrated in the financial services
industry which, for Fund purposes, is considered to be issuers which, on the
basis of information supplied to and analyzed by Franklin Mutual, are believed
to have at least 50% of their assets or revenues derived from the creation,
purchase and sale of financial instruments. Issuers in the financial services
industry include banks, savings and loan organizations, credit card companies,
brokerage firms, finance companies, sub-prime lending institutions, investment
advisers, investment companies and insurance companies. Many issuers within the
financial services industry are smaller capitalized companies and therefore may
be subject to certain risks not associated with larger companies. (See the
discussion in the next paragraph.) As the nature of the financial services
industry continues to evolve, additional types of issues may be included in the
Fund. Financial Services' investment policy of concentrating in the financial
services industry is fundamental and may not be changed without a vote of a
majority of the outstanding voting securities of Financial Services.
Discovery expects to invest approximately 50% of its assets in foreign companies
and to invest proportionately more of its assets in smaller capitalized
companies than the other series. Investing in smaller capitalized companies may
involve greater risks than investing in securities of larger companies. Smaller
companies often are not well known, often may trade at a discount and may not be
followed by established financial institutions.
Each Fund pursues its objectives primarily through investments in common stock
and preferred stock as well as debt securities and securities convertible into
common stock (including convertible preferred and convertible debt securities).
You should bear in mind that since every investment carries risk, the value of
the assets of each series fluctuates with changes in the market value of the
Fund's investments. Therefore, there is no assurance that the Fund's objectives
will be achieved. Except for the Fund's primary and secondary investment
objectives, these objectives are not fundamental and the Board reserves the
right to change them without shareholder approval, which may result in the Fund
having an investment objective different from that which an investor deemed
appropriate at the time of investment.
The general investment policy of each Fund is to invest in common stock,
preferred stock and corporate debt securities, which may be convertible into
common stock and the other investments described below which, in the opinion of
Franklin Mutual, are available at prices less than their intrinsic value. (See
"Non-U.S. Securities," "Repurchase Agreements and Loans of Securities" and
"Hedging.")
Franklin Mutual also has no pre-set limits as to the percentage of each Fund's
portfolio which may be invested in equity securities, debt securities (including
"junk bonds" as described below), or cash equivalents. Franklin Mutual's
opinions are based upon analysis and research, taking into account, among other
factors, the relationship of book value to market value of the securities, cash
flow, and multiples of earnings of comparable securities. These factors are not
applied formulaically, as Franklin Mutual examines each security separately;
Franklin Mutual has no general criteria as to asset size, earnings or industry
type which would make a security unsuitable for purchase by a Fund. Although the
Funds may invest in securities from any size issuer, Mutual Shares, Qualified
and Beacon will tend to invest in securities of issuers with market
capitalizations in excess of $1 billion due to the larger size of these series.
Each Fund may invest in securities that are traded on U.S. or foreign exchanges,
the National Association of Securities Dealers Automated Quotations ("NASDAQ")
national market system or in the over-the-counter ("OTC") market. With the
exception of Financial Services, each Fund may invest in any industry sector
although no series will be concentrated in any one industry.
Debt securities in which the Fund invests (such as corporate and U.S. government
bonds, debentures and notes) may or may not be rated by rating agencies such as
Moody's or S&P, and, if rated, such rating may range from the very highest to
the very lowest, currently C for Moody's and D for S&P. Securities rated D are
in default as to the payments of principal and interest. Medium and lower rated
debt securities in which each series expects to invest are commonly known as
"junk bonds." The Fund may be subject to investment risks as to these unrated or
lower rated securities that are greater in some respects than the investment
risks incurred by a fund which invests only in securities rated in higher
categories. In addition, the secondary market for such securities may be less
liquid and market quotations less readily available than higher rated
securities, thereby increasing the degree to which judgment plays a role in
valuing such securities. The general policy of each Fund is to invest in debt
instruments, including junk bonds, for the same reasons underlying investments
in equities, i.e., whenever such instruments are available, in Franklin Mutual's
opinion, at prices less than their intrinsic value. Consequently, Franklin
Mutual's own analysis of a debt instrument exercises a greater influence over
the investment decision than the stated coupon rate or credit rating. The Funds
have historically invested in debt instruments issued by reorganizing or
restructuring companies, or companies which recently emerged from, or are
facing, the prospect of a financial restructuring. It is under these
circumstances, which usually involve unrated or low rated securities that are
often in, or about to, default that Franklin Mutual identifies securities which
are sometimes available at prices which it believes are less than their
intrinsic value. Although such debt securities may pose a greater risk than
higher rated debt securities of loss of principal, the debt securities of
reorganizing or restructuring companies typically rank senior to the equity
securities of such companies and offer the potential for certain investment
opportunities. See "How does the Fund Invest its Assets? - Medium and Lower
Rated Corporate Debt Securities" in the SAI.
Each Fund also seeks to invest in the securities of domestic and foreign
companies involved in mergers, consolidations, liquidations and reorganizations
or as to which there exist tender or exchange offers, and may participate in
such transactions. Although there are no restrictions limiting the extent to
which a Fund may invest in such transactions, no Fund presently anticipates
investing more than 50% of its portfolio in such investments. There can be no
assurance that any merger, consolidation, liquidation, reorganization or tender
or exchange offer proposed at the time a Fund makes its investment will be
consummated or will be consummated on the terms and within the time period
contemplated by Franklin Mutual.
Each Fund from time to time may also purchase indebtedness and participations
therein, both secured and unsecured, of debtor companies in reorganization or
financial restructuring ("Indebtedness"). Such Indebtedness may be in the form
of loans, notes, bonds or debentures. Participations normally are made available
only on a nonrecourse basis by financial institutions, such as banks or
insurance companies, or by governmental institutions, such as the Resolution
Trust Corporation, the Federal Deposit Insurance Corporation or the Pension
Benefit Guaranty Corporation, or may include supranational organizations such as
the World Bank. When a Fund purchases a participation interest, it assumes the
credit risk associated with the bank or other financial intermediary as well as
the credit risk associated with the issuer of any underlying debt instrument.
Each Fund may also purchase trade and other claims against, and other unsecured
obligations of, such debtor companies, which generally represent money due a
supplier of goods or services to such company. Some corporate debt securities,
including Indebtedness, purchased by the Fund may have very long maturities. The
length of time remaining until maturity is one factor Franklin Mutual considers
in purchasing a particular Indebtedness. The purchase of Indebtedness of a
troubled company always involves a risk as to the creditworthiness of the issuer
and the possibility that the investment may be lost. Franklin Mutual believes
that the difference between perceived risk and actual risk creates the
opportunity for profit which can be realized through proper analysis. There are
no established markets for some of these Indebtedness and thus they are less
liquid than more heavily traded securities. Indebtedness which represents
indebtedness of the debtor company to a bank are not securities of the banks
issuing or selling them. The Funds purchase loans from national and state
chartered banks as well as foreign ones. The Funds normally invest in senior
Indebtedness of the debtor companies, although on occasion subordinated
indebtedness may also be acquired.
Each Fund does not invest more than 15% of its portfolio in assets which are
illiquid, including Indebtedness which are not readily marketable. Other
securities which may be considered to be illiquid but in which the Fund may
invest include restricted securities not registered under the Securities Act of
1933, OTC options and securities that are otherwise considered illiquid as a
result of market or other factors.
Each Fund may invest in securities eligible for resale under Rule 144A of the
Securities Act of 1933 ("144A securities"). The Board has adopted procedures in
accordance with Rule 144A whereby specific 144A securities held in the Fund may
be deemed to be liquid. Nevertheless, due to changing market or other factors
144A securities may be subject to a greater possibility of becoming illiquid
than registered securities. Fund purchases of 144A securities may increase the
level of illiquidity and institutional buyers may become disinterested in
purchasing such securities.
Each Fund may also invest in cash equivalents such as Treasury bills and high
quality commercial paper. The Funds generally purchase securities for investment
purposes and not for the purpose of influencing or controlling management of the
issuer. However, in certain circumstances when Franklin Mutual perceives that
one or more of the Funds may benefit, the Fund may itself seek to influence or
control management or may invest in other entities that purchase securities for
the purpose of influencing or controlling management, such as investing in a
potential takeover or leveraged buyout or investing in other entities engaged in
such activities. The Funds may also invest in distressed mortgage obligations
and other debt secured by real property and may sell short securities it does
not own up to 5% of its assets. Short sales have risks of loss if the price of
the security sold short increases after the sale, but the Fund can profit if the
price decreases. The Funds may also sell securities "short against the box"
without limit. See "How does the Fund Invest its Assets? - Short Sales" in the
SAI for more discussion of these practices.
Each Fund may invest in common stock, preferred stock and corporate debt
securities in such proportions as Franklin Mutual deems advisable. Franklin
Mutual typically keeps a portion of the assets of each Fund invested in
short-term debt securities and preferred stocks although it may choose not to do
so when circumstances dictate. In addition, each Fund may invest from time to
time in other investment company securities, subject to applicable law which
restricts such investments. Investors should recognize that a Fund's purchase of
the securities of such investment companies results in layering of expenses such
that investors indirectly bear a proportionate share of the expenses of such
investment companies, including operating costs, and investment advisory and
administrative fees.
Special Considerations Relating to Financial Services
Under regulations of the SEC, a Fund, including Financial Services, may not
invest more than 5% of its total assets in the securities of any company that
derives more than 15% of its revenues from securities-related activities, which
means activities as a broker, dealer, underwriter or investment adviser.
Further, immediately after a purchase of equity securities of such an issuer,
such Fund may not own more than 5% of the outstanding securities of any class of
equity securities of such issuer, and immediately after a purchase of debt
securities of such an issuer, such Fund may not own more than 10% of the
outstanding principal amount of such issuer's debt securities.
As stated above, Financial Services concentrates its investments in the
financial service industry. Its investments and performance, accordingly, will
be affected by general market and economic conditions as well as other risk
factors particular to the financial services industry. Financial services
companies are subject to extensive government regulation which may limit both
the amount and types of loans and other financial commitments they can make, and
the interest rates and fees they can charge. Profitability is largely dependent
on the availability and cost of capital funds, and can fluctuate significantly
when interest rates change. Credit losses resulting from financial difficulties
of borrowers can negatively impact the industry. Insurance companies may be
subject to severe price competition, claims activity, marketing competition and
general economic conditions. Particular insurance lines will also be influenced
by specific matters. Property and casualty insurer profits may be affected by
certain weather catastrophes and other disasters. Life and health insurer
profits may be affected by mortality risks and morbidity rates. Individual
insurance companies may be subject to material risks including reserve
inadequacy and the inability to collect from reinsurance carriers.
Congress is currently considering legislation that would reduce the separation
between commercial and investment banking businesses. If enacted this could
significantly impact the industry and Financial Services. While banks may be
able to expand the services which they offer if legislation broadening bank
powers is enacted, expanded powers could expose banks to well-established
competitors, particularly as the historical distinctions between banks and other
financial institutions erode. In addition, the financial services industry is an
evolving and competitive industry that is undergoing significant change with
various consolidations and the continual development of new products, structures
and a regulatory framework that is anticipated to be subject to further change.
Non-U.S. Securities
The Funds may purchase securities of non-U.S. issuers and Discovery expects that
approximately 50% of its assets may be so invested. European will normally
invest at least 65% of its invested assets in European countries (as defined
above). The remaining Funds expect to invest a lesser percentage in securities
of non-U.S. issuers than Discovery, with Beacon investing the next largest
percentage, followed by Qualified, Financial Services and finally with Mutual
Shares holding the smallest percentage of these securities. The Funds may
purchase securities denominated in any currency and generally expect currency
risks will be hedged to the extent that hedging is available. Investments in
securities of non-U.S. issuers involve certain risks not ordinarily associated
with investments in securities of domestic issuers. Such risks include
fluctuations in foreign exchange rates, volatile political and economic
developments, and the possible imposition of exchange controls or other foreign
governmental laws or restrictions. Since each Fund may invest in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates will affect the value of securities in the
portfolio and the unrealized appreciation or depreciation of investments,
although Franklin Mutual generally attempts to reduce such risks through hedging
transactions. In addition, with respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
There may be less publicly available information about a foreign company than
about a U.S. company. Foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to or as
uniform as those of U.S. companies. Non-U.S. securities markets, while growing
in volume, have, for the most part, substantially less volume than U.S. markets,
and securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable U.S. companies. Transaction costs on
non-U.S. securities markets are generally higher than in the U.S. There is
generally less government supervision and regulation of exchanges, brokers and
issuers than there is in the U.S. Each series' foreign investments may include
both voting and non voting securities, sovereign debt and participations in
foreign government deals. The Fund might have greater difficulty taking
appropriate legal action with respect to foreign investments in non-U.S. courts
than with respect to domestic issuers in U.S. courts.
Each Fund may invest in securities commonly known as Depositary Receipts of
non-U.S. issuers which have certain risks, including trading for a lower price,
having less liquidity than their underlying securities and risks relating to the
issuing bank or trust company. Depositary Receipts can be sponsored by the
issuer of the underlying securities or the issuing bank or trust company or
unsponsored. Holders of unsponsored Depositary Receipts have a greater risk that
receipt of corporate information and proxy disclosure will be untimely,
information may be incomplete and costs may be higher.
Dividend and interest income from non-U.S. securities will generally be subject
to withholding taxes by the country in which the issuer is located, which may
not be recoverable, either directly or indirectly, as a foreign tax credit or
deduction by the Fund or its shareholders. Please see the SAI for more details.
Repurchase Agreements and Loans of Securities
Each Fund may invest up to 10% of its assets in repurchase agreements, including
tri-party repurchase agreements. Each Fund may also loan its portfolio
securities in order to realize additional income. Repurchase and tri-party
agreements are generally agreements under which the Fund obtains money market
instruments subject to resale to the seller at an agreed upon price and date.
Any loans of portfolio securities which the Fund may make must be fully
collateralized at all times by securities with a value at least equal to 100% of
the current market value of the loaned securities. The Funds presently do not
anticipate loaning more than 5% of their respective portfolio securities. There
are certain risks associated with such transactions which are described in the
SAI.
Hedging and Income Transactions
The Funds may utilize various investment strategies as described below to hedge
various market risks (such as risks related to fluctuations in interest rates,
currency exchange rates, and broad or specific equity market movements), to
manage the effective maturity or duration of fixed-income securities or for
gain. Such strategies are generally accepted by modern portfolio managers and
are regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur and the Fund will describe
any such techniques in its registration statement before using them. In the
course of pursuing these investment strategies, the Funds may purchase and sell
exchange-listed and OTC put and call options on securities, equity and
fixed-income indices and other financial instruments, purchase and sell
financial futures contracts and options thereon, and enter into various currency
transactions such as currency forward contracts, currency futures contracts,
currency swaps or options on currencies or currency futures (collectively, all
of the above are called "Hedging Transactions").
Hedging Transactions may be used to attempt to protect against possible changes
in the market value of securities held in or to be purchased for a Fund's
portfolio resulting from changes in securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, or to establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities. Any or all of these
investment techniques may be used at any time and there is no particular
strategy that dictates the use of one technique rather than another, as use of
any Hedging Transaction is a function of numerous variables including market
conditions. The ability of a Fund to utilize these Hedging Transactions
successfully will depend on Franklin Mutual's ability to predict pertinent
market movements, which cannot be assured. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. Each Fund generally hedges the foreign currency risk associated
with its investments in foreign securities. European expects to hedge for gain
on market risks including broad movements in markets in addition to the specific
currency risk of its portfolio securities. No more than 5% of the Fund's assets
will be at risk in such types of instruments entered into for non-hedging
purposes. Hedging Transactions involving financial futures and options thereon
will be purchased, sold or entered into generally for bona fide hedging, risk
management or portfolio management purposes.
Hedging Transactions, whether entered into as a hedge or for gain, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent Franklin Mutual's view as to certain
market movements is incorrect, the risk that the use of such Hedging
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to a Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Fund can realize on its
investments, increase the cost of holding a security and reduce the returns on
securities or cause a series to hold a security it might otherwise sell. The use
of currency transactions can result in a Fund incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain OTC options
may have no markets. As a result, in certain markets, a Fund might not be able
to close out a transaction without incurring substantial losses, if it is able
to close out a transaction at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Hedging Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Hedging
Transactions had not been utilized. The cost of entering into Hedging
Transactions may also reduce the Fund's total return to investors.
Fundamental Restrictions
Each Fund has adopted a number of fundamental investment restrictions, which may
not be changed for a particular Fund without the approval of that Fund's
shareholders. These restrictions are set forth in the SAI.
Among other things, each Fund may not purchase the securities of any one issuer,
other than the U.S. government or any of its agencies or instrumentalities, if
immediately after such purchase more than 5% of the value of its total assets
would be invested in such issuer, or such Fund would own more than 10% of the
outstanding voting securities of such issuer, except that up to 25% of the value
of such series' total assets may be invested without regard to such 5% and 10%
limitations; make loans, except to the extent the purchase of debt obligations
of any type are considered loans and except that the Fund may lend portfolio
securities to qualified institutional investors in compliance with requirements
established from time to time by the SEC and the securities exchanges on which
such securities are traded; for all Funds except for Financial Services, invest
more than 25% of the value of its assets in a particular industry (except that
U.S. government securities are not considered an industry); or issue securities
senior to its stock or borrow money or utilize leverage in excess of the maximum
permitted by the Investment Company Act of 1940, which is currently 331/3% of
total assets (plus 5% for emergency or other short-term purposes). Such
borrowing has special risks. The Fund will not engage in investment transactions
when borrowing exceeds 5% of its assets.
While Mutual Shares, Qualified, Beacon, Discovery and European have identical
basic investment restrictions, and Mutual Shares, Qualified, Beacon, Financial
Services, and European have identical investment objectives, Franklin Mutual
seeks to retain certain historical differences among the Funds on an informal
basis. Mutual Shares, Qualified and Beacon have generally invested in larger and
medium sized companies with large share trading volume. Discovery, in comparison
to the other Funds, has tended to invest proportionately more of its portfolio
in smaller companies (see the discussion of investment policies above) and in
foreign companies (see "Non-U.S. Securities"). Qualified was originally intended
for purchase by pension plans, profit sharing plans and other nontaxpaying
entities, and the portfolio was intended to have greater flexibility due to
reduced concerns about the tax effects on shareholders. Depending on market
conditions, and any future changes in tax laws, Franklin Mutual expects that it
will purchase securities for Qualified which satisfy such a goal, although
currently Qualified operates in the same fashion as Mutual Shares and Beacon.
Financial Services and European will utilize the same investment philosophy but
will apply it in the context of investing in the financial services industry and
European securities, respectively. Allocation of investments among the Funds
will also depend upon, among other things, the amount of cash in, and relative
size of each Fund's portfolio. In addition, the factors outlined above are not
mutually exclusive and a particular security may be owned by more than one of
the Funds.
Other Policies and Restrictions. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Restrictions and Limitations" in
the SAI.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
WHO MANAGES THE FUND?
The Board. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
Investment Manager. Franklin Mutual manages the Fund's assets and makes its
investment decisions. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries. Charles B.
Johnson and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
Together, Franklin Mutual and its affiliates manage over $207 billion in assets.
Please see "Investment Management and Other Services" and "Miscellaneous
Information" in the SAI for information on securities transactions and a summary
of the Fund's Code of Ethics.
Management Team. The team responsible for the day-to-day management of the
Fund's portfolio is: Michael F. Price since 1975, Jeffrey A. Altman since 1988,
Robert L. Friedman since 1988, Raymond Garea since 1991, Peter A. Langerman
since 1986 and Lawrence N. Sondike since 1984.
Michael F. Price
Chief Executive Officer and President of Franklin Mutual
Mr. Price has a Bachelor of Arts degree in Business Administration from the
University of Oklahoma. Prior to November 1996, Mr. Price was President and
Chairman of Heine, the former investment manager for Franklin Mutual Series Fund
Inc. He became Chief Executive Officer of Franklin Mutual in November 1996. He
is
Chairman of the Board and President of Franklin Mutual Series Fund Inc.
Jeffrey A. Altman
Senior Vice President of Franklin Mutual
Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
November 1996, Mr. Altman was employed as a Research Analyst and Trader for
Heine, the former investment manager for Franklin Mutual Series Fund Inc. He
joined Franklin Mutual in November 1996. He is a Vice President of Franklin
Mutual Series Fund Inc.
Robert L. Friedman
Senior Vice President of Franklin Mutual
Mr. Friedman has a Bachelor of Arts degree in Humanities from Johns Hopkins
University and a Masters in Business Administration from the Wharton School,
University of Pennsylvania. Prior to November 1996, Mr. Friedman was a Research
Analyst for Heine, the former investment manager for Franklin Mutual Series Fund
Inc. He joined Franklin Mutual in November 1996. He is a Vice President of
Franklin Mutual Series Fund Inc.
Raymond Garea
Senior Vice President of Franklin Mutual
Mr. Garea has a Bachelor of Science degree in Engineering from Case Institute of
Technology and a Masters in Business Administration from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine, the
former investment manager for Franklin Mutual Series Fund Inc. He joined
Franklin Mutual in November 1996. He is a Vice President of Franklin Mutual
Series Fund Inc.
Peter A. Langerman
Chief Operating Officer and Senior Vice President of Franklin Mutual
Mr. Langerman has a Bachelor of Arts degree from Yale University, a Masters in
Science from New York University Graduate School of Business and a Juris Doctor
from Stanford University Law School. Prior to November 1996, he was a Research
Analyst for Heine, the former investment manager for Franklin Mutual Series Fund
Inc. He joined Franklin Mutual in November 1996. Mr. Langerman is a director and
Executive Vice President of Franklin Mutual Series Fund Inc.
Lawrence N. Sondike
Senior Vice President of Franklin Mutual
Mr. Sondike has a Bachelor of Arts degree from Cornell University and a Masters
in Business Administration from New York University Graduate School of Business.
Prior to November 1996, he was a Research Analyst for Heine, the former
investment manager for Franklin Mutual Series Fund Inc. He joined Franklin
Mutual in November 1996. He is a Vice President of Franklin Mutual Series Fund
Inc.
Management Fees. During the fiscal year ended December 31, 1996, management
fees, before any advance waiver, totaled 0.60%, 0.60%, 0.60%, 0.80% and 0.80% of
the average daily net assets of Mutual Shares, Qualified, Beacon, Discovery, and
European, respectively, and total operating expenses were: Mutual Shares, Class
I, 1.18%, Class II, 1.80%; Qualified, Class I, 1.28%, Class II, 1.93%; Beacon,
Class I, 1.13%, Class II, 1.85%; Discovery, Class I, 1.51%, Class II, 2.13%; and
European, Class I, 1.42%, Class II, 2.04%. Under an agreement by Franklin Mutual
to limit its fees, Mutual Shares, Qualified, Beacon, Discovery, and European
paid management fees totaling 0.58%, 0.57%, 0.58%, 0.77% and 0.74%,
respectively, and total operating expenses were: Mutual Shares, Class I, 1.09%,
Class II, 1.71%; Qualified, Class I, 1.13%, Class II, 1.78%; Beacon, Class I,
1.03%, Class II, 1.75%; Discovery, Class I, 1.38%, Class II, 2.00%; and
European, Class I, 1.32%, Class II, 1.94%. Franklin Mutual may end this
arrangement at any time upon notice to the Board.
The Fund pays its own operating expenses. These expenses include Franklin
Mutual's management fees; taxes, if any; custodian, legal and auditing fees; the
fees and expenses of Board members who are not members of, affiliated with, or
interested persons of Franklin Mutual; fees of any personnel not affiliated with
Franklin Mutual; insurance premiums; trade association dues; expenses of
obtaining quotations for calculating the Fund's Net Asset Value; and printing
and other expenses that are not expressly assumed by Franklin Mutual. The Board
has determined the method and procedure for allocating expenses between the
series and the classes of Mutual Series and reserves the right to modify such
method and procedures.
Under their management agreements, the Funds pay Franklin Mutual a management
fee equal to an annual rate of 0.60% of the average daily net assets of Mutual
Shares, Qualified and Beacon and 0.80% of the average daily net assets of
Discovery, European and Financial Services. The fee is computed at the close of
business on the last business day of each month.
Portfolio Transactions. Franklin Mutual seeks to obtain the best execution on
all transactions. If Franklin Mutual believes more than one broker or dealer can
provide the best execution, it may consider research and related services and
the sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. To the extent that
any of the Funds owns more than 5% of the securities of a broker-dealer, that
broker-dealer may be considered to be an affiliated person of such Fund. If such
Fund places any portfolio transactions through that broker-dealer, such fund
would be required to comply with certain rules of the SEC relating to the
payment of brokerage commissions to affiliated broker-dealer. Please see "How
does the Fund Buy Securities for its Portfolio?" in the SAI for more
information.
Administrative Services. FT Services provides certain administrative services
and facilities for the Fund. Under its administration agreement, the Fund pays
FT Services a monthly administration fee equal to an annual rate of 0.15% of the
Fund's average daily net assets up to $200 million, 0.135% of average daily net
assets over $200 million up to $700 million, 0.10% of average daily net assets
over $700 million up to $1.2 billion, and 0.075% of average daily net assets
over $1.2 billion. During the two-month period ended December 31, 1996,
annualized administration fees totaling 0.08% of the average daily net assets of
each series were paid to FT Services. These fees are included in the amount of
total expenses shown above. Please see "Investment Management and Other
Services" in the SAI for more information.
The Rule 12b-1 Plans
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
Fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the Fund under the Class I plan may not exceed 0.35% per year of
Class I's average daily net assets. Of this amount, the Fund may reimburse up to
0.25% to Distributors or others and may reimburse an additional 0.10% to
Distributors for distribution expenses. All distribution expenses over this
amount will be borne by those who have incurred them. During the first year
after certain Class I purchases made without a sales charge, Distributors may
keep the Rule 12b-1 fees associated with the purchase.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. The more
commonly used measure of performance is total return. Performance figures are
usually calculated using the maximum sales charges, but certain figures may not
include sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
Each series is treated as a separate entity for federal income tax purposes. The
Fund has elected and intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will generally not be liable for federal
income or excise taxes.
You will generally have to pay Federal income taxes on the dividends and
distributions you receive from a series and on gains realized upon redemption of
your shares.
Following each calendar year, you will receive information for tax purposes on
the dividends and capital gain distributions received during the previous year.
The Fund may make distributions from net investment income or capital gain and
may also make distributions in kind. Dividends from net investment income and
any net short-term capital gain will be taxable as ordinary income whether
received in cash or in kind. Any distributions designated as realized net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) will be taxable as long-term capital gain, regardless of the
holding period of your shares of such series. All or a portion of any dividends
paid by the Fund to corporate shareholders may, under certain circumstances, be
eligible for the dividends received deduction. Credit for foreign taxes paid by
the Fund have generally not been available to shareholders.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and generally be subject to tax.
The IRS requires backup withholding of federal income tax of 31% of the gross
amount of dividends, capital gain distributions, and redemption proceeds paid or
credited to shareholders who do not furnish a valid social security or taxpayer
identification number. If you are using the Fund as a medium for tax qualified
retirement plans, you may be subject to a 20% mandatory withholding upon
withdrawal under certain circumstances.
Redemptions of shares of a series will be taxable transactions for federal
income tax purposes. Generally, gain or loss will be recognized in an amount
equal to the difference between your basis in your shares and the amount
received. Assuming that such shares are held as a capital asset, such gain or
loss will be a capital gain or loss and will be a long-term capital gain or loss
if you have held your shares for a period of more than one year. If you redeem
shares of any series at a loss and make an additional investment in the same
series 30 days before or after your redemption, the loss may be disallowed under
the wash sale rules.
Income received by each series from sources outside the U.S. may be subject to
withholding and other foreign taxes. As long as more than 50% of the value of a
particular series' assets at the close of any taxable year consists of
securities of foreign corporations, as is anticipated for European, such series
intends to elect to treat any foreign income paid by the series as if it were
paid by shareholders. Accordingly, the amount of foreign income taxes paid by
European will be included in the income of its shareholders and the European
shareholders will be entitled to credit their portions of those amounts against
their U.S. federal income taxes, if any, or to deduct such portions from their
taxable income. No deduction for foreign taxes may be claimed by a shareholder
who does not itemize deductions. In addition, certain individual shareholders
may be subject to rules that limit or reduce their ability to deduct fully their
pro rata share of foreign taxes. Shortly after any year for which it makes such
an election, European will report to its shareholders, in writing, the amount
per share of any foreign tax that must be included in each shareholder's gross
income and the amount that will be available for deduction or credit.
In general, a credit for foreign taxes may not exceed the U.S. shareholder's
U.S. federal income tax attributable to its foreign source taxable income. If
European elects to treat foreign taxes paid by the series as paid by the
shareholders as described in the preceding paragraph, the source of European's
income will flow through to its shareholders for purposes of calculating the
limitation on foreign tax credits. Dividends and interest received by the Fund
in respect of non-U.S. securities will give rise to foreign source income to
shareholders. Please consult your tax advisors with respect to the federal,
state, local or foreign tax consequences of the pass-through of foreign tax
credits described above.
The foregoing summary of federal income tax consequences is included herein for
general informational purposes only. It does not address the tax consequences to
all investors and does not address the tax consequences under state, local,
foreign and other tax laws. Please consult your own tax advisors with respect to
the tax consequences of an investment in the Fund.
HOW IS THE FUND ORGANIZED?
Each Fund is a diversified series of Mutual Series, an open-end management
investment company, commonly called a mutual fund. Mutual Series was organized
as a Maryland corporation on November 12, 1987, and is registered with the SEC.
Each Fund, with the exception of Financial Services, which was not effective
until August 19, 1997, began offering three classes of shares on November 1,
1996: Mutual Shares Fund - Class Z, Mutual Shares Fund - Class I, Mutual Shares
Fund - Class II, Mutual Qualified Fund - Class Z, Mutual Qualified Fund - Class
I, Mutual Qualified Fund - Class II, Mutual Beacon Fund - Class Z, Mutual Beacon
Fund - Class I, Mutual Beacon Fund - Class II, Mutual European Fund - Class Z,
Mutual European Fund Class I, Mutual European Fund - Class II, Mutual Discovery
Fund - Class Z, Mutual Discovery Fund - Class I, and Mutual Discovery Fund -
Class II. All shares outstanding before the offering of Class I and Class II
shares on November 1, 1996, are considered Class Z shares. Financial Services
was created initially with, and offers, three classes of shares: Class I, Class
II, and Class Z. Additional series and classes of shares may be offered in the
future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of Mutual Series for matters that affect Mutual Series as a
whole.
Mutual Series has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the Board.
If this happens, holders of the remaining shares voting will not be able to
elect anyone to the Board.
Mutual Series does not intend to hold annual shareholder meetings. Mutual Series
or a Fund may hold special meetings, however, for matters requiring shareholder
approval. A meeting may also be called by the Board in its discretion or by
shareholders holding at least 10% of the outstanding shares. In certain
circumstances, we are required to help you communicate with other shareholders
about the removal of a Board member.
As of July 22, 1997, Michael F. Price owned of record and beneficially more than
25% of the outstanding shares of European.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
Opening Your Account
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. PLEASE INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT
SPECIFY A CLASS, YOUR PURCHASE WILL BE AUTOMATICALLY INVESTED IN CLASS I SHARES.
CURRENTLY, THE FUND DOES NOT ALLOW INVESTMENTS BY MARKET TIMERS.
MINIMUM
INVESTMENTS*
- ---------------------------------------------------------------
To Open Your Account $1,000**
To Add to Your Account $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares.
**$500 for accounts opened pursuant to an automatic investment plan.
Deciding Which Class to Buy
You should consider a number of factors when deciding which class of shares to
buy. IF YOU PLAN TO BUY $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO
BUY CLASS I SHARES WITHOUT A SALES CHARGE, YOU MAY NOT BUY CLASS II SHARES.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton
Funds; and
o you plan to sell a substantial number of your shares within
approximately six years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
Purchase Price of Fund Shares
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE
AS A PERCENTAGE OF AMOUNT PAID
------------------ TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- -------------------------------------------------------------------------
CLASS I
Under $100,000 4.50% 4.71% 4.00%
$100,000 but less than
$250,000 3.75% 3.90% 3.25%
$250,000 but less than
$500,000 2.75% 2.83% 2.50%
$500,000 but less than
$1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares?
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
Sales Charge Reductions and Waivers
IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR WAIVER
CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH EACH
PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't include this
statement, we cannot guarantee that you will receive the sales charge
reduction or waiver.
Cumulative Quantity Discounts - Class I Only. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts. Companies with one or more retirement plans may add together the total
plan assets invested in the Franklin Templeton Funds to determine the sales
charge that applies.
Letter of Intent - Class I Only. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
Group Purchases - Class I Only. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
Sales Charge Waivers. The Fund's front-end sales charge and Contingent Deferred
Sales Charge do not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges do not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a real estate investment trust (REIT) sponsored or advised by Franklin
Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, the Templeton Variable Annuity Fund,
the Templeton Variable Products Series Fund, or the Franklin Governmet
Securities Trust. You should contact your tax advisor for information on
any tax consequences that may apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The
Contingent Deferred Sales Charge will not be waived if the shares were
subject to a Contingent Deferred Sales Charge when sold. We will credit
your account in shares, at the current value, in proportion to the amount
reinvested for any Contingent Deferred Sales Charge paid in connection
with the earlier redemption, but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD,
you may reinvest them as described above. The proceeds must be reinvested
within 365 days from the date the CD matures, including any rollover.
The Fund's sales charges also do not apply to Class I purchases by:
5. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
6. Group annuity separate accounts offered to retirement plans
7. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
8. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
9. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs. Distributors may, at its
discretion, reduce the required minimum initial investment amount to $500
for investors in this category.
10. Registered Securities Dealers and their affiliates, for their investment
accounts only
11. Current employees of Securities Dealers and their affiliates and thei
family members, as allowed by the internal policies of their employer
12. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
13. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
14. Accounts managed by the Franklin Templeton Group
15. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
Retirement Plans. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, or (ii) have plan assets of $1 million or more, or (iii)
agree to invest at least $500,000 in the Franklin Templeton Funds over a 13
month period may buy Class I shares without a front-end sales charge. Retirement
plans that are not Qualified Retirement Plans or SEPs, such as 403(b) or 457
plans, must also meet the requirements described under "Group Purchases - Class
I Only" above. For retirement plan accounts opened on or after May 1, 1997, a
Contingent Deferred Sales Charge may apply if the account is closed within 365
days of the retirement plan account's initial purchase in the Franklin Templeton
Funds. Please see "How Do I Sell Shares? - Contingent Deferred Sales Charge" for
details.
How Do I Buy Shares in Connection with Retirement Plans?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
Other Payments to Securities Dealers
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 1% of the amount invested.
3. Class I purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers -
Retirement Plans" above - up to 1% of the amount invested. For retirement
plan accounts opened on or after May 1, 1997, a Contingent Deferred Sales
Charge will not apply to the account if the Securities Dealer chooses to
receive a payment of 0.25% or less or if no payment is made.
4. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
5. Class I purchases by Chilean retirement plans - up to 1% of the amount
invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1, 2 or 5 above or a payment of up to 1% for investments
described in paragraph 3 will be eligible to receive the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums. Some Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you want to exchange
- -------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by phone to apply
to your account, please let us know.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- -----------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
Contingent Deferred Sales Charge - Class I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, we will first exchange any shares
in your account that are not subject to the charge. If there are not enough of
these to meet your exchange request, we will exchange shares subject to the
charge in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
Contingent Deferred Sales Charge - Class II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
Contingent Deferred Sales Charge, such as shares from the reinvestment of
dividends and capital gains ("free shares"), $2,000 in shares that are no longer
subject to a Contingent Deferred Sales Charge because you have held them for
longer than 18 months ("matured shares"), and $3,000 in shares that are still
subject to a Contingent Deferred Sales Charge ("CDSC liable shares"). If you
exchange $3,000 into a new fund, $500 will be exchanged from free shares, $1,000
from matured shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. The tax consequences of a sale or exchange are determined by the
Code and not by the method used by the Fund to transfer shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature
for all transactions. Please notify us in writing if you do not want
this option to be available on your account. Additional procedures may
apply. Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares
as described above. Restrictions may apply to other types of retirement
plans. Please contact Retirement Plan Services for information on
exchanges within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- -------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all account owners. If you
would like your redemption proceeds wired to a bank account,
your instructions should include:
o The name, address and telephone number of the bank where you want
the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the name of
the corresponding bank and the account number
2. Include any outstanding share certificates for the shares you are
selling.
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may have
other requirements.
- -------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your redemption
proceeds wired to a bank account, other than an escrow account,
you must first sign up for the wire feature. To sign up, send us
written instructions, with a signature guarantee. To avoid any
delay in processing, the instructions should include the items
listed in "By Mail" above. Telephone phone requests will be
accepted:
o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you want
to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement plan
account o Unless the address on your account was changed by phone
within the last 15 days
If you do not want the ability to redeem by phone to apply to your
account, please let us know.
- -------------------------------------------------------------------------
THROUGH
YOUR DEALER Call your investment representative
- -------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
591/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
Contingent Deferred Sales Charge
For Class I purchases, if you did not pay a front-end sales charge because you
invested $1 million or more or agreed to invest $1 million or more under a
Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell all
or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make without
a sales charge may also be subject to a Contingent Deferred Sales Charge if they
are sold within the Contingency Period. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares within the Contingency
Period. The charge is 1% of the value of the shares sold or the Net Asset Value
at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan account is
closed within 365 days of the account's initial purchase in the Franklin
Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNt, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1,
1997, or (ii) the Securities Dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, as described under "How Do I
Buy Shares? - Other Payments to Securities Dealers"
o Redemptions by the Fund when an account falls below the minimum
required account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan at a rate of up to 1%
a month of an account's Net Asset Value. For example, if you maintain
an annual balance of $1 million in Class I shares, you can redeem up
to $120,000 annually through a systematic withdrawal plan free of
charge. Likewise, if you maintain an annual balance of $10,000 in
Class II shares, $1,200 may be redeemed annually free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee
benefit plans serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semi-annually. The
distributions are frequently declared at mid-year and during late December.
Capital gains, if any, may be distributed twice a year, usually once in December
and once at mid-year.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of Class I and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, dividend distributions,
or both. If you own Class II shares, you may also reinvest your distributions in
Class I shares of the Fund. This is a convenient way to accumulate additional
shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. Receive distributions in cash - You may receive capital gain distributions,
dividend distributions, or both in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Trust Company retirement plans, special forms are
required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
Share Price
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share of the class you wish to purchase, plus any applicable sales charges. When
you sell shares, you receive the Net Asset Value per share minus any applicable
Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
How and When Shares are Priced
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the scheduled close of the NYSE,
generally 4:00 p.m. Eastern time. You can find the prior day's closing Net Asset
Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the
evening if preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A
NOTARIZED SIGNATURE IS NOT SUFFICIENT.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by phone, we will not be liable for any loss.
Trust Company Retirement Plan Accounts. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
Account Registrations and Required Documents
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless ALL owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- ---------------------------------------------------------------------------
CORPORATION Corporate Resolution
- ------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- -------------------------------------------------------------------------
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Important Information If You Have an Investment Representative If there is a
Securities Dealer or other representative of record on your account, we are
authorized: (1) to provide confirmations, account statements and other
information about your account directly to your dealer and/or representative;
and (2) to accept telephone and electronic instructions directly from your
dealer or representative, including instructions to exchange or redeem your
shares. Electronic instructions may be processed through established electronic
trading systems and programs used by the Fund. Telephone instructions directly
from your representative will be accepted unless you have let us know that you
do not want telephone privileges to apply to your account.
Tax Identification Number
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $500. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $500.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the shareholder application included with this
prospectus or contact your investment representative. If you start the automatic
investment plan when you open your account, your initial investment amount may
be as little as $500. The market value of the Fund's shares may fluctuate and a
systematic investment plan such as this will not assure a profit or protect
against a loss. You may discontinue the program at any time by notifying
Investor Services by mail or phone.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton
Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the code number for each class to use TeleFACTS(R). The code
numbers for Class I and Class II are:
CODE NUMBER
- --------------------------------------------------------------------------
FUND NAME CLASSI CLASS II
- --------------------------------------------------------------------------
Mutual Shares 474 574
Qualified 475 575
Beacon 476 576
Discovery 477 577
European 478 578
Financial
Services 479 579
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments.
PLEASE VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce
Fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if
you would like an additional free copy of the Fund's financial
reports.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 700 Central Avenue, P.O. Box 33030, St. Petersburg, Florida 33733-8030. The
Fund and Franklin Mutual are located at 51 John F. Kennedy Parkway, Short Hills,
New Jersey 07078. Distributors is located at 777 Mariners Island Blvd., P.O. Box
7777, San Mateo, California 94403-7777. You may also contact us by phone at one
of the numbers listed below.
HOURS OF OPERATION (EASTERN TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- --------------------------------------------------------------------------
Shareholder
Services 1-800/632-2301 8:30 a.m. to 8:00 p.m.
Dealer Services 1-800/524-4040 8:30 a.m. to 8:00 p.m.
Fund Information 1-800/DIAL BEN 8:30 a.m. to 11:00 p.m.
(1-800/342-5236) 9:30 a.m. to 5:30 p.m. (Saturday)
Retirement
Plan Services 1-800/527-2020 8:30 a.m. to 8:00 p.m.
Institutional
Services 1-800/321-8563 9:00 a.m. to 8:00 p.m.
TDD
(hearing
impaired) 1-800/851-0637 8:30 a.m. to 8:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
Useful Terms and Definitions
Board - The Board of Directors of the Fund
CD - Certificate of deposit
Class I, Class II and Class Z - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Class Z." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
Franklin Mutual - Franklin Mutual Advisers, Inc., the Fund's investment manager
Franklin Templeton Funds - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products` Series
Fund
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the Fund's administrator
Heine - Heine Securities Corporation, the Fund's former investment manager that
was acquired by Resources on October 31, 1996
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Market Timers - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
Moody's - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
Qualified Retirement Plans - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TeleFACTS(R) - Franklin Templeton's automated customer servicing system
Trust Company - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
SUPPLEMENT DATED FEBRUARY 19, 1998
TO THE PROSPECTUS OF
FRANKLIN MUTUAL SERIES FUND INC. - CLASS Z
DATED MAY 1, 1997, AS AMENDED AUGUST 19, 1997
The prospectus is amended as follows:
I. FINANCIAL HIGHLIGHTS
The "FINANCIAL HIGHLIGHTS" table is amended to add:
AUGUST 19, 1997
(COMMENCEMENT OF
OPERATIONS) TO
FINANCIAL SERVICES DECEMBER 31, 1997
- -----------------------------------------------------
PER SHARE OPERATING
PERFORMANCE - CLASS Z
(For a share outstanding
throughout the period)
Net asset value, beginning of
period $10.00
Income from investment operations:
Net investment income .04
Net realized and unrealized gain 2.35
Total from investment operations 2.39
Less distributions from:
Net investment income (.03)
Net realized gains (.09)
Total distributions (.12)
Net asset value, end of period $12.27
Total Return* 23.92%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $136,350
Ratios to average net assets:
Expenses 1.00%**
Expenses, excluding waiver
and payments by affiliate 1.62%**
Net investment income 1.37%**
Portfolio turnover rate 42.26%
Average commission rate paid*** $.0241
*Total return is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities.
CLASS Z
SIX MONTHS
ENDED
MUTUAL SHARES (UNAUDITED) JUNE 30, 1997
- -----------------------------------------------
Net asset value, beginning of period $18.58
Income from investment operations:
Net investment income .20
Net realized and unrealized gain 2.34
Total from investment operations 2.54
Distributions:
Dividends from net investment income -
Distributions from net realized gains -
Total distributions -
Change in net asset value 2.54
Net asset value, end of period $21.12
TOTAL RETURN* 13.67%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $7,325,535
Ratio of expenses to average net assets .75%**
Ratio of expenses, net
of fee waiver, to average net assets .71%**
Ratio of net investment income
to average net assets 2.17%**
Portfolio turnover rate 27.07%
Average commission
rate paid (per share) $.0412
CLASS Z
SIX MONTHS
ENDED
QUALIFIED (UNAUDITED) JUNE 30, 1997
- -----------------------------------------------
Net asset value, beginning of period $16.24
Income from investment operations:
Net investment income .18
Net realized and unrealized gain 2.05
Total from investment operations 2.23
Distributions:
Dividends from net investment income -
Distributions from net realized gains -
Total distributions -
Change in net asset value 2.23
Net asset value, end of period $18.47
TOTAL RETURN* 13.73%
RATIOS/SUPPLEMENTAL DATA
Net assets, end
of period (000) $4,942,467
Ratio of expenses to
average net assets .78%**
Ratio of expenses, net
of fee waiver, to average net assets .74%**
Ratio of net investment income
to average net assets 2.20%**
Portfolio turnover rate 27.62%
Average commission rate
paid (per share) $0.0413
CLASS Z
SIX MONTHS
ENDED
BEACON (UNAUDITED) JUNE 30, 1997
- -----------------------------------------------
Net asset value, beginning of period $12.98
Income from investment operations:
Net investment income .15
Net realized and unrealized gain 1.45
Total from investment operations 1.60
Distributions:
Dividends from net investment income -
Distributions from net realized gains -
Total distributions -
Change in net asset value 1.60
Net asset value, end of period $14.58
TOTAL RETURN* 12.33%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000) $5,466,442
Ratio of expenses to
average net assets .76%**
Ratio of expenses, net of fee waiver
to average net assets .72%**
Ratio of net investment income to
average net assets 1.10%**
Portfolio turnover rate 25.96%
Average commission rate
paid (per share) $.0204
CLASS Z
SIX MONTHS
ENDED
DISCOVERY (UNAUDITED) JUNE 30, 1997
- -----------------------------------------------
Net asset value, beginning of period $17.18
Income from investment operations:
Net investment income .21
Net realized and unrealized gain 2.18
Total from investment operations 2.39
Distributions:
Dividends from net investment income -
Distributions from net realized gains -
Total distributions -
Change in net asset value 2.39
Net asset value, end of period $19.57
TOTAL RETURN* 13.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000) $3,669,693
Ratio of expenses to average
net assets 1.00%**
Ration of expenses, net of fee
waiver, to average net assets .98%**
Ratio of net investment income
to average net assets 2.38%**
Portfolio turnover rate 27.02%
Average commission rate
paid (per share) $.0275
CLASS Z
SIX MONTHS
ENDED
EUROPEAN (UNAUDITED) JUNE 30, 1997
-----------------------------------------------
Net asset value, beginning of period $11.39
Income from investment operations:
Net investment income .23
Net realized and unrealized gain 1.26
Total from investment operations 1.49
Distributions:
Dividends from net investment income -
Distributions from net realized gains -
Total distributions -
Change in net asset value 1.49
Net asset value, end of period $12.88
TOTAL RETURN* 13.08%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000) $616,219
Ratio of expenses to
average net assets 1.05%**
Ratio of expenses, net of fee
waiver, to average net assets 1.03%**
Ratio of net investment income
to average net assets 4.03%**
Portfolio turnover rate 44.40%
Average commission rate paid
(per share) $.0153
*Not annualized for periods of less than one year.
**Annualized.
II. HOW DO I BUY SHARES?
The subsections "OPENING YOUR ACCOUNT" and "TELEPHONE PURCHASES" are replaced
with the following:
OPENING YOUR ACCOUNT
Shares of the Fund may be purchased without a sales charge. Please note that as
of January 1, 1998, shares of the Fund are not available to retirement plans
through Franklin Templeton's ValuSelect(R) program. Retirement plans in Franklin
Templeton's ValuSelect program before January 1, 1998, however, may continue to
invest in the Fund.
To open your account, please follow the steps below. This will help avoid any
delays in processing your request. PLEASE KEEP IN MIND THAT THE FUND DOES NOT
CURRENTLY ALLOW INVESTMENTS BY MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The Fund's minimum
investments are:
To open your account: $5,000,000*
To add to your account: $25*
*We may waive or lower these minimums for certain investors. Please see
"Minimum Investments" below. We also reserve the right to refuse any order to
buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. It is important
that we receive a signed application since we will not be able to process
any redemptions from your account until we receive your signed
application.
4. Make your investment using the table below.
- --------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the Fund with your
check made payable to the Fund.
For additional investments:
Send a check made payable to the Fund. Please
inclue your account number on the check.
- --------------------------------------------------------------------------------
BY PHONE Call the Fund at 1-800/448-FUND before 4:00 p.m. (For additional
Eastern time or the close of the NYSE, whichever is purchases only) earlier.
This privilege is only available to current Fund
shareholders for purchases of at least $1,000. The
purchase also must be for an account with an existing
balance of at least one-half of the telephone
purchase. Please see section 7 of the shareholder
application.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
MINIMUM INVESTMENTS
To determine if you meet the minimum initial investment requirement of $5
million, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds. At least $1 million of this amount, however, must be invested in Advisor
Class or Class Z shares of any of the Franklin Templeton Funds.
The Fund may waive or lower its minimum investment requirement for certain
purchases. A lower minimum initial investment requirement applies to purchases
by:
1. Existing shareholders of any series as of October 31, 1996, and their
immediate family members residing at the same address, subject to the
other terms and conditions of this prospectus and a $1,000 minimum initial
investment requirement
2. Partnership shareholders who had an account on October 31, 1996, whether
or not they are listed on the registration, subject to a $1,000 minimum
initial investment requirement
3. Corporate shareholders invested in the Fund as of October 31, 1996, using
the same registration, or new companies of such corporate shareholders
that have been reorganized into smaller, independent companies, subject to
a $1,000 minimum initial investment requirement
4. Shareholders who owned shares of the Fund through a broker-dealer or
service agent omnibus account on October 31, 1996, subject to a $1,000
minimum initial investment requirement
5. Employees who owned Fund shares through an employer-sponsored retirement
plan as of October 31, 1996, and who wish to open new individual Class Z
accounts in their own names, subject to a $1,000 minimum initial
investment requirement. The minimum initial investment requirement does
not apply, however, to employees who wish to open new retirement accounts,
including IRAs.
6. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs, subject to a $250,000 minimum
initial investment requirement or a $100,000 minimum initial investment
requirement for an individual client
7. Qualified registered investment advisors or certified financial planners
who have clients invested in the Franklin Mutual Series Fund Inc. on
October 31, 1996, or who buy through a broker-dealer or service agent who
has entered into an agreement with Distributors, subject to a $1,000
minimum initial investment requirement
8. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group and their immediate family
members, subject to a $100 minimum investment requirement
9. Each series of the Franklin Templeton Fund Allocator Series, investing in
Mutual Shares or Discovery, subject to a $1,000 minimum initial and
subsequent investment requirement
10. Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under Section 501 of the Code, subject to a
$1 million initial investment in Class Z shares
No minimum initial investment requirement applies to purchases by:
1. Investors buying shares with redemption proceeds from a sale of Class Z
shares of the Fund if reinvested in the same class of shares of any series
within 365 days of the redemption date
2. A direct rollover to an IRA by employees of a company with a non-custodial
pension plan set up as an omnibus account on October 31, 1996
3. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition, or exchange offer or other business combination
transaction
4. New participants and accounts of employer-sponsored retirement plans
invested in the Fund as of October 31, 1996
5. Accounts managed by the Franklin Templeton Group
6. The Franklin Templeton Profit Sharing 401(k) Plan
7. Defined contribution plans such as employer stock, bonus, pension or
profit sharing plans that meet the requirements for qualification under
Section 401 of the Code, including salary reduction plans qualified under
Section 401(k) of the Code, and that (i) are sponsored by an employer with
at least 10,000 employees, or (ii) have plan assets of $100 million or
more
8. Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which
the trust companies and bank trust departments or other plan fiduciaries
or participants, in the case of certain retirement plans, have full or
shared investment discretion
9. Shareholders of the Fund as of October 31, 1996, who wish to open new
retirement accounts, including IRAs
10. Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of a qualified group, if the
group as a whole meets the $5 million minimum investment requirement. A
qualified group is one that:
Was formed at least six months ago,
Has a purpose other than buying Fund shares at a discount,
Has more than 10 members,
Can arrange for meetings between our representatives and group
members,
Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
PROSPECTUS & APPLICATION
FRANKLIN
MUTUAL
SERIES FUND INC.
CLASS Z
- ----------------------------------------------------------------------------
MAY 1, 1997
AS AMENDED AUGUST 19, 1997
INVESTMENT STRATEGIES
Mutual Shares Fund GROWTH AND INCOME o VALUE
Mutual Qualified Fund GROWTH AND INCOME o VALUE
Mutual Beacon Fund GROWTH AND INCOME o VALUE
Mutual Financial Services Fund GROWTH AND INCOME o VALUE
Mutual European Fund GLOBAL o VALUE
Mutual Discovery Fund GLOBAL o VALUE
This prospectus describes the Class Z shares of the six series of Franklin
Mutual Series Fund Inc. ("Mutual Series"): Mutual Shares Fund ("Mutual Shares"),
Mutual Qualified Fund ("Qualified"), Mutual Beacon Fund ("Beacon"), Mutual
European Fund ("European"), Mutual Discovery Fund ("Discovery") and Mutual
Financial Services Fund ("Financial Services"). Each of these series may,
individually or together, be referred to as the "Fund(s)." This prospectus
contains information you should know before investing in the Fund. Please keep
it for future reference.
The Fund currently offers other classes of shares with different sales charge
and expense structures, which affect performance. These classes are described in
a separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Class Z
shares, dated May 1, 1997, as amended August 19, 1997, which may be further
amended from time to time. It includes more information about the Fund's
procedures and policies. It has been filed with the SEC and is incorporated by
reference into this prospectus. For a free copy or a larger print version of
this prospectus, call 1-800/DIAL BEN or write the Fund at its address.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
The principal investment objective of Mutual Shares, Qualified, Beacon, European
and Financial Services is capital appreciation, which may occasionally be
short-term. A secondary objective of each is income. Discovery's investment
objective is long-term capital appreciation. These objectives are fundamental
policies of each Fund and may not be changed without shareholder approval. Of
course, there is no assurance that the Fund's objective will be achieved.
TABLE OF CONTENTS
About the Fund
Expense Summary
Financial Highlights
How does the Fund Invest its Assets?
Who Manages the Fund?
How does the Fund Measure Performance?
How Taxation Affects the Fund and its Shareholders
How is the Fund Organized?
ABOUT YOUR ACCOUNT
How Do I Buy Shares?
May I Exchange Shares for Shares of Another Fund?
How Do I Sell Shares?
What Distributions Might I Receive from the Fund?
Transaction Procedures and Special Requirements
Services to Help You Manage Your Account
What If I Have Questions About My Account?
GLOSSARY
Useful Terms and Definitions
Franklin
Mutual Series
Fund Inc. - Class Z
- ------------------------------------------------------
May 1, 1997,
as amended August 19, 1997
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
51 John F. Kennedy Parkway
Short Hills, NJ 07078
1-800/DIAL BEN
ABOUT THE FUND
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. With the exception of Financial Services, it is based on the historical
expenses of Class Z for the fiscal year ended December 31, 1996. The numbers in
the table for Financial Services are based on estimated expenses for the current
fiscal year. The Funds' actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
MUTUAL FINANCIAL
SHARES QUALIFIED BEACON DISCOVERY EUROPEAN SERVICES
===============================================================================
Maximum Sales
Charge Imposed
on Purchases None None None None None None
B. Annual Fund Operating Expenses*
(as a percentage of average net assets)
Management Fees**
0.60%*** 0.60%*** 0.60%*** 0.80%*** 0.80%*** 0.00%**
Rule 12b-1 Fees None None None None None None
Other Expenses 0.12% 0.18% 0.15% 0.19% 0.35% 1.00%
----------------------------------------------------------
Total Fund
Operating Expenses**
0.72%*** 0.78%*** 0.75%*** 0.99%*** 1.15%*** 1.00%**
==============================================================
C. Example
Assume the annual return for the class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the Fund.
MUTUAL FINANCIAL
SHARES QUALIFIED BEACON DISCOVERY EUROPEAN SERVICES
- -------------------------------------------------------------------------------
1 Year $ 7 $ 8 $ 8 $ 10 $ 12 $10
3 Years $23 $25 $24 $ 32 $ 37 $32
5 Years $40 $43 $42 $ 55 $ 63 --
10 Years $89 $97 $93 $121 $140 --
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. Actual expenses and returns may be more or less than those shown. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of the class and are not directly charged to
your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
*In connection with the transaction which resulted in Franklin Mutual becoming
the Fund's investment manager, Franklin Mutual made a commitment to the Fund's
Board not to seek an increase in the rate of investment advisory fees for a
three year period beginning November 1, 1996. This agreement applies only to
those series which existed at that time. The parties also agreed that for the
same period the ordinary expenses of each series' (based on a percentage of net
assets) will not be higher than they were expected to be as of November 1, 1996,
based on the annualized expense ratios of each series as of that date. Increases
in expenses beyond these expense ratios will be permitted, however, if the Board
is satisfied that such expenses also would have been higher (based upon such
considerations as the amount and composition of assets under management, the
number of security transactions, the number of shareholder accounts, regulatory
requirements and general economic conditions) had the transaction not taken
place. This expense limitation does not include items such as litigation
expenses, interest, taxes, insurance, brokerage commissions and expenses of an
extraordinary nature.
**Franklin Mutual has agreed in advance to waive its management fee and make
certain payments to reduce the Financial Services Fund's expenses so its
aggregate annual operating expenses do not exceed 1.00% of Class Z's average net
assets for its initial twenty-four months of operation. Absent this reduction,
contractual management fees and total expected operating expenses for the
current fiscal year would equal 0.80% and 1.85%, respectively, of Class Z's
average net assets. After the first twenty-four months of operations, Franklin
Mutual may terminate this arrangement at any time.
***For the period shown, Franklin Mutual and its affiliates had agreed in
advance to limit its management fees during the Fund's previous fiscal year.
This agreement, which expires October 31, 1999, did not apply to Financial
Services which was not in existence during the previous fiscal year. With this
reduction, management fees and total operating expenses were as follows:
MUTUAL
SHARES QUALIFIED BEACON DISCOVERY EUROPEAN
==============================================================================
Management
Fees 0.58% 0.57% 0.58% 0.77% 0.74%
Total
Operating
Expenses 0.70% 0.75% 0.73% 0.96% 1.09%
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history for Class Z. The information
has been audited by Ernst & Young LLP, the Fund's independent auditors. Their
audit report appears in the Fund's Annual Report to Shareholders. The Annual
Report to Shareholders also includes more information about the Fund's
performance. For a free copy, please call Fund Information.
MUTUAL SHARES - CLASS Z
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
Beginning of Year $86.45 $78.69 $80.97 $73.36 $64.49 $56.39 $67.16 $67.77 $57.83 $60.43
-------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 2.77 1.99 1.34 1.41 1.55 2.04 3.32 4.03 2.64 2.23
Net Gains
or Losses
on Securities
(realized
and unrealized) 14.80 20.51 2.28 13.89 12.07 9.69 (9.86) 6.00 14.98 1.78
------------------------------------------------------------------------------------
Total from Investment Operations 17.57 22.50 3.62 15.30 13.62 11.73 (6.54) 10.03 17.62 4.01
------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends (from net
investment income) 2.48 1.93 1.34 1.38 1.59 2.00 3.34 4.09 2.63 2.52
Distributions (from capital gains) 8.69 12.81 4.56 6.31 3.16 1.63 .89 6.55 5.05 4.09
-------------------------------------------------------------------------------------
Total Distributions 11.17 14.74 5.90 7.69 4.75 3.63 4.23 10.64 7.68 6.61
Net Asset Value,
End of Period $92.85 $86.45 $78.69 $80.97 $73.36 $64.49 $56.39 $67.16 $67.77 $57.83
=====================================================================================
TOTAL RETURN 20.76% 29.11% 4.53% 21.00% 21.33% 20.99% (9.82)% 14.93% 30.69% 6.34%
RATIOS/SUPPLEMENTAL DATA: =====================================================================================
Net Assets, End of Period
(millions) $6,543 $5,230 $3,746 $3,527 $2,913 $2,640 $2,521 $3,403 $2,551 $1,685
Ratio of Expenses to Average
Net Assets .70%* .69% .72% .74% .78% .82% .85% .65%* .67%* .69%
Ratio of Net Investment
Income to Average Net Assets 3.02%* 2.47% 1.80% 1.90% 2.18% 3.08% 4.88% 5.57%* 4.16%* 3.32%
Portfolio Turnover Rate 58.35% 79.32% 66.55% 48.78% 41.06% 47.89% 43.41% 71.54% 89.67% 77.72%
Average Commission Per Share $.041 -- -- -- -- -- -- -- -- --
</TABLE>
*After reduction of expenses by the investment adviser. Had the investment
adviser not undertaken such action, the ratios of operating expenses and net
investment income would have been .72% and 3.00% in 1996, .67% and 5.55% in
1989, and .74% and 4.09% in 1988.
QUALIFIED - CLASS Z
<TABLE>
YEAR ENDED DECEMBER 31,
==============================================================================
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
=======================================================================================================================
NET ASSET VALUE,
Beginning of Year $29.74 $26.67 $27.00 $24.43 $21.18 $18.37 $22.21 $22.71 $19.37 $20.06
-----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .94 .66 .43 .38 .49 .67 1.22 1.34 .84 .77
Net Gains or Losses
on Securities (realized
and unrealized) 5.24 6.33 1.10 5.12 4.27 3.18 (3.45) 1.91 4.95 .86
--------------------------------------------------------------------------------------
Total from Investment Operations 6.18 6.99 1.53 5.50 4.76 3.85 (2.23) 3.25 5.79 1.63
LESS DISTRIBUTIONS: -------------------------------------------------------------------------------------
Dividends (from net
investment income) .87 .65 .43 .37 .49 .67 1.23 1.36 .83 .88
Distributions (from capital gains) 2.58 3.27 1.43 2.56 1.02 .37 .38 2.39 1.62 1.44
-----------------------------------------------------------------------------------
Total Distributions 3.45 3.92 1.86 2.93 1.51 1.04 1.61 3.75 2.45 2.32
Net Asset Value, -----------------------------------------------------------------------------------
End of Period $32.47 $29.74 $26.67 $27.00 $24.43 $21.18 $18.37 $22.21 $22.71 $19.37
====================================================================================
Total Return 21.19% 26.60% 5.73% 22.71% 22.70% 21.13% (10.12)% 14.44% 30.15% 7.72%
=====================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of
Period (millions) $4,287 $3,002 $1,792 $1,511 $1,251 $1,110 $1,075 $1,470 $1,094 $686
Ratio of Expenses to
Average Net Assets .75%* .72% .73% .78% .82% .87% .89% .70%* .62%* .71%
Ratio of Net Investment Income
to Average Net Asset 3.06%* 2.71% 1.91% 1.65% 2.10% 3.09% 5.40% 5.61%* 3.96%* 3.43%
Portfolio Turnover Rate 65.03% 75.59% 67.65% 56.22% 47.39% 51.99% 46.12% 73.41% 85.05% 73.50%
Average Commission Per Share $.036 -- -- -- -- -- -- -- -- --
</TABLE>
*After reduction of expenses by the investment adviser. Had the investment
adviser not undertaken such action, the ratios of operating expenses and net
investment income would have been .78% and 3.03% in 1996, .71% and 5.60% in
1989, and .69% and 3.89% in 1988.
BEACON - CLASS Z
<TABLE>
Sept. 1, 1987 Year Ended
Year Ended December 31, to Dec. 31, August 31,
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1987+
=============================================================================================================================
NET ASSET VALUE,
Beginning of Period $35.94 $31.03 $31.09 $27.10 $23.36 $20.80 $24.09 $22.85 $19.49 $24.78 $19.27
-----------------------------------------------------------------------------------------------------
INCOME FROM
INVESTMENT OPERATIONS:
Net Investment Income 1.20 .87 .46 .37 .45 .75 1.08 1.12 .77 .22 .37
Net Gains or Losses on
Securities
(realized and
unrealized) 6.28 7.09 1.28 5.81 4.85 2.88 (3.03) 2.84 4.80 (3.96) 6.39
-----------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 7.48 7.96 1.74 6.18 5.30 3.63 (1.95) 3.96 5.57 (3.74) 6.76
Less Distributions: ------------------------------------------------------------------------------------------------------
Dividends (from net
investment income) 1.06 .84 .44 .37 .46 .74 1.08 1.17 .80 .51 .31
Distributions (from
capital gains) 3.41 2.21 1.36 1.82 1.10 .33 .26 1.55 1.41 1.04 .94
-------------------------------------------------------------------------------------------------------
Total Distributions 4.47 3.05 1.80 2.19 1.56 1.07 1.34 2.72 2.21 1.55 1.25
Net Asset Value, ------------------------------------------------------------------------------------------------------
End of Period $38.95 $35.94 $31.03 $31.09 $27.10 $23.36 $20.80 $24.09 $22.85 $19.49 $24.78
----------------------------------------------------------------------------------------------------
TOTAL RETURN* 21.19% 25.89% 5.61% 22.93% 22.92% 17.60% (8.17)%17.46% 28.79% (15.12)% 37.33%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End
of Period (millions) $4,920 $3,573 $2,060 $1,062 $534 $398 $388 $409 $214 $131 $159
Ratio of Expenses
to Average Net Assets .73%*** .72% .75% .73% .81% .85% .85% .67%*** .59%*** .87%** .85%
Ratio of Net
Investment
Income to
Average Net
Assets 3.21%*** 2.89% 1.96% 1.53% 1.90% 3.07% 4.59% 4.98%*** 3.64%***2.86%** 2.50%
Portfolio
Turnover Rate 66.87% 73.18% 70.63% 52.88% 57.52% 56.63% 57.74% 67.18% 86.79% 28.07% 73.41%
Average Commission
Per Share $.047 -- -- -- -- -- -- -- -- -- --
</TABLE>
+This year is covered by the report of other independent auditors. This report
is not included in this prospectus.
*Not annualized for periods of less than one year.
**Annualized.
***After reduction of expenses by the investment adviser. Had the investment
adviser not undertaken such action, the ratios of operating expenses and net
investment income would have been 0.75% and 3.19% in 1996, .68% and 4.97% in
1989, and .66% and 3.57% in 1988.
DISCOVERY - CLASS Z
YEAR ENDED DECEMBER 31,
==================================================================
1996 1995 1994 1993
===============================================================
NET ASSET VALUE,
BEGINNING OF YEAr $15.16 $12.55 $13.05 $10.00
----------------------------------------------------
Income from
Investment
Operations:
Net Investment
Income .34 .17 .15 .10
Net Gain on Securities
(realized and
unrealized) 3.39 3.40 .32 3.48
---------------------------------------
Total from Investment
Operations 3.73 3.57 .47 3.58
Less Distributions: ----------------------------------------
Dividends (from net
investment income) .31 .14 .16 .09
Distributions
(from capital gains) 1.40 .82 .81 .44
-----------------------------------------
Total Distributions 1.71 .96 .97 .53
Net Asset Value, ------------------------------------------
End of Period $17.18 $15.16 $12.55 $13.05
==========================================
Total Return 24.93% 28.63% 3.62% 35.85%
==========================================
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of
Period (millions) $2,976 $1,370 $725 $548
Ratio of Expenses
to Average
Net Assets .96%* .99% .99% 1.07%
Ratio of Net Investment
Income to
Average Net Asset 2.24%* 2.00% 1.64% 1.17%
Portfolio
Turnover Rate 80.18% 73.23 72.70% 90.37%
Average Commission
Per Share $.026 -- -- --
*After reduction of expenses by the investment adviser. Had the investment
adviser not undertaken such action, the ratios of operating expenses and net
investment income would have been .99% and 2.21% in 1996.
EUROPEAN - CLASS Z
For the period
July 3, 1996+ to
December 31, 1996
===================================
NET ASSET VALUE,
Beginning of Period $10.00
------------------------------------
Income from Investment Operations:
Net Investment Income .06
Net Gain on Securities
(realized and
unrealized) 1.40
------------------------------------
Total from Investment
Operations 1.46
------------------------------------
LESS DISTRIBUTIONS:
Dividends (from net
investment income) .05
Distributions (from
capital gains) .02
------------------------------------
Total Distributions .07
NET ASSET VALUE, ------------------------------------
End of Period $11.39
====================================
Total Return 14.61%*
=====================================
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of
Period (millions) $450
Ratio of Expenses to
Average Net Assets 1.15%**
Ratio of Expenses,
Net of Reimbursement,
to Average Net Assets 1.09%**
Ratio of Net Investment
Income to
Average Net Assets 1.87%**
Portfolio Turnover Rate 36.75%
Average Commission
Per Share $.023
+Commencement of Operations
*Not annualized for periods of less than one year.
**Annualized.
HOW DOES THE FUND INVEST ITS ASSETS?
The Fund's Investment Objective
The principal investment objective of Mutual Shares, Qualified, Beacon, European
and Financial Services is capital appreciation, which may occasionally be
short-term. A secondary objective of each is income. Discovery's investment
objective is long-term capital appreciation. These objectives are fundamental
policies of each Fund and may not be changed without shareholder approval. Of
course, there is no assurance that the Fund's objective will be achieved.
Types of Securities in which the Fund May Invest
European will normally invest at least 65% of its invested assets in the
securities of issuers organized under the laws of, or whose principal business
operations are in, or at least 50% of whose revenue is earned from, European
countries. European countries are given a broad definition which includes all of
the countries that are members of the European Union, United Kingdom,
Scandinavia, Eastern and Western Europe and those regions of Russia and the
former Soviet Union that are considered part of Europe. European may also invest
up to 35% of its invested assets in U.S. securities as well as in securities of
issuers from the Levant, Middle East and the rest of the world. European is
currently expected to invest primarily in Western Europe and Scandinavia but may
also include investments in other countries. European will normally invest in at
least 5 countries although it may invest all of its assets in a single country.
However, European may include in its portfolio securities of issuers from
outside of Europe and the U.S. For short-term purposes, European anticipates
that it generally will buy short-term securities denominated in U.S. dollars.
European will normally attempt to maintain at least 50% of the value of its
assets invested in securities of foreign corporations at the close of each
taxable year.
Financial Services will normally invest at least 65% of its invested assets in
the securities issued by companies in the financial services industry.
Accordingly, Financial Services will be concentrated in the financial services
industry which, for Fund purposes, is considered to be issuers which, on the
basis of information supplied to and analyzed by Franklin Mutual, are believed
to have at least 50% of their assets or revenues derived from the creation,
purchase and sale of financial instruments. Issuers in the financial services
industry include banks, savings and loan organizations, credit card companies,
brokerage firms, finance companies, sub-prime lending institutions, investment
advisers, investment companies and insurance companies. Many issuers within the
financial services industry are smaller capitalized companies and therefore may
be subject to certain risks not associated with larger companies. (See the
discussion in the next paragraph.) As the nature of the financial services
industry continues to evolve, additional types of issuers may be included in the
Fund. Financial Services' investment policy of concentrating in the financial
services industry is fundamental and may not be changed without a vote of a
majority of the outstanding voting securities of Financial Services.
Discovery expects to invest approximately 50% of its assets in foreign companies
and to invest proportionately more of its assets in smaller capitalized
companies than the other series. Investing in smaller capitalized companies may
involve greater risks than investing in securities of larger companies. Smaller
companies often are not well known, often may trade at a discount and may not be
followed by established financial institutions.
Each Fund pursues its objectives primarily through investments in common stock
and preferred stock as well as debt securities and securities convertible into
common stock (including convertible preferred and convertible debt securities).
You should bear in mind that since every investment carries risk, the value of
the assets of each series fluctuates with changes in the market value of the
Fund's investments. Therefore, there is no assurance that the Fund's objectives
will be achieved. Except for the Fund's primary and secondary investment
objectives, these objectives are not fundamental and the Board reserves the
right to change them without shareholder approval, which may result in the Fund
having an investment objective different from that which an investor deemed
appropriate at the time of investment.
The general investment policy of each Fund is to invest in common stock,
preferred stock and corporate debt securities, which may be convertible into
common stock and the other investments described below which, in the opinion of
Franklin Mutual, are available at prices less than their intrinsic value. (See
"Non-U.S. Securities," "Repurchase Agreements and Loans of Securities" and
"Hedging.")
Franklin Mutual also has no pre-set limits as to the percentage of each Fund's
portfolio which may be invested in equity securities, debt securities (including
"junk bonds" as described below), or cash equivalents. Franklin Mutual's
opinions are based upon analysis and research, taking into account, among other
factors, the relationship of book value to market value of the securities, cash
flow, and multiples of earnings of comparable securities. These factors are not
applied formulaically, as Franklin Mutual examines each security separately;
Franklin Mutual has no general criteria as to asset size, earnings or industry
type which would make a security unsuitable for purchase by a series. Although
the Funds may invest in securities from any size issuer, Mutual Shares,
Qualified and Beacon will tend to invest in securities of issuers with market
capitalizations in excess of $1 billion due to the larger size of these series.
Each Fund may invest in securities that are traded on U.S. or foreign exchanges,
the National Association of Securities Dealers Automated Quotation system
("NASDAQ") national market system or in the over-the-counter ("OTC") market.
With the exception of Financial Services, each Fund may invest in any industry
sector although no series will be concentrated in any one industry.
Debt securities in which the Fund invests (such as corporate and U.S. government
bonds, debentures and notes) may or may not be rated by rating agencies such as
Moody's or S&P, and, if rated, such rating may range from the very highest to
the very lowest, currently C for Moody's and D for S&P. Securities rated D are
in default as to the payments of principal and interest. Medium and lower rated
debt securities in which each series expects to invest are commonly known as
"junk bonds." The Fund may be subject to investment risks as to these unrated or
lower rated securities that are greater in some respects than the investment
risks incurred by a fund which invests only in securities rated in higher
categories. In addition, the secondary market for such securities may be less
liquid and market quotations less readily available than higher rated
securities, thereby increasing the degree to which judgment plays a role in
valuing such securities. The general policy of each Fund is to invest in debt
instruments, including junk bonds, for the same reasons underlying investments
in equities, i.e., whenever such instruments are available, in Franklin Mutual's
opinion, at prices less than their intrinsic value. Consequently, Franklin
Mutual's own analysis of a debt instrument exercises a greater influence over
the investment decision than the stated coupon rate or credit rating. The Funds
have historically invested in debt instruments issued by reorganizing or
restructuring companies, or companies which recently emerged from, or are
facing, the prospect of a financial restructuring. It is under these
circumstances, which usually involve unrated or low rated securities that are
often in, or about to, default that Franklin Mutual identifies securities which
are sometimes available at prices which it believes are less than their
intrinsic value. Although such debt securities may pose a greater risk than
higher rated debt securities of loss of principal, the debt securities of
reorganizing or restructuring companies typically rank senior to the equity
securities of such companies and offer the potential for certain investment
opportunities. See "How does the Fund Invest its Assets? - Medium and Lower
Rated Corporate Debt Securities" in the SAI.
Each Fund also seeks to invest in the securities of domestic and foreign
companies involved in mergers, consolidations, liquidations and reorganizations
or as to which there exist tender or exchange offers, and may participate in
such transactions. Although there are no restrictions limiting the extent to
which a Fund may invest in such transactions, no Fund presently anticipates
investing more than 50% of its portfolio in such investments. There can be no
assurance that any merger, consolidation, liquidation, reorganization or tender
or exchange offer proposed at the time a Fund makes its investment will be
consummated or will be consummated on the terms and within the time period
contemplated by Franklin Mutual.
Each Fund from time to time may also purchase indebtedness and participations
therein, both secured and unsecured, of debtor companies in reorganization or
financial restructuring ("Indebtedness"). Such Indebtedness may be in the form
of loans, notes, bonds or debentures. Participations normally are made available
only on a nonrecourse basis by financial institutions, such as banks or
insurance companies, or by governmental institutions, such as the Resolution
Trust Corporation, the Federal Deposit Insurance Corporation or the Pension
Benefit Guaranty Corporation, or may include supranational organizations such as
the World Bank. When a Fund purchases a participation interest, it assumes the
credit risk associated with the bank or other financial intermediary as well as
the credit risk associated with the issuer of any underlying debt instrument.
Each Fund may also purchase trade and other claims against, and other unsecured
obligations of, such debtor companies, which generally represent money due a
supplier of goods or services to such company. Some corporate debt securities,
including Indebtedness, purchased by the Fund may have very long maturities. The
length of time remaining until maturity is one factor Franklin Mutual considers
in purchasing a particular Indebtedness. The purchase of Indebtedness of a
troubled company always involves a risk as to the creditworthiness of the issuer
and the possibility that the investment may be lost. Franklin Mutual believes
that the difference between perceived risk and actual risk creates the
opportunity for profit which can be realized through proper analysis. There are
no established markets for some of this Indebtedness and thus it is less liquid
than more heavily traded securities. Indebtedness which represents indebtedness
of the debtor company to a bank are not securities of the banks issuing or
selling them. The Funds purchase loans from national and state chartered banks
as well as foreign ones. The Funds normally invest in senior indebtedness of the
debtor companies, although on occasion subordinated indebtedness may also be
acquired.
Each Fund does not invest more than 15% of its portfolio in assets which are
illiquid, including Indebtedness which are not readily marketable. Other
securities which may be considered to be illiquid but in which a Fund may invest
include restricted securities not registered under the Securities Act of 1933,
OTC options and securities that are otherwise considered illiquid as a result of
market or other factors.
Each Fund may invest in securities eligible for resale under Rule 144A of the
Securities Act of 1933 ("144A securities"). The Board has adopted procedures in
accordance with Rule 144A whereby specific 144A securities held in the Fund may
be deemed to be liquid. Nevertheless, due to changing market or other factors
144A securities may be subject to a greater possibility of becoming illiquid
than registered securities. Fund purchases of 144A securities may increase the
level of illiquidity and institutional buyers may become disinterested in
purchasing such securities.
Each Fund may also invest in cash equivalents such as Treasury bills and high
quality commercial paper. The Funds generally purchase securities for investment
purposes and not for the purpose of influencing or controlling management of the
issuer. However, in certain circumstances when Franklin Mutual perceives that
one or more of the Funds may benefit, the Fund may itself seek to influence or
control management or may invest in other entities that purchase securities for
the purpose of influencing or controlling management, such as investing in a
potential takeover or leveraged buyout or investing in other entities engaged in
such activities. The Funds may also invest in distressed mortgage obligations
and other debt secured by real property and may sell short securities it does
not own up to 5% of its assets. Short sales have risks of loss if the price of
the security sold short increases after the sale, but the Fund can profit if the
price decreases. The Funds may also sell securities "short against the box"
without limit. See "How does the Fund Invest its Assets? - Short Sales" in the
SAI for more discussion of these practices.
Each Fund may invest in common stock, preferred stock and corporate debt
securities in such proportions as Franklin Mutual deems advisable. Franklin
Mutual typically keeps a portion of the assets of each Fund invested in
short-term debt securities and preferred stocks although it may choose not to do
so when circumstances dictate. In addition, each Fund may invest from time to
time in other investment company securities, subject to applicable law which
restricts such investments. Investors should recognize that a Fund's purchase of
the securities of such investment companies results in layering of expenses such
that investors indirectly bear a proportionate share of the expenses of such
investment companies, including operating costs, and investment advisory and
administrative fees.
Special Considerations Relating to Financial Services
Under regulations of the SEC, a Fund, including Financial Services, may not
invest more than 5% of its total assets in the securities of any company that
derives more than 15% of its revenues from securities-related activities, which
means activities as a broker, dealer, underwriter or investment adviser.
Further, immediately after a purchase of equity securities of such an issuer,
such Fund may not own more than 5% of the outstanding securities of any class of
equity securities of such issuer, and immediately after a purchase of debt
securities of such an issuer, such Fund may not own more than 10% of the
outstanding principal amount of such issuer's debt securities.
As stated above, Financial Services concentrates its investments in the
financial service industry. Its investment and performance, accordingly, will be
affected by general market and economic conditions as well as other risk factors
particular to the financial services industry. Financial services companies are
subject to extensive government regulation which may limit both the amount and
types of loans and other financial commitments they can make, and the interest
rates and fees they can charge. Profitability is largely dependent on the
availability and cost of capital funds, and can fluctuate significantly when
interest rates change. Credit losses resulting from financial difficulties of
borrowers can negatively impact the industry. Insurance companies may be subject
to severe price competition, claims activity, marketing competition and general
economic conditions. Particular insurance lines will also be influenced by
specific matters. Property and casualty insurer profits may be affected by
certain weather catastrophes and other disasters. Life and health insurer
profits may be affected by mortality risks and morbidity rates. Individual
insurance companies may be subject to material risks including reserve
inadequacy and the inability to collect from reinsurance carriers.
Congress is currently considering legislation that would reduce the separation
between commercial and investment banking businesses. If enacted this could
significantly impact the industry and Financial Services. While banks may be
able to expand the services which they offer if legislation broadening bank
powers is enacted, expanded powers could expose banks to well-established
competitors, particularly as the historical distinctions between banks and other
financial institutions erode. In addition, the financial services industry is an
evolving and competitive industry that is undergoing significant change with
various consolidations and the continual development of new products, structures
and a regulatory framework that is anticipated to be subject to further change.
Non-U.S. Securities
The Funds may purchase securities of non-U.S. issuers and Discovery expects that
approximately 50% of its assets may be so invested. European will normally
invest at least 65% of its invested assets in European countries (as defined
above). The remaining Funds expect to invest a lesser percentage in securities
of non-U.S. issuers than Discovery, with Beacon investing the next largest
percentage, followed by Qualified, Financial Services and finally with Mutual
Shares holding the smallest percentage of these securities. The Funds may
purchase securities denominated in any currency and generally expect currency
risks will be hedged to the extent that hedging is available. Investments in
securities of non-U.S. issuers involve certain risks not ordinarily associated
with investments in securities of domestic issuers. Such risks include
fluctuations in foreign exchange rates, volatile political and economic
developments, and the possible imposition of exchange controls or other foreign
governmental laws or restrictions. Since each Fund may invest in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates will affect the value of securities in the
portfolio and the unrealized appreciation or depreciation of investments,
although Franklin Mutual generally attempts to reduce such risks through hedging
transactions. In addition, with respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
There may be less publicly available information about a foreign company than
about a U.S. company. Foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to or as
uniform as those of U.S. companies. Non-U.S. securities markets, while growing
in volume, have, for the most part, substantially less volume than U.S. markets,
and securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable U.S. companies. Transaction costs on
non-U.S. securities markets are generally higher than in the U.S. There is
generally less government supervision and regulation of exchanges, brokers and
issuers than there is in the U.S. Each series' foreign investments may include
both voting and non-voting securities, sovereign debt and participations in
foreign government deals. The Fund might have greater difficulty taking
appropriate legal action with respect to foreign investments in non-U.S. courts
than with respect to domestic issuers in U.S. courts.
Each Fund may invest in securities commonly known as Depositary Receipts of
non-U.S. issuers which have certain risks, including trading for a lower price,
having less liquidity than their underlying securities and risks relating to the
issuing bank or trust company. Depositary Receipts can be sponsored by the
issuer of the underlying securities or the issuing bank or trust company or
unsponsored. Holders of unsponsored Depositary Receipts have a greater risk that
receipt of corporate information and proxy disclosure will be untimely,
information may be incomplete and costs may be higher.
Dividend and interest income from non-U.S. securities will generally be subject
to withholding taxes by the country in which the issuer is located, which may
not be recoverable, either directly or indirectly, as a foreign tax credit or
deduction by the Fund or its shareholders. Please see the SAI for more details.
Repurchase Agreements and Loans of Securities
Each Fund may invest up to 10% of its assets in repurchase agreements, including
tri-party repurchase agreements. Each Fund may also loan its portfolio
securities in order to realize additional income. Repurchase and tri-party
agreements are generally agreements under which the Fund obtains money market
instruments subject to resale to the seller at an agreed upon price and date.
Any loans of portfolio securities which the Fund may make must be fully
collateralized at all times by securities with a value at least equal to 100% of
the current market value of the loaned securities. The Funds presently do not
anticipate loaning more than 5% of their respective portfolio securities. There
are certain risks associated with such transactions which are described in the
SAI.
Hedging and Income Transactions
The Funds may utilize various investment strategies as described below to hedge
various market risks (such as risks related to fluctuations in interest rates,
currency exchange rates, and broad or specific equity market movements), to
manage the effective maturity or duration of fixed-income securities or for
gain. Such strategies are generally accepted by modern portfolio managers and
are regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur and the Fund will describe
any such techniques in its registration statement before using them. In the
course of pursuing these investment strategies, the Funds may purchase and sell
exchange-listed and OTC put and call options on securities, equity and
fixed-income indices and other financial instruments, purchase and sell
financial futures contracts and options thereon, and enter into various currency
transactions such as currency forward contracts, currency futures contracts,
currency swaps or options on currencies or currency futures (collectively, all
of the above are called "Hedging Transactions").
Hedging Transactions may be used to attempt to protect against possible changes
in the market value of securities held in or to be purchased for a Fund's
portfolio resulting from changes in securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, or to establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities. Any or all of these
investment techniques may be used at any time and there is no particular
strategy that dictates the use of one technique rather than another, as use of
any Hedging Transaction is a function of numerous variables including market
conditions. The ability of a Fund to utilize these Hedging Transactions
successfully will depend on Franklin Mutual's ability to predict pertinent
market movements, which cannot be assured. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. Each Fund generally hedges the foreign currency risk associated
with its investments in foreign securities. European expects to hedge for gain
on market risks including broad movements in markets in addition to the specific
currency risk of its portfolio securities. No more than 5% of the Fund's assets
will be at risk in such types of instruments entered into for non-hedging
purposes. Hedging Transactions involving financial futures and options thereon
will be purchased, sold or entered into generally for bona fide hedging, risk
management or portfolio management purposes.
Hedging Transactions, whether entered into as a hedge or for gain, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent Franklin Mutual's view as to certain
market movements is incorrect, the risk that the use of such Hedging
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to a Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Fund can realize on its
investments, increase the cost of holding a security and reduce the returns on
securities or cause a series to hold a security it might otherwise sell. The use
of currency transactions can result in a Fund incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain OTC options
may have no markets. As a result, in certain markets, a Fund might not be able
to close out a transaction without incurring substantial losses, if it is able
to close out a transaction at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Hedging Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Hedging
Transactions had not been utilized. The cost of entering into Hedging
Transactions may also reduce the Fund's total return to investors.
Fundamental Restrictions
Each Fund has adopted a number of fundamental investment restrictions, which may
not be changed for a particular Fund without the approval of that Fund's
shareholders. These restrictions are set forth in the SAI.
Among other things, each Fund may not purchase the securities of any one issuer,
other than the U.S. government or any of its agencies or instrumentalities, if
immediately after such purchase more than 5% of the value of its total assets
would be invested in such issuer, or such Fund would own more than 10% of the
outstanding voting securities of such issuer, except that up to 25% of the value
of such series' total assets may be invested without regard to such 5% and 10%
limitations; make loans, except to the extent the purchase of debt obligations
of any type are considered loans and except that the Fund may lend portfolio
securities to qualified institutional investors in compliance with requirements
established from time to time by the SEC and the securities exchanges on which
such securities are traded; for all Funds except for Financial Services, invest
more than 25% of the value of its assets in a particular industry (except that
U.S. government securities are not considered an industry); or issue securities
senior to its stock or borrow money or utilize leverage in excess of the maximum
permitted by the Investment Company Act of 1940, which is currently 331/3% of
total assets (plus 5% for emergency or other short-term purposes). Such
borrowing has special risks. The Fund will not engage in investment transactions
when borrowing exceeds 5% of its assets.
While Mutual Shares, Qualified, Beacon, Discovery and European have identical
basic investment restrictions, and Mutual Shares, Qualified, Beacon, European
and Financial Services have identical investment objectives, Franklin Mutual
seeks to retain certain historical differences among the Funds on an informal
basis. Mutual Shares, Qualified and Beacon have generally invested in larger and
medium sized companies with large share trading volume. Discovery, in comparison
to the other Funds, has tended to invest proportionately more of its portfolio
in smaller companies (see the discussion of investment policies above) and in
foreign companies (see "Non-U.S. Securities"). Qualified was originally intended
for purchase by pension plans, profit sharing plans and other nontaxpaying
entities, and the portfolio was intended to have greater flexibility due to
reduced concerns about the tax effects on shareholders. Depending on market
conditions, and any future changes in tax laws, Franklin Mutual expects that it
will purchase securities for Qualified which satisfy such a goal, although
currently Qualified operates in the same fashion as Mutual Shares and Beacon.
Financial Services and European will utilize the same investment philosophy but
will apply it in the context of investing in the financial services industry and
European securities, respectively. Allocation of investments among the Funds
will also depend upon, among other things, the amount of cash in, and relative
size of each Fund's portfolio. In addition, the factors outlined above are not
mutually exclusive and a particular security may be owned by more than one of
the Funds.
Other Policies and Restrictions. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Restrictions and Limitations" in
the SAI.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
WHO MANAGES THE FUND?
The Board. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
Investment Manager. Franklin Mutual manages the Fund's assets and makes its
investment decisions. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries. Charles B.
Johnson and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
Together, Franklin Mutual and its affiliates manage over $207 billion in assets.
Please see "Investment Management and Other Services" and "Miscellaneous
Information" in the SAI for information on securities transactions and a summary
of the Fund's Code of Ethics.
Management Team. The team responsible for the day-to-day management of the
Fund's portfolio is: Michael F. Price since 1975, Jeffrey A. Altman since 1988,
Robert L. Friedman since 1988, Raymond Garea since 1991, Peter A. Langerman
since 1986 and Lawrence N. Sondike since 1984.
Michael F. Price
Chief Executive Officer and President of Franklin Mutual
Mr. Price has a Bachelor of Arts degree in Business Administration from the
University of Oklahoma. Prior to November 1996, Mr. Price was President and
Chairman of Heine, the former investment manager for Franklin Mutual Series Fund
Inc. He became Chief Executive Officer of Franklin Mutual in November 1996. He
is Chairman of the Board and President of Franklin Mutual Series Fund Inc.
Jeffrey A. Altman
Senior Vice President of Franklin Mutual
Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
November 1996, Mr. Altman was employed as a Research Analyst and Trader for
Heine, the former investment manager for Franklin Mutual Series Fund Inc. He
joined Franklin Mutual in November 1996. He is a Vice President of Franklin
Mutual Series Fund Inc.
Robert L. Friedman
Senior Vice President of Franklin Mutual
Mr. Friedman has a Bachelor of Arts degree in Humanities from Johns Hopkins
University and a Masters in Business Administration from the Wharton School,
University of Pennsylvania. Prior to November 1996, Mr. Friedman was a Research
Analyst for Heine, the former investment manager for Franklin Mutual Series Fund
Inc. He joined Franklin Mutual in November 1996. He is a Vice President of
Franklin Mutual Series Fund Inc.
Raymond Garea
Senior Vice President of Franklin Mutual
Mr. Garea has a Bachelor of Science degree in Engineering from Case Institute of
Technology and a Masters in Business Administration from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine, the
former investment manager for Franklin Mutual Series Fund Inc. He joined
Franklin Mutual in November 1996. He is a Vice President of Franklin Mutual
Series Fund Inc.
Peter A. Langerman
Chief Operating Officer and Senior Vice President of Franklin Mutual
Mr. Langerman has a Bachelor of Arts degree from Yale University, a Masters in
Science from New York University Graduate School of Business and a Juris Doctor
from Stanford University Law School. Prior to November 1996, he was a Research
Analyst for Heine, the former investment manager for Franklin Mutual Series Fund
Inc. He joined Franklin Mutual in November 1996. Mr. Langerman is a director and
Executive Vice President of Franklin Mutual Series Fund Inc.
Lawrence N. Sondike
Senior Vice President of Franklin Mutual
Mr. Sondike has a Bachelor of Arts degree from Cornell University and a Masters
in Business Administration from New York University Graduate School of Business.
Prior to November 1996, he was a Research Analyst for Heine, the former
investment manager for Franklin Mutual Series Fund Inc. He joined Franklin
Mutual in November 1996. He is a Vice President of Franklin Mutual Series Fund
Inc.
Management Fees. During the fiscal year ended December 31, 1996, management
fees, before any advance waiver, totaled 0.60%, 0.60%, 0.60%, 0.80% and 0.80% of
the average daily net assets of Mutual Shares, Qualified, Beacon, Discovery, and
European, respectively. Total operating expenses of the class were 0.72%, 0.78%,
0.75%, 0.99% and 1.15% of the average daily net assets of Mutual Shares,
Qualified, Beacon, Discovery, and European, respectively. Under an agreement by
Franklin Mutual to limit its fees, Mutual Shares, Qualified, Beacon, Discovery,
and European paid management fees totaling 0.58%, 0.57%, 0.58%, 0.77% and 0.74%,
respectively, and operating expenses totaling 0.70%, 0.75%, 0.73%, 0.96% and
1.09%, respectively.
The Fund pays its own operating expenses. These expenses include Franklin
Mutual's management fees; taxes, if any; custodian, legal and auditing fees; the
fees and expenses of Board members who are not members of, affiliated with, or
interested persons of Franklin Mutual; fees of any personnel not affiliated with
Franklin Mutual; insurance premiums; trade association dues; expenses of
obtaining quotations for calculating the Fund's Net Asset Value; and printing
and other expenses that are not expressly assumed by Franklin Mutual. The Board
has determined the method and procedure for allocating expenses between the
series and the classes of Mutual Series and reserves the right to modify such
method and procedures.
Under their management agreements, the Funds pay Franklin Mutual a management
fee equal to an annual rate of 0.60% of the average daily net assets of Mutual
Shares, Qualified and Beacon, and 0.80% of the average daily net assets of
Discovery, European and Financial Services. The fee is computed at the close of
business on the last business day of each month.
Portfolio Transactions. Franklin Mutual seeks to obtain the best execution on
all transactions. If Franklin Mutual believes more than one broker or dealer can
provide the best execution, it may consider research and related services and
the sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. To the extent that
any of the Funds owns more than 5% of the securities of a broker-dealer, that
broker-dealer may be considered to be an affiliated person of such Fund. If such
Fund places any portfolio transactions through the broker-dealer, such Fund
would be required to comply with certain rules of the SEC relating to the
payment of brokerage commissions to affiliated broker-dealers. Please see "How
does the Fund Buy Securities for its Portfolio?" in the SAI for more
information.
Administrative Services. FT Services provides certain administrative services
and facilities for the Fund. Under its administration agreement, the Fund pays
FT Services a monthly administration fee equal to an annual rate of 0.15% of the
Fund's average daily net assets up to $200 million, 0.135% of average daily net
assets over $200 million up to $700 million, 0.10% of average daily net assets
over $700 million up to $1.2 billion, and 0.075% of average daily net assets
over $1.2 billion. During the two-month period ended December 31, 1996,
annualized administration fees totaling 0.08% of the average daily net assets of
each series were paid to FT Services. These fees are included in the amount of
total expenses shown above. Please see "Investment Management and Other
Services" in the SAI for more information.
Prior Services. Before November 1, 1996, Heine managed the Fund's assets and
made its investment decisions under separate investment management agreements
that were substantially the same as the management agreement currently in effect
with Franklin Mutual.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, Class Z of the Fund advertises its performance. The more
commonly used measure of performance is total return.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The investment results of Class Z will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
Each series is treated as a separate entity for federal income tax purposes. The
Fund has elected and intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will generally not be liable for federal
income or excise taxes.
You will generally have to pay Federal income taxes on the dividends and
distributions you receive from a series and on gains realized upon redemption of
your shares.
Following each calendar year, you will receive information for tax purposes on
the dividends and capital gain distributions received during the previous year.
The Fund may make distributions from net investment income or capital gain and
may also make distributions in kind. Dividends from net investment income and
any net short-term capital gain will be taxable as ordinary income whether
received in cash or in kind. Any distributions designated as realized net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) will be taxable as long-term capital gain, regardless of the
holding period of your shares of such series. All or a portion of any dividends
paid by the Fund to corporate shareholders may, under certain circumstances, be
eligible for the dividends received deduction. Credit for foreign taxes paid by
the Fund have generally not been available to shareholders.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and generally be subject to tax.
The IRS requires backup withholding of federal income tax of 31% of the gross
amount of dividends, capital gain distributions, and redemption proceeds paid or
credited to shareholders who do not furnish a valid social security or taxpayer
identification number. If you are using the Fund as a medium for tax qualified
retirement plans, you may be subject to a 20% mandatory withholding upon
withdrawal under certain circumstances.
Redemptions of shares of a series will be taxable transactions for federal
income tax purposes. Generally, gain or loss will be recognized in an amount
equal to the difference between your basis in your shares and the amount
received. Assuming that such shares are held as a capital asset, such gain or
loss will be a capital gain or loss and will be a long-term capital gain or loss
if you have held your shares for a period of more than one year. If you redeem
shares of any series at a loss and make an additional investment in the same
series 30 days before or after your redemption, the loss may be disallowed under
the wash sale rules.
Income received by each series from sources outside the U.S. may be subject to
withholding and other foreign taxes. As long as more than 50% of the value of a
particular series' assets at the close of any taxable year consists of
securities of foreign corporations, as is anticipated for European, such series
intends to elect to treat any foreign income paid by the series as if it were
paid by shareholders. Accordingly, the amount of foreign income taxes paid by
European will be included in the income of its shareholders and the European
shareholders will be entitled to credit their portions of those amounts against
their U.S. federal income taxes, if any, or to deduct such portions from their
taxable income. No deduction for foreign taxes may be claimed by a shareholder
who does not itemize deductions. In addition, certain individual shareholders
may be subject to rules that limit or reduce their ability to deduct fully their
pro rata share of foreign taxes. Shortly after any year for which it makes such
an election, European will report to its shareholders, in writing, the amount
per share of any foreign tax that must be included in each shareholder's gross
income and the amount that will be available for deduction or credit.
In general, a credit for foreign taxes may not exceed the U.S. shareholder's
U.S. federal income tax attributable to its foreign source taxable income. If
European elects to treat foreign taxes paid by the series as paid by the
shareholders as described in the preceding paragraph, the source of European's
income will flow through to its shareholders for purposes of calculating the
limitation on foreign tax credits. Dividends and interest received by the Fund
in respect of non-U.S. securities will give rise to foreign source income to
shareholders. Please consult your tax advisors with respect to the federal,
state, local or foreign tax consequences of the pass-through of foreign tax
credits described above.
The foregoing summary of federal income tax consequences is included herein for
general informational purposes only. It does not address the tax consequences to
all investors and does not address the tax consequences under state, local,
foreign and other tax laws. Please consult your own tax advisors with respect to
the tax consequences of an investment in the Fund.
HOW IS THE FUND ORGANIZED?
Each Fund is a diversified series of Mutual Series, an open-end management
investment company, commonly called a mutual fund. Mutual Series was organized
as a Maryland corporation on November 12, 1987, and is registered with the SEC.
Each Fund, with the exception of Financial Services, which was not effective
until August 19, 1997, began offering three classes of shares on November 1,
1996: Mutual Shares Fund Class Z, Mutual Shares Fund - Class I, Mutual Shares
Fund - Class II, Mutual Qualified Fund - Class Z, Mutual Qualified Fund - Class
I, Mutual Qualified Fund Class II, Mutual Beacon Fund - Class Z, Mutual Beacon
Fund - Class I, Mutual Beacon Fund - Class II, Mutual European Fund - Class Z,
Mutual European Fund - Class I, Mutual European Fund - Class II, Mutual
Discovery Fund - Class Z, Mutual Discovery Fund - Class I, and Mutual Discovery
Fund - Class II. All shares outstanding before the offering of Class I and Class
II shares on November 1, 1996, are considered Class Z shares. Financial Services
was created initially with, and offers, three classes of shares: Class I, Class
II, and Class Z. Additional series and classes of shares may be offered in the
future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of Mutual Series for matters that affect Mutual Series as a
whole.
Mutual Series has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the Board.
If this happens, holders of the remaining shares voting will not be able to
elect anyone to the Board.
Mutual Series does not intend to hold annual shareholder meetings. Mutual Series
or a Fund may hold special meetings, however, for matters requiring shareholder
approval. A meeting may also be called by the Board in its discretion or by
shareholders holding at least 10% of the outstanding shares. In certain
circumstances, we are required to help you communicate with other shareholders
about the removal of a Board member.
As of July 22, 1997, Michael F. Price owned of record and beneficially more than
25% of the outstanding shares of Class Z of European.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
Opening Your Account
Shares of the Fund may be purchased without a sales charge. To open your
account, contact your investment representative or complete and sign the
enclosed shareholder application and return it to the Fund with your check.
CURRENTLY, THE FUND DOES NOT ALLOW INVESTMENTS BY MARKET TIMERS.
MINIMUM
INVESTMENTS*
- -------------------------------------------------------
To Open Your Account $5,000,000
To Add to Your Account $25
*We waive or lower these minimums for certain investors listed below. We may
also refuse any order to buy shares. To determine if you meet the minimum
investment requirement, the amount of your current purchase is added to the cost
or current value, whichever is higher, of your existing shares in the Franklin
Templeton Funds. At least $1 million of this amount, however, must be invested
in Advisor Class or Class Z shares of any of the Franklin Templeton Funds.
The Fund's minimum initial investment requirement will not apply to purchases
by:
1. Existing shareholders of any series as of October 31, 1996, and their
immediate family members residing at the same address subject to the other
terms and conditions as set forth in this prospectus
2. Redemption proceeds from a sale of Class Z shares of the Fund if reinvested
in the same class of shares of any series within 365 days of the redemption
date
3. A direct rollover to an IRA by employees of a company with a non-custodial
pension plan set up as an omnibus account on October 31, 1996
4. Partnership shareholders who have an account on October 31, 1996, whether
or not they are listed on the registration
5. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition, or exchange offer or other business combination
transaction
6. New participants and accounts of employer-sponsored retirement plans
invested in the Fund as of October 31, 1996, and employees who own Fund
shares through an employer-sponsored retirement plan as of October 31,
1996, who wish to open new individual Class Z accounts in their own names
7. Corporate shareholders invested in the Fund as of October 31, 1996, using
the same registration, or new companies of such corporate shareholders that
have been reorganized into smaller, independent companies
8. Shareholders who owned shares of the Fund through a broker-dealer or
service agent omnibus account on October 31, 1996
9. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
10. Qualified registered investment advisors or certified financial planners
who have clients invested in Mutual Series on October 31, 1996, or who buy
through a broker-dealer or service agent who has entered into an agreement
with Distributors
11. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group and their immediate family
members, subject to a $100 minimum investment requirement
12. Accounts managed by the Franklin Templeton Group
13. The Franklin Templeton Profit Sharing 401(k) Plan
14. Each series of the Franklin Templeton Fund Allocator Series investing in
Mutual Shares and Discovery, subject to a $1,000 minimum initial and
subsequent investment requirement
15. Employer stock, bonus, pension or profit sharing plans that meet the
requirements for qualification under Section 401 of the Code, including
salary reduction plans qualified under Section 401(k) of the Code, and that
(i) are sponsored by an employer with at least 5,000 employees, or (ii
have plan assets of $50 million or more
16. Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a fiduciary,
agency, advisory, custodial or similar capacity and over which the trust
companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion
17. Defined benefit plans or governments, municipalities, and tax-exempt
entities that meet the requirements for qualification under Section 501
of the Code, subject to a $1 million initial investment in Class Z shares
18. Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of a qualified group, if the group
as a whole meets the $5 million minimum investment requirement. A qualified
group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
Telephone Purchases
If you are a current shareholder, you may buy Fund shares by calling the Fund at
1-800-448-FUND prior to the earlier of 4:00 p.m. Eastern time or the close of
the NYSE. Telephone purchases must be for at least $1,000 and must be made in an
account that has an existing balance equal to at least one half of the telephone
purchase. Please see section seven of the application.
How Do I Buy Shares in Connection with Retirement Plans?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
Payments to Securities Dealers
Securities Dealers who initiate and are responsible for purchases of Class Z
shares may receive up to 0.25% of the amount invested. The payment is subject to
the sole discretion of Distributors, and is paid by Distributors or one of its
affiliates and not by the Fund or its shareholders.
For information on additional compensation payable to Securities Dealers in
connection with the sale of Fund shares, please see "How Do I Buy, Sell and
Exchange Shares? - Other Payments to Securities Dealers" in the SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and some do not offer Class Z
or Advisor Class shares.
METHOD STEPS TO FOLLOW
- -------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
- -------------------------------------------------------------------------
BY PHONE Call Shareholder Services
If you do not want the ability to exchange by phone to
apply to your account, please let us know.
- ---------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this
option to be available on your account. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
o Mutual Series Class Z shareholders of record on October 31, 1996, and
others who would not qualify to buy Class I shares of Franklin Templeton
Funds at Net Asset Value, may exchange their shares for Class I shares at
Net Asset Value of other Franklin Templeton Funds, as permitted by each
fund's current prospectus, provided those shares have been held at least
six consecutive months in any one Fund prior to the exchange.
Because excessive trading can hurt Fund performance, operations, and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
Limited Exchanges Between Different Classes of Shares
If you qualify to buy Advisor Class shares of the Franklin Templeton Funds and
you want to exchange into a fund that does not currently offer an Advisor Class,
you may exchange your Class Z shares for Class I shares of that fund at Net
Asset Value. If you qualify to buy Advisor Class shares of the Franklin
Templeton Funds and you do not qualify to buy Advisor Class shares of Templeton
Developing Markets Trust, Templeton Foreign Fund or Templeton Growth Fund, you
may exchange the Class Z shares you own for Class I shares of those funds or of
Templeton Institutional Funds, Inc. at Net Asset Value. If you do so and you
later decide you would like to exchange into a fund that offers a Class Z or
Advisor Class, you may exchange your Class I shares for Class Z or Advisor Class
shares of that fund.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- -----------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need
to send additional documents. Accounts under court
jurisdiction may have other requirements.
- -----------------------------------------------------------------------
BY PHONE Call Shareholder Services
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts
may exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you
want to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement
plan account
o Unless the address on your account was changed by phone
within the last 15 days
If you do not want the ability to redeem by phone to
apply to your account, please let us know.
- ----------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
591/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semi-annually. The
distributions are frequently declared at mid-year and during late December.
Capital gains, if any, may be distributed twice a year, usually once in December
and once at mid-year.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the same
class of the Fund by reinvesting capital gain distributions, or both dividend
and capital gain distributions. This is a convenient way to accumulate
additional shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the Advisor Class of another Franklin Templeton Fund. You
may also direct your distributions to buy Class I shares of another Franklin
Templeton Fund. Many shareholders find this a convenient way to diversify their
investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions, in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Trust Company retirement plans, special forms are
required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
Share Price
You buy and sell Class Z shares at the Net Asset Value per share. The Net Asset
Value we use when you buy or sell shares is the one next calculated after we
receive your transaction request in proper form. If you buy or sell shares
through your Securities Dealer, however, we will use the Net Asset Value next
calculated after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
How and When Shares are Priced
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the scheduled close of the NYSE, generally 4:00 p.m.
Eastern time. You can find the prior day's closing Net Asset Value in many
newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the
evening if preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it. Any outstanding share
certificates must be returned to the Fund if you want to sell or exchange those
shares or if you would like to start a systematic withdrawal plan. The
certificates should be properly endorsed. You can do this either by signing the
back of the certificate or by completing a share assignment form. For your
protection, you may prefer to complete a share assignment form and to send the
certificate and assignment form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by phone, we will not be liable for any loss.
Trust Company Retirement Plan Accounts. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
Account Registrations and Required Documents
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless ALL owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------
CORPORATION Corporate Resolution
- -------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
- -----------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- ---------------------------------------------------------------------------
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Important Information If You Have an Investment Representative If there is a
Securities Dealer or other representative of record on your account, we are
authorized: (1) to provide confirmations, account statements and other
information about your account directly to your dealer and/or representative;
and (2) to accept telephone and electronic instructions directly from your
dealer or representative, including instructions to exchange or redeem your
shares. Electronic instructions may be processed through established electronic
trading systems and programs used by the Fund. Telephone instructions directly
from your representative will be accepted unless you have let us know that you
do not want telephone privileges to apply to your account.
Tax Identification Number
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $300, or $100 for IRA
accounts. We will only do this if the value of your account fell below this
amount because you voluntarily sold your shares and your account has been
inactive (except for the reinvestment of distributions) for at least six months.
Before we close your account, we will notify you and give you 30 days to
increase the value of your account to $300, or $100 for IRA accounts. These
minimums do not apply if you fall within categories 12, 13, 14 or 15 under "How
Do I Buy Shares? - Opening Your Account."
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your savings
or checking account to the Fund each month to buy additional shares. If you are
interested in this program, please refer to the shareholder application included
with this prospectus or contact your investment representative. The market value
of the Fund's shares may fluctuate and a systematic investment plan such as this
will not assure a profit or protect against a loss. You may discontinue the
program at any time by notifying Investor Services by mail or phone.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household
and send only one copy of a report. Call Fund Information if you would like
an additional free copy of the Fund's financial reports.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at P.O. Box 997151, Sacramento, California 95899-9983. The Fund and Franklin
Mutual are located at 51 John F. Kennedy Parkway, Short Hills, New Jersey 07078.
Distributors is located at 777 Mariners Island Blvd., San Mateo, California
94403-7777. You may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- -----------------------------------------------------------------------------
Shareholder Services 1-800/448-3863 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/448-3863 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Automated
Telephone Inquiry 1-800/858-3013 24 hours a day, 7 days a
week
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
Useful Terms and Definitions
Board - The Board of Directors of the Fund
CD - Certificate of deposit
Class I, Class II and Class Z - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Class Z." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
Code - Internal Revenue Code of 1986, as amended
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
Franklin Mutual - Franklin Mutual Advisers, Inc., the Fund's investment manager
Franklin Templeton Funds - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the Fund's administrator
Heine - Heine Securities Corporation, the Fund's former investment manager that
was acquired by Resources on October 31, 1996
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Market Timers - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
Moody's - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
Trust Company - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
SUPPLEMENT DATED FEBRUARY 19, 1998
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN MUTUAL SERIES FUND INC.
DATED MAY 1, 1997, AS AMENDED AUGUST 19, 1997
The Statement of Additional Information is amended as follows:
I. OFFICERS AND DIRECTORS
The last paragraph in the section is replaced with the following:
As of February 2, 1998, the officers and Board members as a group, owned
of record and beneficially the following shares of Mutual Series:
270,955.590 shares of Mutual Shares - Class Z; 119,485.602 shares of
Qualified - Class Z; 161,795.585 shares of Beacon - Class Z; 176,912.438
shares of Discovery Class Z; or less than 1% of the total outstanding
Class Z shares of those Funds. As of February 2, 1998, the officers and
Board members as a group, owned of record and beneficially 8,489,585.730
shares of European - Class Z and 123,541.206 shares of Financial Services
- Class Z or 19.76% and 1.00%, respectively, of the total outstanding
Class Z shares of European and Financial Services.
II. HOW DO I BUY, SELL AND EXCHANGE SHARES?
The first paragraph under "ADDITIONAL INFORMATION ON SELLING SHARES" is replaced
with the following:
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing
or maintaining a systematic withdrawal plan. Once your plan is
established, any distributions paid by the Fund will be automatically
reinvested in your account. Payments under the plan will be made from the
redemption of an equivalent amount of shares in your account, generally on
the 25th day of the month in which a payment is scheduled. If the 25th
falls on a weekend or holiday, we will process the redemption on the next
business day.
III. THE FUND'S UNDERWRITER
The second paragraph under "THE RULE 12B-1 PLANS" is replaced with the
following:
THE CLASS I PLAN. Under the Class I plan, the Fund may pay up to a maximum
of 0.35% per year of Class I's average daily net assets, payable
quarterly, for expenses incurred in the promotion and distribution of
Class I shares. Of this amount, the Fund may reimburse up to 0.35% to
Distributors or others, out of which 0.10% will generally be retained by
Distributors for its distribution expenses.
IV. HOW DOES THE FUND MEASURE PERFORMANCE?
The subsection titled "TOTAL RETURN" is revised to add the following:
The restated average annual total return for each class for the one-,
five-, ten-year and from inception periods ended June 30, 1997, was:
CLASS I 1 YEAR 5 YEARS 10 YEARS
----------------------------------------------------------------
Financial Services* N/A N/A N/A
Mutual Shares 20.90% 18.80% 14.22%
Qualified 20.22% 19.10% 14.34%
Beacon 17.55% 18.68% 14.35%
Discovery** 19.97% N/A N/A
European*** 23.46% N/A N/A
CLASS II 1 YEAR 5 YEARS 10 YEARS
----------------------------------------------------------------
Financial Services* N/A N/A N/A
Mutual Shares 23.87% 19.57% 14.59%
Qualified 23.19% 19.88% 14.71%
Beacon 20.37% 19.44% 14.71%
Discovery** 22.92% N/A N/A
European*** 26.40% N/A N/A
*Financial Services commenced operations on August 19, 1997. **Discovery
commenced operations on December 31, 1992. The restated average annual
return from inception was 22.08% for Class I and 22.96% for Class II.
***European commenced operations on July 3, 1996.
The restated cumulative total return for each class of the funds listed below
for the one-, five-, ten-year and from inception periods ended June 30, 1997,
was:
CLASS I 1 YEAR 5 YEARS 10 YEARS
----------------------------------------------------------------
Mutual Shares 20.90% 136.68% 277.92%
Qualified 20.22% 139.67% 282.01%
Beacon 17.55% 135.40% 282.29%
Discovery* 19.97% N/A N/A
European** 23.46% N/A N/A
CLASS II 1 YEAR 5 YEARS 10 YEARS
----------------------------------------------------------------
Mutual Shares 23.87% 144.44% 290.26%
Qualified 23.19% 147.55% 294.53%
Beacon 20.37% 143.08% 294.59%
Discovery* 22.92% N/A N/A
European** 26.40% N/A N/A
*Discovery commenced operations on December 31, 1992. The restated
cumulative total return from inception was 145.16% for Class I and 153.21%
for Class II.
**European commenced operations on July 3, 1996.
The cumulative total return for Financial Services - Class I from the date
of inception (August 19, 1997) through December 31, 1997, was 18.37%. The
cumulative total return for Financial Services - Class II from the date of
inception (August 19, 1997) through December 31, 1997, was 21.46%.
V. MISCELLANEOUS INFORMATION
The fourth paragraph in this section is replaced with the following:
As of February 2, 1998, the principal shareholders of Mutual Series,
beneficial or of record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
BEACON - CLASS I
------------------------------------
Manufacturers Life Ins. Co. USA 8,737,769.066 15.33%
200 Bloor St. E
Toronto, Ontario
Canada 231 M4W 1E5
EUROPEAN - CLASS Z
------------------------------------
Michael Price 8,439,422.451 19.64%
51 John F. Kennedy Parkway
Short Hills, NJ 07078
FINANCIAL SERVICES - CLASS Z
------------------------------------
State Street Bank 661,980.365 5.38%
Cust. Markman Aggressive
1 Heritage Dr.
North Quincy, MA 02171
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.
VI. FINANCIAL STATEMENTS
The following is added to the section:
The unaudited financial statements contained in the Semi-Annual Report to
Shareholders of the Fund, for the period ended June 30, 1997, are
incorporated herein by reference. The audited financial statements of the
Financial Services Fund for the period ended December 31, 1997, are as
follows:
MUTUAL FINANCIAL SERVICES FUND
Financial Highlights
AUGUST 19, 1997
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31, 1997
------------------
PER SHARE OPERATING PERFORMANCE -CLASS Z
(For a share outstanding
throughout the period)
Net asset value, beginning of
period.......................... $10.00
Income from investment -----------
operations:
Net investment income.......... .04
Net realized and unrealized gain 2.35
--------
Total from investment operations 2.39
Less distributions from: ---------
Net investment income.......... (.03)
Net realized gains............. (.09)
--------
Total distributions............. (.12)
--------
Net asset value, end of period.. $ 12.27
--------
Total Return*................... 23.92%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's) $136,350
Ratios to average net assets:
Expenses....................... 1.00%**
Expenses, excluding waiver and 1.62%**
payments by affiliate...........
Net investment income.......... 1.37%**
Portfolio turnover rate......... 42.26%
Average commission rate paid***. $ .0241
*Total return is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities.)
AUGUST 19, 1997
(COMMENCEMENT
OF OPERATIONS)
TO DECEMBER 31, 1997
--------------------
PER SHARE OPERATING PERFORMANCE
- CLASS I
(For a share outstanding
throughout the period)
Net asset value, beginning of
period.......................... $10.00
Income from investment -------
operations:
Net investment income.......... .03
Net realized and unrealized gain 2.35
------
Total from investment operations 2.38
Less distributions -------
from:
Net investment income.......... (.02)
Net realized gains............. (.09)
------
Total distributions............. (.11)
------
Net asset value, end of period.. $12.27
------
Total Return*................... 23.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's) $78,249
Ratios to average net assets:
Expenses....................... 1.35%**
Expenses, excluding waiver and
payments by affiliate........ 1.97%**
Net investment income.......... 1.02%**
Portfolio turnover rate......... 42.26%
Average commission rate paid***. $ .0241
*Total return does not reflect sales commissions and is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities.
AUGUST 19, 1997
(COMMENCEMENT
OF OPERATIONS)
TO DECEMBERR 31, 1997
----------------------
PER SHARE OPERATING PERFORMANCE
- CLASS II
(For a share outstanding
throughout the period)
Net asset value, beginning of
period.......................... $10.00
Income from investment --------
operations:
Net investment income.......... .01
Net realized and unrealized gain 2.35
------
Total from investment operations 2.36
Less distributions from:
Net investment income.......... (.01)
Net realized gains............. (.09)
------
Total distributions............. (.10)
------
Net asset value, end of period.. $12.26
------
Total Return*................... 23.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's) $43,207
Ratios to average net assets:
Expenses....................... 2.00%**
Expenses, excluding waiver and 2.62%**
payments by affiliate...........
Net investment income.......... 0.37%**
Portfolio turnover rate......... 42.26%
Average commission rate paid***. $ .0241
*Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities.
MUTUAL FINANCIAL SERVICES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997
COUNTRY SHARES VALUE
COMMON STOCKS 80.6% --------------------------
BANKING 32.7%
* Annapolis National Bancorp Inc.... United States 48,663 $ 517,044
* Banca Di Roma SpA................. Italy 1,800,000 1,815,263
* Banca Nazionale del Lavoro SpA, fgn Italy 631,500 9,816,986
Banco Latinoamericano de
Exportaciones SA, E............. Panama 93,300 3,860,288
* Banque Cantonale Vaudoise, fgn... Switzerland 13,780 4,704,423
BG Bank AS, fgn.................. Denmark 41,700 2,805,601
* Bok Financial Corp...............United States 92,700 3,597,919
* Century Bancorp Inc..............United States 5,500 98,313
Chase Manhattan Corp.............United States 35,000 3,832,500
* Credit National/Natexis.......... France 60,533 3,530,295
First Union Corp.................United States 102,780 5,267,475
Fleet Financial Group Inc........United States 59,000 4,421,312
Long Island Commercial Bank......United States 17,000 276,250
Mellon Bank Corp.................United States 45,000 2,728,125
Merita Ltd., A................... Finland 448,500 2,452,709
* Nordbanken Holding AB............. Sweden 542,500 3,067,828
PNC Bank Corp....................United States 59,000 3,366,688
(R)Regency Bancorp.................United States 100,000 956,250
Santa Monica Bank................United States 19,800 550,688
Sumitomo Bank of California......United States 5,000 273,125
UMB Financial Corp...............United States 14,700 801,150
* UnionBanCal Corp.................United States 16,000 1,720,000
* Unionbancorp Inc.................United States 67,500 1,476,563
* United Security Bancorporation...United States 93,500 1,916,750
UST Corp., Inc...................United States 96,100 2,666,775
* Vermont Financial Services Corp..United States 250,000 6,937,500
+ Warren Bancorp Inc...............United States 215,500 4,956,500
Wells Fargo & Co.................United States 10,000 3,394,375
Western Bancorp..................United States 10,296 339,768
Whitney Holding Corp.............United States 35,700 2,034,900
---------
84,183,363
BEVERAGES & TOBACCO 1.1%......... ------------
B.A.T. Industries Plc............United Kingdom 300,000 2,732,065
---------
BUSINESS & PUBLIC SERVICES 1.4%
Suez Lyonnaise des Eaux SA......... France 32,916 3,642,445
---------
DATA PROCESSING & REPRODUCTION 0.2%
* National Processing Inc..........United States 60,000 592,500
--------
ENERGY EQUIPMENT & SERVICES 0.2%
Cie Generale De Geophysique SA.... France 3,112 398,145
* Cie Generale De Geophysique SA, ADR France 300 7,688
--------
405,833
ENERGY SOURCES 0.4% --------
Societe Elf Aquitane SA........... France 10,000 $1,163,081
------------
FINANCIAL SERVICES 32.9%
Advanta Corp., B.................United States 22,500 $ 570,938
American Capital Strategies Ltd..United States 125,000 2,265,624
Annaly Mortgage Management Inc...United States 260,000 2,860,000
Bankatlantic Bancorp Inc., A.....United States 300,000 4,893,750
* Bankunited Financial Corp., A....United States 80,000 1,232,500
Bayonne Bancshares Inc...........United States 95,000 1,270,625
Beneficial Corp..................United States 35,000 2,909,375
Cenfed Financial Corp............United States 17,000 765,000
* CIT Group Inc., A................United States 175,000 5,643,750
* Citizens Bancorp Indiana.........United States 15,000 221,250
Commonwealth Bancorp Inc.........United States 244,500 4,859,437
* Federal Trust Corp...............United States 55,000 151,250
Fidelity Bankshares Inc..........United States 25,500 828,750
* First Alliance Corporation.......United States 120,000 2,205,000
First Colorado Bancorp...........United States 12,800 304,000
First Essex Bancorp Inc..........United States 91,200 2,120,400
* Golden State Bancorp Inc.........United States 4,500 168,188
Greater Delaware Valley
Savings Bank United States 10,000 306,250
* IMC Mortgage Co..................United States 280,000 3,325,000
Imperial Credit Commercial
Mortgage Investment.............United States 350,000 5,118,750
INMC Mortgage Holdings Inc......United States 30,000 703,125
Julius Baer Holdings AG.........Switzerland 2,500 4,635,173
Klamath First Bancorp Inc.......United States 64,700 1,391,050
(R)Laser Mortgage Management Inc...United States 250,000 3,625,000
* Life Financial Corp..............United States 169,600 2,141,200
* Long Beach Financial Corp........United States 416,000 4,836,000
* Matrix Capital Corp..............United States 172,000 2,623,000
* MECH Financial Inc...............United States 61,000 1,589,812
Mercury Asset Management Group
Plc. United Kingdom 85,000 2,367,626
Morgan Stanley, Dean Witter
Discover & Co. United States 8,000 473,000
Northwest Savings Bank............United States 40,000 565,000
Peoples Bancorp Inc...............United States 110,600 5,004,650
Pinnacle Financial Services Inc...United States 52,000 2,567,500
Pioneer Group Inc.................United States 32,500 914,063
* Security Capital Group, B........United States 55,000 1,787,500
Southwest Bancshares Inc..........United States 12,500 371,875
Trilon Financial Corporation....... Canada 50,000 402,365
United Asset Management Corp.....United States 283,500 6,928,031
----------
84,945,807
INSURANCE 10.4% ----------
Argonaut Group Inc...............United States 31,250 1,058,594
Arthur J Gallagher Co............United States 25,800 888,488
Assurances Generales de France AGF France 50,000 2,649,331
Citizens Corp.....................United StateS 146,700 4,217,625
* Companhia de Seguros Mundial
Confianca
SA, fgn..........................Portugal 168,100 3,059,685
Guardian Royal Exchange Plc.......United Kingdom 175,000 934,092
Pohjola Insurance Co. Ltd......... Finland 51,800 1,920,208
Reliable Life Insurance Co., A... United States 800 90,800
Sampo Insurance Co. Ltd., A........ Finland 159,940 5,283,197
SCOR SA........................... France 42,350 $2,025,144
* Topdanmark AS..................... Denmark 12,000 2,276,741
* Union Assurances Federales SA..... France 15,194 1,994,394
Unitrin Inc.......................United States 4,700 303,738
--------
26,702,037
TELECOMMUNICATIONS 1.3% -----------
*360 Degrees Communications
Company..........................United States 10,900 220,044
Koninklijke Ptt Nederland NV.....Netherlands 75,000 3,129,238
---------
3,349,282
----------
TOTAL COMMON STOCKS (COST $192,267,775) 207,716,413
-----------
PRINCIPAL
AMOUNT**
BONDS 1.3% ---------
Bay View Capital Corp.,
9.125%, 8/15/07 United States $750,000 776,250
Local Financial, 11.00%,
9/5/04... United States 750,000 795,000
Matrix Capital Corp., 11.50%,
11.50% 9/30/04 United States 1,700,000 1,708,500
---------
TOTAL BONDS (COST $3,195,125). 3,279,750
---------
BONDS & NOTES IN REORGANIZATION
COST $167,175) 0.1%
Mercury Finance Co., Bank
Claim, MTN 7.42%, 6/29/00. United States 188,234 156,234
--------
SHORT TERM INVESTMENTS 12.6%
Federal National Mortgage Assn.,
5.40% to 5.65%,
with maturities to 4/24/98..United States 25,200,000 24,953,046
Federal Home Loan Bank,
5.42% to 5.55%, with maturities
to 3/4/98................ United States 5,000,000 4,967,272
Federal Home Loan Mortgage Corp.,
5.48%, 1/23/98.......... United States 2,500,000 2,491,760
---------
TOTAL SHORT TERM INVESTMENTS
(COST $32,401,719)............. 32,412,078
----------
TOTAL INVESTMENTS 94.6%
(COST $228,031,794)............ 243,564,475
SECURITIES SOLD SHORT (0.2%)... (481,875)
NET EQUITY IN FORWARD
CONTRACTS 0.5% .............. 1,332,795
OTHER ASSETS, LESS
LIABILITIES 5.1%.................. 13,390,101
----------
TOTAL NET ASSETS 100.0%...... $257,805,496
------------
SECURITIES SOLD SHORT COUNTRY SHARES VALUE
------------------------------------------------------------------------
ISSUER
--------
* CNB Bancshares Inc.
(proceeds $479,615) United States 10,000 $(481,875)
=========
*Non-income producing.
**Securities traded in U.S. dollars.
(R)Restricted securities (See note 6).
+The Investment Company Act of 1940 defines "affiliated companies" as
investments in portfolio companies in which the Fund owns 5% or more of the
outstanding voting securities. Investments in non-controlled "affiliated
companies" at 12/31/97 were $4,956,500.
See Notes to Financial Statements.
MUTUAL FINANCIAL SERVICES
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
Assets:
Investments in securities, at
value:
Unaffiliated Issuers (Cost
$223,828,436).....................$238,607,975
Non Controlled Affiliates
(Cost $4,203,358)................. 4,956,500 $243,564,475
Cash............................. --------- 6,478,227
Receivables:
Investment securities sold...... 2,007,313
Capital shares sold............. 6,589,591
Dividends and interest.......... 409,004
Unrealized gain on forward
exchange contracts (Note 7)....... 1,419,472
----------
Total assets................. 260,468,082
-----------
Liabilities:
Payables:
Investment securities purchased. 1,107,868
Capital shares redeemed......... 625,061
To affiliates................... 201,819
Securities sold short, at value
(Proceeds $479,615)............... 481,875
Unrealized loss on forward
exchange contracts (Note 7)....... 86,677
Other liabilities................ 159,286
---------
Total liabilities............ 2,662,586
---------
Net assets, at value.............. $257,805,496
============
Net assets consist of:
Undistributed net investment
income............................ $ 108,579
Net unrealized appreciation...... 16,863,216
Accumulated net realized gain.... 3,503,357
Capital shares................... 237,330,344
-----------
Net assets, at value.............. $257,805,496
CLASS Z =============
Net asset value and maximum offering
price per share ($136,350,249 /
11,114,665 shares outstanding)........... $12.27
CLASS I ======
Net asset value per share ($78,248,590 /
6,376,348 shares outstanding)............ $12.27
Maximum offering price per share ($12.27 ======
/ 95.50%)................................ $12.85
CLASS II ======
Net asset value per share ($43,206,657 /
3,524,251 shares outstanding)*............ $12.26
Maximum offering price per share ($12.26 ======
/ 99.00%).................................. $12.38
======
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
MUTUAL FINANCIAL SERVICES
Financial Statements (CONTINUED)
STATEMENT OF OPERATIONS
FOR THE PERIOD AUGUST 19, 1997 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,
1997
Investment Income:
(net of foreign taxes of $6,736)
Dividends.......................... $641,194
Interest........................... 604,980
--------
Total Investment Income....... $1,246,174
----------
Expenses:
Management fees (Note 3)........... 419,994
Administrative fees (Note 3)....... 40,704
Distribution fees (Note 3)
Class I...................... 53,249
Class II..................... 80,369
Transfer agent fees (Note 3)....... 58,200
Custodian fees..................... 29,331
Reports to shareholders............ 60,000
Registration and filing fees....... 180,306
Professional fees.................. 63,600
Directors' fees and expenses....... 500
Other.............................. 491
--------
Total expenses................. 986,744
Expenses waived/paid by
affiliate (Note 3)............ (327,232)
--------
Net expenses.............. 659,512
--------
Net investment income... 586,662
--------
Realized and unrealized gains
(losses):
Net realized gain (loss) from:
Investments....................... 5,576,882
Foreign currency transactions..... (326,955)
---------
Net realized gain.............. 5,249,927
Net unrealized appreciation on:
Investments...................... 15,530,421
Translation of assets and
liabilities denominated in foreign
currencies...................... 1,332,795
----------
Net unrealized appreciation.... 16,863,216
----------
Net realized and unrealized gain.... 22,113,143
----------
Net increase in net assets $22,699,805
resulting from operations...... ===========
See Notes to Financial Statements.
MUTUAL FINANCIAL SERVICES FUND
Financial Statements (CONTINUED)
STATEMENT OF CHANGES IN NET ASSETS FOR THE PERIOD AUGUST 19, 1997
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1997
1997
Increase in net assets: ------
Operations:
Net investment income.................... $ 586,662
Net realized gain from investments and
oreign currency transactions............ 5,249,927
Net unrealized appreciation on
investments and translation of assets and
liabilities denominated in foreign
currencies.............................. 16,863,216
----------
Net increase in net assets resulting
from operations........................... 22,699,805
Distributions to shareholders from:
Net investment income:
Class Z.................................. (312,463)
Class I.................................. (127,466)
Class II................................. (17,029)
Net realized gains:
Class Z.................................. (937,387)
Class I.................................. (541,128)
Class II................................. (289,180)
Capital share transactions (Note 2):
Class Z.................................. 124,473,660
Class I.................................. 72,594,863
Class II................................. 40,261,821
----------
Net increase in net assets............. 257,805,496
Net assets:
Beginning of period....................... --
-----------
End of period............................. $257,805,496
Undistributed net investment income ============
included in net assets:
End of period............................. $ 108,579
=========
See Notes to Financial Statements.
MUTUAL FINANCIAL SERVICES FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mutual Financial Services Fund (the Fund) is a separate, diversified series of
Franklin Mutual Series Fund Inc. (the Series Fund), which is an open-end
investment company registered under the Investment Company Act of 1940. The Fund
seeks long-term capital appreciation by investing approximately 65% of its
assets in securities issued by companies in the financial services industry. The
following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Directors.
B. FOREIGN CURRENCY TRANSLATIONS:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
C. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
D. SECURITIES TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
Common expenses incurred by the Series Fund are allocated among the funds
comprising the Series Fund based on the ratio of net assets of each fund to the
combined net assets. Other expenses are charged to each fund on a specific
identification basis.
E. FORWARD EXCHANGE CONTRACTS:
The Fund may enter into forward exchange contracts to hedge against foreign
exchange risks. These contracts are valued daily and the Fund's equity therein
is included in the Statement of Assets and Liabilities. Realized and unrealized
gains and losses are included in the Statement of Operations.
F. OPTION CONTRACTS:
Options purchased are recorded as investments; options written (sold) are
recorded as liabilities. When an option expires, the premium (original option
value) is realized as a gain if the option was written or as a loss if the
option was purchased. When the exercise of an option results in a cash
settlement, the difference between the premium and the settlement proceeds is
realized as a gain or loss. When securities are acquired or delivered upon
exercise of an option, the acquisition cost or sale proceeds are adjusted by the
amount of the premium. When an option is closed, the difference between the
premium and the cost to close the position is realized as a gain or loss.
G. SECURITIES SOLD SHORT:
The Fund is engaged in selling securities short, which obligates the Fund to
replace a security borrowed by purchasing the same security at the current
market value. The Fund would incur a loss if the price of the security increases
between the date of the short sale and the date on which the Fund replaces the
borrowed security. The Fund would realize a gain if the price of the security
declines between those dates.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale. The Fund must also maintain a deposit with the
broker consisting of cash and securities having a value equal to a specified
percentage of the value of the securities sold short.
H. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. CAPITAL STOCK
The Fund offers three classes of shares: Class Z, Class I and Class II. The
shares differ by their initial sales load, distribution fees, voting rights on
matters affecting a single class and the exchange privilege of each class.
At December 31, 1997, there were 400 million Fund shares authorized ($0.001 par
value) of which 200 million, 100 million, and 100 million were designated as
Class Z, Class I, and Class II shares, respectively. Transactions in the Fund's
shares were as follows:
PERIOD ENDED
DECEMBER 31, 1997*
-------------------
SHARES AMOUNT
CLASS Z -------- ---------
Shares sold................ 12,843,692 $144,526,424
Shares issued on
reinvestment of
distributions.............. 99,632 1,204,770
Shares redeemed............ (1,828,659) (21,257,534)
--------- -------------
Net increase............... 11,114,665 $124,473,660
=========== ===============
PERIOD ENDED
DECEMBER 31, 1997*
------------------
SHARES AMOUNT
CLASS I --------- ---------
Shares sold................ 7,251,035 $82,848,856
Shares issued on
reinvestment of
distributions.............. 49,165 593,254
Shares redeemed............ (923,852) (10,847,247)
Net increase............... 6,376,348 $72,594,863
========= ===========
PERIOD ENDED
DECEMBER 31, 1997*
----------------------
SHARES AMOUNT
CLASS II ========= ============
Shares sold................ 3,598,172 $41,112,595
Shares issued on
reinvestment of
distributions.............. 23,523 283,691
Shares redeemed............ (97,444) (1,134,465)
--------- -----------
Net increase............... 3,524,251 $40,261,821
========= ===========
*Commencement of sales was August 19, 1997.
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Series Fund are also officers and/or directors of
Franklin Mutual Advisers, Inc. (Franklin Mutual) and Franklin Templeton
Services, Inc. (FT Services), the Fund's investment manager and
administrative manager, respectively. Franklin/Templeton Investor Services,
Inc. (Investor Services) and Franklin/Templeton Distributors, Inc.
(Distributors) are the Fund's transfer agent and principal underwriter,
respectively.
The Fund pays an investment management fee to Franklin Mutual of .80% per year
of the average daily net assets of the Fund. Franklin Mutual agreed in advance
to reduce fees to the extent necessary to limit total expenses to an annual rate
of 1.00%, 1.35% and 2.00% of the average daily net assets of Class Z, Class I
and Class II, respectively, through August 19, 1999.
The Fund pays its allocated share of an administrative fee to FT Services based
on the Series Fund's aggregate average daily net assets as follows:
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
-----------------------------------------
0.15% First $200 million
0.135% Over $200 million up to and
including $700 million
0.10% Over $700 million up to and
including $1.2 billion
0.075% Over $1.2 billion
The Fund reimburses Distributors up to .35% and 1.00% per year of the average
daily net assets of Class I and Class II shares, respectively, for costs
incurred in marketing the Fund's Class I and Class II shares. Distributors
received net commissions from sales of those shares and received contingent
deferred sales charges for the year of $38,548 and $7,011, respectively.
4. INCOME TAXES
At December 31, 1997, the net unrealized appreciation based on the cost of
investments for income tax purposes of $228,033,071 was as follows:
Unrealized
appreciation....$19,281,558
Unrealized
depreciation.....(3,750,154)
Net unrealized ------------
appreciation....$15,531,404
==============
Net investment income and net realized capital gains differ for financial
statement and tax purposes primarily due to differing treatments of foreign
currency transactions.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1997 aggregated $242,087,225 and $52,515,155, respectively.
6. RESTRICTED SECURITIES
The Fund may purchase securities through a private offering that generally
cannot be sold to the public without prior registration under the Securities Act
of 1933. The costs of registering such securities are paid by the issuer.
Restricted securities held at December 31, 1997 are as follows:
NUMBER OF ACQUISITION
SHARES ISSUER DATE VALUE
--------------------------------------------------------------------------
250,000 Laser Mortgage Management Inc................11/26/97 $3,625,000
100,000 Regency Bancorp..............................12/24/97 956,250
---------
TOTAL RESTRICTED SECURITIES (COST $4,575,000)
(1.77% OF NET ASSETS)..................................... $4,581,250
==========
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Fund has been a party to financial instruments with off-balance sheet risk,
primarily forward exchange contracts in order to minimize the impact on the Fund
from adverse changes in the relationship between the functional currency and the
foreign currencies and interest rates. These instruments involve market risk in
excess of the amount recognized on the Statement of Assets and Liabilities. Some
of these risks have been minimized by offsetting contracts. Risks arise from the
possible inability of counterparties to meet the terms of their contracts,
future movement in currency values and interest rates and contract positions
that are not exact offsets. The contract amount indicates the extent of the
Fund's involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. The contracts
are reported in the financial statements at the Fund's net equity, as measured
by the difference between the forward exchange rates at the reporting date and
the forward exchange rates at the day of entry into the contract.
As of December 31, 1997, the Fund had the following forward exchange contracts
outstanding:
CONTRACTS TO IN SETTLEMENT UNREALIZED
SELL: EXCHANGE FOR DATE GAIN/(LOSS)
----- ------------------------------------
32,684,095 Belgium francs......U.S. $923,280 2/9/98 U.S $40,935
2,293,567 British pounds...... 3,878,422 2/17/98 120,312
300,000 Canadian dollars.... 217,738 2/27/98 7,422
32,798,323 Danish krone........ 4,864,336 1/26/98 70,918
316,178 Dutch guilders...... 157,773 3/9/98 1,191
4,463,104 Dutch guilders...... 2,272,605 3/17/98 61,215
40,644,391 Finnish marka....... 7,601,184 3/3/98 113,717
27,329,394 French francs....... 4,723,910 2/17/98 170,279
15,868,302 French francs....... 2,696,257 2/27/98 50,799
42,530,505 French francs....... 7,428,276 4/17/98 318,785
21,383,460 French francs....... 3,600,000 6/11/98 14,764
19,242,156,639 Italian lira........ 10,943,138 7/2/98 54,695
536,540,080 Portugal escudo..... 2,969,666 3/17/98 49,752
48,757,375 Swedish krona....... 6,267,330 5/15/98 106,156
13,204,050 Swiss francs........ 9,335,170 6/10/98 134,065
--------- -------
U.S. $67,879,085 1,315,005
===========
Net unrealized gain on offsetting
forward exchange contracts 104,467
-------
Unrealized gain on forward
exchange contracts 1,419,472
--------
CONTRACTS TO BUY:
------------------
25,029,712 Belgium francs.............U.S. $711,192 2/9/98 (35,487)
21,363,889 Swedish krona.............. 2,732,512 5/15/98 (32,913)
--------- --------
U.S. $3,443,704 (68,400)
========== --------
CONTRACTS TO SELL:
--------------------
434,741 British pounds........... U.S. $701,238 1/20/98 (12,045)
3,482,742 French francs.............. 574,388 2/27/98 (6,232)
--------- --------
U.S.$1,275,626 (18,277)
========== --------
Unrealized loss on forward exchange
contracts (86,677)
Net unrealized gain on forward U.S.
exchange contracts $1,332,795
===========
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Franklin Mutual Series Fund Inc.
We have audited the accompanying statement of assets and liabilities of Mutual
Financial Services Fund, a portfolio of Franklin Mutual Series Fund Inc.
("Fund"), including the schedule of investments, as of December 31, 1997, and
the related statement of operations, the statement of changes in net assets, and
the financial highlights for the period August 19, 1997 (commencement of
operations) to December 31, 1997. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
financial highlights. Our procedures included confirmation of securities owned
as of December 31, 1997, by correspondence with the custodian and brokers, or
other appropriate auditing procedures when replies from brokers were not
received. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Mutual
Financial Services Fund, a portfolio of Franklin Mutual Series Fund Inc., at
December 31, 1997, and the results of its operations, the changes in its net
assets, and the financial highlights for the period August 19, 1997
(commencement of operations) to December 31, 1997, in conformity with generally
accepted accounting principles.
/s/Ernst & Young LLP
Boston, Massachusetts
January 30, 1998
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
- ---------------------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
- -----------------------------------------------------------------------------
Mutual Shares Fund ("Mutual Shares"), Mutual Qualified Fund ("Qualified"),
Mutual Beacon Fund ("Beacon"), Mutual Discovery Fund ("Discovery"), Mutual
European Fund ("European") and Mutual Financial Services Fund ("Financial
Services") are diversified series of Franklin Mutual Series Fund Inc. ("Mutual
Series"), an open-end management investment company. Each series may
individually or together be referred to as the "Fund(s)." The principal
investment objective of Mutual Shares, Qualified, Beacon, European and Financial
Services is capital appreciation, which may occasionally be short-term. A
secondary objective of each is income. Discovery's investment objective is
long-term capital appreciation.
The Prospectus, dated May 1, 1997, as amended August 19, 1997, and as may be
further amended from time to time, contains the basic information you should
know before investing in the Fund. For a free copy, call 1-800/DIAL BEN or write
the Fund at the address shown.
This SAI describes the Fund's Class I and Class II shares. The Fund currently
offers another class of shares with a different sales charge and expense
structure, which affects performance. This class is described in a separate SAI
and prospectus. For more information, contact your investment representative or
call 1-800/DIAL BEN.
This SAI is not a prospectus. It contains information in addition to and in more
detail than set forth in the Prospectus. This SAI is intended to provide you
with additional information regarding the activities and operations of the Fund,
and should be read in conjunction with the Prospectus.
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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
- -------------------------------------------------------------------------
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.
SUPPLEMENT DATED FEBRUARY 19, 1998
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN MUTUAL SERIES FUND INC. - CLASS Z
DATED MAY 1, 1997, AS AMENDED AUGUST 19, 1997
The Statement of Additional Information is amended as follows:
I. OFFICERS AND DIRECTORS
The last paragraph in the section is replaced with the following:
As of February 2, 1998, the officers and Board members as a group, owned
of record and beneficially the following shares of Mutual Series:
270,955.590 shares of Mutual Shares - Class Z; 119,485.602 shares of
Qualified - Class Z; 161,795.585 shares of Beacon - Class Z; 176,912.438
shares of Discovery - Class Z; or less than 1% of the total outstanding
Class Z shares of those Funds. As of February 2, 1998, the officers and
Board members as a group, owned of record and beneficially 8,489,585.730
shares of European - Class Z and 123,541.206 shares of Financial Services
- Class Z or 19.76% and 1.00%, respectively, of the total outstanding
Class Z shares of European and Financial Services.
II. HOW DOES THE FUND MEASURE PERFORMANCE?
The subsection titled "TOTAL RETURN" is revised to add the following:
The average annual total return for Class Z for the one-, five-, ten-year
and from inception periods ended June 30, 1997, was:
1 YEAR 5 YEARS 10 YEARS
-----------------------------------------------------------------------
Financial Services* N/A N/A N/A
Mutual Shares 26.93% 19.97% 14.78%
Qualified 26.24% 20.27% 14.90%
Beacon 23.37% 19.83% 14.90%
Discovery** 26.11% N/A N/A
European*** 29.60% N/A N/A
*Financial Services commenced operations on August 19, 1997.
**Discovery commenced operations on December 31, 1992. The average annual
total return for the three-year period ended June 30, 1997, was 22.42% and from
inception was 23.43%.
***European commenced operations on July 3, 1996.
The cumulative total return for Class Z of the funds listed below for the one-,
five-, ten-year and from inception periods ended June 30, 1997, was:
1 YEAR 5 YEARS 10 YEARS
-----------------------------------------------------------------------
Mutual Shares 26.93% 148.50% 296.77%
Qualified 26.24% 151.69% 301.14%
Beacon 23.37% 147.09% 301.17%
Discovery* 26.11% N/A N/A
European** 29.60% N/A N/A
*Discovery commenced operations on December 31, 1992. The cumulative total
return for the three-year period ended June 30, 1997, was 83.49% and from
inception was 157.67%.
**European commenced operations on July 3, 1996.
The cumulative total return for Financial Services - Class Z from the date of
inception (August 19, 1997) through December 31, 1997, was 24.02%.
III. MISCELLANEOUS INFORMATION
The fourth paragraph in this section is replaced with the following:
As of February 2, 1998, the principal shareholders of Mutual Series,
beneficial or of record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
BEACON - CLASS I
------------------------------------
Manufacturers Life Ins. Co. USA
200 Bloor St. E
Toronto, Ontario
Canada 231 M4W 1E5 8,737,769.066 15.33%
EUROPEAN - CLASS Z
------------------------------------
Michael Price
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078 8,439,422.451 19.64%
FINANCIAL SERVICES - CLASS Z
------------------------------------
State Street Bank
Cust. Markman Aggressive
1 Heritage Dr.
North Quincy, MA 02171 661,980.365 5.38%
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.
IV. FINANCIAL STATEMENTS
The following is added to the section:
The unaudited financial statements contained in the Semi-Annual Report to
Shareholders of the Fund, for the period ended June 30, 1997, are
incorporated herein by reference. The audited financial statements of the
Financial Services Fund for the period ended December 31, 1997, are as
follows:
MUTUAL FINANCIAL SERVICES
Financial Highlights
AUGUST 19, 1997
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31, 1997
------------------
PER SHARE OPERATING PERFORMANCE -CLASS Z
(For a share outstanding
throughout the period)
Net asset value, beginning of
period.......................... $10.00
Income from investment -----------
operations:
Net investment income.......... .04
Net realized and unrealized gain 2.35
--------
Total from investment operations 2.39
Less distributions from: ---------
Net investment income.......... (.03)
Net realized gains............. (.09)
--------
Total distributions............. (.12)
--------
Net asset value, end of period.. $ 12.27
--------
Total Return*................... 23.92%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's) $136,350
Ratios to average net assets:
Expenses....................... 1.00%**
Expenses, excluding waiver and 1.62%**
payments by affiliate...........
Net investment income.......... 1.37%**
Portfolio turnover rate......... 42.26%
Average commission rate paid***. $ .0241
*Total return is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities.)
AUGUST 19, 1997
(COMMENCEMENT
OF OPERATIONS)
TO DECEMBER 31, 1997
--------------------
PER SHARE OPERATING PERFORMANCE
- CLASS I
(For a share outstanding
throughout the period)
Net asset value, beginning of
period.......................... $10.00
Income from investment -------
operations:
Net investment income.......... .03
Net realized and unrealized gain 2.35
------
Total from investment operations 2.38
Less distributions -------
from:
Net investment income.......... (.02)
Net realized gains............. (.09)
------
Total distributions............. (.11)
------
Net asset value, end of period.. $12.27
------
Total Return*................... 23.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's) $78,249
Ratios to average net assets:
Expenses....................... 1.35%**
Expenses, excluding waiver and
payments by affiliate........ 1.97%**
Net investment income.......... 1.02%**
Portfolio turnover rate......... 42.26%
Average commission rate paid***. $ .0241
*Total return does not reflect sales commissions and is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities.
AUGUST 19, 1997
(COMMENCEMENT
OF OPERATIONS)
TO DECEMBERR 31, 1997
----------------------
PER SHARE OPERATING PERFORMANCE
- CLASS II
(For a share outstanding
throughout the period)
Net asset value, beginning of
period.......................... $10.00
Income from investment --------
operations:
Net investment income.......... .01
Net realized and unrealized gain 2.35
------
Total from investment operations 2.36
Less distributions from:
Net investment income.......... (.01)
Net realized gains............. (.09)
------
Total distributions............. (.10)
------
Net asset value, end of period.. $12.26
------
Total Return*................... 23.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's) $43,207
Ratios to average net assets:
Expenses....................... 2.00%**
Expenses, excluding waiver and 2.62%**
payments by affiliate...........
Net investment income.......... 0.37%**
Portfolio turnover rate......... 42.26%
Average commission rate paid***. $ .0241
*Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities.
MUTUAL FINANCIAL SERVICES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997
COUNTRY SHARES VALUE
COMMON STOCKS 80.6% --------------------------
BANKING 32.7%
* Annapolis National Bancorp Inc.... United States 48,663 $ 517,044
* Banca Di Roma SpA................. Italy 1,800,000 1,815,263
* Banca Nazionale del Lavoro SpA, fgn Italy 631,500 9,816,986
Banco Latinoamericano de
Exportaciones SA, E............. Panama 93,300 3,860,288
* Banque Cantonale Vaudoise, fgn... Switzerland 13,780 4,704,423
BG Bank AS, fgn.................. Denmark 41,700 2,805,601
* Bok Financial Corp...............United States 92,700 3,597,919
* Century Bancorp Inc..............United States 5,500 98,313
Chase Manhattan Corp.............United States 35,000 3,832,500
* Credit National/Natexis.......... France 60,533 3,530,295
First Union Corp.................United States 102,780 5,267,475
Fleet Financial Group Inc........United States 59,000 4,421,312
Long Island Commercial Bank......United States 17,000 276,250
Mellon Bank Corp.................United States 45,000 2,728,125
Merita Ltd., A................... Finland 448,500 2,452,709
* Nordbanken Holding AB............. Sweden 542,500 3,067,828
PNC Bank Corp....................United States 59,000 3,366,688
(R)Regency Bancorp.................United States 100,000 956,250
Santa Monica Bank................United States 19,800 550,688
Sumitomo Bank of California......United States 5,000 273,125
UMB Financial Corp...............United States 14,700 801,150
* UnionBanCal Corp.................United States 16,000 1,720,000
* Unionbancorp Inc.................United States 67,500 1,476,563
* United Security Bancorporation...United States 93,500 1,916,750
UST Corp., Inc...................United States 96,100 2,666,775
* Vermont Financial Services Corp..United States 250,000 6,937,500
+ Warren Bancorp Inc...............United States 215,500 4,956,500
Wells Fargo & Co.................United States 10,000 3,394,375
Western Bancorp..................United States 10,296 339,768
Whitney Holding Corp.............United States 35,700 2,034,900
---------
84,183,363
BEVERAGES & TOBACCO 1.1%......... ------------
B.A.T. Industries Plc............United Kingdom 300,000 2,732,065
---------
BUSINESS & PUBLIC SERVICES 1.4%
Suez Lyonnaise des Eaux SA......... France 32,916 3,642,445
---------
DATA PROCESSING & REPRODUCTION 0.2%
* National Processing Inc..........United States 60,000 592,500
--------
ENERGY EQUIPMENT & SERVICES 0.2%
Cie Generale De Geophysique SA.... France 3,112 398,145
* Cie Generale De Geophysique SA, ADR France 300 7,688
--------
405,833
ENERGY SOURCES 0.4% --------
Societe Elf Aquitane SA........... France 10,000 $1,163,081
------------
FINANCIAL SERVICES 32.9%
Advanta Corp., B.................United States 22,500 $ 570,938
American Capital Strategies Ltd..United States 125,000 2,265,624
Annaly Mortgage Management Inc...United States 260,000 2,860,000
Bankatlantic Bancorp Inc., A.....United States 300,000 4,893,750
* Bankunited Financial Corp., A....United States 80,000 1,232,500
Bayonne Bancshares Inc...........United States 95,000 1,270,625
Beneficial Corp..................United States 35,000 2,909,375
Cenfed Financial Corp............United States 17,000 765,000
* CIT Group Inc., A................United States 175,000 5,643,750
* Citizens Bancorp Indiana.........United States 15,000 221,250
Commonwealth Bancorp Inc.........United States 244,500 4,859,437
* Federal Trust Corp...............United States 55,000 151,250
Fidelity Bankshares Inc..........United States 25,500 828,750
* First Alliance Corporation.......United States 120,000 2,205,000
First Colorado Bancorp...........United States 12,800 304,000
First Essex Bancorp Inc..........United States 91,200 2,120,400
* Golden State Bancorp Inc.........United States 4,500 168,188
Greater Delaware Valley
Savings Bank United States 10,000 306,250
* IMC Mortgage Co..................United States 280,000 3,325,000
Imperial Credit Commercial
Mortgage Investment.............United States 350,000 5,118,750
INMC Mortgage Holdings Inc......United States 30,000 703,125
Julius Baer Holdings AG.........Switzerland 2,500 4,635,173
Klamath First Bancorp Inc.......United States 64,700 1,391,050
(R)Laser Mortgage Management Inc...United States 250,000 3,625,000
* Life Financial Corp..............United States 169,600 2,141,200
* Long Beach Financial Corp........United States 416,000 4,836,000
* Matrix Capital Corp..............United States 172,000 2,623,000
* MECH Financial Inc...............United States 61,000 1,589,812
Mercury Asset Management Group
Plc. United Kingdom 85,000 2,367,626
Morgan Stanley, Dean Witter
Discover & Co. United States 8,000 473,000
Northwest Savings Bank............United States 40,000 565,000
Peoples Bancorp Inc...............United States 110,600 5,004,650
Pinnacle Financial Services Inc...United States 52,000 2,567,500
Pioneer Group Inc.................United States 32,500 914,063
* Security Capital Group, B........United States 55,000 1,787,500
Southwest Bancshares Inc..........United States 12,500 371,875
Trilon Financial Corporation....... Canada 50,000 402,365
United Asset Management Corp.....United States 283,500 6,928,031
----------
84,945,807
INSURANCE 10.4% ----------
Argonaut Group Inc...............United States 31,250 1,058,594
Arthur J Gallagher Co............United States 25,800 888,488
Assurances Generales de France AGF France 50,000 2,649,331
Citizens Corp.....................United States 146,700 4,217,625
* Companhia de Seguros Mundial
Confianca
SA, fgn..........................Portugal 168,100 3,059,685
Guardian Royal Exchange Plc.......United Kingdom 175,000 934,092
Pohjola Insurance Co. Ltd......... Finland 51,800 1,920,208
Reliable Life Insurance Co., A... United States 800 90,800
Sampo Insurance Co. Ltd., A........ Finland 159,940 5,283,197
SCOR SA........................... France 42,350 $2,025,144
* Topdanmark AS..................... Denmark 12,000 2,276,741
* Union Assurances Federales SA..... France 15,194 1,994,394
Unitrin Inc.......................United States 4,700 303,738
--------
26,702,037
TELECOMMUNICATIONS 1.3% -----------
*360 Degrees Communications
Company..........................United States 10,900 220,044
Koninklijke Ptt Nederland NV.....Netherlands 75,000 3,129,238
---------
3,349,282
----------
TOTAL COMMON STOCKS (COST $192,267,775) 207,716,413
-----------
PRINCIPAL
AMOUNT**
BONDS 1.3% ---------
Bay View Capital Corp.,
9.125%, 8/15/07 United States $750,000 776,250
Local Financial, 11.00%,
9/5/04... United States 750,000 795,000
Matrix Capital Corp., 11.50%,
11.50% 9/30/04 United States 1,700,000 1,708,500
---------
TOTAL BONDS (COST $3,195,125). 3,279,750
---------
BONDS & NOTES IN REORGANIZATION
COST $167,175) 0.1%
Mercury Finance Co., Bank
Claim, MTN 7.42%, 6/29/00. United States 188,234 156,234
--------
SHORT TERM INVESTMENTS 12.6%
Federal National Mortgage Assn.,
5.40% to 5.65%,
with maturities to 4/24/98..United States 25,200,000 24,953,046
Federal Home Loan Bank,
5.42% to 5.55%, with maturities
to 3/4/98................ United States 5,000,000 4,967,272
Federal Home Loan Mortgage Corp.,
5.48%, 1/23/98.......... United States 2,500,000 2,491,760
---------
TOTAL SHORT TERM INVESTMENTS
(COST $32,401,719)............. 32,412,078
----------
TOTAL INVESTMENTS 94.6%
(COST $228,031,794)............ 243,564,475
SECURITIES SOLD SHORT (0.2%)... (481,875)
---------------------------------
NET EQUITY IN FORWARD
CONTRACTS 0.5% .............. 1,332,795
OTHER ASSETS, LESS
LIABILITIES 5.1%.................. 13,390,101
----------
TOTAL NET ASSETS 100.0%...... $257,805,496
------------
SECURITIES SOLD SHORT COUNTRY SHARES VALUE
------------------------------------------------------------------------
ISSUER
* CNB Bancshares Inc.
(proceeds $479,615) United States 10,000 $(481,875)
=========
*Non-income producing.
**Securities traded in U.S. dollars.
(R)Restricted securities (See note 6).
+The Investment Company Act of 1940 defines "affiliated companies" as
investments in portfolio companies in which the Fund owns 5% or more of the
outstanding voting securities. Investments in non-controlled "affiliated
companies" at 12/31/97 were $4,956,500.
See Notes to Financial Statements.
MUTUAL FINANCIAL SERVICES
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
Assets:
Investments in securities, at
value:
Unaffiliated Issuers (Cost
$223,828,436).....................$238,607,975
Non Controlled Affiliates
(Cost $4,203,358)................. 4,956,500 $243,564,475
Cash............................. --------- 6,478,227
Receivables:
Investment securities sold...... 2,007,313
Capital shares sold............. 6,589,591
Dividends and interest.......... 409,004
Unrealized gain on forward
exchange contracts (Note 7)....... 1,419,472
----------
Total assets................. 260,468,082
-----------
Liabilities:
Payables:
Investment securities purchased. 1,107,868
Capital shares redeemed......... 625,061
To affiliates................... 201,819
Securities sold short, at value
(Proceeds $479,615)............... 481,875
Unrealized loss on forward
exchange contracts (Note 7)....... 86,677
Other liabilities................ 159,286
---------
Total liabilities............ 2,662,586
---------
Net assets, at value.............. $257,805,496
============
Net assets consist of:
Undistributed net investment
income............................ $ 108,579
Net unrealized appreciation...... 16,863,216
Accumulated net realized gain.... 3,503,357
Capital shares................... 237,330,344
-----------
Net assets, at value.............. $257,805,496
CLASS Z =============
Net asset value and maximum offering
price per share ($136,350,249 /
11,114,665 shares outstanding)........... $12.27
CLASS I ======
Net asset value per share ($78,248,590 /
6,376,348 shares outstanding)............ $12.27
Maximum offering price per share ($12.27 ======
/ 95.50%)................................ $12.85
CLASS II ======
Net asset value per share ($43,206,657 /
3,524,251 shares outstanding)*............ $12.26
Maximum offering price per share ($12.26 ======
/ 99.00%).................................. $12.38
======
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
MUTUAL FINANCIAL SERVICES
Financial Statements (CONTINUED)
STATEMENT OF OPERATIONS
FOR THE PERIOD AUGUST 19, 1997 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,
1997
Investment Income:
(net of foreign taxes of $6,736)
Dividends.......................... $641,194
Interest........................... 604,980
--------
Total Investment Income....... $1,246,174
----------
Expenses:
Management fees (Note 3)........... 419,994
Administrative fees (Note 3)....... 40,704
Distribution fees (Note 3)
Class I...................... 53,249
Class II..................... 80,369
Transfer agent fees (Note 3)....... 58,200
Custodian fees..................... 29,331
Reports to shareholders............ 60,000
Registration and filing fees....... 180,306
Professional fees.................. 63,600
Directors' fees and expenses....... 500
Other.............................. 491
--------
Total expenses................. 986,744
Expenses waived/paid by
affiliate (Note 3)............ (327,232)
--------
Net expenses.............. 659,512
--------
Net investment income... 586,662
--------
Realized and unrealized gains
(losses):
Net realized gain (loss) from:
Investments....................... 5,576,882
Foreign currency transactions..... (326,955)
---------
Net realized gain.............. 5,249,927
Net unrealized appreciation on:
Investments...................... 15,530,421
Translation of assets and
liabilities denominated in foreign
currencies...................... 1,332,795
----------
Net unrealized appreciation.... 16,863,216
----------
Net realized and unrealized gain.... 22,113,143
----------
Net increase in net assets $22,699,805
resulting from operations...... ===========
See Notes to Financial Statements.
MUTUAL FINANCIAL SERVICES FUND
Financial Statements (CONTINUED)
STATEMENT OF CHANGES IN NET ASSETS FOR THE PERIOD AUGUST 19, 1997
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1997
1997
Increase in net assets: ------
Operations:
Net investment income.................... $ 586,662
Net realized gain from investments and
oreign currency transactions............ 5,249,927
Net unrealized appreciation on
investments and translation of assets and
liabilities denominated in foreign
currencies.............................. 16,863,216
----------
Net increase in net assets resulting
from operations........................... 22,699,805
Distributions to shareholders from:
Net investment income:
Class Z.................................. (312,463)
Class I.................................. (127,466)
Class II................................. (17,029)
Net realized gains:
Class Z.................................. (937,387)
Class I.................................. (541,128)
Class II................................. (289,180)
Capital share transactions (Note 2):
Class Z.................................. 124,473,660
Class I.................................. 72,594,863
Class II................................. 40,261,821
----------
Net increase in net assets............. 257,805,496
Net assets:
Beginning of period....................... --
-----------
End of period............................. $257,805,496
Undistributed net investment income ============
included in net assets:
End of period............................. $ 108,579
=========
See Notes to Financial Statements.
MUTUAL FINANCIAL SERVICES FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mutual Financial Services Fund (the Fund) is a separate, diversified series of
Franklin Mutual Series Fund Inc. (the Series Fund), which is an open-end
investment company registered under the Investment Company Act of 1940. The Fund
seeks long-term capital appreciation by investing approximately 65% of its
assets in securities issued by companies in the financial services industry. The
following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Directors.
B. FOREIGN CURRENCY TRANSLATIONS:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
C. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
D. SECURITIES TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
Common expenses incurred by the Series Fund are allocated among the funds
comprising the Series Fund based on the ratio of net assets of each fund to the
combined net assets. Other expenses are charged to each fund on a specific
identification basis.
E. FORWARD EXCHANGE CONTRACTS:
The Fund may enter into forward exchange contracts to hedge against foreign
exchange risks. These contracts are valued daily and the Fund's equity therein
is included in the Statement of Assets and Liabilities. Realized and unrealized
gains and losses are included in the Statement of Operations.
F. OPTION CONTRACTS:
Options purchased are recorded as investments; options written (sold) are
recorded as liabilities. When an option expires, the premium (original option
value) is realized as a gain if the option was written or as a loss if the
option was purchased. When the exercise of an option results in a cash
settlement, the difference between the premium and the settlement proceeds is
realized as a gain or loss. When securities are acquired or delivered upon
exercise of an option, the acquisition cost or sale proceeds are adjusted by the
amount of the premium. When an option is closed, the difference between the
premium and the cost to close the position is realized as a gain or loss.
G. SECURITIES SOLD SHORT:
The Fund is engaged in selling securities short, which obligates the Fund to
replace a security borrowed by purchasing the same security at the current
market value. The Fund would incur a loss if the price of the security increases
between the date of the short sale and the date on which the Fund replaces the
borrowed security. The Fund would realize a gain if the price of the security
declines between those dates.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale. The Fund must also maintain a deposit with the
broker consisting of cash and securities having a value equal to a specified
percentage of the value of the securities sold short.
H. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. CAPITAL STOCK
The Fund offers three classes of shares: Class Z, Class I and Class II. The
shares differ by their initial sales load, distribution fees, voting rights on
matters affecting a single class and the exchange privilege of each class.
At December 31, 1997, there were 400 million Fund shares authorized ($0.001 par
value) of which 200 million, 100 million, and 100 million were designated as
Class Z, Class I, and Class II shares, respectively. Transactions in the Fund's
shares were as follows:
PERIOD ENDED
DECEMBER 31, 1997*
-------------------
SHARES AMOUNT
CLASS Z -------- ---------
Shares sold................ 12,843,692 $144,526,424
Shares issued on
reinvestment of
distributions.............. 99,632 1,204,770
Shares redeemed............ (1,828,659) (21,257,534)
--------- -------------
Net increase............... 11,114,665 $124,473,660
=========== ===============
PERIOD ENDED
DECEMBER 31, 1997*
------------------
SHARES AMOUNT
CLASS I --------- ---------
Shares sold................ 7,251,035 $82,848,856
Shares issued on
reinvestment of
distributions.............. 49,165 593,254
Shares redeemed............ (923,852) (10,847,247)
Net increase............... 6,376,348 $72,594,863
========= ===========
PERIOD ENDED
DECEMBER 31, 1997*
----------------------
SHARES AMOUNT
CLASS II ========= ============
Shares sold................ 3,598,172 $41,112,595
Shares issued on
reinvestment of
distributions.............. 23,523 283,691
Shares redeemed............ (97,444) (1,134,465)
--------- -----------
Net increase............... 3,524,251 $40,261,821
========= ===========
*Commencement of sales was August 19, 1997.
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Series Fund are also officers and/or directors of
Franklin Mutual Advisers, Inc. (Franklin Mutual) and Franklin Templeton
Services, Inc. (FT Services), the Fund's investment manager and
administrative manager, respectively. Franklin/Templeton Investor Services,
Inc. (Investor Services) and Franklin/Templeton Distributors, Inc.
(Distributors) are the Fund's transfer agent and principal underwriter,
respectively.
The Fund pays an investment management fee to Franklin Mutual of .80% per year
of the average daily net assets of the Fund. Franklin Mutual agreed in advance
to reduce fees to the extent necessary to limit total expenses to an annual rate
of 1.00%, 1.35% and 2.00% of the average daily net assets of Class Z, Class I
and Class II, respectively, through August 19, 1999.
The Fund pays its allocated share of an administrative fee to FT Services based
on the Series Fund's aggregate average daily net assets as follows:
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
-----------------------------------------
0.15% First $200 million
0.135% Over $200 million up to and
including $700 million
0.10% Over $700 million up to and
including $1.2 billion
0.075% Over $1.2 billion
The Fund reimburses Distributors up to .35% and 1.00% per year of the average
daily net assets of Class I and Class II shares, respectively, for costs
incurred in marketing the Fund's Class I and Class II shares. Distributors
received net commissions from sales of those shares and received contingent
deferred sales charges for the year of $38,548 and $7,011, respectively.
4. INCOME TAXES
At December 31, 1997, the net unrealized appreciation based on the cost of
investments for income tax purposes of $228,033,071 was as follows:
Unrealized
appreciation....$19,281,558
Unrealized
depreciation.....(3,750,154)
Net unrealized ------------
appreciation....$15,531,404
==============
Net investment income and net realized capital gains differ for financial
statement and tax purposes primarily due to differing treatments of foreign
currency transactions.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1997 aggregated $242,087,225 and $52,515,155, respectively.
6. RESTRICTED SECURITIES
The Fund may purchase securities through a private offering that generally
cannot be sold to the public without prior registration under the Securities Act
of 1933. The costs of registering such securities are paid by the issuer.
Restricted securities held at December 31, 1997 are as follows:
NUMBER OF ACQUISITION
SHARES ISSUER DATE VALUE
--------------------------------------------------------------------------
250,000 Laser Mortgage Management Inc................11/26/97 $3,625,000
100,000 Regency Bancorp..............................12/24/97 956,250
---------
TOTAL RESTRICTED SECURITIES (COST $4,575,000)
(1.77% OF NET ASSETS)..................................... $4,581,250
==========
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Fund has been a party to financial instruments with off-balance sheet risk,
primarily forward exchange contracts in order to minimize the impact on the Fund
from adverse changes in the relationship between the functional currency and the
foreign currencies and interest rates. These instruments involve market risk in
excess of the amount recognized on the Statement of Assets and Liabilities. Some
of these risks have been minimized by offsetting contracts. Risks arise from the
possible inability of counterparties to meet the terms of their contracts,
future movement in currency values and interest rates and contract positions
that are not exact offsets. The contract amount indicates the extent of the
Fund's involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. The contracts
are reported in the financial statements at the Fund's net equity, as measured
by the difference between the forward exchange rates at the reporting date and
the forward exchange rates at the day of entry into the contract.
As of December 31, 1997, the Fund had the following forward exchange contracts
outstanding:
CONTRACTS TO IN SETTLEMENT UNREALIZED
SELL: EXCHANGE FOR DATE GAIN/(LOSS)
----- ------------------------------------
32,684,095 Belgium francs......U.S. $923,280 2/9/98 U.S $40,935
2,293,567 British pounds...... 3,878,422 2/17/98 120,312
300,000 Canadian dollars.... 217,738 2/27/98 7,422
32,798,323 Danish krone........ 4,864,336 1/26/98 70,918
316,178 Dutch guilders...... 157,773 3/9/98 1,191
4,463,104 Dutch guilders...... 2,272,605 3/17/98 61,215
40,644,391 Finnish marka....... 7,601,184 3/3/98 113,717
27,329,394 French francs....... 4,723,910 2/17/98 170,279
15,868,302 French francs....... 2,696,257 2/27/98 50,799
42,530,505 French francs....... 7,428,276 4/17/98 318,785
21,383,460 French francs....... 3,600,000 6/11/98 14,764
19,242,156,639 Italian lira........ 10,943,138 7/2/98 54,695
536,540,080 Portugal escudo..... 2,969,666 3/17/98 49,752
48,757,375 Swedish krona....... 6,267,330 5/15/98 106,156
13,204,050 Swiss francs........ 9,335,170 6/10/98 134,065
--------- -------
U.S. $67,879,085 1,315,005
===========
Net unrealized gain on offsetting
forward exchange contracts 104,467
-------
Unrealized gain on forward
exchange contracts 1,419,472
--------
CONTRACTS TO BUY:
------------------
25,029,712 Belgium francs.............U.S. $711,192 2/9/98 (35,487)
21,363,889 Swedish krona.............. 2,732,512 5/15/98 (32,913)
--------- --------
U.S. $3,443,704 (68,400)
========== --------
CONTRACTS TO SELL:
--------------------
434,741 British pounds........... U.S. $701,238 1/20/98 (12,045)
3,482,742 French francs.............. 574,388 2/27/98 (6,232)
--------- --------
U.S.$1,275,626 (18,277)
========== --------
Unrealized loss on forward exchange
contracts (86,677)
Net unrealized gain on forward U.S.
exchange contracts $1,332,795
===========
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Franklin Mutual Series Fund Inc.
We have audited the accompanying statement of assets and liabilities of Mutual
Financial Services Fund, a portfolio of Franklin Mutual Series Fund Inc.
("Fund"), including the schedule of investments, as of December 31, 1997, and
the related statement of operations, the statement of changes in net assets, and
the financial highlights for the period August 19, 1997 (commencement of
operations) to December 31, 1997. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
financial highlights. Our procedures included confirmation of securities owned
as of December 31, 1997, by correspondence with the custodian and brokers, or
other appropriate auditing procedures when replies from brokers were not
received. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Mutual
Financial Services Fund, a portfolio of Franklin Mutual Series Fund Inc., at
December 31, 1997, and the results of its operations, the changes in its net
assets, and the financial highlights for the period August 19, 1997
(commencement of operations) to December 31, 1997, in conformity with generally
accepted accounting principles.
/s/Ernst & Young LLP
Boston, Massachusetts
January 30, 1998
FRANKLIN MUTUAL
SERIES FUND INC. - CLASS Z
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
AS AMENDED AUGUST 19, 1997
51 JOHN F. KENNEDY PARKWAY
SHORT HILLS, NJ 07078
1-800/DIAL BEN
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TABLE OF CONTENTS
How does the Fund Invest its Assets?
Restrictions and Limitations
Officers and Directors
Investment Management
and Other Services
How does the Fund Buy
Securities for its Portfolio?
How Do I Buy, Sell and
Exchange Shares?
How are Fund Shares Valued?
Additional Information on
Distributions and Taxes
The Fund's Underwriter
How does the Fund
Measure Performance?
Miscellaneous Information
Financial Statements
Useful Terms and Definitions
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
- -----------------------------------------------------------------------------
Mutual Shares Fund ("Mutual Shares"), Mutual Qualified Fund ("Qualified"),
Mutual Beacon Fund ("Beacon"), Mutual Discovery Fund ("Discovery"), Mutual
European Fund ("European") and Mutual Financial Services Fund ("Financial
Services") are diversified series of Franklin Mutual Series Fund Inc. ("Mutual
Series"), an open-end management investment company. Each series may,
individually or together, be referred to as the "Fund(s)." The principal
investment objective of Mutual Shares, Qualified, Beacon, European and Financial
Services is capital appreciation, which may occasionally be short-term. A
secondary objective of each is income. Discovery's investment objective is
long-term capital appreciation.
This SAI describes the Fund's Class Z shares. The Prospectus, dated May 1, 1997,
as amended August 19, 1997, and as may be further amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
- -----------------------------------------------------------------------------
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?
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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 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.
